-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OriS6Yuc8ivQbrNI7jliIfSk73BLeOyp0tGEpmr1uHjfh5gK3zBoaPe4LcSQS+/X iOgzlEPtFn4ywPxk7RSZVw== 0001031296-02-000017.txt : 20020415 0001031296-02-000017.hdr.sgml : 20020415 ACCESSION NUMBER: 0001031296-02-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLEVELAND ELECTRIC ILLUMINATING CO CENTRAL INDEX KEY: 0000020947 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340150020 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02323 FILM NUMBER: 02597123 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET STREET 2: C/O FIRSTENERGY CORP CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2166229800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLEDO EDISON CO CENTRAL INDEX KEY: 0000352049 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 344375005 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03583 FILM NUMBER: 02597125 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET CITY: AKRON STATE: OH ZIP: 43308 BUSINESS PHONE: 2166229800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA POWER CO CENTRAL INDEX KEY: 0000077278 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 250718810 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03491 FILM NUMBER: 02597126 BUSINESS ADDRESS: STREET 1: 1 E WASHINGTON ST STREET 2: P O BOX 891 CITY: NEW CASTLE STATE: PA ZIP: 16103-0891 BUSINESS PHONE: 4126525531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO EDISON CO CENTRAL INDEX KEY: 0000073960 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340437786 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02578 FILM NUMBER: 02597128 BUSINESS ADDRESS: STREET 1: 76 S MAIN ST CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2163845100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTENERGY CORP CENTRAL INDEX KEY: 0001031296 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 341843785 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-21011 FILM NUMBER: 02597124 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 BUSINESS PHONE: 3303845100 MAIL ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA ELECTRIC CO CENTRAL INDEX KEY: 0000077227 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 250718085 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03522 FILM NUMBER: 02597127 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE READING STREET 2: MUHLENBERG TOWNSHIP CITY: BERKS COUNTY STATE: PA ZIP: 19640-0001 BUSINESS PHONE: 6109293601 MAIL ADDRESS: STREET 1: C/O GPU ENERGY STREET 2: 2800 POTTSVILLE PIKE CITY: READING STATE: PA ZIP: 19605-2459 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROPOLITAN EDISON CO CENTRAL INDEX KEY: 0000065350 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 230870160 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-27099 FILM NUMBER: 02597129 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE STREET 2: MUHLENBERG TOWNSHIP CITY: READING STATE: PA ZIP: 19640-0001 BUSINESS PHONE: 6109293601 MAIL ADDRESS: STREET 1: C/O ENERGY GPU ENERGY STREET 2: 2800 POTTERVILLE CITY: READING STATE: PA ZIP: 19640-0001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JERSEY CENTRAL POWER & LIGHT CO CENTRAL INDEX KEY: 0000053456 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 210485010 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03141 FILM NUMBER: 02597130 BUSINESS ADDRESS: STREET 1: 2800 POTTSVILLE PIKE CITY: READING STATE: PA ZIP: 19640-0001 BUSINESS PHONE: 6109293601 MAIL ADDRESS: STREET 1: C/O GPU ENERGY STREET 2: 2800 POTTSVILLE PIKE CITY: READING STATE: PA ZIP: 19640-0001 10-K 1 main.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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, OH 44308 Telephone (800)736-3402 1-2578 OHIO EDISON COMPANY 34-0437786 (An Ohio Corporation) c/o FirstEnergy Corp. 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) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3141 JERSEY CENTRAL POWER & LIGHT COMPANY 21-0485010 (A New Jersey Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-446 METROPOLITAN EDISON COMPANY 23-0870160 (A Pennsylvania Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3522 PENNSYLVANIA ELECTRIC COMPANY 25-0718085 (A Pennsylvania Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Indicate by check mark whether the registrant (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 ( ) State the aggregate market value of the voting stock held by non-affiliates of the registrant: $10,875,494,020 as of February 28, 2002. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: OUTSTANDING CLASS As of MARCH 29, 2002 ----- -------------------- FirstEnergy Corp., $.10 par value 297,636,276 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 Jersey Central Power & Light Company, $10 par value 15,371,270 Metropolitan Edison Company, no par value 859,500 Pennsylvania Electric Company, $20 par value 5,290,596 FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company, and Pennsylvania Electric Company common stock; Ohio Edison Company is the sole holder of Pennsylvania Power Company common stock. Documents incorporated by reference (to the extent indicated herein): PART OF FORM 10-K INTO WHICH DOCUMENT DOCUMENT IS INCORPORTED -------- ----------------------- FirstEnergy Corp. Annual Report to Stockholders for the fiscal year ended December 31, 2001 (Pages 16-55) Part II Proxy Statement for 2002 Annual Meeting of Stockholders to be held May 21, 2002 Part III SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Registrant Title of Each Class on Which Registered - ------------------ --------------------------------- ------------------------ FirstEnergy Corp. Common Stock, $.10 par value New York Stock Exchange Ohio Edison Company Cumulative Preferred Stock, $100 par value 3.90% Series All series registered on 4.40% Series New York Stock Exchange 4.44% Series and Chicago Stock 4.56% Series Exchange Cumulative Preferred Stock, $25 par value 7.75% Series Registered on New York Stock Exchange and Chicago Stock Exchange The Cleveland Elec- Cumulative Serial Preferred Stock, tric Illuminating without par value: Company $7.40 Series A All series registered on $7.56 Series B New York Stock Exchange Adjustable Rate, Series L The Toledo Edison Cumulative Preferred Stock, Company par value $100 per share: Registered on American 4-1/4% Series Stock Exchange Cumulative Preferred Stock, par value $25 per share: $2.365 Series All series registered on Adjustable Rate, Series A New York Stock Exchange Adjustable Rate, Series B First Mortgage Bonds: Registered on New York 8% Series due 2003 Stock Exchange Pennsylvania Power Cumulative Preferred Stock, $100 Company par value: 4.24% Series All series registered on 4.25% Series Philadelphia Stock 4.64% Series Exchange, Inc. Jersey Central Power Cumulative Preferred Stock, New York Stock Exchange & Light Company without par value 4% Series This combined Form 10-K is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company, and Pennsylvania Electric 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 seven FirstEnergy subsidiary registrants is also attributed to FirstEnergy. FORM 10-K TABLE OF CONTENTS Page ---- Part I Item 1. Business.................................................... 1 The Company............................................... 1 Merger.................................................... 2 Divestitures- International Operations................................ 2 Generating Assets....................................... 3 Utility Regulation........................................ 3 PUCO Rate Matters....................................... 3 NJBPU Rate Matters...................................... 4 PPUC Rate Matters....................................... 4 FERC Rate Matters....................................... 5 Regulatory Accounting................................... 6 Capital Requirements...................................... 6 Met-Ed Capital Trust and Penelec Capital Trust............ 8 Nuclear Regulation........................................ 8 Nuclear Insurance......................................... 9 Environmental Matters..................................... 10 Air Regulation.......................................... 10 Water Regulation........................................ 11 Waste Disposal.......................................... 11 Summary................................................. 11 Fuel Supply............................................... 11 System Capacity and Reserves.............................. 12 Regional Reliability...................................... 13 Competition............................................... 13 Research and Development.................................. 13 Executive Officers........................................ 14 Item 2. Properties.................................................. 15 Item 3. Legal Proceedings........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders......... 16 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 16 Item 6. Selected Financial Data..................................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 16 Item 8. Financial Statements and Supplementary Data................. 16 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure...................... 17 Part III Item 10. Directors and Executive Officers of the Registrant.......... 17 Item 11. Executive Compensation...................................... 17 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 17 Item 13. Certain Relationships and Related Transactions.............. 17 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................. 17 PART 1 ITEM 1. BUSINESS The Company FirstEnergy Corp. was organized under the laws of the State of Ohio in 1996. On November 7, 2001, FirstEnergy merged with GPU, Inc., a Pennsylvania corporation, with FirstEnergy being the surviving company. FirstEnergy's application to the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (1935 Act) to acquire all of the outstanding shares of GPU's common stock and to become a registered holding company under the 1935 Act, was approved on October 29, 2001. FirstEnergy's principal business is the holding, directly or indirectly, of all of the outstanding common stock of its principal electric utility operating subsidiaries, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), Pennsylvania Power Company (Penn), The Toledo Edison Company (TE), American Transmission Systems, Incorporated (ATSI), Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). These utility subsidiaries are referred to throughout as "Companies." FirstEnergy's consolidated revenues are primarily derived from electric service provided by its utility operating subsidiaries and the revenues of its other principal subsidiaries: FirstEnergy Solutions Corp. (FES); FirstEnergy Facilities Services Group, LLC (FEFSG); MYR Group Inc. (MYR); MARBEL Energy Corporation (MARBEL); GPU Capital, Inc.; and GPU Power, Inc. In addition, FirstEnergy holds all of the outstanding common stock of other direct subsidiaries including: FirstEnergy Properties, Inc., FirstEnergy Ventures Corp., FirstEnergy Nuclear Operating Company (FENOC), FirstEnergy Securities Transfer Company, GPU Diversified Holdings, LLC, GPU Telecom Services, Inc., GPU Nuclear, Inc.; FirstEnergy Service Company (FECO); GPU Service, Inc. (GPUS); and GPU Advanced Resources, Inc. The Companies' combined service areas encompass approximately 37,200 square miles in Ohio, New Jersey and Pennsylvania. The areas they serve have a combined population of approximately 11.0 million. OE was organized under the laws of the State of Ohio in 1930 and owns property and does business as an electric public utility in that state. OE also has ownership interests in certain generating facilities located in the Commonwealth of Pennsylvania. OE engages in the generation, distribution and sale of electric energy to communities in a 7,500 square mile area of central and northeastern Ohio. OE also engages in the sale, purchase and interchange of electric energy with other electric companies. The area it serves has a population of approximately 2.7 million. OE owns all of the outstanding common stock of Penn. Penn was organized under the laws of the Commonwealth of Pennsylvania in 1930 and owns property and does business as an electric public utility in that state. Penn is also authorized to do business and owns property in the State of Ohio. Penn furnishes electric service to communities in a 1,500 square mile area of western Pennsylvania. The area served by Penn has a population of approximately 0.3 million. CEI was organized under the laws of the State of Ohio in 1892 and does business as an electric public utility in that state. CEI engages in the generation, distribution and sale of electric energy in an area of approximately 1,700 square miles in northeastern Ohio. It also has ownership interests in certain generating facilities in Pennsylvania. CEI also engages in the sale, purchase and interchange of electric energy with other electric companies. The area CEI serves has a population of approximately 1.9 million. TE was organized under the laws of the State of Ohio in 1901 and does business as an electric public utility in that state. TE engages in the generation, distribution and sale of electric energy in an area of approximately 2,500 square miles in northwestern Ohio. It also has interests in certain generating facilities in Pennsylvania. TE also engages in the sale, purchase and interchange of electric energy with other electric companies. The area TE serves has a population of approximately 0.8 million. JCP&L was organized under the laws of the State of New Jersey in 1925 and owns property and does business as an electric public utility in that state. JCP&L provides retail electric energy services in northern, western and east central New Jersey. The area it serves has a population of approximately 2.7 million. Met-Ed was organized under the laws of the Commonwealth of Pennsylvania in 1922 and owns property and does business as an electric public utility in that state. Met-Ed provides retail electric energy services in eastern and south central Pennsylvania. The area it serves has a population of approximately 1.3 million. Penelec was organized under the laws of the Commonwealth of Pennsylvania in 1919 and owns property and does business as an electric public utility in that state. Penelec provides retail and wholesale electric energy services in western, northern and south central Pennsylvania. The area it serves has a population of approximately 1.6 million. Penelec, as lessee of the property of its subsidiary, The Waverly Electric Light & Power Company, also serves a population of about 13,400 in Waverly, New York and vicinity. FES was organized under the laws of the State of Ohio in 1997 and provides energy-related products and services, and through its FirstEnergy Generation Corp. (FGCO) subsidiary, operates FirstEnergy's nonnuclear generation businesses. FEFSG is the parent company of eleven direct subsidiaries that are heating, ventilating, air conditioning and energy management companies; MYR is a utility infrastructure construction service company. MARBEL is a natural gas pipeline company whose subsidiaries include MARBEL HoldCo, Inc. a holding company having a 50% ownership interest in Great Lakes Energy Partners, LLC, an oil and natural gas exploration and production venture, and Northeast Ohio Natural Gas Corp., a public utility that provides gas distribution and transportation services. GPU Capital owns and operates electric distribution systems in foreign countries (see "Merger") and GPU Power owns and operates generation facilities in foreign countries. FECO and GPUS provide legal, financial and other corporate support services to affiliated FirstEnergy companies. Merger On November 7, 2001, the merger of FirstEnergy and GPU became effective pursuant to the Agreement and Plan of Merger, dated August 8, 2000 (Merger Agreement). As a result of the merger, GPU's former wholly owned subsidiaries, including JCP&L, Met-Ed and Penelec (collectively, the "Former GPU Companies"), became wholly owned subsidiaries of FirstEnergy. Under the terms of the Merger Agreement, GPU shareholders received the equivalent of $36.50 for each share of GPU common stock they owned, payable in cash and/or FirstEnergy common stock. GPU shareholders receiving FirstEnergy shares received 1.2318 shares of FirstEnergy common stock for each share of GPU common stock that they exchanged. The elections by GPU shareholders were subject to proration since the total elections received would have resulted in more than one-half of the GPU common stock being exchanged for FirstEnergy shares. FirstEnergy borrowed the funds for the cash portion of the merger consideration, approximately $2.2 billion, through a credit agreement dated as of October 2, 2001 from a group of banks led by Barclay's Bank Plc, as administrative agent; the borrowings were refinanced with long-term debt on November 15, 2001. FirstEnergy issued nearly 73.7 million shares of its common stock to GPU shareholders for the share portion of the transaction consideration. The merger was accounted for by the purchase method of accounting and, accordingly, the Consolidated Statements of Income include the results of the Former GPU Companies beginning November 7, 2001. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by FirstEnergy's management based on information currently available and on current assumptions as to future operations. The merger purchase accounting adjustments, which were recorded in the records of GPU's direct subsidiaries, primarily consisted of: (1) revaluation of GPU's international operations to fair value; (2) revaluation of property, plant and equipment; (3) adjusting preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (4) recognizing additional obligations related to retirement benefits; and (5) recognizing estimated severance and other compensation liabilities. Assets and liabilities remaining subject to rate regulation on a historical cost basis were not adjusted. Divestitures International Operations Prior to consummation of the GPU merger, FirstEnergy identified certain GPU international operations for divestiture within twelve months of the merger date. These operations constitute individual "lines of business" as defined in Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with physically and operationally separable activities. Application of Emerging Issues Task Force Issue No. 87-11, "Allocation of Purchase Price to Assets to Be Sold," required that expected, pre-sale cash flows, including incremental interest expense on related acquisition debt, of these operations be considered part of the purchase price allocation. Accordingly, subsequent to the merger date, results of operations and incremental interest costs that are related to these international subsidiaries have not been included in FirstEnergy's Consolidated Statement of Income. Additionally, assets and liabilities of these international operations have been segregated under separate captions on the Consolidated Balance Sheet - "Assets Pending Sale" and "Liabilities Related to Assets Pending Sale." The entities identified for divestiture prior to the merger date are discussed below. In December 2001, FirstEnergy divested its Australian gas transmission companies through an initial public offering of GasNet's common stock. The IPO provided net proceeds of $125 million to FirstEnergy and immediately removed from FirstEnergy's consolidated debt $290 million of GasNet-related debt. On March 15, 2002, FirstEnergy finalized the terms of a previously announced agreement through which Aquila, Inc. (formerly UtiliCorp United) will acquire a 79.9 percent interest in FirstEnergy's wholly owned Avon Energy Partners Holdings subsidiary, the holding company for Midlands Electricity plc, for a purchase price of $264 million. As a result of this transaction, Avon's debt of approximately $1.7 billion, which is non-recourse to FirstEnergy, would no longer be included on FirstEnergy's consolidated balance sheet. The transaction is subject to the receipt of all applicable regulatory approvals. GPU's former Argentina operations, including GPU Empresa Distribuidora Electrica Regional S.A., were identified by FirstEnergy for divestiture within twelve months of the merger. FirstEnergy is actively pursuing the sale of these operations. Other international companies are being considered for sale; however, as of the merger date those sales were not judged to be probable of occurring within twelve months. Generating Assets On November 29, 2001, FirstEnergy reached an agreement to sell four coal-fired power plants (with an aggregate net book value of $539 million as of December 31, 2001) totaling 2,535 megawatts (MW) to NRG Energy Inc. for $1.5 billion ($1.355 billion in cash and $145 million in debt assumption). The net, after-tax gain from the sale, based on the difference between the sale price of the plants and their market price used in our Ohio restructuring transition plan, will be credited to customers by reducing the transition cost recovery period. FirstEnergy also entered into a power purchase agreement (PPA) with NRG. Under the terms of the PPA, NRG is obligated to sell up to 10.5 billion kilowatt-hours of electricity annually, similar to the average annual output of the plants, through 2005. The sale is expected to close in mid-2002. Utility Regulation As a registered public utility holding company, FirstEnergy is subject to regulation by the SEC under the 1935 Act. The SEC has determined that the electric facilities of the FirstEnergy Companies constitute a single integrated public utility system under the standards of the 1935 Act. The 1935 Act regulates FirstEnergy with respect to accounting, the issuance of securities, the acquisition and sale of utility assets, securities or any other interest in any business, and entering into, and performance of, service, sales and construction contracts among its subsidiaries, and certain other matters. The 1935 Act also limits the extent to which FirstEnergy may engage in nonutility businesses or acquire additional utility businesses. Each of the FirstEnergy Companies' retail rates, conditions of service, issuance of securities and other matters are subject to regulation in the state in which each operates - in Ohio by the Public Utilities Commission of Ohio (PUCO), in New Jersey by the New Jersey Board of Public Utilities (NJBPU) and in Pennsylvania by the Pennsylvania Public Utility Commission (PPUC). With respect to their wholesale and interstate electric operations and rates, FirstEnergy Companies are subject to regulation, including regulation of their accounting policies and practices, by the Federal Energy Regulatory Commission (FERC). Under Ohio law, municipalities may regulate rates, subject to appeal to the PUCO if not acceptable to the utility. PUCO Rate Matters Ohio's 1999 electric utility restructuring law allowed Ohio electric customers to select their generation suppliers beginning January 1, 2001, provided for a five percent reduction on the generation portion of residential customers' bills and the opportunity for utilities to recover transition costs, including regulatory assets. Under this law, the PUCO approved FirstEnergy's transition plan in 2000 as modified by a settlement agreement with major parties to the transition plan, which it filed on behalf of OE, CEI and TE (Ohio Companies). The settlement agreement included approval for recovery of the amounts of transition costs 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. The settlement also granted preferred access over FirstEnergy's subsidiaries to nonaffiliated marketers, brokers and aggregators to 1,120 MW of generation capacity through 2005 at established prices for sales to the Ohio Companies' retail customers. The Ohio Companies' base electric rates for distribution service under their prior respective regulatory plans were extended from December 31, 2005 to December 31, 2007. The transition rate credits for customers under their prior regulatory plans were also extended through the Ohio 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 resulted in the 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 planned changes in 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 a 5% reduction in the price of generation for residential customers. FirstEnergy's Ohio customers choosing alternative suppliers receive an additional incentive applied to the shopping credit (generation component) 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. Based on annualized shopping levels as of December 31, 2001, FirstEnergy believes the maximum potential recovery reductions are approximately $174 million (OE - $87 million, CEI - $52 million and TE - $35 million). NJBPU Rate Matters In March 2001, the NJBPU issued a Final Decision and Order (Final Order) with respect to JCP&L's rate unbundling, stranded cost and restructuring filings, which superseded its 1999 Summary Order. The Final Order confirms rate reductions set forth in the Summary Order, which remain in effect at increasing levels through July 2003 with rates after July 31, 2003 to be determined in a rate case commencing in 2002. The Final Order also includes the right of customers to select their generation suppliers effective August 1, 1999, and includes the deregulation of electric generation service. The Final Order confirms the establishment of a non-bypassable societal benefits charge to recover costs which include nuclear plant decommissioning and manufactured gas plant remediation, as well as a non-bypassable market transition charge (MTC) primarily to recover stranded costs. However, the NJBPU deferred making a final determination of the net proceeds and stranded costs related to prior generating asset divestitures until JCP&L's request for an Internal Revenue Service (IRS) ruling regarding the treatment of associated federal income tax benefits is acted upon. Should the IRS ruling support the return of the tax benefits to ratepayers, JCP&L would need to record a corresponding charge to income of approximately $25 million; there would be no effect to FirstEnergy's net income as the contingency existed prior to the merger. JCP&L has an obligation to provide basic generation service (BGS), that is, it must act as provider of last resort (PLR) to non-shopping customers as a result of the NJBPU's restructuring plans. JCP&L obtains its supply of electricity to meet its BGS obligation to non-shopping customers almost entirely from contracted and open market purchases. JCP&L is permitted to defer for future collection from customers the amounts by which its costs of supplying BGS to non-shopping customers and costs incurred under nonutility generation (NUG) agreements exceed amounts collected through BGS and MTC rates. As of December 31, 2001, the accumulated deferred cost balance totaled approximately $300 million, after giving effect to the reduction discussed below. The Final Order provided for the ability to securitize stranded costs associated with the divested Oyster Creek Nuclear Generation Station. In February 2002, JCP&L received NJBPU authorization to issue $320 million of transition bonds to securitize the recovery of these costs. The NJBPU order also provides for a usage-based non-bypassable transition bond charge and for the transfer of the bondable transition property to another entity. JCP&L plans to sell transition bonds in the second quarter of 2002 which will be recognized on the Consolidated Balance Sheet. The Final Order also allows for additional securitization of JCP&L's deferred balance to the extent permitted by law upon application by JCP&L and a determination by the NJBPU that the conditions of the New Jersey restructuring legislation are met. There can be no assurance as to the extent, if any, that the NJBPU will permit such securitization. In June 2001, the four incumbent New Jersey electric distribution companies, including JCP&L, filed a joint proposal seeking NJBPU approval of a competitive bidding process to procure supply for the provision of BGS from August 1, 2002 through July 31, 2003. In December 2001, the NJBPU authorized the auctioning of BGS to meet the electric demands of all customers who have not selected an alternative supplier. BGS for all four companies, for August 1, 2002 through July 31, 2003, was simultaneously put out for bid. The auction, which ended on February 13, 2002 and was approved by the NJBPU on February 15, 2002, removed JCP&L's BGS obligation of 5,100 MW for the period August 1, 2002 through July 31, 2003. The auction provides a transitional mechanism and a different model for the procurement of BGS commencing August 1, 2003 may be adopted. On September 26, 2001, the NJBPU approved the merger between FirstEnergy and GPU (see "Merger") subject to the terms and conditions set forth in a Stipulation of Settlement which had been signed by the major parties in the merger discussions. Under this Stipulation of Settlement, FirstEnergy agreed to reduce JCP&L's regulatory assets by $300 million, in order to ensure that customers receive the benefit of future merger savings. JCP&L wrote off $300 million of its deferred costs upon receipt on October 29, 2001 of the final regulatory approval for the merger. PPUC Rate Matters In December 1996, Pennsylvania enacted "The Electricity Generation Customer Choice and Competition Act," which permitted customers, including Penn's, Met-Ed's and Penelec's customers, to choose their electric generation supplier, while transmission and distribution services will continue to be supplied by their current providers. The PPUC authorized 1998 rate restructuring plans for Penn, Met-Ed and Penelec, which essentially resulted in the deregulation of their respective generation businesses. Met-Ed and Penelec subsequently divested substantially all of their generating assets. The phase in of customer choice was completed on January 1, 2001. Under their respective plans, Penn, Met-Ed and Penelec continue to deliver power to homes and businesses through their distribution systems, which remain regulated by the PPUC. Their rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition, and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of their rates will be excluded from their bills and the customers will receive a generation charge from the alternative supplier. The stranded cost recovery portion of rates provides for recovery of certain amounts not otherwise considered recoverable in a competitive generation market, including regulatory assets. Penn is entitled to recover $236 million of stranded costs through a competitive transition charge (CTC) that started in 1999 and ends in 2006. In 2000, the PPUC disallowed a portion of the requested additional stranded costs above those amounts granted in Met-Ed's and Penelec's 1998 rate restructuring plan orders. The PPUC required Met-Ed and Penelec to seek an IRS ruling regarding the return of certain unamortized investment tax credits and excess deferred income tax benefits to ratepayers. Similar to JCP&L's situation, if the IRS ruling ultimately supports returning these tax benefits to ratepayers, Met-Ed and Penelec would then reduce stranded costs by $12 million and $25 million, respectively, plus interest and record a corresponding charge to income; similar to JCP&L, there would be no effect to FirstEnergy's net income. As a result of their generating asset divestitures, Met-Ed and Penelec obtain their supply of electricity to meet their PLR obligations almost entirely from contracted and open market purchases. During 2000, their purchased power costs substantially exceeded the amounts they could recover under their capped generation rates which are in effect for varying periods, pursuant to their 1998 rate restructuring plans. In November 2000, Met-Ed and Penelec filed a petition with the PPUC seeking permission to defer for future recovery their energy costs in excess of amounts reflected in their capped generation rates. In January 2001, the PPUC consolidated this petition with the FirstEnergy/GPU merger proceeding (see "Merger") for consideration and resolution in accordance with the merger procedural schedule. In June 2001, Met-Ed, Penelec and FirstEnergy entered into a Settlement Stipulation with all of the major parties in the combined merger and rate relief proceedings, that, in addition to resolving certain issues concerning the PPUC's approval of the FirstEnergy/GPU merger, also addressed Met-Ed's and Penelec's request for PLR rate relief. On June 20, 2001, the PPUC entered orders approving the Settlement Stipulation, which approved the merger and provided Met-Ed and Penelec PLR rate relief. Met-Ed and Penelec were permitted to defer for future recovery the difference between their actual energy costs and those reflected in their capped generation rates, retroactive to January 1, 2001. Deferral accounting will continue for such cost differences through December 31, 2005. Should energy costs incurred by Met-Ed and Penelec during that period be below their respective capped generation rates, the difference would be used to reduce their recoverable deferred costs. Met-Ed's and Penelec's PLR obligations have been extended through December 31, 2010. Met-Ed's and Penelec's CTC revenues will be applied first to PLR costs, then to non-NUG stranded costs and finally to NUG stranded costs through December 31, 2010. Met-Ed and Penelec would be permitted to recover any remaining stranded costs through a continuation of the CTC after December 31, 2010; however, such recovery would extend to no later than December 31, 2015. Any amounts not expected to be recovered by December 31, 2015 would be written off at the time such nonrecovery becomes probable. Several parties had filed Petitions for Review with the Commonwealth Court of Pennsylvania regarding the PPUC's order that approved a settlement of the FirstEnergy/GPU merger case and granted certain relief to Met-Ed and Penelec concerning their PLR obligations to retail customers. On February 21, 2002, the Court affirmed the PPUC decision regarding the FirstEnergy/GPU merger, remanding the decision to the PPUC only with respect to the issue of merger savings. The Court reversed the PPUC's decision regarding the PLR obligations of Met-Ed and Penelec, and rejected those parts of the settlement that permitted the companies to defer for accounting purposes the difference between their wholesale power costs and the amount that they collect from retail customers. FirstEnergy filed a Petition for Allowance of Appeal with the Pennsylvania Supreme Court on March 25, 2002, asking it to review the Commonwealth Court decision. FirstEnergy is unable to predict the outcome of these matters. FERC Rate Matters The Companies provide wholesale power and transmission service subject to the jurisdiction of the FERC. On November 9, 2000, FirstEnergy and GPU filed an application for approval of their merger under Section 203 of the Federal Power Act. The FERC approved the merger on March 15, 2001. Following the FirstEnergy/GPU merger the transmission facilities of JCP&L, Met-Ed and Penelec continue to be operated by PJM Interconnection, Inc. PJM was approved by the FERC as a regional transmission organization (RTO) on July 12, 2001. Transmission service over the facilities of FirstEnergy's PJM operating companies is provided under the PJM Open Access Tariff. ATSI, which owns and operates FirstEnergy's transmission facilities within the Ohio Companies' and Penn's service areas, proposed to transfer its transmission facilities in the East Central Area Reliability Agreement (ECAR) area to the Alliance RTO. ATSI, along with other members of the Alliance Companies (Ameren Services Company, American Electric Power Service Corporation (AEP), Consumers Energy Company, The Dayton Power and Light Company (DPL), Exelon Corporation, Illinois Power Company, Northern Indiana Public Service Company and Virginia Electric and Power Company) made a series of filings during 2001, and received conditional approval from the FERC to act as an RTO on May 8, 2001. Operations were projected to begin in March 2002. On December 20, 2001, the FERC issued an order that reversed prior findings that the Alliance RTO had adequate scope and concluded that there should be only one RTO in the Midwest. While favoring the Midwest ISO as the preferred platform for a single RTO in the Midwest, the FERC stated that it was confident that the Alliance business plan for an independent transmission company could be successfully accommodated within the Midwest ISO. As directed by the FERC, the Alliance Companies are in negotiations with the Midwest ISO, as well as PJM, to develop an arrangement for the Alliance business organization to operate under an RTO umbrella. A revised date for operation of ATSI's transmission assets in an RTO has not been determined. Regulatory Accounting All of the Companies' regulatory assets (deferred costs) are expected to continue to be recovered under provisions of the Ohio transition plan and the respective Pennsylvania and New Jersey regulatory plans. Under prior regulatory plans, the PUCO had authorized OE to recognize additional capital recovery related to its generating assets (which was reflected as additional depreciation expense) and additional amortization of regulatory assets of at least $2 billion, and the PPUC had authorized Penn to accelerate at least $358 million, more than the amounts that would have been recognized if the prior regulatory plans were not in effect. These additional amounts were being recovered through rates. Under OE's prior regulatory plan, which was terminated at the end of 2000, and Penn's rate restructuring plan, OE's and Penn's cumulative additional capital recovery and regulatory asset amortization amounted to $1.424 billion. The application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), was discontinued in 1997 with respect to CEI's and TE's nuclear operations; in 1998 with respect to Penn's, Met-Ed's and Penelec's generation operations; in 1999 with respect to JCP&L's generation operations; and in 2000 with respect to OE's generation business and the nonnuclear generation businesses of CEI and TE. JCP&L, Met-Ed and Penelec subsequently divested substantially all of their generating assets. The SEC issued interpretive guidance regarding asset impairment measurement, concluding that any supplemental regulated cash flows such as a CTC should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, $1.6 billion of impaired plant investments ($1.2 billion, $304 million and $53 million for OE, CEI and TE, respectively) were recognized as regulatory assets recoverable as transition costs through future regulatory cash flows. Capital Requirements Capital expenditures for the FirstEnergy Companies for the years 2001 through 2006, excluding nuclear fuel, are shown in the following table. Such costs include expenditures for the betterment of existing facilities and for the construction of generating capacity, facilities for environmental compliance, transmission lines, distribution lines, substations and other additions. See "Environmental Matters" below with regard to possible environment-related expenditures not included in the forecast. 2001 2002-2006 Capital Expenditures Forecast ------------------------------------------ Actual 2002 2003-2006 Total ------ ---- --------- ----- (In millions) OE................. $ 62 $ 92 $ 241 $ 333 Penn............... 31 36 141 177 CEI................ 70 121 271 392 TE................. 44 72 156 228 JCP&L.............. 32* 144 428 572 Met-Ed............. 9* 66 257 323 Penelec............ 15* 72 303 375 ATSI............... 27 14 98 112 FES................ 305 130 320 450 Other subsidiaries 78 103 286 389 ---- ---- ------ ------ Total.............. $673 $850 $2,501 $3,351 * Includes costs for the period from the November 7, 2001 merger date to December 31, 2001. During the 2002-2006 period, maturities of, and sinking fund requirements for, long-term debt and preferred stock of the Company and its subsidiaries are: Preferred Stock and Long-Term Debt 2002-2006 Redemption Schedule ------------------------------------------ 2002 2003-2006 Total ---- --------- ----- (In millions) OE................... $ 408 $ 410 $ 818 Penn................. 2 81 83 CEI.................. 343 699 1,042 TE................... 248 312 560 JCP&L................ 61 628 689 Met-Ed............... 30 332 362 Penelec.............. 50 134 184 FirstEnergy.......... -- 1,550 1,550 Other subsidiaries... 12 63 75 ------ ------ ------ Total................ $1,154 $4,209 $5,363 OE's and Penn's nuclear fuel purchases had been financed through OES Fuel (a wholly owned subsidiary of OE) commercial paper and loans, both of which were supported by a $141.5 million long-term bank credit agreement which is expiring on March 31, 2002. FirstEnergy is not extending the credit agreement and OE and Penn will directly purchase, own and finance their nuclear fuel requirements. CEI and TE also replaced their prior leasing arrangements with direct ownership of nuclear fuel in 2001. The Companies' respective investments for additional nuclear fuel, and nuclear fuel investment reductions as the fuel is consumed, during the 2002-2006 period are presented in the following table. The table also displays the Companies' operating lease commitments, net of capital trust cash receipts for the 2002-2006 period.
Other Net Nuclear Fuel 2002-2006 Forecasts Operating Lease Commitments --------------------------------------------------- New Investments Consumption 2002-2006 Schedule ------------------------ ------------------------ ---------------------------- 2002 2003-2006 Total 2002 2003-2006 Total 2002 2003-2006 Total ---- --------- ----- ---- --------- ----- ---- --------- ----- (In millions) OE.................. $15 $131 $146 $ 28 $107 $135 $ 70 $316 $386 Penn................ 8 86 94 19 76 95 -- 1 1 CEI................. 19 157 176 32 131 163 6 62 68 TE.................. 12 108 120 22 92 114 73 311 384 JCP&L............... -- -- -- -- -- -- 2 11 13 Met-Ed.............. -- -- -- -- -- -- 1 1 2 --- ---- ---- ---- ---- ---- ---- ---- ---- Total............... $54 $482 $536 $101 $406 $507 $152 $702 $854
Short-term borrowings outstanding as of December 31, 2001, consisted of $688.3 million of bank borrowings (FirstEnergy-$385.0 million, OE-$60.0 million, FEFSG-$9.5 million and $233.8 million related to the pending divestitures) and $159.8 million of OES Capital, Incorporated commercial paper. OES Capital is a wholly owned subsidiary of OE whose borrowings are secured by customer accounts receivable. OES Capital can borrow up to $170 million under a receivables financing agreement at rates based on certain bank commercial paper. FirstEnergy and OE also had $865 million and $250 million, respectively, available under revolving lines of credit as of December 31, 2001. FirstEnergy may borrow under its facility and could transfer any of its borrowings to affiliated companies. OE and MYR had $34 million and $50 million, respectively, of unused bank facilities as of December 31, 2001. In addition, OE and Penn had bank facilities of $30 million and $2 million, respectively, available that provide for borrowings on a short-term basis at the bank's discretion. Based on their present plans, the Companies could provide for their cash requirements in 2002 from the following sources: funds to be received from operations; available cash and temporary cash investments as of December 31, 2001 (Company's nonutility subsidiaries-$120 million, OE-$5 million; JCP&L-$31 million, Met-Ed-$25 million and Penelec-$39 million); the issuance of long-term debt (for refunding purposes); net proceeds from the sale of assets; and funds available under revolving credit arrangements. The extent and type of future financings will depend on the need for external funds as well as market conditions, the maintenance of an appropriate capital structure and the ability of the Companies to comply with coverage requirements in order to issue first mortgage bonds and preferred stock. The Companies will continue to monitor financial market conditions and, where appropriate, may take advantage of economic opportunities to refund debt and preferred stock to the extent that their financial resources permit. The coverage requirements contained in the first mortgage indentures under which the Companies issue first mortgage bonds provide that, except for certain refunding purposes, the Companies may not issue first mortgage bonds unless applicable net earnings (before income taxes), calculated as provided in the indentures, for any period of twelve consecutive months within the fifteen calendar months preceding the month in which such additional bonds are issued, are at least twice annual interest requirements on outstanding first mortgage bonds, including those being issued. Under OE's first mortgage indenture, the availability of property additions is more restrictive than the earnings test at the present time and would limit the amount of first mortgage bonds issuable against property additions to $133 million. OE is currently able to issue $915 million principal amount of first mortgage bonds against previously retired bonds without the need to meet the above restrictions. Under Penn's first mortgage indenture, other requirements also apply and are more restrictive than the earnings test at the present time. Penn is currently able to issue $293 million principal amount of first mortgage bonds, with up to $134 million of such amount issuable against property additions; the remainder could be issued against previously retired bonds. CEI and TE can issue $476 million and $415 million, respectively, principal amount of first mortgage bonds against a combination of previously retired bonds and property additions. JCP&L, Met-Ed and Penelec are able to issue $257 million, $88 million and $450 million, respectively, principal amount of first mortgage bonds against previously retired bonds. OE's, Penn's, TE's and JCP&L's respective articles of incorporation prohibit the sale of preferred stock unless applicable gross income, calculated as provided in the articles of incorporation, is equal to at least 1-1/2 times the aggregate of the annual interest requirements on indebtedness and annual dividend requirements on preferred stock outstanding immediately thereafter. Based upon earnings for 2001, an assumed dividend rate of 9.00%, and no additional indebtedness, OE, Penn, TE and JCP&L would be permitted, under the earnings coverage test contained in their respective charters, to issue at least $2.1 billion, $195 million, $102 million and $4.6 billion of preferred stock, respectively. There are no restrictions on the ability of CEI, Met-Ed and Penelec to issue preferred stock. To the extent that coverage requirements or market conditions restrict the Companies' abilities to issue desired amounts of first mortgage bonds or preferred stock, the Companies may seek other methods of financing. Such financings could include the sale of preferred and/or preference stock or of such other types of securities as might be authorized by applicable regulatory authorities which would not otherwise be sold and could result in annual interest charges and/or dividend requirements in excess of those that would otherwise be incurred. Met-Ed Capital Trust and Penelec Capital Trust In 1999, Met-Ed Capital Trust, a wholly owned subsidiary of Met-Ed, issued $100 million of trust preferred securities (Met-Ed Trust Preferred Securities) at 7.35%, due 2039. The sole assets of Met-Ed Capital Trust are the 7.35% Cumulative Preferred Securities of Met-Ed Capital II, L.P. (Met-Ed Partnership Preferred Securities) and its only revenues are the quarterly cash distributions it receives on the Met-Ed Partnership Preferred Securities. Each Met-Ed Trust Preferred Security represents a Met-Ed Partnership Preferred Security. Met-Ed Capital II, L.P. is a wholly owned subsidiary of Met-Ed and the sponsor of Met-Ed Capital Trust. The sole assets of Met-Ed Capital II, L.P. are Met-Ed's 7.35% Subordinated Debentures, Series A, due 2039, which have an aggregate principal amount of $103.1 million. Distributions were made on the Trust Preferred Securities during 2001 in the aggregate amount of $7,350,000. Expenses of Met-Ed Trust for 2001 were approximately $17,000, all of which were paid by Met-Ed Preferred Capital II, Inc., the general partner of Met-Ed Capital II, L.P. The Trust Preferred Securities are issued in book-entry form only so that there is only one holder of record. Met-Ed has fully and unconditionally guaranteed the Met-Ed Partnership Preferred Securities, and, therefore, the Met-Ed Trust Preferred Securities. In 1999, Penelec Capital Trust, a wholly-owned subsidiary of Penelec, issued $100 million of trust preferred securities (Penelec Trust Preferred Securities) at 7.34%, due 2039. The sole assets of Penelec Capital Trust are the 7.34% Cumulative Preferred Securities of Penelec Capital II, L.P. (Penelec Partnership Preferred Securities) and its only revenues are the quarterly cash distributions it receives on the Penelec Partnership Preferred Securities. Each Penelec Trust Preferred Security represents a Penelec Partnership Preferred Security. Penelec Capital II, L.P. is a wholly-owned subsidiary of Penelec and the sponsor of Penelec Capital Trust. The sole assets of Penelec Capital II, L.P. are Penelec's 7.34% Subordinated Debentures, Series A, due 2039, which have an aggregate principal amount of $103.1 million. Distributions were made on the Trust Preferred Securities during 2001 in the aggregate amount of $7,340,000. Expenses of Penelec Trust for 2001 were approximately $15,000, all of which were paid by Penelec Preferred Capital II, Inc., the general partner of Penelec Capital II, L.P. The Trust Preferred Securities are issued in book-entry form only so that there is only one holder of record. Penelec has fully and unconditionally guaranteed the Penelec Partnership Preferred Securities, and, therefore, the Penelec Trust Preferred Securities. Nuclear Regulation The construction, operation and decommissioning of nuclear generating units are subject to the regulatory jurisdiction of the Nuclear Regulatory Commission (NRC) including the issuance by it of construction permits, operating licenses, and possession only licenses for decommissioning reactors. The NRC's procedures with respect to the amendment of nuclear reactor operating licenses afford opportunities for interested parties to request adjudicatory hearings on health, safety and environmental issues subject to meeting NRC "standing" requirements. In this connection, the NRC may require substantial changes in operation or the installation of additional equipment to meet safety or environmental standards, subject to the backfit rule requiring the NRC to justify such new requirements as necessary for the overall protection of public health and safety. The possibility also exists for modification, denial or revocation of licenses in the event of substantial safety concerns at the nuclear facility. Beaver Valley Unit 1 was placed in commercial operation in 1976, and its operating license expires in 2016. Davis-Besse was placed in commercial operation in 1977, and its operating license expires in 2017. Perry Unit 1 and Beaver Valley Unit 2 were placed in commercial operation in 1987, and their operating licenses expire in 2026 and 2027, respectively. Davis-Besse, which is operated by FENOC, began its scheduled refueling outage on February 16, 2002. The plant was originally scheduled to return to service by the end of March. During the refueling outage, visual and ultrasonic testings were conducted on all 69 of the Control Rod Drive Mechanism penetration nozzles. This testing was performed to check for the kind of circular or circumferential cracking in these nozzles that had been found at some other plants similar in design and vintage to Davis-Besse. Based on the inspection and test results, five nozzles were scheduled for repair during the refueling outage. As repair work began on one of the nozzles, FENOC found a small area of corrosion in the reactor vessel head near the penetration hole, apparently created by boric acid deposits. The corrosion will have to be repaired and is expected to extend the planned refueling outage. On March 12, 2002, the NRC sent a team of engineers and metallurgists to inspect corrosion on the reactor head of Davis-Besse. Although the exact length of the outage has not been determined, FENOC expects the outage to be extended by 60 to 90 days and expects additional nuclear-related operation and maintenance costs of approximately $5-10 million. In addition, the loss of generation output from Davis-Besse during the extended outage period could increase energy costs between $10 million to $15 million per month. As a result of the merger with GPU, FirstEnergy now owns the Three Mile Island Unit 2 (TMI-2) and the Saxton Nuclear Experimental Facility. Both facilities are in various stages of decommissioning. TMI-2 is in a post-defueling monitored storage condition, with decommissioning planned in 2014. Saxton is in the final stages of decommissioning, with license termination scheduled for the end of 2002 and final site restoration scheduled for the second quarter of 2003. The NRC has promulgated and continues to promulgate regulations related to the safe operation of nuclear power plants and standards for decommissioning clean-up and final license termination. The Companies cannot predict what additional regulations (including post-September 11, 2001 security enhancements) may be promulgated, design changes required or the effect that any such regulations or design changes or additional clean-up standards for final site release, or the consideration thereof, may have upon their nuclear plants. Although the Companies have no reason to anticipate an accident at any of their nuclear plants, if such an accident did happen, it could have a material but currently undeterminable adverse effect on FirstEnergy's consolidated financial position. In addition, such an accident at any operating nuclear plant, whether or not owned by the Companies, could result in regulations or requirements that could affect the operation, licensing, or decommissioning of plants that the Companies do own with a consequent but currently undeterminable adverse impact, and could affect the Companies' abilities to raise funds in the capital markets. Nuclear Insurance The Price-Anderson Act limits the public liability which can be assessed with respect to a nuclear power plant to $9.5 billion (assuming 106 units licensed to operate) for a single nuclear incident, which amount is covered by: (i) private insurance amounting to $200 million; and (ii) $9.3 billion provided by an industry retrospective rating plan required by the NRC pursuant thereto. Under such retrospective rating plan, in the event of a nuclear incident at any unit in the United States resulting in losses in excess of private insurance, up to $88.1 million (but not more than $10 million per unit per year in the event of more than one incident) must be contributed for each nuclear unit licensed to operate in the country by the licensees thereof to cover liabilities arising out of the incident. Based on their present nuclear ownership and leasehold interests, the Companies' maximum potential assessment under these provisions would be $352.4 million (OE-$94.2 million, Penn-$74.0 million, CEI-$106.3 million and TE-$77.9 million) per incident but not more than $40.0 million (OE-$10.7 million, Penn-$8.4 million, CEI-$12.1 million and TE-$8.8 million) in any one year for each incident. In addition to the public liability insurance provided pursuant to the Price-Anderson Act, the Companies have also obtained insurance coverage in limited amounts for economic loss and property damage arising out of nuclear incidents. The Companies are members of Nuclear Electric Insurance Limited (NEIL) which provides coverage (NEIL I) for the extra expense of replacement power incurred due to prolonged accidental outages of nuclear units. Under NEIL I, the Companies have policies, renewable yearly, corresponding to their respective nuclear interests, which provide an aggregate indemnity of up to approximately $1.182 billion (OE-$315 million, Penn-$222 million, CEI-$382 million and TE-$263 million) for replacement power costs incurred during an outage after an initial 12-week waiting period. Members of NEIL I pay annual premiums and are subject to assessments if losses exceed the accumulated funds available to the insurer. The Companies' present maximum aggregate assessment for incidents at any covered nuclear facility occurring during a policy year would be approximately $11.3 million (OE-$3.1 million, Penn-$2.3 million, CEI-$3.5 million and TE-$2.4 million). The Companies are insured as to their respective nuclear interests under property damage insurance provided by NEIL to the operating company for each plant. Under these arrangements, $2.75 billion of coverage for decontamination costs, decommissioning costs, debris removal and repair and/or replacement of property is provided. The Companies pay annual premiums for this coverage and are liable for retrospective assessments of up to approximately $59.7 million (OE-$16.1 million, Penn-$11.6 million, CEI-$18.5 million, TE-$12.7 million, JCP&L-$0.2 million, Met-Ed-$0.4 million and Penelec-$0.2 million) during a policy year. The Companies intend to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Companies' plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Companies' insurance policies, or to the extent such insurance becomes unavailable in the future, the Companies would remain at risk for such costs. The NRC requires nuclear power plant licensees to obtain minimum property insurance coverage of $1.06 billion or the amount generally available from private sources, whichever is less. The proceeds of this insurance are required to be used first to ensure that the licensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant risk to the public health and safety. Within 30 days of stabilization, the licensee is required to prepare and submit to the NRC a cleanup plan for approval. The plan is required to identify all cleanup operations necessary to decontaminate the reactor sufficiently to permit the resumption of operations or to commence decommissioning. Any property insurance proceeds not already expended to place the reactor in a safe and stable condition must be used first to complete those decontamination operations that are ordered by the NRC. The Companies are unable to predict what effect these requirements may have on the availability of insurance proceeds to the Companies for the Companies' bondholders. 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 $225 million, which is included in the construction forecast provided under "Capital Requirements" for 2002 through 2006. Air Regulation Under the provisions of the Clean Air Act of 1970, the States of Ohio and New Jersey and the Commonwealth of Pennsylvania have adopted ambient air quality standards, and related emission limits, including limits for sulfur dioxide (SO2) and particulates. In addition, the U.S. Environmental Protection Agency (EPA) promulgated an SO2 regulatory plan for Ohio which became effective for OE's, CEI's and TE's plants in 1977. Generating plants to be constructed in the future and some future modifications of existing facilities will be covered not only by the applicable state standards but also by EPA emission performance standards for new sources. In Ohio, New Jersey and Pennsylvania the construction or certain modifications of emission sources requires approval from appropriate environmental authorities, and the facilities involved may not be operated unless a permit or variance to do so has been issued by those same authorities. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. 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, New Jersey 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 nineteen states and the District of Columbia, including New Jersey, Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. State Implementation Plans (SIP) must comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania submitted a SIP that requires compliance with the NOx budgets at the 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. 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 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. Water Regulation Various water quality regulations, the majority of which are the result of the federal Clean Water Act and its amendments, apply to the Companies' plants. In addition, Ohio, New Jersey and Pennsylvania have water quality standards applicable to the Companies' operations. As provided in the Clean Water Act, authority to grant federal National Pollutant Discharge Elimination System water discharge permits can be assumed by a state. Ohio, New Jersey and Pennsylvania have assumed such authority. Waste Disposal As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, the Companies' proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. The Companies 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. In addition, JCP&L has accrued liabilities for environmental remediation of former manufactured gas plants in New Jersey. The Companies have total accrued liabilities aggregating approximately $60 million as of December 31, 2001. FirstEnergy does not believe environmental remediation costs will have a material adverse effect on its financial condition, cash flows or results of operations. In 1980, Congress passed the Low-Level Radioactive Waste Policy Act which provides that the disposal of low-level radioactive waste is the responsibility of the state where such waste is generated. The Act encourages states to form compacts among themselves to develop regional disposal facilities. Failure by a state or compact to begin implementation of a program could result in access denial to the two facilities currently accepting low-level radioactive waste. Ohio is part of the Midwest Compact and has responsibility for siting and constructing a disposal facility. On June 26, 1997, the Midwest Compact Commission (Compact) voted to cease all siting activities in the host state of Ohio and to dismantle the Ohio Low-Level Radioactive Waste Facility Development Authority, the statutory agency charged with siting and constructing the low-level radioactive waste disposal facility. While the Compact remains intact, it has no plans to site or construct a low-level radioactive waste disposal facility in the Midwest. The Companies continue to ship low-level radioactive waste from their nuclear facilities to the Barnwell, South Carolina waste disposal facility. Summary Environmental controls are still developing and require, in many instances, balancing the needs for additional quantities of energy in future years and the need to protect the environment. As a result, the Companies cannot now estimate the precise effect of existing and potential regulations and legislation upon any of their existing and proposed facilities and operations or upon their ability to issue additional first mortgage bonds under their respective mortgages. These mortgages contain covenants by the Companies to observe and conform to all valid governmental requirements at the time applicable unless in course of contest, and provisions which, in effect, prevent the issuance of additional bonds if there is a completed default under the mortgage. The provisions of each of the mortgages, in effect, also require, in the opinion of counsel for the respective Companies, that certification of property additions as the basis for the issuance of bonds or other action under the mortgages be accompanied by an opinion of counsel that the company certifying such property additions has all governmental permissions at the time necessary for its then current ownership and operation of such property additions. The Companies intend to contest any requirements they deem unreasonable or impossible for compliance or otherwise contrary to the public interest. Developments in these and other areas of regulation may require the Companies to modify, supplement or replace equipment and facilities, and may delay or impede the construction and operation of new facilities, at costs which could be substantial. Fuel Supply The Companies' sources of generation during 2001 were: Coal Nuclear ---- ------- OE.................... 72.8% 27.2% Penn.................. 37.5% 62.5% CEI................... 53.8% 46.2% TE.................... 42.3% 57.7% Total FirstEnergy..... 57.5% 42.5% Generation from JCP&L's and Met-Ed's hydro and combustion turbine generation facilities was minimal in 2001. FirstEnergy currently has long-term coal contracts which will provide approximately 13,500,000 tons for the year 2002. The contracts are shared among the Companies based on various economic considerations. This contract coal is produced primarily from mines located in Pennsylvania, Kentucky and West Virginia. The contracts expire at various times through December 31, 2007. The Companies estimate their 2002 coal requirements to be approximately 15,190,000 tons (OE - 6,770,000, Penn - 6,110,000, CEI - 1,590,000, and TE - 720,000). These requirements assume that the sale of the Lake Plants (Ashtabula, Bay Shore, Eastlake and Lakeshore) to NRG will be completed by June 1, 2002. See "Environmental Matters" for factors pertaining to meeting environmental regulations affecting coal-fired generating units. OES Fuel was the sole lessor for OE's and Penn's nuclear fuel requirements (see "Capital Requirements," Note 4G of Notes to FirstEnergy's Consolidated Financial Statements and Note 3G of Notes to OE's Consolidated Financial Statements). OES Fuel credit agreements expire as of March 31, 2002. OE and Penn have arranged for other financing for their nuclear fuel requirements. Nuclear fuel is currently financed for CEI and TE through a revolving line of credit. FirstEnergy has contracts for uranium material and conversion services through 2006. The enrichment services are contracted for the majority of the enrichment requirements for nuclear fuel through 2006. Fabrication services for fuel assemblies are contracted for the next two reloads for Beaver Valley Unit 1, three reloads for Beaver Valley Unit 2 (through approximately 2004 and 2005, respectively), the next two reloads for Davis-Besse (through approximately 2005) and through the life of the plant for Perry (through approximately 2026). In addition to the existing commitments, FirstEnergy intends to make additional arrangements for the supply of uranium and for the subsequent conversion, enrichment, fabrication, and waste disposal services. On-site spent fuel storage facilities are expected to be adequate for Perry through 2011; facilities at Beaver Valley Units 1 and 2 are expected to be adequate through 2018 and 2009, respectively. After scheduled plant modifications are completed in 2002, Davis-Besse will have adequate storage through the remainder of its operating license period. After current on-site storage capacity is exhausted, additional storage capacity will have to be obtained either through plant modifications, interim off-site disposal, or permanent waste disposal facilities. The Federal Nuclear Waste Policy Act of 1982 provides for the construction of facilities for the permanent disposal of high-level nuclear wastes, including spent fuel from nuclear power plants operated by electric utilities; however, the selection of a suitable site is embroiled in the political process. FirstEnergy has contracts with the U.S. Department of Energy (DOE) for the disposal of spent fuel for Beaver Valley, Davis-Besse and Perry. On February 15, 2002, President Bush approved the DOE's recommendation of Yucca Mountain for underground disposal of spent nuclear fuel from nuclear power plants and high level waste from U.S. defense programs. Those who oppose this recommendation have filed to overturn this decision and both houses of Congress have 90 consecutive days of session from the filing date to override this opposition. The recommendation by President Bush enables the process to proceed to the licensing phase. Based on the DOE schedule published in the July 1999 Draft Environmental Impact Statement, the Yucca Mountain Repository is currently projected to start receiving spent fuel in 2010. FirstEnergy intends to make additional arrangements for storage capacity as a contingency for further delays with the DOE acceptance of spent fuel for disposal past 2010. System Capacity and Reserves The 2001 net maximum hourly demand for each of the Companies was: OE-6,253 MW (including an additional 387 MW of firm power sales under a contract which extends through 2005) on August 8, 2001; Penn-1,011MW (including an additional 63 MW of firm power sales under a contract which extends through 2005) on August 8, 2001; CEI-4,446 MW on August 7, 2001; TE-2,047 MW on July 23, 2001; JCP&L-5,592 MW on August 9, 2001; Met-Ed-2,567 MW on August 9, 2001; and Penelec-2,654 MW on August 9, 2001. JCP&L's load was auctioned off in the New Jersey BGS Auction, transferring the full 5,100 MW load obligation to other parties for the period August 1, 2002 to July 31, 2003. FES participated in the auction and won a segment of that load. Based on existing capacity plans, ongoing arrangements for firm purchase contracts, and anticipated term power sales and purchases, FirstEnergy has sufficient supply resources to meet load obligations. The current FirstEnergy capacity portfolio contains 13,285 MW of owned generation and approximately 1,600 MW of long-term purchases from non-utility generators. An additional 340 MW of peaking capacity will be added around mid-2002. The sale of four power plants expected to close in mid-2002 will have little impact on the supply plan. As part of the asset sale, FirstEnergy's PPA will provide a similar amount of electricity from the purchaser as would have been expected prior to the sale. The PPA runs from the close of the sale transaction, expected mid year 2002, through December 31, 2005 which is the end of the transition period for the Ohio operating companies. Any remaining load obligations will be met through a mix of multi-year forward purchases, short-term forward purchases (less than one year) and spot market purchases. Regional Reliability The Companies participate with 24 other electric companies operating in nine states in ECAR, which was organized for the purpose of furthering the reliability of bulk power supply in the area through coordination of the planning and operation by the ECAR members of their bulk power supply facilities. The ECAR members have established principles and procedures regarding matters affecting the reliability of the bulk power supply within the ECAR region. Procedures have been adopted regarding: i) the evaluation and simulated testing of systems' performance; ii) the establishment of minimum levels of daily operating reserves; iii) the development of a program regarding emergency procedures during conditions of declining system frequency; and iv) the basis for uniform rating of generating equipment. Following the FirstEnergy/GPU merger the transmission facilities of JCP&L, Met-Ed and Penelec continue to be operated by PJM. PJM is the organization responsible for the operation and control of the bulk electric power system throughout major portions of five Mid-Atlantic states and the District of Columbia. PJM is dedicated to meeting the reliability criteria and standards of the North American Reliability Council and the Mid-Atlantic Area Council. Competition The Companies had traditionally competed with other utilities for intersystem bulk power sales and for sales to municipalities and cooperatives. The Companies compete with suppliers of natural gas and other forms of energy in connection with their industrial and commercial sales and in the home climate control market, both with respect to new customers and conversions, and with all other suppliers of electricity. To date, there has been no substantial cogeneration by the Companies' customers. As a result of the actions taken by state legislative bodies over the last few years, major changes in the electric utility business are occurring in parts of the United States, including Ohio, New Jersey and Pennsylvania where FirstEnergy's utility subsidiaries operate. These changes have resulted in fundamental alterations in the way traditional integrated utilities and holding company systems, like FirstEnergy, conduct their business. In accordance with the Ohio electric utility restructuring law under which Ohio electric customers could begin choosing their electric generation suppliers starting in January 2001, FirstEnergy has further aligned its business units to accommodate its retail strategy and participate in the competitive electricity marketplace in Ohio. The organizational changes are intended to deal with the unbundling of electric utility services and new ways of conducting business. Sales of electricity in deregulated markets are diversifying FirstEnergy's revenue sources through its competitive subsidiaries in areas outside of the Companies' franchise areas. This strategy has positioned FirstEnergy to compete in the northeast quadrant of the United States - the region targeted by the Company for growth. FirstEnergy's competitive subsidiaries are actively participating in deregulated energy markets in Ohio, Pennsylvania, New Jersey, Delaware and Maryland. Currently, FES is providing electric generation to customers within those states. As additional states within the northeast region of the United States become deregulated, FES is preparing to enter these markets. Competition in Ohio's electric generation began on January 1, 2001. FirstEnergy moved the operation of the generation portion of its business to the competitive business unit as reflected in its approved Ohio transition plan. The Companies will continue to provide generation services to regulated franchise customers who have not chosen an alternative, competitive generation supplier, except in New Jersey where JCP&L's obligation to provide BGS has been removed through a transitional mechanism of auctioning the obligation (see "NJBPU Rate Matters"). The Ohio Companies and Penn obtain their generation through power supply agreements with FES. In addition to electric generation, FES is also competing in deregulated natural gas markets as well as offering other energy-related products and services. Research and Development The Companies participate in funding the Electric Power Research Institute (EPRI), which was formed for the purpose of expanding electric research and development under the voluntary sponsorship of the nation's electric utility industry - public, private and cooperative. Its goal is to mutually benefit utilities and their customers by promoting the development of new and improved technologies to help the utility industry meet present and future electric energy needs in environmentally and economically acceptable ways. EPRI conducts research on all aspects of electric power production and use, including fuels, generation, delivery, energy management and conservation, environmental effects and energy analysis. The major portion of EPRI research and development projects is directed toward practical solutions and their applications to problems currently facing the electric utility industry. In 2001, approximately 69% of the Companies' research and development expenditures were related to EPRI. Executive Officers The executive officers are elected at the annual organization meeting of the Board of Directors, held immediately after the annual meeting of stockholders, and hold office until the next such organization meeting, unless the Board of Directors shall otherwise determine, or unless a resignation is submitted.
Position Held During Name Age Past Five Years Dates - ----------------- --- ---------------------------------------------------------- ------------------ F. D. Hafer 61 Chairman of the Board 2001-present** Chairman, President and Chief Executive Officer-GPU *-2001 H. P. Burg 55 Vice Chairman of the Board and Chief Executive Officer 2001-present** Chairman of the Board and Chief Executive Officer 2000-2001 President and Chief Executive Officer 1999-2000 President and Chief Operating Officer 1998-1999 President and Chief Financial Officer 1997-1998 President, Chief Operating Officer and Chief Financial Officer-OE *-1997 A. J. Alexander 50 President and Chief Operating Officer 2001-present President 2000-2001 Executive Vice President and General Counsel 1997-2000 Senior Vice President and General Counsel-OE *-1997 A. R. Garfield 63 President - FirstEnergy Solutions 2001-present Senior Vice President - Supply and Sales 2000-2001 Vice President - Business Development 1997-2000 Vice President - System Operations - OE *-1997 R. F. Saunders 58 President and Chief Nuclear Officer - FENOC 2000-present Vice President, Nuclear Site Operations - Pennsylvania Power & Light 1998-2000 Vice President, Nuclear Engineering - Virginia Power Company *-1998 E. T. Carey 59 Senior Vice President 2001-present Vice President - Distribution 1997-2001 Vice President - Regional Operations and Customer Service-OE *-1997 K. J. Keough 42 Senior Vice President 2001-present Vice President - Business Planning & Ventures 1999-2001 Partner - McKinsey & Company *-1999 R. H. Marsh 51 Senior Vice President and Chief Financial Officer 2001-present Vice President and Chief Financial Officer 1998-2001 Vice President - Finance 1997-1998 Treasurer - OE *-1997 C. B. Snyder 56 Senior Vice President 2001-present Executive Vice President - Corporate Affairs - GPU 1998-2001 Senior Vice President - Corporate Affairs - GPU *-1998 L. L. Vespoli 42 Senior Vice President and General Counsel 2001-present Vice President and General Counsel 2000-2001 Associate General Counsel 1997-2000 Senior Attorney - OE *-1997 H. L. Wagner 49 Vice President and Controller 2001-present Controller 1997-2001 Comptroller - OE *-1997 Mrs. Vespoli and Messrs. Burg, Carey, Marsh and Wagner are the executive officers of OE, Penn, CEI, TE, Met-Ed and Penelec. Mrs. Vespoli and Messrs. Carey, Marsh and Wagner are the executive officers of JCP&L. * Indicates position held at least since January 1, 1997. ** Mr. Hafer is retiring from the Board effective at the annual meeting of stockholders on May 21, 2002. Mr. Burg will succeed Mr. Hafer as Chairman of the Board at that time and will continue as Chief Executive Officer.
As of January 1, 2002, FirstEnergy's nonutility subsidiaries and the Companies had a total of 18,700 employees located in the United States as follows: FirstEnergy-1,588, OE-1,362, CEI-1,025, TE-507, Penn-256, FES-2,375, FENOC-2,717, FEFSG-3,780, MARBEL-39 and Former GPU Companies-5,051 (primarily GPU Energy Company employees for JCP&L, Met-Ed and Penelec). ITEM 2. PROPERTIES The Companies' respective first mortgage indentures constitute, in the opinion of the Companies' counsel, direct first liens on substantially all of the respective Companies' physical property, subject only to excepted encumbrances, as defined in the indentures. See "Leases" and "Capitalization" notes to the respective financial statements for information concerning leases and financing encumbrances affecting certain of the Companies' properties. The Companies own, individually or together as tenants in common, and/or lease, the generating units in service as of March 1, 2002, shown on the table below.
Net Demonstrated Capacity (MW) -------------- OE Penn CEI --------------- ------------ --------------- Unit Total % MW % MW % MW ---- ----- - -- - -- - -- Plant - Location - ---------------- Coal-Fired Units - ---------------- Ashtabula-........ 5,7,8,9 376 -- -- -- -- 100.00% 376 Ashtabula, OH (a) Bay Shore-........ 1-4 631 -- -- -- -- -- -- Toledo, OH (a) R. E. Burger-..... 3-5 406 100.00% 406 -- -- -- -- Shadyside, OH Eastlake-Eastlake, OH (a) 1-5 1,233 -- -- -- -- 100.00% 1,233 Lakeshore-........ 18 245 -- -- -- -- 100.00% 245 Cleveland, OH (a) B. Mansfield-..... 1 780 60.00% 468 33.50% 261 6.50% 51 Shippingport, PA 2 780 43.06% 336 9.36% 73 30.28%(b) 236 3 800 49.34% 395 6.28% 50 24.47% 196 W. H. Sammis-..... 1-6 1,620 100.00% 1,620 -- -- -- -- Stratton, OH... 7 600 48.00% 288 20.80% 125 31.20% 187 ------ ----- ----- ----- Total........ 7,471 3,513 509 2,524 ------ ----- ----- ----- Nuclear Units - ------------- Beaver Valley-.... 1 821 35.00% 287 65.00% 534 -- -- Shippingport, PA 2 831 41.88%(c) 348 13.74% 114 24.47% 203 Davis-Besse-...... 1 883 -- -- -- -- 51.38% 454 Oak Harbor, OH. Perry-............ 1 1,266 30.00%(c) 380 5.24% 66 44.85% 568 N. Perry Village, OH ------ ----- ----- ----- Total........ 3,801 1,015 714 1,225 ------ ----- ------ ----- Oil/Gas-Fired/ Pumped Storage Units - -------------------- Edgewater-Lorain, OH 4 100 100.00% 100 -- -- -- -- Richland-Defiance, OH 1-6 432 -- -- -- -- -- -- Seneca-Warren, PA. 1-3 435 -- -- -- -- 100.00% 435 West Lorain-...... 1-6 545 100.00% 545 -- -- -- -- Lorain, OH..... Yard's Creek-..... 1-3 200 -- -- -- -- -- Other............. 301 109 19 33 ------ ----- ----- ----- Total........ 2,013 754 19 468 ------ ----- ----- ----- Total........ 13,285 5,282 1,242 4,217 ====== ===== ===== ===== Notes: (a) Companies' interests in these plants are to be sold to NRG Energy, Inc. in mid-2002. (b) CEI's interests consist of 1.68% owned and 28.60% leased and TE's interests are leased. (c) OE's interests consist of 20.22% owned and 21.66% leased for Beaver Valley Unit 2; and 17.42% owned (representing portion leased from a wholly owned subsidiary of OE) and 12.58% leased for Perry. (d) TE's interests consist of 1.65% owned and 18.26% leased.
Net Demonstrated Capacity (MW) -------------- TE JCP&L Met-Ed --------------- ------------ ----------------- Unit Total % MW % MW % MW Plant - Location Coal-Fired Units - ---------------- Ashtabula-........ 5,7,8,9 376 -- -- -- -- -- -- Ashtabula, OH (a) Bay Shore-........ 1-4 631 100.00% 631 -- -- -- -- Toledo, OH (a) R. E. Burger-..... 3-5 406 -- -- -- -- -- -- Shadyside, OH Eastlake-Eastlake, OH (a) 1-5 1,233 -- -- -- -- -- -- Lakeshore-........ 18 245 -- -- -- -- -- -- Cleveland, OH (a) B. Mansfield-..... 1 780 -- -- -- -- -- -- Shippingport, PA 2 780 17.30%(b) 135 -- -- -- -- 3 800 19.91% 159 -- -- -- -- W. H. Sammis-..... 1-6 1,620 -- -- -- -- -- -- Stratton, OH... 7 600 -- -- -- -- -- -- ------ ----- ---- ---- Total........ 7,471 925 -- -- ------ ----- ---- ---- Nuclear Units - ------------- Beaver Valley-.... 1 821 -- -- -- -- -- -- Shippingport, PA 2 831 19.91%(d) 166 -- -- -- -- Davis-Besse-...... 1 883 48.62% 429 -- -- -- -- Oak Harbor, OH. Perry-............ 1 1,266 19.91% 252 -- -- -- -- N. Perry Village, OH ------ ----- ---- ---- 3,801 847 -- -- Total........ ------ ----- ---- ---- Oil/Gas-Fired/ Pumped Storage Units - -------------------- Edgewater-Lorain, OH 4 100 -- -- -- -- -- -- Richland-Defiance, OH 1-6 432 100.00% 432 -- -- -- -- Seneca-Warren, PA. 1-3 435 -- -- -- -- -- West Lorain-...... 1-6 545 -- -- -- -- -- -- Lorain, OH..... Yard's Creek-..... 1-3 200 -- -- 50% 200 -- -- Other............. 301 35 86 19 ------ ----- ---- ---- Total........ 2,013 467 286 19 ------ ----- ---- ---- Total........ 13,285 2,239 286 19 ====== ===== ==== ==== Notes: (a) Companies' interests in these plants are to be sold to NRG Energy, Inc. in mid-2002. (b) CEI's interests consist of 1.68% owned and 28.60% leased and TE's interests are leased. (c) OE's interests consist of 20.22% owned and 21.66% leased for Beaver Valley Unit 2; and 17.42% owned (representing portion leased from a wholly owned subsidiary of OE) and 12.58% leased for Perry. (d) TE's interests consist of 1.65% owned and 18.26% leased.
Prolonged outages of existing generating units might make it necessary for the Companies, depending upon the demand for electric service upon their system, to use to a greater extent than otherwise, less efficient and less economic generating units, or purchased power, and in some cases may require the reduction of load during peak periods under the Companies' interruptible programs, all to an extent not presently determinable. The Companies' generating plants and load centers are connected by a transmission system consisting of elements having various voltage ratings ranging from 23 kilovolts (kV) to 345 kV. The Companies' overhead and underground transmission lines aggregate 14,952 pole miles. The Companies' electric distribution systems include 110,548 miles of overhead pole line and underground conduit carrying primary, secondary and street lighting circuits. They own substations with a total installed transformer capacity of 86,566,000 kilovolt-amperes. FirstEnergy's transmission facilities that are owned and operated by ATSI also interconnect with those of AEP, DPL, Duquesne Light Company, Allegheny Energy, Inc., Michigan Electric Coordination Systems and Penelec. The transmission facilities of JCP&L, Met-Ed and Penelec are physically interconnected and are operated on an integrated basis as part of the PJM RTO. FirstEnergy's distribution and transmission systems as of December 31, 2001, consist of the following: Substation Distribution Transmission Transformer Lines Lines Capacity ------------ ------------- ------------ (Miles) (kV-amperes) OE.................... 27,750 1,124 8,209,000 Penn.................. 5,232 38 1,712,000 CEI................... 24,214 1,827 9,337,000 TE.................... 896 223 3,596,000 JCP&L................. 17,764 2,033 18,438,000 Met-Ed................ 14,434 1,236 9,596,000 Penelec............... 20,258 2,712 13,182,000 ATSI.................. -- 5,759 22,496,000 -------- ------ ---------- Total................. 110,548 14,952 86,566,000 The Company's MARBEL Energy subsidiary owns interests in crude oil and natural gas production, as well as natural gas distribution and transmission facilities. MARBEL's subsidiaries include Marbel HoldCo, Inc. a holding company which has a 50% ownership in Great Lakes Energy Partners, LLC, an oil and natural gas exploration and production venture and Northeast Ohio Operating Companies, Inc. which has as a subsidiary, Northeast Ohio Natural Gas Corporation. The joint venture in Great Lakes includes interests in more than 7,900 oil and natural gas wells, drilling rights to nearly one million acres, proved reserves of 480 billion cubic feet equivalent of natural gas and oil and 4,800 miles of pipelines in the Appalachian Basin. ITEM 3. LEGAL PROCEEDINGS Reference is made to Note 6, Commitments, Guarantees and Contingencies, of the Notes to Consolidated Financial Statements contained in Item 8 for a description of certain legal proceedings involving FirstEnergy, OE, CEI, TE, Penn, JCP&L, Met-Ed and Penelec. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item for FirstEnergy is included on page 17 of FirstEnergy's 2001 Annual Report to Stockholders (Exhibit 13). The information required for OE, CEI, TE, Penn, JCP&L, Met-Ed and Penelec is not applicable because they are wholly owned subsidiaries. ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required for items 6 through 8 is incorporated herein by reference to Selected Financial Data, Management's Discussion and Analysis of Results of Operations and Financial Condition, and Financial Statements included on the pages shown in the following table in the respective company's 2001 Annual Report to Stockholders (Exhibit 13). Item 6 Item 7 Item 8 ------ ------ ------ FirstEnergy.............. 17 18-29 30-55 OE....................... 1 2-7 8-25 Penn..................... 1 2-6 7-21 CEI...................... 1 2-8 9-26 TE....................... 1 2-7 8-24 JCP&L.................... 1 2-8 9-23 Met-Ed................... 1 2-7 8-21 Penelec.................. 1 2-8 9-22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT FirstEnergy ----------- The information required by Item 10, with respect to Identification of FirstEnergy's Directors and with respect to reports required to be filed under Section 16 of the Securities Exchange Act of 1934, is incorporated herein by reference to the Company's 2002 Proxy Statement filed with the SEC pursuant to Regulation 14A and, with respect to Identification of Executive Officers, to "Part I, Item 1. Business - Executive Officers" herein. OE, Penn, CEI, TE, JCP&L, Met-Ed and Penelec -------------------------------------------- H. P. Burg, A. J. Alexander and R. H. Marsh are the Directors of OE, Penn, CEI, TE, Met-Ed and Penelec. Information concerning these individuals is shown in the "Executive Officers" section of Item 1. E. T. Carey, C. E. Jones, L. L. Vespoli, G. E. Persson and S. C. Van Ness are the Directors of JCP&L. Mr. Jones has served as FirstEnergy's Vice President-Regional Operations since 2001. From 1998-2001, Mr. Jones served as President of FirstEnergy's Northern Region; from 1997-1998 he served as Manager of the Northern Region; and prior to that he served as Ohio Edison's Division Manager-Akron. Mrs. Persson has served in the N. J. Division of Consumer Affairs Elder Fraud Investigation Unit since 1999. She previously served as liaison (Special Assistant Director) between the N. J. Division of Consumer Affairs and various state boards. Prior to 1995, she was owner and President of Business Dynamics Associates of Red Bank, NJ. Mrs. Persson is a member of the United States Small Business Administration National Advisory Board, the New Jersey Small Business Advisory Council, the Board of Advisors of Brookdale Community College and the Board of Advisors of Georgian Court College. Mr. Van Ness has been Of Counsel in the firm of Hubert, Van Ness, Cayci and Goodell of Princeton, NJ since 1998. Prior to that he was affiliated with the law firm of Pico, Mack, Kennedy, Jaffe, Perrella and Yoskin of Trenton, NJ since 1990. He is also a director of The Prudential Insurance Company of America. Information concerning the other Directors of JCP&L is shown in the "Executive Officers" section of item 1. ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS FirstEnergy, OE, CEI, TE, Penn, JCP&L, Met-Ed and Penelec - --------------------------------------------------------- The information required by Items 11, 12 and 13 is incorporated herein by reference to the Company's 2002 Proxy Statement filed with the SEC pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements Included in Part II of this report and incorporated herein by reference to the respective company's 2001 Annual Report to Stockholders (Exhibit 13 below) at the pages indicated.
First- Energy OE Penn CEI TE JCP&L Met-Ed Penelec ------ -- ---- --- -- ----- ------ ------- Report of Independent Public Accountants................ 16 26 22 27 25 24-25 22-23 23-24 Statements of Income-Three Years Ended December 31, 2001 30 8 7 9 8 9 8 9 Balance Sheets-December 31, 2001 and 2000............... 31 9 8 10 9 10 9 10 Statements of Capitalization-December 31, 2001 and 2000. 32-35 10-11 9 11-12 10-11 11 10 11 Statements of Common Stockholders' Equity-Three Years Ended December 31, 2001.............................. 36 12 10 13 12 12 11 12 Statements of Preferred Stock-Three Years Ended December 31, 2001.................................... 37 12 10 13 12 12 11 12 Statements of Cash Flows-Three Years Ended December 31, 2001 38 13 11 14 13 13 12 13 Statements of Taxes-Three Years Ended December 31, 2001. 39 14 12 15 14 14 13 14 Notes to Financial Statements........................... 40-55 15-25 13-21 16-26 15-24 15-23 14-21 15-22
2. Financial Statement Schedules Included in Part IV of this report:
First- Energy OE Penn CEI TE JCP&L Met-Ed Penelec ------ -- ---- --- -- ----- ------ ------- Report of Independent Public Accountants................ 51 52 55 53 54 56 57 58 Schedule - Three Years Ended December 31, 2001: II - Consolidated Valuation and Qualifying Accounts..... 59 60 63 61 62 64 65 66
Schedules other than the schedule listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. 3. Exhibits - FirstEnergy Exhibit Number - ------ 3-1 -- Articles of Incorporation constituting FirstEnergy Corp.'s Articles of Incorporation, dated September 17, 1996. (September 17, 1996 Form 8-K, Exhibit C) 3-1(a) -- Amended Articles of Incorporation of FirstEnergy Corp. (Registration No. 333-21011, Exhibit (3)-1.) 3-2 -- Regulations of FirstEnergy Corp. (September 17, 1996 Form 8-K, Exhibit D) 3-2(a) -- FirstEnergy Corp. Amended Code of Regulations. (Registration No. 333-21011, Exhibit (3)-2.) 4-1 -- Rights Agreement (December 1, 1997 Form 8-K, Exhibit 4.1) (A) 4-2 -- FirstEnergy Corp. to The Bank of New York, Supplemental Indenture, dated November 7, 2001. 10-1 -- FirstEnergy Corp. Executive and Director Incentive Compensation Plan, revised November 15, 1999. (1999 Form 10-K, Exhibit 10-1) 10-2 -- Amended FirstEnergy Corp. Deferred Compensation Plan for Directors, revised November 15, 1999. (1999 Form 10-K, Exhibit 10-2) 10-3 -- Employment, severance and change of control agreement between FirstEnergy Corp. and executive officers. (1999 Form 10-K, Exhibit 10-3) 10-4 -- FirstEnergy Corp. Supplemental Executive Retirement Plan, amended January 1, 1999. (1999 Form 10-K, Exhibit 10-4) 10-5 -- FirstEnergy Corp. Executive Incentive Compensation Plan. (1999 Form 10-K, Exhibit 10-5) 10-6 -- Restricted stock agreement between FirstEnergy Corp. and A. J. Alexander. (1999 Form 10-K, Exhibit 10-6) 10-7 -- FirstEnergy Corp. Executive and Director Incentive Compensation Plan. (1998 Form 10-K, Exhibit 10-1) 10-8 -- Amended FirstEnergy Corp. Deferred Compensation Plan for Directors, amended February 15, 1999. (1998 Form 10-K, Exhibit 10-2) 10-9 -- Restricted stock agreement between FirstEnergy Corp. and A. J. Alexander. (2000 Form 10-K, Exhibit 10-9) 10-10 -- Restricted stock agreement between FirstEnergy Corp. and H. P. Burg. (2000 Form 10-K,Exhibit 10-10) 10-11 -- Stock option agreement between FirstEnergy Corp. and officers dated November 22, 2000. (2000 Form 10-K, Exhibit 10-11) 10-12 -- Stock option agreement between FirstEnergy Corp. and officers dated March 1, 2000. (2000 Form 10-K, Exhibit 10-12) 10-13 -- Stock option agreement between FirstEnergy Corp. and director dated January 1, 2000. (2000 Form 10-K, Exhibit 10-13) 10-14 -- Stock option agreement between FirstEnergy Corp. and two directors dated January 1, 2001. (2000 Form 10-K, Exhibit 10-14) (A) 10-15 -- Executive and Director Incentive Compensation Plan dated May 15, 2001. (A) 10-16 -- Amended FirstEnergy Corp. Deferred Compensation Plan for Directors, revised September 18, 2000. (A) 10-17 -- Stock Option Agreements between FirstEnergy Corp. and Officers dated May 16, 2001. (A) 10-18 -- Restricted Stock Agreements between FirstEnergy Corp. and Officers dated February 20, 2002. (A) 10-19 -- Stock Option Agreements between FirstEnergy Corp. and One Director dated January 1, 2002. (A) 10-20 -- FirstEnergy Corp. Executive Deferred Compensation Plan. (A) 10-21 -- Executive Incentive Compensation Plan-Tier 2. (A) 10-22 -- Executive Incentive Compensation Plan-Tier 3. (A) 10-23 -- Executive Incentive Compensation Plan-Tier 4. (A) 10-24 -- Executive Incentive Compensation Plan-Tier 5. (A) 10-25 -- Amendment to GPU, Inc. 1990 Stock Plan for Employees of GPU, Inc. and Subsidiaries, effective April 5, 2001. (A) 10-26 -- Form of Amendment, effective November 7, 2001, to GPU, Inc. 1990 Stock Plan for Employees of GPU, Inc. and Subsidiaries, Deferred Remuneration Plan for Outside Directors of GPU, Inc., and Retirement Plan for Outside Directors of GPU, Inc. (A) 10-27 -- GPU, Inc. Stock Option and Restricted Stock Plan for MYR Group, Inc. Employees. 10-28 -- GPU, Inc. 1990 Stock Plan for Employees of GPU, Inc. and Subsidiaries as amended and restated to reflect amendments through June 3, 1999. (1999 Form 10-K, Exhibit 10-V, File No. 1-6047, GPU, Inc.) 10-29 -- Form of 1998 Stock Option Agreement under the GPU, Inc. 1990 Stock Plan for Employees of GPU, Inc. and Subsidiaries. (1997 Form 10-K, Exhibit 10-Q, File No. 1-6047, GPU, Inc.) 10-30 -- Form of 1999 Stock Option Agreement under the GPU, Inc. 1990 Stock Plan for Employees of GPU, Inc. and Subsidiaries. (1999 Form 10-K, Exhibit 10-W, File No. 1-6047, GPU, Inc.) 10-31 -- Form of 2000 Stock Option Agreement under the GPU, Inc. 1990 Stock Plan for Employees of GPU, Inc. and Subsidiaries. (2000 Form 10-K, Exhibit 10-W, File No. 1-6047, GPU, Inc.) 10-32 -- Deferred Remuneration Plan for Outside Directors of GPU, Inc. as amended and restated effective August 8, 2000. (2000 Form 10-K, Exhibit 10-O, File No. 1-6047, GPU, Inc.) 10-33 -- Retirement Plan for Outside Directors of GPU, Inc. as amended and restated as of August 8, 2000. (2000 Form 10-K, Exhibit 10-N, File No. 1-6047, GPU, Inc.) 10-34 -- Forms of Estate Enhancement Program Agreements entered into by certain former GPU directors. (1999 Form 10-K, Exhibit 10-JJ, File No. 1-6047, GPU, Inc.) (A) 12.1 -- Consolidated fixed charge ratios. (A) 13 -- 2001 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the SEC.) (A) 21 -- List of Subsidiaries of the Registrant at December 31, 2001. (A) 23 -- Consent of Independent Public Accountants. (A) 99 -- Letter to Securities and Exchange Commission (A) -- Provided herein in electronic format as an exhibit. 3. Exhibits - Ohio Edison 2-1 -- Agreement and Plan of Merger, dated as of September 13, 1996, between Ohio Edison Company (OE) and Centerior Energy Corporation. (September 17, 1996 Form 8-K, Exhibit 2-1). 3-1 -- Amended Articles of Incorporation, Effective June 21, 1994, constituting OE's Articles of Incorporation. (1994 Form 10-K, Exhibit 3-1.) (A) 3-2 -- Amended and Restated Code of Regulations, amended March 15, 2002. (B) 4-1 -- Indenture dated as of August 1, 1930 between OE and Bankers Trust Company, (now the Bank of New York), as Trustee, as amended and supplemented by Supplemental Indentures: Dated as of File Reference Exhibit No. ----------- -------------- ----------- March 3, 1931 2-1725 B1, B-1(a),B-1(b) November 1, 1935 2-2721 B-4 January 1, 1937 2-3402 B-5 September 1, 1937 Form 8-A B-6 June 13, 1939 2-5462 7(a)-7 August 1, 1974 Form 8-A, August 28, 1974 2(b) July 1, 1976 Form 8-A, July 28, 1976 2(b) December 1, 1976 Form 8-A, December 15, 1976 2(b) June 15, 1977 Form 8-A, June 27, 1977 2(b) Supplemental Indentures: September 1, 1944 2-61146 2(b)(2) April 1, 1945 2-61146 2(b)(2) September 1, 1948 2-61146 2(b)(2) May 1, 1950 2-61146 2(b)(2) January 1, 1954 2-61146 2(b)(2) May 1, 1955 2-61146 2(b)(2) August 1, 1956 2-61146 2(b)(2) March 1, 1958 2-61146 2(b)(2) April 1, 1959 2-61146 2(b)(2) June 1, 1961 2-61146 2(b)(2) September 1, 1969 2-34351 2(b)(2) May 1, 1970 2-37146 2(b)(2) September 1, 1970 2-38172 2(b)(2) June 1, 1971 2-40379 2(b)(2) August 1, 1972 2-44803 2(b)(2) September 1, 1973 2-48867 2(b)(2) Dated as of File Reference Exhibit No ----------- -------------- ---------- May 15, 1978 2-66957 2(b)(4) February 1, 1980 2-66957 2(b)(5) April 15, 1980 2-66957 2(b)(6) June 15, 1980 2-68023 (b)(4)(b)(5) October 1, 1981 2-74059 (4)(d) October 15, 1981 2-75917 (4)(e) February 15, 1982 2-75917 (4)(e) July 1, 1982 2-89360 (4)(d) March 1, 1983 2-89360 (4)(e) March 1, 1984 2-89360 (4)(f) September 15, 1984 2-92918 (4)(d) September 27, 1984 33-2576 (4)(d) November 8, 1984 33-2576 (4)(d) December 1, 1984 33-2576 (4)(d) December 5, 1984 33-2576 (4)(e) January 30, 1985 33-2576 (4)(e) February 25, 1985 33-2576 (4)(e) July 1, 1985 33-2576 (4)(e) October 1, 1985 33-2576 4)(e) January 15, 1986 33-8791 4)(d) May 20, 1986 33-8791 4)(d) June 3, 1986 33-8791 (4)(e) October 1, 1986 33-29827 (4)(d) August 25, 1989 33-34663 (4)(d) February 15, 1991 33-39713 (4)(d) May 1, 1991 33-45751 (4)(d) May 15, 1991 33-45751 (4)(d) September 15, 1991 33-45751 (4)(d) April 1, 1992 33-48931 (4)(d) June 15, 1992 33-48931 (4)(d) September 15, 1992 33-48931 (4)(e) April 1, 1993 33-51139 (4)(d) June 15, 1993 33-51139 (4)(d) September 15, 1993 33-51139 (4)(d) November 15, 1993 1-2578 (4)(2) April 1, 1995 1-2578 (4)(2) May 1, 1995 1-2578 (4)(2) July 1, 1995 1-2578 (4)(2) June 1, 1997 1-2578 (4)(2) April 1, 1998 1-2578 (4)(2) June 1, 1998 1-2578 (4)(2) September 29, 1999 1-2578 (4)(2) April 1, 2000 1-2578 (4)(2)(a) April 1, 2000 1-2578 (4)(2)(b) June 1, 2001 (A) (B) 4-2 -- General Mortgage Indenture and Deed of Trust dated as of January 1, 1998 between OE and the Bank of New York, as Trustee. (Registration No. 333-05277, Exhibit 4(g).) 10-1 -- Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(2) 10-2 -- Amendment No. 1 dated January 4, 1974 to Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-68906, Exhibit 5(c)(3).) 10-3 -- Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(3).) 10-4 -- Amendment No. 1 dated as of January 1, 1993 to Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (1993 Form 10-K, Exhibit 10-4.) 10-5 -- Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (Registration No. 2-68906, Exhibit 10-4.) 10-6 -- Amendment dated as of December 23, 1993 to Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (1993 Form 10-K, Exhibit 10-6). 10-7 -- CAPCO Basic Operating Agreement, as amended September 1, 1980. (Registration No. 2-68906, Exhibit 10-5.) 10-8 -- Amendment No. 1 dated August 1, 1981, and Amendment No. 2 dated September 1, 1982 to CAPCO Basic Operating Agreement, as amended September 1, 1980. (September 30, 1981 Form 10-Q, Exhibit 20-1 and 1982 Form 10-K, Exhibit 19-3, respectively.) 10-9 -- Amendment No. 3 dated July 1, 1984 to CAPCO Basic Operating Agreement, as amended September 1, 1980. (1985 Form 10-K, Exhibit 10-7.) 10-10 -- Basic Operating Agreement between the CAPCO Companies as amended October 1, 1991. (1991 Form 10-K, Exhibit 10-8.) 10-11 -- Basic Operating Agreement between the CAPCO Companies as amended January 1, 1993. (1993 Form 10-K, Exhibit 10-11.) 10-12 -- Memorandum of Agreement effective as of September 1, 1980 among the CAPCO Group. (1982 Form 10-K, Exhibit 19-2.) 10-13 -- Operating Agreement for Beaver Valley Power Station Units Nos. 1 and 2 as Amended and Restated September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 10-15.) 10-14 -- Construction Agreement with respect to Perry Plant between the CAPCO Group dated as of July 22, 1974. (Registration No. 2-52251 of Toledo Edison Company, Exhibit 5(yy).) 10-15 -- Amendment No. 3 dated as of October 31, 1980 to the Bond Guaranty dated as of October 1, 1973, as amended, with respect to the CAPCO Group. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 10-16.) 10-16 -- Amendment No. 4 dated as of July 1, 1985 to the Bond Guaranty dated as October 1, 1973, as amended, by the CAPCO Companies to National City Bank as Bond Trustee. (1985 Form 10-K, Exhibit 10-30.) 10-17 -- Amendment No. 5 dated as of May 1, 1986, to the Bond Guaranty by the CAPCO Companies to National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-33.) 10-18 -- Amendment No. 6A dated as of December 1, 1991, to the Bond Guaranty dated as of October 1, 1973, by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, The Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-33.) 10-19 -- Amendment No. 6B dated as of December 30, 1991, to the Bond Guaranty dated as of October 1, 1973 by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, The Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-34.) 10-20 -- Bond Guaranty dated as of December 1, 1991, by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, The Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-35.) 10-21 -- Memorandum of Understanding dated March 31, 1985 among the CAPCO Companies. (1985 Form 10-K, Exhibit 10-35.) (C) 10-22 -- Ohio Edison System Executive Supplemental Life Insurance Plan. (1995 Form 10-K, Exhibit 10-44.) (C) 10-23 -- Ohio Edison System Executive Incentive Compensation Plan. (1995 Form 10-K, Exhibit 10-45.) (C) 10-24 -- Ohio Edison System Restated and Amended Executive Deferred Compensation Plan. (1995 Form 10-K, Exhibit 10-46.) (C) 10-25 -- Ohio Edison System Restated and Amended Supplemental Executive Retirement Plan. (1995 Form 10-K, Exhibit 10-47.) (C) 10-26 -- Severance pay agreement between Ohio Edison Company and W. R. Holland. (1995 Form 10-K, Exhibit 10-48.) (C) 10-27 -- Severance pay agreement between Ohio Edison Company and H. P. Burg. (1995 Form 10-K, Exhibit 10-49.) (C) 10-28 -- Severance pay agreement between Ohio Edison Company and A. J. Alexander. (1995 Form 10-K, Exhibit 10-50.) (C) 10-29 -- Severance pay agreement between Ohio Edison Company and J. A. Gill. (1995 Form 10K, Exhibit 10-51.) (D) 10-30 -- Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Hereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-1.) (D) 10-31 -- Amendment No. 1 dated as of September 1, 1987 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 thereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company (now The Bank of New York), as Indenture Trustee, and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-46.) (D) 10-32 -- Amendment No. 3 dated as of May 16, 1988 to Participation Agreement dated as of March 16, 1987, as amended among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-47.) (D) 10-33 -- Amendment No. 4 dated as of November 1, 1991 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-47.) (D) 10-34 -- Amendment No. 5 dated as of November 24, 1992 to Participation Agreement dated as of March 16, 1987, as amended, among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company as Lessee. (1992 Form 10-K, Exhibit 10-49.) (D) 10-35 -- Amendment No. 6 dated as of January 12, 1993 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-50.) (D) 10-36 -- Amendment No. 7 dated as of October 12, 1994 to Participation Agreement dated as of March 16, 1987 as amended, among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-54.) (D) 10-37 -- Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1986 Form 10-K, Exhibit 28-2.) (D) 10-38 -- Amendment No. 1 dated as of September 1, 1987 to Facility Lease dated as of March 16, 1997 between The First National Bank of Boston, as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-49.) (D) 10-39 -- Amendment No. 2 dated as of November 1, 1991, to Facility Lease dated as of March 16, 1987, between The First National Bank of Boston, as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-50.) (D) 10-40 -- Amendment No. 3 dated as of November 24, 1992 to Facility Lease dated as March 16, 1987 as amended, between The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited partnership, as Owner Participant and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-54.) (D) 10-41 -- Amendment No. 4 dated as of January 12, 1993 to Facility Lease dated as of March 16, 1987 as amended, between, The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-59.) (D) 10-42 -- Amendment No. 5 dated as of October 12, 1994 to Facility Lease dated as of March 16, 1987 as amended, between, The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-60.) (D) 10-43 -- Letter Agreement dated as of March 19, 1987 between Ohio Edison Company, Lessee, and The First National Bank of Boston, Owner Trustee under a Trust dated March 16, 1987 with Chase Manhattan Realty Leasing Corporation, required by Section 3(d) of the Facility Lease. (1986 Form 10-K, Exhibit 28-3.) (D) 10-44 -- Ground Lease dated as of March 16, 1987 between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with the Owner Participant, Tenant. (1986 Form 10-K, Exhibit 28-4.) (D) 10-45 -- Trust Agreement dated as of March 16, 1987 between Perry One Alpha Limited Partnership, as Owner Participant, and The First National Bank of Boston. (1986 Form 10-K, Exhibit 28-5.) (D) 10-46 -- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of March 16, 1987 with Perry One Alpha Limited Partnership, and Irving Trust Company, as Indenture Trustee. (1986 Form 10-K, Exhibit 28-6.) (D) 10-47 -- Supplemental Indenture No. 1 dated as of September 1, 1987 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee and Irving Trust Company (now The Bank of New York), as Indenture Trustee. (1991 Form 10-K, Exhibit 10-55.) (D) 10-48 -- Supplemental Indenture No. 2 dated as of November 1, 1991 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and The Bank of New York, as Indenture Trustee. (1991 Form 10-K, Exhibit 10-56.) (D) 10-49 -- Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-7.) (D) 10-50 -- Amendment No. 1 dated as of November 1, 1991 to Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and PARock Limited Partnership and Ohio Edison Company. (1991 Form 10-K, Exhibit 10-58.) (D) 10-51 -- Amendment No. 2 dated as of January 12, 1993 to Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and PARock Limited Partnership and Ohio Edison Company. (1994 Form 10-K, Exhibit 10-69.) (D) 10-52 -- Amendment No. 3 dated as of October 12, 1994 to Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and PARock Limited Partnership and Ohio Edison Company. (1994 Form 10-K, Exhibit 10-70.) (D) 10-53 -- Partial Mortgage Release dated as of March 19, 1987 under the Indenture between Ohio Edison Company and Bankers Trust Company, as Trustee, dated as of the 1st day of August 1930. (1986 Form 10-K, Exhibit 28-8.) (D) 10-54 -- Assignment, Assumption and Further Agreement dated as of March 16, 1987 among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1986 Form 10-K, Exhibit 28-9.) (D) 10-55 -- Additional Support Agreement dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, and Ohio Edison Company. (1986 Form 10-K, Exhibit 28-10.) (D) 10-56 -- Bill of Sale, Instrument of Transfer and Severance Agreement dated as of March 19, 1987 between Ohio Edison Company, Seller, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership. (1986 Form 10-K, Exhibit 28-11.) (D) 10-57 -- Easement dated as of March 16, 1987 from Ohio Edison Company, Grantor, to The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, Grantee. (1986 Form 10-K, File Exhibit 28-12.) 10-58 -- Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, the Original Loan Participants listed in Schedule 1 Hereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1986 Form 10-K, as Exhibit 28-13.) 10-59 -- Amendment No. 1 dated as of September 1, 1987 to Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, The Original Loan Participants Listed in Schedule 1 thereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-65.) 10-60 -- Amendment No. 4 dated as of November 1, 1991, to Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-66.) 10-61 -- Amendment No. 5 dated as of November 24, 1992 to Participation Agreement dated as of March 16, 1987 as amended among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNNP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-71.) 10-62 -- Amendment No. 6 dated as of January 12, 1993 to Participation Agreement dated as of March 16, 1987 as amended among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-80.) 10-63 -- Amendment No. 7 dated as of October 12, 1994 to Participation Agreement dated as of March 16, 1987 as amended among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-81.) 10-64 -- Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, Lessor, and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-14.) 10-65 -- Amendment No. 1 dated as of September 1, 1987 to Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-68.) 10-66 -- Amendment No. 2 dated as of November 1, 1991 to Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-69.) 10-67 -- Amendment No. 3 dated as of November 24, 1992 to Facility Lease dated as of March 16, 1987, as amended, between, The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, as Owner Participant and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-75.) 10-68 -- Amendment No. 4 dated as of January 12, 1993 to Facility Lease dated as of March 16, 1987 as amended between, The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-76.) 10-69 -- Amendment No. 5 dated as of October 12, 1994 to Facility Lease dated as of March 16, 1987 as amended between, The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-87.) 10-70 -- Letter Agreement dated as of March 19, 1987 between Ohio Edison Company, as Lessee, and The First National Bank of Boston, as Owner Trustee under a Trust, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, required by Section 3(d) of the Facility Lease. (1986 Form 10-K, Exhibit 28-15.) 10-71 -- Ground Lease dated as of March 16, 1987 between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, Tenant. (1986 Form 10-K, Exhibit 28-16.) 10-72 -- Trust Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation, as Owner Participant, and The First National Bank of Boston. (1986 Form 10-K, Exhibit 28-17.) 10-73 -- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, and Irving Trust Company, as Indenture Trustee. (1986 Form 10-K, Exhibit 28-18.) 10-74 -- Supplemental Indenture No. 1 dated as of September 1, 1987 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and Irving Trust Company (now The Bank of New York), as Indenture Trustee. (1991 Form 10-K, Exhibit 10-74.) 10-75 -- Supplemental Indenture No. 2 dated as of November 1, 1991 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and The Bank of New York, as Indenture Trustee. (1991 Form 10-K, Exhibit 10-75.) 10-76 -- Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-19.) 10-77 -- Amendment No. 1 dated as of November 1, 1991 to Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation and Ohio Edison Company. (1991 Form 10-K, Exhibit 10-77.) 10-78 -- Amendment No. 2 dated as of January 12, 1993 to Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation and Ohio Edison Company. (1994 Form 10-K, Exhibit 10-96.) 10-79 -- Amendment No. 3 dated as of October 12, 1994 to Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation and Ohio Edison Company. (1994 Form 10-K, Exhibit 10-97.) 10-80 -- Assignment, Assumption and Further Agreement dated as of March 16, 1987 among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1986 Form 10-K, Exhibit 28-20.) 10-81 -- Additional Support Agreement dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, and Ohio Edison Company. (1986 Form 10-K, Exhibit 28-21.) 10-82 -- Bill of Sale, Instrument of Transfer and Severance Agreement dated as of March 19, 1987 between Ohio Edison Company, Seller, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, Buyer. (1986 Form 10-K, Exhibit 28-22.) 10-83 -- Easement dated as of March 16, 1987 from Ohio Edison Company, Grantor, to The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, Grantee. (1986 Form 10-K, Exhibit 28-23.) 10-84 -- Refinancing Agreement dated as of November 1, 1991 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York, as New Collateral Trust Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-82.) 10-85 -- Refinancing Agreement dated as of November 1, 1991 among Security Pacific Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York as New Collateral Trust Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-83.) 10-86 -- Ohio Edison Company Master Decommissioning Trust Agreement for Perry Nuclear Power Plant Unit One, Perry Nuclear Power Plant Unit Two, Beaver Valley Power Station Unit One and Beaver Valley Power Station Unit Two dated July 1, 1993. (1993 Form 10-K, Exhibit 10-94.) 10-87 -- Nuclear Fuel Lease dated as of March 31, 1989, between OES Fuel, Incorporated, as Lessor, and Ohio Edison Company, as Lessee. (1989 Form 10-K, Exhibit 10-62.) 10-88 -- Receivables Purchase Agreement dated as November 28, 1989, as amended and restated as of April 23, 1993, between OES Capital, Incorporated, Corporate Asset Funding Company, Inc. and Citicorp North America, Inc. (1994 Form 10-K, Exhibit 10-106.) 10-89 -- Guarantee Agreement entered into by Ohio Edison Company dated as of January 17, 1991. (1990 Form 10-K, Exhibit 10-64.) 10-90 -- Transfer and Assignment Agreement among Ohio Edison Company and Chemical Bank, as trustee under the OE Power Contract Trust. (1990 Form 10-K, Exhibit 10-65.) 10-91 -- Renunciation of Payments and Assignment among Ohio Edison Company, Monongahela Power Company, West Penn Power Company, and the Potomac Edison Company dated as of January 4, 1991. (1990 Form 10-K, Exhibit 10-66.) 10-92 -- Transfer and Assignment Agreement dated May 20, 1994 among Ohio Edison Company and Chemical Bank, as trustee under the OE Power Contract Trust. (1994 Form 10-K, Exhibit 10-110.) 10-93 -- Renunciation of Payments and Assignment among Ohio Edison Company, Monongahela Power Company, West Penn Power Company, and the Potomac Edison Company dated as of May 20, 1994. (1994 Form 10-K, Exhibit 10-111.) 10-94 -- Transfer and Assignment Agreement dated October 12, 1994 among Ohio Edison Company and Chemical Bank, as trustee under the OE Power Contract Trust. (1994 Form 10-K, Exhibit 10-112.) 10-95 -- Renunciation of Payments and Assignment among Ohio Edison Company, Monongahela Power Company, West Penn Power Company, and the Potomac Edison Company dated as of October 12, 1994. (1994 Form 10-K, Exhibit 10-113.) (E) 10-96 -- Participation Agreement dated as of September 15, 1987, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company as Lessee. (1987 Form 10-K, Exhibit 28-1.) (E) 10-97 -- Amendment No. 1 dated as of February 1, 1988, to Participation Agreement dated as of September 15, 1987, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-2.) (E) 10-98 -- Amendment No. 3 dated as of March 16, 1988 to Participation Agreement dated as of September 15, 1987, as amended, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, BVPS Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-99.) (E) 10-99 -- Amendment No. 4 dated as of November 5, 1992 to Participation Agreement dated as of September 15, 1987, as amended, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-100.) (E) 10-100 -- Amendment No. 5 dated as of September 30, 1994 to Participation Agreement dated as of September 15, 1987, as amended, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-118.) (E) 10-101 -- Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-3.) (E) 10-102 -- Amendment No. 1 dated as of February 1, 1988, to Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-4.) (E) 10-103 -- Amendment No. 2 dated as of November 5, 1992, to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-103.) (E) 10-104 -- Amendment No. 3 dated as of September 30, 1994 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-122.) (E) 10-105 -- Ground Lease and Easement Agreement dated as of September 15, 1987, between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, Tenant. (1987 Form 10-K, Exhibit 28-5.) (E) 10-106 -- Trust Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Limited Partnership, as Owner Participant, and The First National Bank of Boston. (1987 Form 10-K, Exhibit 28-6.) (E) 10-107 -- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-7.) (E) 10-108 -- Supplemental Indenture No. 1 dated as of February 1, 1988 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with Beaver Valley Two Pi Limited Partnership and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-8.) (E) 10-109 -- Tax Indemnification Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-9.) (E) 10-110 -- Amendment No. 1 dated as of November 5, 1992 to Tax Indemnification Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-128.) (E) 10-111 -- Amendment No. 2 dated as of September 30, 1994 to Tax Indemnification Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-129.) (E) 10-112 -- Tax Indemnification Agreement dated as of September 15, 1987, between HG Power Plant, Inc., as Limited Partner and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-10.) (E) 10-113 -- Amendment No. 1 dated as of November 5, 1992 to Tax Indemnification Agreement dated as of September 15, 1987, between HG Power Plant, Inc., as Limited Partner and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-131.) (E) 10-114 -- Amendment No. 2 dated as of September 30, 1994 to Tax Indemnification Agreement dated as of September 15, 1987, between HG Power Plant, Inc., as Limited Partner and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-132.) (E) 10-115 -- Assignment, Assumption and Further Agreement dated as of September 15, 1987, among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1987 Form 10-K, Exhibit 28-11.) (E) 10-116 -- Additional Support Agreement dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, and Ohio Edison Company. (1987 Form 10-K, Exhibit 28-12.) (F) 10-117 -- Participation Agreement dated as of September 15, 1987, among Chrysler Consortium Corporation, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-13.) (F) 10-118 -- Amendment No. 1 dated as of February 1, 1988, to Participation Agreement dated as of September 15, 1987, among Chrysler Consortium Corporation, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-14.) (F) 10-119 -- Amendment No. 3 dated as of March 16, 1988 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-114.) (F) 10-120 -- Amendment No. 4 dated as of November 5, 1992 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-115.) (F) 10-121 -- Amendment No. 5 dated as of January 12, 1993 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-139.) (F) 10-122 -- Amendment No. 6 dated as of September 30, 1994 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-140.) (F) 10-123 -- Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, Lessor, and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-15.) (F) 10-124 -- Amendment No. 1 dated as of February 1, 1988, to Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-16.) (F) 10-125 -- Amendment No. 2 dated as of November 5, 1992 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-118.) (F) 10-126 -- Amendment No. 3 dated as of January 12, 1993 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-119.) (F) 10-127 -- Amendment No. 4 dated as of September 30, 1994 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-145.) (F) 10-128 -- Ground Lease and Easement Agreement dated as of September 15, 1987, between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, Tenant. (1987 Form 10-K, Exhibit 28-17.) (F) 10-129 -- Trust Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and The First National Bank of Boston. (1987 Form 10-K, Exhibit 28-18.) (F) 10-130 -- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-19.) (F) 10-131 -- Supplemental Indenture No. 1 dated as of February 1, 1988 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with Chrysler Consortium Corporation and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-20.) (F) 10-132 -- Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-21.) (F) 10-133 -- Amendment No. 1 dated as of November 5, 1992 to Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-151.) (F) 10-134 -- Amendment No. 2 dated as of January 12, 1993 to Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-152.) (F) 10-135 -- Amendment No. 3 dated as of September 30, 1994 to Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-153.) (F) 10-136 -- Assignment, Assumption and Further Agreement dated as of September 15, 1987, among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, and Toledo Edison Company. (1987 Form 10-K, Exhibit 28-22.) (F) 10-137 -- Additional Support Agreement dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, and Ohio Edison Company. (1987 Form 10-K, Exhibit 28-23.) 10-138 -- Operating Agreement dated March 10, 1987 with respect to Perry Unit No. 1 between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-24.) 10-139 -- Operating Agreement for Bruce Mansfield Units Nos. 1, 2 and 3 dated as of June 1, 1976, and executed on September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-25.) 10-140 -- Operating Agreement for W. H. Sammis Unit No. 7 dated as of September 1, 1971 by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-26.) 10-141 -- OE-APS Power Interchange Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company, and Monongahela Power Company and West Penn Power Company and The Potomac Edison Company. (1987 Form 10-K, Exhibit 28-27.) 10-142 -- OE-PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-28.) 10-143 -- Supplement No. 1 dated as of April 28, 1987, to the OE-PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company, Pennsylvania Power Company, and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-29.) 10-144 -- APS-PEPCO Power Resale Agreement dated March 18, 1987, by and among Monongahela Power Company, West Penn Power Company, and The Potomac Edison Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-30.) (A) 12.2 -- Consolidated fixed charge ratios. (A) 13.1 -- 2001 Annual Report to Stockholders (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the SEC.) (A) 21.1 -- List of Subsidiaries of the Registrant at December 31, 2001. (A) 23.1 -- Consent of Independent Public Accountants. (A) 99 -- Letter to Securities and Exchange Commission (A) Provided herein in electronic format as an exhibit. (B) Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, OE has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of OE and its subsidiaries on a consolidated basis, but hereby agrees to furnish to the SEC on request any such instruments. (C) Management contract or compensatory plan contract or arrangement filed pursuant to Item 601 of Regulation S-K. (D) Substantially similar documents have been entered into relating to three additional Owner Participants. (E) Substantially similar documents have been entered into relating to five additional Owner Participants. (F) Substantially similar documents have been entered into relating to two additional Owner Participants. Note: Reports of OE on Forms 10-Q and 10-K are on file with the SEC under number 1-2578. Pursuant to Rule 14a - 3 (10) of the Securities Exchange Act of 1934, the Company will furnish any exhibit in this Report upon the payment of the Company's expenses in furnishing such exhibit. 3. Exhibits - Penn (A) 3-1 -- Amended and Restated Articles of Incorporation, as amended March 15, 2002. (A) 3-2 -- Amended and Restated By-Laws of Penn, as amended March 15, 2002. 4-1* -- Indenture dated as of November 1, 1945, between Penn and The First National Bank of the City of New York (now Citibank, N.A.), as Trustee, as supplemented and amended by Supplemental Indentures dated as of May 1, 1948, March 1, 1950, February 1, 1952, October 1, 1957, September 1, 1962, June 1, 1963, June 1, 1969, May 1, 1970, April 1, 1971, October 1, 1971, May 1, 1972, December 1, 1974, October 1, 1975, September 1, 1976, April 15, 1978, June 28, 1979, January 1, 1980, June 1, 1981, January 14, 1982, August 1, 1982, December 15, 1982, December 1, 1983, September 6, 1984, December 1, 1984, May 30, 1985, October 29, 1985, August 1, 1987, May 1, 1988, November 1, 1989, December 1, 1990, September 1, 1991, May 1, 1992, July 15, 1992, August 1, 1992, and May 1, 1993, July 1, 1993, August 31, 1993, September 1, 1993, September 15, 1993, October 1, 1993, November 1, 1993, and August 1, 1994. (Physically filed and designated as Exhibits 2(b)(1)-1 through 2(b)(1)-15 in Registration Statement File No. 2-60837; as Exhibits 2(b)(2), 2(b)(3), and 2(b)(4) in Registration Statement File No. 2-68906; as Exhibit 4-2 in Form 10-K for 1981 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1982 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1983 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1984 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1985 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1987 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1988 File No. 1-3491; as Exhibit 19 in Form 10-K for 1989 File No. 1-3491; as Exhibit 19 in Form 10-K for 1990 File No. 1-3491; as Exhibit 19 in Form 10-K for 1991 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1992 File No. 1-3491; as Exhibit 4-2 in Form 10-K for 1993 File No. 1-3491; and as Exhibit 4-2 in Form 10-K for 1994 File No. 1-3491.) 4-2 -- Supplemental Indenture dated as of September 1, 1995, between Penn and Citibank, N.A., as Trustee. (1995 Form 10-K, Exhibit 4-2.) 4-3 -- Supplemental Indenture dated as of June 1, 1997, between Penn and Citibank, N.A., as Trustee. (1997 Form 10-K, Exhibit 4-3.) 4-4 -- Supplemental Indenture dated as of June 1, 1998, between Penn and Citibank, N. A., as Trustee. (1998 Form 10-K, Exhibit 4-4.) 4-5 -- Supplemental Indenture dated as of September 29, 1999, between Penn and Citibank, N.A., as Trustee. (1999 Form 10-K, Exhibit 4-5.) 4-6 -- Supplemental Indenture dated as of November 15, 1999, between Penn and Citibank, N.A., as Trustee. (1999 Form 10-K, Exhibit 4-6.) (A) 4-7 -- Supplemental Indenture dated as of June 1, 2001. 10-1 -- Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration Statement of Ohio Edison Company, File No. 2-43102, Exhibit 5(c)(2).) 10-2 -- Amendment No. 1 dated January 4, 1974 to Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration Statement No. 2-68906, Exhibit 5 (c)(3).) 10-3 -- Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (Registration Statement of Ohio Edison Company, File No. 2-43102, Exhibit 5 (c)(3).) 10-4 -- Amendment No. 1 dated as of January 1, 1993 to Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (1993 Form 10-K, Exhibit 10-4, Ohio Edison Company.) 10-5 -- Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (Registration Statement No. 2-68906, Exhibit 10-4.) 10-6 -- Amendment dated as of December 23, 1993 to Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (1993 Form 10-K, Exhibit 10-6, Ohio Edison Company.) ---------- * Pursuant to paragraph (b)(4)(iii) (A) of Item 601 of Regulation S-K, Penn has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of Penn, but hereby agrees to furnish to the Commission on request any such instruments. 10-7 -- CAPCO Basic Operating Agreement, as amended September 1, 1980. (Registration Statement No. 2-68906, as Exhibit 10-5.) 10-8 -- Amendment No. 1 dated August 1, 1981 and Amendment No. 2 dated September 1, 1982, to CAPCO Basic Operating Agreement as amended September 1, 1980. (September 30, 1981 Form 10-Q, Exhibit 20-1 and 1982 Form 10-K, Exhibit 19-3, File No. 1-2578, of Ohio Edison Company.) 10-9 -- Amendment No. 3 dated as of July 1, 1984, to CAPCO Basic Operating Agreement as amended September 1, 1980. (1985 Form 10-K, Exhibit 10-7, File No. 1-2578, of Ohio Edison Company.) 10-10 -- Basic Operating Agreement between the CAPCO Companies as amended October 1, 1991. (1991 Form 10-K, Exhibit 10-8, File No. 1-2578, of Ohio Edison Company.) 10-11 -- Basic Operating Agreement between the CAPCO Companies as amended January 1, 1993. (1993 Form 10-K, Exhibit 10-11, Ohio Edison.) 10-12 -- Memorandum of Agreement effective as of September 1, 1980, among the CAPCO Group. (1991 Form 10-K, Exhibit 19-2, Ohio Edison Company.) 10-13 -- Operating Agreement for Beaver Valley Power Station Units Nos. 1 and 2 as Amended and Restated September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 10-15, File No. 1-2578, of Ohio Edison Company.) 10-14 -- Construction Agreement with respect to Perry Plant between the CAPCO Group dated as of July 22, 1974. (Registration Statement of Toledo Edison Company, File No. 2-52251, as Exhibit 5 (yy).) 10-15 -- Memorandum of Understanding dated as of March 31, 1985, among the CAPCO Companies. (1985 Form 10-K, Exhibit 10-35, File No. 1-2578, Ohio Edison Company.) (B) 10-16 -- Ohio Edison System Executive Supplemental Life Insurance Plan. (1995 Form 10-K, Exhibit 10-44, File No. 1-2578, Ohio Edison Company.) (B) 10-17 -- Ohio Edison System Executive Incentive Compensation Plan. (1995 Form 10-K, Exhibit 10-45, File No. 1-2578, Ohio Edison Company.) (B) 10-18 -- Ohio Edison System Restated and Amended Executive Deferred Compensation Plan. (1995 Form 10-K, Exhibit 10-46, File No. 1-2578, Ohio Edison Company.) (B) 10-19 -- Ohio Edison System Restated and Amended Supplemental Executive Retirement Plan. (1995 Form 10-K, Exhibit 10-47, File No. 1-2578, Ohio Edison Company.) 10-20 -- Operating Agreement for Perry Unit No. 1 dated March 10, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-24, File No. 1-2578, Ohio Edison Company.) 10-21 -- Operating Agreement for Bruce Mansfield Units Nos. 1, 2 and 3 dated as of June 1, 1976, and executed on September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-25, File No. 1-2578, Ohio Edison Company.) 10-22 -- Operating Agreement for W. H. Sammis Unit No. 7 dated as of September 1, 1971, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-26, File No. 1-2578, Ohio Edison Company.) 10-23 -- OE-APS Power Interchange Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company, and Monongahela Power Company and West Penn Power Company and The Potomac Edison Company. (1987 Form 10-K, Exhibit 28-27, File No. 1-2578, of Ohio Edison Company.) 10-24 -- OE-PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-28, File No. 1-2578, of Ohio Edison Company.) 10-25 -- Supplement No. 1 dated as of April 28, 1987, to the OE-PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company, Pennsylvania Power Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-29, File No. 1-2578, of Ohio Edison Company.) 10-26 -- APS-PEPCO Power Resale Agreement dated March 18, 1987, by and among Monongahela Power Company, West Penn Power Company, and The Potomac Edison Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-30, File No. 1-2578, of Ohio Edison Company.) 10-27 -- Pennsylvania Power Company Master Decommissioning Trust Agreement for Beaver Valley Power Station and Perry Nuclear Power Plant dated as of April 21, 1995. (Quarter ended June 30, 1995 Form 10-Q, Exhibit 10, File No. 1-3491.) 10-28 -- Nuclear Fuel Lease dated as of March 31, 1989, between OES Fuel, Incorporated, as Lessor, and Pennsylvania Power Company, as Lessee. (1989 Form 10-K, Exhibit 10-39, File No. 1-3491.) (A) 12.5 -- Fixed Charge Ratios (A) 13.4 -- 2001 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the Securities and Exchange Commission.) (A) 23.3 -- Consent of Independent Public Accountants. (A) 99 -- Letter to Securities and Exchange Commission (A) -- Provided herein in electronic format as an exhibit. (B) -- Management contract or compensatory plan contract or arrangement filed pursuant to Item 601 of Regulation S-K. Pursuant to Rule 14a-3(10) of the Securities Exchange Act of 1934, the Company will furnish any exhibit in this Report upon the payment of the Company's expenses in furnishing such exhibit. 3. Exhibits - Common Exhibits to CEI and TE Exhibit Number - ------ 2(a) -- Agreement and Plan of Merger between Ohio Edison and Centerior Energy dated as of September 13, 1996 (Exhibit (2)-1, Form S-4 File No. 333-21011, filed by FirstEnergy). 2(b) -- Merger Agreement by and among Centerior Acquisition Corp., FirstEnergy and Centerior (Exhibit (2)-3, Form S-4 File No. 333-21011, filed by FirstEnergy). 4(a) -- Rights Agreement (Exhibit 4, June 25, 1996 Form 8-K, File Nos. 1-9130, 1-2323 and 1-3583). 4(b)(1) -- Form of Note Indenture between Cleveland Electric, Toledo Edison and The Chase Manhattan Bank, as Trustee dated as of June 13, 1997 (Exhibit 4(c), Form S-4 File No. 333-35931, filed by Cleveland Electric and Toledo Edison). 4(b)(2) -- Form of First Supplemental Note Indenture between Cleveland Electric, Toledo Edison and The Chase Manhattan Bank, as Trustee dated as of June 13, 1997 (Exhibit 4(d), Form S-4 File No. 333-35931, filed by Cleveland Electric and Toledo Edison). 10b(1)(a) -- CAPCO Administration Agreement dated November 1, 1971, as of September 14, 1967, among the CAPCO Group members regarding the organization and procedures for implementing the objectives of the CAPCO Group (Exhibit 5(p), Amendment No. 1, File No. 2-42230, filed by Cleveland Electric). 10b(1)(b) -- Amendment No. 1, dated January 4, 1974, to CAPCO Administration Agreement among the CAPCO Group members (Exhibit 5(c)(3), File No. 2-68906, filed by Ohio Edison). 10b(2) -- CAPCO Transmission Facilities Agreement dated November 1, 1971, as of September 14, 1967, among the CAPCO Group members regarding the installation, operation and maintenance of transmission facilities to carry out the objectives of the CAPCO Group (Exhibit 5(q), Amendment No. 1, File No. 2-42230, filed by Cleveland Electric). 10b(2)(1) -- Amendment No. 1 to CAPCO Transmission Facilities Agreement, dated December 23, 1993 and effective as of January 1, 1993, among the CAPCO Group members regarding requirements for payment of invoices at specified times, for payment of interest on non-timely paid invoices, for restricting adjustment of invoices after a four-year period, and for revising the method for computing the Investment Responsibility charge for use of a member's transmission facilities (Exhibit 10b(2)(1), 1993 Form 10-K, File Nos. 1-9130, 1-2323 and 1-3583). 10b(3) -- CAPCO Basic Operating Agreement As Amended January 1, 1993 among the CAPCO Group members regarding coordinated operation of the members' systems (Exhibit 10b(3), 1993 Form 10-K, File Nos. 1-9130, 1-2323 and 1-3583). 10b(4) -- Agreement for the Termination or Construction of Certain Agreement By and Among the CAPCO Group members, dated December 23, 1993 and effective as of September 1, 1980 (Exhibit 10b(4), 1993 Form 10-K, File Nos. 1-9130, 1-2323 and 1-3583). 10b(5) -- Construction Agreement, dated July 22, 1974, among the CAPCO Group members and relating to the Perry Nuclear Plant (Exhibit 5 (yy), File No. 2-52251, filed by Toledo Edison). 10b(6) -- Contract, dated as of December 5, 1975, among the CAPCO Group members for the construction of Beaver Valley Unit No. 2 (Exhibit 5 (g), File No. 2-52996, filed by Cleveland Electric). 10b(7) -- Amendment No. 1, dated May 1, 1977, to Contract, dated as of December 5, 1975, among the CAPCO Group members for the construction of Beaver Valley Unit No. 2 (Exhibit 5(d)(4), File No. 2-60109, filed by Ohio Edison). 10d(1)(a) -- Form of Collateral Trust Indenture among CTC Beaver Valley Funding Corporation, Cleveland Electric, Toledo Edison and Irving Trust Company, as Trustee (Exhibit 4(a), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(1)(b) -- Form of Supplemental Indenture to Collateral Trust Indenture constituting Exhibit 10d(1)(a) above, including form of Secured Lease Obligation bond (Exhibit 4(b), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(1)(c) -- Form of Collateral Trust Indenture among Beaver Valley II Funding Corporation, The Cleveland Electric Illuminating Company and The Toledo Edison Company and The Bank of New York, as Trustee (Exhibit (4)(a), File No. 33-46665, filed by Cleveland Electric and Toledo Edison). 10d(1)(d) -- Form of Supplemental Indenture to Collateral Trust Indenture constituting Exhibit 10d(1)(c) above, including form of Secured Lease Obligation Bond (Exhibit (4)(b), File No. 33-46665, filed by Cleveland Electric and Toledo Edison). 10d(2)(a) -- Form of Collateral Trust Indenture among CTC Mansfield Funding Corporation, Cleveland Electric, Toledo Edison and IBJ Schroder Bank & Trust Company, as Trustee (Exhibit 4(a), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(2)(b) -- Form of Supplemental Indenture to Collateral Trust Indenture constituting Exhibit 10d(2)(a) above, including forms of Secured Lease Obligation bonds (Exhibit 4(b), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(3)(a) -- Form of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the limited partnership Owner Participant named therein, Lessor, and Cleveland Electric and Toledo Edison, Lessee (Exhibit 4(c), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(3)(b) -- Form of Amendment No. 1 to Facility Lease constituting Exhibit 10d(3)(a) above (Exhibit 4(e), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(4)(a) -- Form of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the corporate Owner Participant named therein, Lessor, and Cleveland Electric and Toledo Edison, Lessees (Exhibit 4(d), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(4)(b) -- Form of Amendment No. 1 to Facility Lease constituting Exhibit 10d(4)(a) above (Exhibit 4(f), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(5)(a) -- Form of Facility Lease dated as of September 30, 1987 between Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Lessor, and Cleveland Electric and Toledo Edison, Lessees (Exhibit 4(c), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(5)(b) -- Form of Amendment No. 1 to the Facility Lease constituting Exhibit 10d(5)(a) above (Exhibit 4(f), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(6)(a) -- Form of Participation Agreement dated as of September 15, 1987 among the limited partnership Owner Participant named therein, the Original Loan Participants listed in Schedule 1 thereto, as Original Loan Participants, CTC Beaver Valley Fund Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Cleveland Electric and Toledo Edison, as Lessees (Exhibit 28(a), File No. 33-18755, filed by Cleveland Electric And Toledo Edison). 10d(6)(b) -- Form of Amendment No. 1 to Participation Agreement constituting Exhibit 10d(6)(a) above (Exhibit 28(c), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(7)(a) -- Form of Participation Agreement dated as of September 15, 1987 among the corporate Owner Participant named therein, the Original Loan Participants listed in Schedule 1 thereto, as Owner Loan Participants, CTC Beaver Valley Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Cleveland Electric and Toledo Edison, as Lessees (Exhibit 28(b), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(7)(b) -- Form of Amendment No. 1 to Participation Agreement constituting Exhibit 10d(7)(a) above (Exhibit 28(d), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(8)(a) -- Form of Participation Agreement dated as of September 30, 1987 among the Owner Participant named therein, the Original Loan Participants listed in Schedule II thereto, as Owner Loan Participants, CTC Mansfield Funding Corporation, Meridian Trust Company, as Owner Trustee, IBJ Schroder Bank & Trust Company, as Indenture Trustee, and Cleveland Electric and Toledo Edison, as Lessees (Exhibit 28(a), File No. 33-0128, filed by Cleveland Electric and Toledo Edison). 10d(8)(b) -- Form of Amendment No. 1 to the Participation Agreement constituting Exhibit 10d(8)(a) above (Exhibit 28(b), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(9) -- Form of Ground Lease dated as of September 15, 1987 between Toledo Edison, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, Tenant (Exhibit 28(e), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(10) -- Form of Site Lease dated as of September 30, 1987 between Toledo Edison, Lessor, and Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Tenant (Exhibit 28(c), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(11) -- Form of Site Lease dated as of September 30, 1987 between Cleveland Electric, Lessor, and Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Tenant (Exhibit 28(d), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(12) -- Form of Amendment No. 1 to the Site Leases constituting Exhibits 10d(10) and 10d(11) above (Exhibit 4(f), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(13) -- Form of Assignment, Assumption and Further Agreement dated as of September 15, 1987 among The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, Cleveland Electric, Duquesne, Ohio Edison, Pennsylvania Power and Toledo Edison (Exhibit 28(f), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(14) -- Form of Additional Support Agreement dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, and Toledo Edison (Exhibit 28(g), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(15) -- Form of Support Agreement dated as of September 30, 1987 between Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Toledo Edison, Cleveland Electric, Duquesne, Ohio Edison and Pennsylvania Power (Exhibit 28(e), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(16) -- Form of Indenture, Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 between Toledo Edison, Seller, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, Buyer (Exhibit 28(h), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(17) -- Form of Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 between Toledo Edison, Seller, and Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Buyer (Exhibit 28(f), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(18) -- Form of Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 between Cleveland Electric, Seller, and Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Buyer (Exhibit 28(g), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(19) -- Forms of Refinancing Agreement, including exhibits thereto, among the Owner Participant named therein, as Owner Participant, CTC Beaver Valley Funding Corporation, as Funding Corporation, Beaver Valley II Funding Corporation, as New Funding Corporation, The Bank of New York, as Indenture Trustee, The Bank of New York, as New Collateral Trust Trustee, and The Cleveland Electric Illuminating Company and The Toledo Edison Company, as Lessees (Exhibit (28)(e)(i), File No. 33-46665, filed by Cleveland Electric and Toledo Edison). 10d(20)(a) -- Form of Amendment No. 2 to Facility Lease among Citicorp Lescaman, Inc., Cleveland Electric and Toledo Edison (Exhibit 10(a), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10d(20)(b) -- Form of Amendment No. 3 to Facility Lease among Citicorp Lescaman, Inc., Cleveland Electric and Toledo Edison (Exhibit 10(b), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10d(21)(a) -- Form of Amendment No. 2 to Facility Lease among US West Financial Services, Inc., Cleveland Electric and Toledo Edison (Exhibit 10(c), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10d(21)(b) -- Form of Amendment No. 3 to Facility Lease among US West Financial Services, Inc., Cleveland Electric and Toledo Edison (Exhibit 10(d), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10d(22) -- Form of Amendment No. 2 to Facility Lease among Midwest Power Company, Cleveland Electric and Toledo Edison (Exhibit 10(e), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10e(1) -- Centerior Energy Corporation Equity Compensation Plan (Exhibit 99, Form S-8, File No. 33-59635). 3. Exhibits - Cleveland Electric Illuminating (CEI) 3a -- Amended Articles of Incorporation of CEI, as amended, effective May 28, 1993 (Exhibit 3a, 1993 Form 10-K, File No. 1-2323). 3b -- Regulations of CEI, dated April 29, 1981, as amended effective October 1, 1988 and April 24, 1990 (Exhibit 3b, 1990 Form 10-K, File No. 1-2323). (A)3c -- Amended and Restated Code of Regulations, dated March 15, 2002. (B)4b(1) -- Mortgage and Deed of Trust between CEI and Guaranty Trust Company of New York (now The Chase Manhattan Bank (National Association)), as Trustee, dated July 1, 1940 (Exhibit 7(a), File No. 2-4450). Supplemental Indentures between CEI and the Trustee, supplemental to Exhibit 4b(1), dated as follows: 4b(2) -- July 1, 1940 (Exhibit 7(b), File No. 2-4450). 4b(3) -- August 18, 1944 (Exhibit 4(c), File No. 2-9887). 4b(4) -- December 1, 1947 (Exhibit 7(d), File No. 2-7306). 4b(5) -- September 1, 1950 (Exhibit 7(c), File No. 2-8587). 4b(6) -- June 1, 1951 (Exhibit 7(f), File No. 2-8994). 4b(7) -- May 1, 1954 (Exhibit 4(d), File No. 2-10830). 4b(8) -- March 1, 1958 (Exhibit 2(a)(4), File No. 2-13839). 4b(9) -- April 1, 1959 (Exhibit 2(a)(4), File No. 2-14753). 4b(10) -- December 20, 1967 (Exhibit 2(a)(4), File No. 2-30759). 4b(11) -- January 15, 1969 (Exhibit 2(a)(5), File No. 2-30759). 4b(12) -- November 1, 1969 (Exhibit 2(a)(4), File No. 2-35008). 4b(13) -- June 1, 1970 (Exhibit 2(a)(4), File No. 2-37235). 4b(14) -- November 15, 1970 (Exhibit 2(a)(4), File No. 2-38460). 4b(15) -- May 1, 1974 (Exhibit 2(a)(4), File No. 2-50537). 4b(16) -- April 15, 1975 (Exhibit 2(a)(4), File No. 2-52995). 4b(17) -- April 16, 1975 (Exhibit 2(a)(4), File No. 2-53309). 4b(18) -- May 28, 1975 (Exhibit 2(c), June 5, 1975 Form 8-A, File No. 1-2323). 4b(19) -- February 1, 1976 (Exhibit 3(d)(6), 1975 Form 10 K, File No. 1-2323). 4b(20) -- November 23, 1976 (Exhibit 2(a)(4), File No. 2-57375). 4b(21) -- July 26, 1977 (Exhibit 2(a)(4), File No. 2-59401). 4b(22) -- September 7, 1977 (Exhibit 2(a)(5), File No. 2-67221). 4b(23) -- May 1, 1978 (Exhibit 2(b), June 30, 1978 Form 10-Q, File No. 1-2323). 4b(24) -- September 1, 1979 (Exhibit 2(a), September 30, 1979 Form 10-Q, File No. 1-2323). 4b(25) -- April 1, 1980 (Exhibit 4(a)(2), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(26) -- April 15, 1980 (Exhibit 4(b), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(27) -- May 28, 1980 (Exhibit 2(a)(4), Amendment No. 1, File No. 2-67221). 4b(28) -- June 9, 1980 (Exhibit 4(d), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(29) -- December 1, 1980 (Exhibit 4(b)(29), 1980 Form 10-K, File No. 1-2323). 4b(30) -- July 28, 1981 (Exhibit 4(a), September 30, 1981, Form 10-Q, File No. 1-2323). 4b(31) -- August 1, 1981 (Exhibit 4(b), September 30, 1981, Form 10-Q, File No. 1-2323). 4b(32) -- March 1, 1982 (Exhibit 4(b)(3), Amendment No. 1, File No. 2-76029). 4b(33) -- July 15, 1982 (Exhibit 4(a), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(34) -- September 1, 1982 (Exhibit 4(a)(1), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(35) -- November 1, 1982 (Exhibit (a)(2), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(36) -- November 15, 1982 (Exhibit 4(b)(36), 1982 Form 10-K, File No. 1-2323). 4b(37) -- May 24, 1983 (Exhibit 4(a), June 30, 1983 Form 10-Q, File No. 1-2323). 4b(38) -- May 1, 1984 (Exhibit 4, June 30, 1984 Form 10-Q, File No. 1-2323). 4b(39) -- May 23, 1984 (Exhibit 4, May 22, 1984 Form 8-K, File No. 1-2323). 4b(40) -- June 27, 1984 (Exhibit 4, June 11, 1984 Form 8-K, File No. 1-2323). 4b(41) -- September 4, 1984 (Exhibit 4b(41), 1984 Form 10-K, File No. 1-2323). 4b(42) -- November 14, 1984 (Exhibit 4b(42), 1984 Form 10 K, File No. 1-2323). 4b(43) -- November 15, 1984 (Exhibit 4b(43), 1984 Form 10-K, File No. 1-2323). 4b(44) -- April 15, 1985 (Exhibit 4(a), May 8, 1985 Form 8-K, File No. 1-2323). 4b(45) -- May 28, 1985 (Exhibit 4(b), May 8, 1985 Form 8-K, File No. 1-2323). 4b(46) -- August 1, 1985 (Exhibit 4, September 30, 1985 Form 10-Q, File No. 1-2323). 4b(47) -- September 1, 1985 (Exhibit 4, September 30, 1985 Form 8-K, File No. 1-2323). 4b(48) -- November 1, 1985 (Exhibit 4, January 31, 1986 Form 8-K, File No. 1-2323). 4b(49) -- April 15, 1986 (Exhibit 4, March 31, 1986 Form 10-Q, File No. 1-2323). 4b(50) -- May 14, 1986 (Exhibit 4(a), June 30, 1986 Form 10-Q, File No. 1-2323). 4b(51) -- May 15, 1986 (Exhibit 4(b), June 30, 1986 Form 10-Q, File No. 1-2323). 4b(52) -- February 25, 1987 (Exhibit 4b(52), 1986 Form 10-K, File No. 1-2323). 4b(53) -- October 15, 1987 (Exhibit 4, September 30, 1987 Form 10 -Q, File No. 1-2323). 4b(54) -- February 24, 1988 (Exhibit 4b(54), 1987 Form 10-K, File No. 1-2323). 4b(55) -- September 15, 1988 (Exhibit 4b(55), 1988 Form 10-K, File No. 1-2323). 4b(56) -- May 15, 1989 (Exhibit 4(a)(2)(i), File No. 33-32724). 4b(57) -- June 13, 1989 (Exhibit 4(a)(2)(ii), File No. 33-32724). 4b(58) -- October 15, 1989 (Exhibit 4(a)(2)(iii), File No. 33-32724). 4b(59) -- January 1, 1990 (Exhibit 4b(59), 1989 Form 10-K, File No. 1-2323). 4b(60) -- June 1, 1990 (Exhibit 4(a). September 30, 1990 Form 10-Q, File No. 1-2323). 4b(61) -- August 1, 1990 (Exhibit 4(b), September 30, 1990 Form 10-Q, File No. 1-2323). 4b(62) -- May 1, 1991 (Exhibit 4(a), June 30, 1991 Form 10-Q, File No. 1-2323). 4b(63) -- May 1, 1992 (Exhibit 4(a)(3), File No. 33-48845). 4b(64) -- July 31, 1992 (Exhibit 4(a)(3), File No. 33-57292). 4b(65) -- January 1, 1993 (Exhibit 4b(65), 1992 Form 10-K, File No. 1-2323). 4b(66) -- February 1, 1993 (Exhibit 4b(66), 1992 Form 10-K, File No. 1-2323). 4b(67) -- May 20, 1993 (Exhibit 4(a), July 14, 1993 Form 8-K, File No. 1-2323). 4b(68) -- June 1, 1993 (Exhibit 4(b), July 14, 1993 Form 8-K, File No. 1-2323). 4b(69) -- September 15, 1994 (Exhibit 4(a), September 30, 1994 Form 10-Q, File No. 1-2323). 4b(70) -- May 1, 1995 (Exhibit 4(a), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(71) -- May 2, 1995 (Exhibit 4(b), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(72) -- June 1, 1995 (Exhibit 4(c), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(73) -- July 15, 1995 (Exhibit 4b(73), 1995 Form 10-K, File No. 1-2323). 4b(74) -- August 1, 1995 (Exhibit 4b(74), 1995 Form 10-K, File No. 1-2323). 4b(75) -- June 15, 1997 (Exhibit 4(a), Form S-4 File No. 333-35931, filed by Cleveland Electric and Toledo Edison). 4b(76) -- October 15, 1997 (Exhibit 4(a), Form S-4 File No. 333-47651, filed by Cleveland Electric). 4b(77) -- June 1, 1998 (Exhibit 4b(77), Form S-4 File No. 333-72891). 4b(78) -- October 1, 1998 (Exhibit 4b(78), Form S-4 File No. 333-72891). 4b(79) -- October 1, 1998 (Exhibit 4b(79), Form S-4 File No. 333-72891). 4b(80) -- February 24, 1999 (Exhibit 4b(80), Form S-4 File No. 333-72891). 4b(81) -- September 29, 1999. (Exhibit 4b(81), 1999 Form 10-K, File No. 1-2323). 4b(82) -- January 15, 2000. (Exhibit 4b(82), 1999 Form 10-K, File No. 1-2323). 4d -- Form of Note Indenture between Cleveland Electric and The Chase Manhattan Bank, as Trustee dated as of October 24, 1997 (Exhibit 4(b), Form S-4 File No. 333-47651, filed by Cleveland Electric). 4d(1) -- Form of Supplemental Note Indenture between Cleveland Electric and The Chase Manhattan Bank, as Trustee dated as of October 24, 1997 (Exhibit 4(c), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10-1 -- Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(2).) 10-2 -- Amendment No. 1 dated January 4, 1974 to Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-68906, Exhibit 5(c)(3).) 10-3 -- Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(3).) 10-4 -- Amendment No. 1 dated as of January 1, 1993 to Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (1993 Form 10-K, Exhibit 10-4.) 10-5 -- Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980, October 15, 1997 (Exhibit 4(a), Form S-4 File No. 333-47651, filed by Cleveland Electric). (A)12.3 -- Consolidated fixed charge ratios. (A)13.2 -- 2001 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the SEC.) (A)21.2 -- List of Subsidiaries of the Registrant at December 31, 2001. (A)23.2 -- Consent of Independent Public Accountants. (A) 99 -- Letter to Securities and Exchange Commission (A) -- Provided herein in electronic format as an exhibit. (B) -- Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, CEI has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of CEI, but hereby agrees to furnish to the Commission on request any such instruments. 3. Exhibits - Toledo Edison (TE) Exhibit Number - ------ 3a -- Amended Articles of Incorporation of TE, as amended effective October 2, 1992 (Exhibit 3a, 1992 Form 10-K, File No. 1-3583). (A)3b -- Amended and Restated Code of Regulations, dated March 15, 2002. (B)4b(1) -- Indenture, dated as of April 1, 1947, between TE and The Chase National Bank of the City of New York (now The Chase Manhattan Bank (National Association)) (Exhibit 2(b), File No. 2-26908). 4b(2) -- September 1, 1948 (Exhibit 2(d), File No. 2-26908). 4b(3) -- April 1, 1949 (Exhibit 2(e), File No. 2-26908). 4b(4) -- December 1, 1950 (Exhibit 2(f), File No. 2-26908). 4b(5) -- March 1, 1954 (Exhibit 2(g), File No. 2-26908). 4b(6) -- February 1, 1956 (Exhibit 2(h), File No. 2-26908). 4b(7) -- May 1, 1958 (Exhibit 5(g), File No. 2-59794). 4b(8) -- August 1, 1967 (Exhibit 2(c), File No. 2-26908). 4b(9) -- November 1, 1970 (Exhibit 2(c), File No. 2-38569). 4b(10) -- August 1, 1972 (Exhibit 2(c), File No. 2-44873). 4b(11) -- November 1, 1973 (Exhibit 2(c), File No. 2-49428). 4b(12) -- July 1, 1974 (Exhibit 2(c), File No. 2-51429). 4b(13) -- October 1, 1975 (Exhibit 2(c), File No. 2-54627). 4b(14) -- June 1, 1976 (Exhibit 2(c), File No. 2-56396). 4b(15) -- October 1, 1978 (Exhibit 2(c), File No. 2-62568). 4b(16) -- September 1, 1979 (Exhibit 2(c), File No. 2-65350). 4b(17) -- September 1, 1980 (Exhibit 4(s), File No. 2-69190). 4b(18) -- October 1, 1980 (Exhibit 4(c), File No. 2-69190). 4b(19) -- April 1, 1981 (Exhibit 4(c), File No. 2-71580). 4b(20) -- November 1, 1981 (Exhibit 4(c), File No. 2-74485). 4b(21) -- June 1, 1982 (Exhibit 4(c), File No. 2-77763). 4b(22) -- September 1, 1982 (Exhibit 4(x), File No. 2-87323). 4b(23) -- April 1, 1983 (Exhibit 4(c), March 31, 1983, Form 10-Q, File No. 1-3583). 4b(24) -- December 1, 1983 (Exhibit 4(x), 1983 Form 10-K, File No. 1-3583). 4b(25) -- April 1, 1984 (Exhibit 4(c), File No. 2-90059). 4b(26) -- October 15, 1984 (Exhibit 4(z), 1984 Form 10-K, File No. 1-3583). 4b(27) -- October 15, 1984 (Exhibit 4(aa), 1984 Form 10-K, File No. 1-3583). 4b(28) -- August 1, 1985 (Exhibit 4(dd), File No. 33-1689). 4b(29) -- August 1, 1985 (Exhibit 4(ee), File No. 33-1689). 4b(30) -- December 1, 1985 (Exhibit 4(c), File No. 33-1689). 4b(31) -- March 1, 1986 (Exhibit 4b(31), 1986 Form 10-K, File No. 1-3583). 4b(32) -- October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-Q, File No. 1-3583). 4b(33) -- September 15, 1988 (Exhibit 4b(33), 1988 Form 10-K, File No. 1-3583). 4b(34) -- June 15, 1989 (Exhibit 4b(34), 1989 Form 10-K, File No. 1-3583). 4b(35) -- October 15, 1989 (Exhibit 4b(35), 1989 Form 10-K, File No. 1-3583). 4b(36) -- May 15, 1990 (Exhibit 4, June 30, 1990 Form 10-Q, File No. 1-3583). 4b(37) -- March 1, 1991 (Exhibit 4(b), June 30, 1991 Form 10-Q, File No. 1-3583). 4b(38) -- May 1, 1992 (Exhibit 4(a)(3), File No. 33-48844). 4b(39) -- August 1, 1992 (Exhibit 4b(39), 1992 Form 10-K, File No. 1-3583). 4b(40) -- October 1, 1992 (Exhibit 4b(40), 1992 Form 10-K, File No. 1-3583). 4b(41) -- January 1, 1993 (Exhibit 4b(41), 1992 Form 10-K, File No. 1-3583). 4b(42) -- September 15, 1994 (Exhibit 4(b), September 30, 1994 Form 10-Q, File No. 1-3583). 4b(43) -- May 1, 1995 (Exhibit 4(d), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(44) -- June 1, 1995 (Exhibit 4(e), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(45) -- July 14, 1995 (Exhibit 4(f), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(46) -- July 15, 1995 (Exhibit 4(g), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(47) -- August 1, 1997 (Exhibit 4b(47), 1998 Form 10-K, File No. 1-3583). 4b(48) -- June 1, 1998 (Exhibit 4b (48), 1998 Form 10-K, File No. 1-3583). 4b(49) -- January 15, 2000 (Exhibit 4b(49), 1999 Form 10-K, File No. 1-3583). 4b(50) -- May 1, 2000 (Exhibit 4b(50), 2000 Form 10-K, File No. 1-3583). 4b(51) -- September 1, 2000 (A) 12.4 -- Consolidated fixed charge ratios. (A) 13.3 -- 2001 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the SEC.) (A) 21.3 -- List of Subsidiaries of the Registrant at December 31, 2001. (A) 99 -- Letter to Securities and Exchange Commission (A) -- Provided herein in electronic format as an exhibit. (B) -- Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, TE has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of TE, but hereby agrees to furnish to the Commission on request any such instruments. 3. Exhibits - Combined Exhibits for JCP&L, Met-Ed and Penelec Exhibit Number - ------ 3-A -- Restated Certificate of Incorporation of JCP&L, as amended - Incorporated by reference to Exhibit 3-A, 1990 Annual Report on Form 10-K, SEC File No. 1-3141. 3-A-1 -- Certificate of Amendment to Restated Certificate of Incorporation of JCP&L, dated June 19, 1992 - Incorporated by reference to Exhibit A-2(a), Certificate Pursuant to Rule 24, SEC File No. 70-7949. 3-A-2 -- Certificate of Amendment to Restated Certificate of Incorporation of JCP&L, dated June 19, 1992 - Incorporated by reference to Exhibit A-2(a)(i), Certificate Pursuant to Rule 24, SEC File No. 70-7949. 3-B -- By-Laws of JCP&L, as amended May 25, 1993 - Incorporated by reference to Exhibit 3-B, 1993 Annual Report on Form 10-K, SEC File No. 1-3141. 3-C -- Restated Articles of Incorporation of Met-Ed, dated March 8, 1999 - Incorporated by reference to Exhibit 3-E, 1999 Annual Report on Form 10-K, SEC File No. 1-446. 3-D -- By-Laws of Met-Ed as amended May 16, 2000. 3-E -- Restated Articles of Incorporation of Penelec, dated March 8, 1999 - Incorporated by reference to Exhibit 3-G, 1999 Annual Report on Form 10-K, SEC File No. 1-3522. 3-F -- By-Laws of Penelec as amended May 16, 2000. 4-A -- Indenture of JCP&L, dated March 1, 1946, between JCP&L and United States Trust Company of New York, Successor Trustee, as amended and supplemented by eight supplemental indentures dated December 1, 1948 through June 1, 1960 - Incorporated by reference to JCP&L's Instruments of Indebtedness Nos. 1 to 7, inclusive, and 9 and 10 filed as part of Amendment No. 1 to 1959 Annual Report of GPU on Form U5S, SEC File Nos. 30-126 and 1-3292. 4-A-1 -- Ninth Supplemental Indenture of JCP&L, dated November 1, 1962 - Incorporated by reference to Exhibit 2-C, Registration No. 2-20732. 4-A-2 -- Tenth Supplemental Indenture of JCP&L, dated October 1, 1963 - Incorporated by reference to Exhibit 2-C, Registration No. 2-21645. 4-A-3 -- Eleventh Supplemental Indenture of JCP&L, dated October 1, 1964 - Incorporated by reference to Exhibit 5-A-3, Registration No. 2-59785. 4-A-4 -- Twelfth Supplemental Indenture of JCP&L, dated November 1, 1965 - Incorporated by reference to Exhibit 5-A-4, Registration No. 2-59785. 4-A-5 -- Thirteenth Supplemental Indenture of JCP&L, dated August 1, 1966 - Incorporated by reference to Exhibit 4-C, Registration No. 2-25124. 4-A-6 -- Fourteenth Supplemental Indenture of JCP&L, dated September 1, 1967 - Incorporated by reference to Exhibit 5-A-6, Registration No. 2-59785. 4-A-7 -- Fifteenth Supplemental Indenture of JCP&L, dated October 1, 1968 - Incorporated by reference to Exhibit 5-A-7, Registration No. 2-59785. 4-A-8 -- Sixteenth Supplemental Indenture of JCP&L, dated October 1, 1969 - Incorporated by reference to Exhibit 5-A-8, Registration No. 2-59785. 4-A-9 -- Seventeenth Supplemental Indenture of JCP&L, dated June 1, 1970 - Incorporated by reference to Exhibit 5-A-9, Registration No. 2-59785. 4-A-10 -- Eighteenth Supplemental Indenture of JCP&L, dated December 1, 1970 - Incorporated by reference to Exhibit 5-A-10, Registration No. 2-59785. 4-A-11 -- Nineteenth Supplemental Indenture of JCP&L, dated February 1, 1971 - Incorporated by reference to Exhibit 5-A-11, Registration No. 2-59785. 4-A-12 -- Twentieth Supplemental Indenture of JCP&L, dated November 1, 1971 - Incorporated by reference to Exhibit 5-A-12, Registration No. 2-59875. 4-A-13 -- Twenty-first Supplemental Indenture of JCP&L, dated August 1, 1972 - Incorporated by reference to Exhibit 5-A-13, Registration No. 2-59785. 4-A-14 -- Twenty-second Supplemental Indenture of JCP&L, dated August 1, 1973 - Incorporated by reference to Exhibit 5-A-14, Registration No. 2-59785. 4-A-15 -- Twenty-third Supplemental Indenture of JCP&L, dated October 1, 1973 - Incorporated by reference to Exhibit 5-A-15, Registration No. 2-59785. 4-A-16 -- Twenty-fourth Supplemental Indenture of JCP&L, dated December 1, 1973 - Incorporated by reference to Exhibit 5-A-16, Registration No. 2-59785. 4-A-17 -- Twenty-fifth Supplemental Indenture of JCP&L, dated November 1, 1974 - Incorporated by reference to Exhibit 5-A-17, Registration No. 2-59785. 4-A-18 -- Twenty-sixth Supplemental Indenture of JCP&L, dated March 1, 1975 - Incorporated by reference to Exhibit 5-A-18, Registration No. 2-59785. 4-A-19 -- Twenty-seventh Supplemental Indenture of JCP&L, dated July 1, 1975 - Incorporated by reference to Exhibit 5-A-19, Registration No. 2-59785. 4-A-20 -- Twenty-eighth Supplemental Indenture of JCP&L, dated October 1, 1975 - Incorporated by reference to Exhibit 5-A-20, Registration No. 2-59785. 4-A-21 -- Twenty-ninth Supplemental Indenture of JCP&L, dated February 1, 1976 - Incorporated by reference to Exhibit 5-A-21, Registration No. 2-59785. 4-A-22 -- Supplemental Indenture No. 29A of JCP&L, dated May 31, 1976 - Incorporated by reference to Exhibit 5-A-22, Registration No. 2-59785. 4-A-23 -- Thirtieth Supplemental Indenture of JCP&L, dated June 1, 1976 - Incorporated by reference to Exhibit 5-A-23, Registration No. 2-59785. 4-A-24 -- Thirty-first Supplemental Indenture of JCP&L, dated May 1, 1977 - Incorporated by reference to Exhibit 5-A-24, Registration No. 2-59785. 4-A-25 -- Thirty-second Supplemental Indenture of JCP&L, dated January 20, 1978 - Incorporated by reference to Exhibit 5-A-25, Registration No. 2-60438. 4-A-26 -- Thirty-third Supplemental Indenture of JCP&L, dated January 1, 1979 - Incorporated by reference to Exhibit A-20(b), Certificate Pursuant to Rule 24, SEC File No. 70-6242. 4-A-27 -- Thirty-fourth Supplemental Indenture of JCP&L, dated June 1, 1979 - Incorporated by reference to Exhibit A-28, Certificate Pursuant to Rule 24, SEC File No. 70-6290. 4-A-28 -- Thirty-sixth Supplemental Indenture of JCP&L, dated October 1, 1979 - Incorporated by reference to Exhibit A-30, Certificate Pursuant to Rule 24, SEC File No. 70-6354. 4-A-29 -- Thirty-seventh Supplemental Indenture of JCP&L, dated September 1, 1984 - Incorporated by reference to Exhibit A-1(cc), Certificate Pursuant to Rule 24, SEC File No. 70-7001. 4-A-30 -- Thirty-eighth Supplemental Indenture of JCP&L, dated July 1, 1985 - Incorporated by reference to Exhibit A-1(dd), Certificate Pursuant to Rule 24, SEC File No. 70-7109. 4-A-31 -- Thirty-ninth Supplemental Indenture of JCP&L, dated April 1, 1988 - Incorporated by reference to Exhibit A-1(a), Certificate Pursuant to Rule 24, SEC File No. 70-7263. 4-A-32 -- Fortieth Supplemental Indenture of JCP&L, dated June 14, 1988 - Incorporated by reference to Exhibit A-1(ff), Certificate Pursuant to Rule 24, SEC File No. 70-7603. 4-A-33 -- Forty-first Supplemental Indenture of JCP&L, dated April 1, 1989 - Incorporated by reference to Exhibit A-1(gg), Certificate Pursuant to Rule 24, SEC File No. 70-7603. 4-A-34 -- Forty-second Supplemental Indenture of JCP&L, dated July 1, 1989 - Incorporated by reference to Exhibit A-1(hh), Certificate Pursuant to Rule 24, SEC File No. 70-7603. 4-A-35 -- Forty-third Supplemental Indenture of JCP&L, dated March 1, 1991 - Incorporated by reference to Exhibit 4-A-35, Registration No. 33-45314. 4-A-36 -- Forty-fourth Supplemental Indenture of JCP&L, dated March 1, 1992 - Incorporated by reference to Exhibit 4-A-36, Registration No. 33-49405. 4-A-37 -- Forty-fifth Supplemental Indenture of JCP&L, dated October 1, 1992 - Incorporated by reference to Exhibit 4-A-37, Registration No. 33-49405. 4-A-38 -- Forty-sixth Supplemental Indenture of JCP&L, dated April 1, 1993 - Incorporated by reference to Exhibit C-15, 1992 Annual Report of GPU on Form U5S, SEC File No. 30-126. 4-A-39 -- Forty-seventh Supplemental Indenture of JCP&L, dated April 10, 1993 - Incorporated by reference to Exhibit C-16, 1992 Annual Report of GPU on Form U5S, SEC File No. 30-126. 4-A-40 -- Forty-eighth Supplemental Indenture of JCP&L, dated April 15, 1993 - Incorporated by reference to Exhibit C-17, 1992 Annual Report of GPU on Form U5S, SEC File No. 30-126. 4-A-41 -- Forty-ninth Supplemental Indenture of JCP&L, dated October 1, 1993 - Incorporated by reference to Exhibit C-18, 1993 Annual Report of GPU on Form U5S, SEC File No. 30-126. 4-A-42 -- Fiftieth Supplemental Indenture of JCP&L, dated August 1, 1994 - Incorporated by reference to Exhibit C-19, 1994 Annual Report of GPU on Form U5S, SEC File No. 30-126. 4-A-43 -- Fifty-first Supplemental Indenture of JCP&L, dated August 15, 1996 - Incorporated by reference to Exhibit 4-A-43, 1996 Annual Report on Form 10-K, SEC File No. 1-6047. 4-A-44 -- Fifty-second Supplemental Indenture of JCP&L, dated July 1, 1999 - Incorporated by reference to Exhibit 4-B-44, Registration No. 333-88783. 4-A-45 -- Fifty-third Supplemental Indenture of JCP&L, dated November 1, 1999 - Incorporated by reference to Exhibit 4-A-45, 1999 Annual Report on Form 10-K, SEC File No. 1-3141. 4-A-46 -- Subordinated Debenture Indenture of JCP&L, dated May 1, 1995 - Incorporated by reference to Exhibit A-8(a), Certificate Pursuant to Rule 24, SEC File No. 70-8495. (A) 4-A-47 -- Fifty-fourth Supplemental Indenture of JCP&L, dated November 7, 2001. 4-B -- Indenture of Met-Ed, dated November 1, 1944, between Met-Ed and United States Trust Company of New York, Successor Trustee, as amended and supplemented by fourteen supplemental indentures dated February 1, 1947 through May 1, 1960 - Incorporated by reference to Met-Ed's Instruments of Indebtedness Nos. 1 to 14 inclusive, and 16, filed as part of Amendment No. 1 to 1959 Annual Report of GPU on Form U5S, SEC File Nos. 30-126 and 1-3292. 4-B-1 -- Supplemental Indenture of Met-Ed, dated December 1, 1962 - Incorporated by reference to Exhibit 2-E(1), Registration No. 2-59678. 4-B-2 -- Supplemental Indenture of Met-Ed, dated March 20, 1964 - Incorporated by reference to Exhibit 2-E(2), Registration No. 2-59678. 4-B-3 -- Supplemental Indenture of Met-Ed, dated July 1, 1965 - Incorporated by reference to Exhibit 2-E(3), Registration No. 2-59678. 4-B-4 -- Supplemental Indenture of Met-Ed, dated June 1, 1966 - Incorporated by reference to Exhibit 2-B-4, Registration No. 2-24883. 4-B-5 -- Supplemental Indenture of Met-Ed, dated March 22, 1968 - Incorporated by reference to Exhibit 4-C-5, Registration No. 2-29644. 4-B-6 -- Supplemental Indenture of Met-Ed, dated September 1, 1968 - Incorporated by reference to Exhibit 2-E(6), Registration No. 2-59678. 4-B-7 -- Supplemental Indenture of Met-Ed, dated August 1, 1969 - Incorporated by reference to Exhibit 2-E(7), Registration No. 2-59678. 4-B-8 -- Supplemental Indenture of Met-Ed, dated November 1, 1971 - Incorporated by reference to Exhibit 2-E(8), Registration No. 2-59678. 4-B-9 -- Supplemental Indenture of Met-Ed, dated May 1, 1972 - Incorporated by reference to Exhibit 2-E(9), Registration No. 2-59678. 4-B-10 -- Supplemental Indenture of Met-Ed, dated December 1, 1973 - Incorporated by reference to Exhibit 2-E(10), Registration No. 2-59678. 4-B-11 -- Supplemental Indenture of Met-Ed, dated October 30, 1974 - Incorporated by reference to Exhibit 2-E(11), Registration No. 2-59678. 4-B-12 -- Supplemental Indenture of Met-Ed, dated October 31, 1974 - Incorporated by reference to Exhibit 2-E(12), Registration No. 2-59678. 4-B-13 -- Supplemental Indenture of Met-Ed, dated March 20, 1975 - Incorporated by reference to Exhibit 2-E(13), Registration No. 2-59678. 4-B-14 -- Supplemental Indenture of Met-Ed, dated September 25, 1975 - Incorporated by reference to Exhibit 2-E(15), Registration No. 2-59678. 4-B-15 -- Supplemental Indenture of Met-Ed, dated January 12, 1976 - Incorporated by reference to Exhibit 2-E(16), Registration No. 2-59678. 4-B-16 -- Supplemental Indenture of Met-Ed, dated March 1, 1976 - Incorporated by reference to Exhibit 2-E(17), Registration No. 2-59678. 4-B-17 -- Supplemental Indenture of Met-Ed, dated September 28, 1977 - Incorporated by reference to Exhibit 2-E(18), Registration No. 2-62212. 4-B-18 -- Supplemental Indenture of Met-Ed, dated January 1, 1978 - Incorporated by reference to Exhibit 2-E(19), Registration No. 2-62212. 4-B-19 -- Supplemental Indenture of Met-Ed, dated September 1, 1978 - Incorporated by reference to Exhibit 4-A(19), Registration No. 33-48937. 4-B-20 -- Supplemental Indenture of Met-Ed, dated June 1, 1979 - Incorporated by reference to Exhibit 4-A(20), Registration No. 33-48937. 4-B-21 -- Supplemental Indenture of Met-Ed, dated January 1, 1980 - Incorporated by reference to Exhibit 4-A(21), Registration No. 33-48937. 4-B-22 -- Supplemental Indenture of Met-Ed, dated September 1, 1981 - Incorporated by reference to Exhibit 4-A(22), Registration No. 33-48937. 4-B-23 -- Supplemental Indenture of Met-Ed, dated September 10, 1981 - Incorporated by reference to Exhibit 4-A(23), Registration No. 33-48937. 4-B-24 -- Supplemental Indenture of Met-Ed, dated December 1, 1982 - Incorporated by reference to Exhibit 4-A(24), Registration No. 33-48937. 4-B-25 -- Supplemental Indenture of Met-Ed, dated September 1, 1983 - Incorporated by reference to Exhibit 4-A(25), Registration No. 33-48937. 4-B-26 -- Supplemental Indenture of Met-Ed, dated September 1, 1984 - Incorporated by reference to Exhibit 4-A(26), Registration No. 33-48937. 4-B-27 -- Supplemental Indenture of Met-Ed, dated March 1, 1985 - Incorporated by reference to Exhibit 4-A(27), Registration No. 33-48937. 4-B-28 -- Supplemental Indenture of Met-Ed, dated September 1, 1985 - Incorporated by reference to Exhibit 4-A(28), Registration No. 33-48937. 4-B-29 -- Supplemental Indenture of Met-Ed, dated June 1, 1988 - Incorporated by reference to Exhibit 4-A(29), Registration No. 33-48937. 4-B-30 -- Supplemental Indenture of Met-Ed, dated April 1, 1990 - Incorporated by reference to Exhibit 4-A(30), Registration No. 33-48937. 4-B-31 -- Amendment dated May 22, 1990 to Supplemental Indenture of Met-Ed, dated April 1, 1990 - Incorporated by reference to Exhibit 4-A(31), Registration No. 33-48937. 4-B-32 -- Supplemental Indenture of Met-Ed, dated September 1, 1992 - Incorporated by reference to Exhibit 4-A(32)(a), Registration No. 33-48937. 4-B-33 -- Supplemental Indenture of Met-Ed, dated December 1, 1993 - Incorporated by reference to Exhibit C-58, 1993 Annual Report of GPU on Form U5S, SEC File No. 30-126. 4-B-34 -- Supplemental Indenture of Met-Ed, dated July 15, 1995 - Incorporated by reference to Exhibit 4-B-35, 1995 Annual Report on Form 10-K, SEC File No. 1-446. 4-B-35 -- Supplemental Indenture of Met-Ed, dated August 15, 1996 - Incorporated by reference to Exhibit 4-B-35, 1996 Annual Report on Form 10-K, SEC File No. 1-446. 4-B-36 -- Supplemental Indenture of Met-Ed, dated May 1, 1997 - Incorporated by reference to Exhibit 4-B-36, 1997 Annual Report on Form 10-K, SEC File No. 1-446. 4-B-37 -- Supplemental Indenture of Met-Ed, dated July 1, 1999 - Incorporated by reference to Exhibit 4-B-38, 1999 Annual Report on Form 10-K, SEC File No. 1-446. 4-B-38 -- Indenture between Met-Ed and United States Trust Company of New York, dated May 1, 1999 - Incorporated by reference to Exhibit A-11(a), Certificate Pursuant to Rule 24, SEC File No. 70-9329. 4-B-39 -- Senior Note Indenture between Met-Ed and United States Trust Company of New York, dated July 1, 1999 Incorporated by reference to Exhibit C-154 to GPU, Inc.'s Annual Report on Form U5S for the year 1999, SEC File No. 30-126. 4-B-40 -- First Supplemental Indenture between Met-Ed and United States Trust Company of New York, dated August 1, 2000 - Incorporated by reference to Exhibit 4-A, June 30, 2000 Quarterly Report on Form 10-Q, SEC File No. 1-446. (A) 4-B-41 -- Supplemental Indenture of Met-Ed, dated May 1, 2001. 4-C -- Mortgage and Deed of Trust of Penelec, dated January 1, 1942, between Penelec and United States Trust Company of New York, Successor Trustee, and indentures supplemental thereto dated March 7, 1942 through May 1, 1960 - Incorporated by reference to Penelec's Instruments of Indebtedness Nos. 1-20, inclusive, filed as a part of Amendment No. 1 to 1959 Annual Report of GPU on Form U5S, SEC File Nos. 30-126 and 1-3292. 4-C-1 -- Supplemental Indentures to Mortgage and Deed of Trust of Penelec, dated May 1, 1961 through December 1, 1977 - Incorporated by reference to Exhibit 2-D(1) to 2-D(19), Registration No. 2-61502. 4-C-2 -- Supplemental Indenture of Penelec, dated June 1, 1978 - Incorporated by reference to Exhibit 4-A(2), Registration No. 33-49669. 4-C-3 -- Supplemental Indenture of Penelec, dated June 1, 1979 - Incorporated by reference to Exhibit 4-A(3), Registration No. 33-49669. 4-C-4 -- Supplemental Indenture of Penelec, dated September 1, 1984 - Incorporated by reference to Exhibit 4-A(4), Registration No. 33-49669. 4-C-5 -- Supplemental Indenture of Penelec, dated December 1, 1985 - Incorporated by reference to Exhibit 4-A(5), Registration No. 33-49669. 4-C-6 -- Supplemental Indenture of Penelec, dated December 1, 1986 - Incorporated by reference to Exhibit 4-A(6), Registration No. 33-49669. 4-C-7 -- Supplemental Indenture of Penelec, dated May 1, 1989 - Incorporated by reference to Exhibit 4-A(7), Registration No. 33-49669. 4-C-8 -- Supplemental Indenture of Penelec, dated December 1, 1990-Incorporated by reference to Exhibit 4-A(8), Registration No. 33-45312. 4-C-9 -- Supplemental Indenture of Penelec, dated March 1, 1992 - Incorporated by reference to Exhibit 4-A(9), Registration No. 33-45312. 4-C-10 -- Supplemental Indenture of Penelec, dated June 1, 1993 - Incorporated by reference to Exhibit C-73, 1993 Annual Report of GPU on Form U5S, SEC File No. 30-126. 4-C-11 -- Supplemental Indenture of Penelec, dated November 1, 1995 - Incorporated by reference to Exhibit 4-C-11, 1995 Annual Report on Form 10-K, SEC File No. 1-3522. 4-C-12 -- Supplemental Indenture of Penelec, dated August 15, 1996 - Incorporated by reference to Exhibit 4-C-12, 1996 Annual Report on Form 10-K, SEC File No. 1-3522. 4-C-13 -- Senior Note Indenture between Penelec and United States Trust Company of New York, dated April 1, 1999 - Incorporated by reference to Exhibit 4-C-13, 1999 Annual Report on Form 10-K, SEC File No. 1-3522. 4-C-14 -- Indenture between Penelec and United States Trust Company of New York, dated June 1, 1999 - Incorporated by reference to Exhibit A-11(a), Certificate Pursuant to Rule 24, SEC File No. 70-9327. 4-C-15 -- First Supplemental Indenture between Penelec and United States Trust Company of New York, dated August 1, 2000 - Incorporated by reference to Exhibit 4-B, June 30, 2000 Quarterly Report on Form 10-Q, SEC File No. 1-3522. (A) 4-C-16 -- Supplemental Indenture of Penelec, dated May 1, 2001. (A) 4-C-17 -- Supplemental Indenture No. 1 of Penelec, dated May 1, 2001. 4-D -- Amended and Restated Limited Partnership Agreement of JCP&L Capital, L.P., dated May 11, 1995 - Incorporated by reference to Exhibit A-5(a), Certificate Pursuant to Rule 24, SEC File No. 70-8495. 4-E -- Action Creating Series A Preferred Securities of JCP&L Capital, L.P., dated May 11, 1995 - Incorporated by reference to Exhibit A-6(a), Certificate Pursuant to Rule 24, SEC File No. 70-8495. 4-F -- Payment and Guarantee Agreement of JCP&L, dated May 18, 1995 - Incorporated by reference to Exhibit B-1(a), Certificate Pursuant to Rule 24, SEC File No. 70-8495. 4-G -- Payment and Guarantee Agreement of Met-Ed, dated May 28, 1999 - Incorporated by reference to Exhibit B-1(a), Certificate Pursuant to Rule 24, SEC No. 70-9329. 4-H -- Amendment No. 1 to Payment and Guarantee Agreement of Met-Ed, dated November 23, 1999 - Incorporated by reference to Exhibit 4-H, 1999 Annual Report on Form 10-K, SEC File No. 1-446. 4-I -- Payment and Guarantee Agreement of Penelec, dated June 16, 1999 - Incorporated by reference to Exhibit B-1(a), Certificate Pursuant to Rule 24, SEC File No. 70-9327. 4-J -- Amendment No. 1 to Payment and Guarantee Agreement of Penelec, dated November 23, 1999 - Incorporated by reference to Exhibit 4-J, 1999 Annual Report on Form 10-K, SEC File No. 1-3522. * 10-A -- Deferred Remuneration Plan for Outside Directors of Jersey Central Power & Light Company, as amended and restated effective August 8, 2000. (2000 Form 10-K, Exhibit 10-H, File No. 1-3141, Jersey Central Power & Light Company.) *(A) 10-B -- Form of Amendment, effective November 7, 2001, to Deferred Remuneration Plan for Outside Directors of Jersey Central Power and Light Company. (A) 12.6 -- Consolidated fixed charge ratios - JCP&L. (A) 12.7 -- Consolidated fixed charge ratios - Penelec. (A) 12.8 -- Consolidated fixed charge ratios - Met-Ed. (A) 13.5 -- 2001 Annual Report to Stockholders - JCP&L. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with SEC.) (A) 13.6 -- 2001 Annual Report to Stockholders - Met-Ed. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with SEC.) (A) 13.7 -- 2001 Annual Report to Stockholders - Penelec. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with SEC.) (A) 21.4 -- List of Subsidiaries of JCP&L at December 31, 2001. (A) 21.5 -- List of Subsidiaries of Met-Ed at December 31, 2001. (A) 21.6 -- List of Subsidiaries of Penelec at December 31, 2001. (A) 23.4 -- Consent of Independent Public Accountants - JCP&L. (A) 23.5 -- Consent of Independent Public Accountants - JCP&L. (A) 23.6 -- Consent of Independent Public Accountants - Met-Ed. (A) 23.7 -- Consent of Independent Public Accountants - Met-Ed. (A) 23.8 -- Consent of Independent Public Accountants - Penelec. (A) 23.9 -- Consent of Independent Public Accountants - Penelec. (A) 99 -- Letter to Securities and Exchange Commission. (A) -- Provided here in electronic format as an exhibit. (b) Reports on Form 8-K FirstEnergy- ------------ The Company filed nine reports on Form 8-K since September 30, 2001. A report dated October 18, 2001 reported Utilicorp's offer to acquire Midlands Electricity for $2.1 billion. A report dated October 29, 2001 announced the merger effective date and other information. A report dated November 7, 2001 reported the merger of FirstEnergy and GPU effective November 7, 2001. A report dated November 29, 2001 reported an agreement to sell four coal-fired power plants in Ohio. A report dated February 21, 2002 announced the Commonwealth Court of Pennsylvania's decision on issues related to the merger of FirstEnergy and GPU,Inc. A reported dated February 22, 2002 reported that an agreement had been reached with Utilicorp to extend the dates to terminate the transaction. A report dated March 13, 2002 announced the extension of the Davis-Besse refueling outage. A report dated March 15, 2002 reported the agreement to sell 79.9% of Avon Energy Partners Holdings in the United Kingdom to Aquila, Inc. (formerly Utilicorp). A report dated March 25, 2002 providing additional details with respect to the petition to the Supreme Court of Pennsylvania. OE, Penn- --------- None. CEI --- CEI filed two reports on Form 8-K since September 30, 2001. A report dated November 29, 2001 reported an agreement to sell four coal-fired power plants in Ohio and a report dated March 13, 2002 announced the extension of the Davis-Besse refueling outage. TE -- TE filed two reports on Form 8-K since September 30, 2001. A report dated November 29, 2001 reported an agreement to sell four coal-fired power plants in Ohio and a report dated March 13, 2002 announced the extension of the Davis-Besse refueling outage. GPU, Inc. --------- Dated January 22, 2001, under Item 5 (Other Events). Dated January 26, 2001, under Item 5 (Other Events). Dated March 7, 2001, under Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits). Met-Ed ------ Met-Ed filed two reports on Form 8-K since the September 30, 2001. A report dated February 21, 2002 announced the Commonwealth Court of Pennsylvania's decision on issues related to the merger of FirstEnergy and GPU, Inc. and a report dated March 25, 2002 providing additional details with respect to the petition to the Supreme Court of Pennsylvania. Penelec ------- Penelec filed two reports on Form 8-K since the September 30, 2001. A report dated February 21, 2002 announced the Commonwealth Court of Pennsylvania's decision on issues related to the merger of FirstEnergy and GPU, Inc. and a report dated March 25, 2002 providing additional details with respect to the petition to the Supreme Court of Pennsylvania. JCP&L ----- None REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of FirstEnergy Corp.: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in FirstEnergy Corp.'s Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Ohio Edison Company: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Ohio Edison Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of The Cleveland Electric Illuminating Company: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in The Cleveland Electric Illuminating Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of The Toledo Edison Company: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in The Toledo Edison Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Pennsylvania Power Company: We have audited, in accordance with auditing standards generally accepted in the United States, the financial statements included in Pennsylvania Power Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. To the Stockholders and Board of Directors of Jersey Central Power & Light Company: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements as of December 31, 2001 and for the periods from January 1, 2001 to November 6, 2001 and from November 7, 2001 to December 31, 2001, included in Jersey Central Power & Light Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The information included in this schedule for the year ended December 31, 2001 has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. The consolidated financial statements as of December 31, 2000 and for each of the two years in the period ended December 31, 2000, together with the related information included in this schedule, were audited by other auditors whose report dated January 31, 2001, expressed an unqualified opinion. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. Report of Independent Accountants To the Board of Directors and Stockholder of Jersey Central Power & Light Company: In our opinion, the consolidated balance sheet as of December 31, 2000 and the related consolidated statements of income, and cash flows for each of the two years in the period ended December 31, 2000 (appearing on the accompanying index of the Jersey Central Power & Light Company 2001 Annual Report to Stockholders incorporated by reference in this Form 10-K) present fairly, in all material respects, the financial position, results of operations and cash flows of Jersey Central Power & Light Company and Subsidiary Company at December 31, 2000 and for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 31, 2001 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Metropolitan Edison Company: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements as of December 31, 2001 and for the periods from January 1, 2001 to November 6, 2001 and from November 7, 2001 to December 31, 2001, included in Metropolitan Edison Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The information included in this schedule for the year ended December 31, 2001 has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. The consolidated financial statements as of December 31, 2000 and for each of the two years in the period ended December 31, 2000, together with the related information included in this schedule, were audited by other auditors whose report dated January 31, 2001, expressed an unqualified opinion. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. Report of Independent Accountants To the Board of Directors and Stockholder of Metropolitan Edison Company: In our opinion, the consolidated balance sheet as of December 31, 2000 and the related consolidated statements of income, and cash flows for each of the two years in the period ended December 31, 2000 (appearing on the accompanying index of the Metropolitan Edison Company 2001 Annual Report to Stockholders incorporated by reference in this Form 10-K) present fairly, in all material respects, the financial position, results of operations and cash flows of Metropolitan Edison Company and Subsidiary Companies at December 31, 2000 and for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 31, 2001 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Pennsylvania Electric Company: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements as of December 31, 2001 and for the periods from January 1, 2001 to November 6, 2001 and from November 7, 2001 to December 31, 2001, included in Pennsylvania Electric Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The information included in this schedule for the year ended December 31, 2001 has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. The consolidated financial statements as of December 31, 2000 and for each of the two years in the period ended December 31, 2000, together with the related information included in this schedule, were audited by other auditors whose report dated January 31, 2001, expressed an unqualified opinion. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. Report of Independent Accountants To the Board of Directors and Stockholder of Pennsylvania Electric Company: In our opinion, the consolidated balance sheet as of December 31, 2000 and the related consolidated statements of income, and cash flows for each of the two years in the period ended December 31, 2000 (appearing on the accompanying index of the Pennsylvania Electric Company 2001 Annual Report to Stockholders incorporated by reference in this Form 10-K) present fairly, in all material respects, the financial position, results of operations and cash flows of Pennsylvania Electric Company and Subsidiary Companies at December 31, 2000 and for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 31, 2001
SCHEDULE II FIRSTENERGY CORP. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions ---------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 2001: Accumulated provision for uncollectible accounts - customers....... $32,251 $27,805 $ 41,071(a)(b) $35,769 (c) $65,358 ======= ======= ======== ======= ======= - other........... $ 4,035 $ 3,912 $ -- $ -- $ 7,947 ======= ======= ======== ======= ======= Year Ended December 31, 2000: Accumulated provision for uncollectible accounts - customers......... $ 8,219 $25,589 $ 13,245 (a) $14,802 (c) $32,251 ======== ======= ======== ======= ======= - other............. $ 3,859 $11,203 $(11,027)(a) $ -- $ 4,035 ======== ======= ======== ======= ======= Year Ended December 31, 1999: Accumulated provision for uncollectible accounts - customers......... $ 52,057 $ 8,668 $ 2,313 (a) $54,819 (c) $ 8,219 ======== ======= ======= ======= ======= - other............. $ 591 $ 4,039 $ 18 (a) $ 789 (c) $ 3,859 ======== ======= ======= ======= ======= (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents amount assumed from the former GPU companies as of November 7, 2001, the effective date of the merger. (c) Represents the write-off of accounts considered to be uncollectible.
SCHEDULE II OHIO EDISON COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions ---------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 2001: Accumulated provision for uncollectible accounts.- customers......... $11,777 $16,460 $ 2,401 (a) $26,116 $ 4,522 - other............. $ 1,000 $ -- $ -- $ -- $ 1,000 ======= ======== ======= ======= ======= Year Ended December 31, 2000: Accumulated provision for uncollectible accounts.- customers......... $ 6,452 $16,808 $ 2,218 (a) $13,701 (b) $11,777 - other............. $ 1,000 $ -- $ -- $ -- $ 1,000 ======= ======= ======= ======= ======= Year Ended December 31, 1999: Accumulated provision for uncollectible accounts.- customers......... $ 6,397 $ 8,401 $ 2,313 (a) $10,659 (b) $ 6,452 ======== ======= ======= ======= ======= - other............. $ -- $ 1,000 $ -- $ -- $ 1,000 ======== ======= ======= ======= ======= - ---------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible.
SCHEDULE II THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions ---------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 2001: Accumulated provision for uncollectible accounts.................. $1,000 $ 15 $ -- $ -- $1,015 ====== ====== ===== ==== ====== Year Ended December 31, 2000: Accumulated provision for uncollectible accounts.................. $1,000 $ -- $ -- $ -- $1,000 ====== ====== ===== ==== ======= Year Ended December 31, 1999: Accumulated provision for uncollectible accounts.................. $ 491 $1,180 $ 18 (a) $689(b) $1,000 ====== ====== ===== ==== ======= - --------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible.
SCHEDULE II THE TOLEDO EDISON COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions ---------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 2001: Accumulated provision for uncollectible accounts.................. $ -- $ 2 $ -- $ -- $ 2 ===== ===== ===== ===== ===== Year Ended December 31, 2000: Accumulated provision for uncollectible accounts.................. $ -- $ -- $ -- $ -- $ -- ===== ===== ===== ===== ===== Year Ended December 31, 1999: Accumulated provision for uncollectible accounts.................. $ 100 $ -- $ -- $ 100 (a) $ -- ===== ===== ===== ===== ===== (a) Represents the write-off of accounts considered to be uncollectible.
SCHEDULE II PENNSYLVANIA POWER COMPANY VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions ---------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 2001: Accumulated provision for uncollectible accounts.................. $ 628 $1,172 $311 (a) $1,492(b) $ 619 ====== ====== ==== ====== ====== Year Ended December 31, 2000: Accumulated provision for uncollectible accounts.................. $3,537 $ (496) $478 (a) $2,891(b) $ 628 ====== ====== ==== ====== ====== Year Ended December 31, 1999: Accumulated provision for uncollectible accounts.................. $3,599 $1,289 $300 (a) $1,651(b) $3,537 ====== ====== ==== ====== ====== (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible.
SCHEDULE II JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions ---------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 2001: Accumulated provision for uncollectible accounts Nov. 7-Dec. 31, 2001 $12,858 $ 1,869 $ 57 (a) $ 1,861 (b) $12,923 ======= ======= ======= ======= ======= ____________________________________________________________________________________________________________________ Jan. 1-Nov. 6, 2001 $21,479 $ 390 $ 1,778 (a) $10,789 (b) $12,858 ======= ======= ======= ======= ======= Year Ended December 31, 2000: Accumulated provision for uncollectible accounts $ 6,056 $25,732 $ 2,427 (a) $12,736 (b) $21,479 ======= ======= ======= ======= ======= Year Ended December 31, 1999: Accumulated provision for uncollectible accounts $ 1,764 $ 9,549 $37,098(a) $42,355 (b) $ 6,056 ======= ======== ======= ======= ======= - ---------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible.
SCHEDULE II METROPOLITAN EDISON COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions ---------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 2001: Accumulated provision for uncollectible accounts Nov. 7-Dec. 31, 2001 $11,244 $ 2,669 $ 78 (a) $ 1,720 (b) $12,271 ======= ======= ======= ======= ======= ____________________________________________________________________________________________________________________ Jan. 1-Nov. 6, 2001 $13,004 $ 7,354 $ 743 (a) $ 9,857 (b) $11,244 ======= ======= ======= ======= ======= Year Ended December 31, 2000: Accumulated provision for uncollectible accounts. $ 4,757 $18,511 $1,602 (a) $11,866 (b) $13,004 ======= ======= ====== ======= ======= Year Ended December 31, 1999: Accumulated provision for uncollectible accounts $ 3,335 $ 7,095 $42,811 (a) $48,484 (b) $ 4,757 ======= ======= ======= ======= ======= - ---------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible.
SCHEDULE II PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions ---------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 2001: Accumulated provision for uncollectible accounts Nov. 7-Dec. 31, 2001 $13,509 $ 3,686 $ 83 (a) $ 2,559 (b) $14,719 ======= ======= ======= ======= ======= _____________________________________________________________________________________________________________________ Jan. 1-Nov. 6, 2001 $14,851 $10,833 $ 1,069 (a) $13,244 (b) $13,509 ======= ======= ======= ======= ======= Year Ended December 31, 2000: Accumulated provision for uncollectible accounts $ 5,288 $20,667 $ 1,539(a) $12,643 (b) $14,851 ======= ======= ======= ======= ======= Year Ended December 31, 1999: Accumulated provision for uncollectible accounts $3,235 $ 8,447 $38,374(a) $44,768 (b) $ 5,288 ====== ======= ======= ======= ======= - ---------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTENERGY CORP. BY /s/ H. Peter Burg -------------------------------------- H. Peter Burg Vice Chairman of the Board and Chief Executive Officer Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/Fred D. Hafer /s/H. Peter Burg - --------------------------------- ------------------------------------------ Fred D. Hafer H. Peter Burg Chairman of the Board Vice Chairman of the Board and Chief Executive Officer and Director (Principal Executive Officer) /s/Richard H. Marsh /s/Anthony J. Alexander - --------------------------------- ------------------------------------------ Richard H. Marsh Anthony J. Alexander Senior Vice President and President and Chief Operating Officer Chief Financial Officer (Principal Operating Officer) (Principal Financial Officer) /s/Carol A. Cartwright /s/Harvey L. Wagner - --------------------------------- ----------------------------------------- Carol A. Cartwright Harvey L. Wagner Director Vice President and Controller (Principal Accounting Officer) /s/Paul J. Powers - --------------------------------- ------------------------------------------ William F. Conway Paul J. Powers Director Director /s/Robert B. Heisler, Jr /s/Catherine A. Rein - --------------------------------- ------------------------------------------ Robert B. Heisler, Jr. Catherine A. Rein Director Director /s/Robert L. Loughhead - --------------------------------- ------------------------------------------ Robert L. Loughhead Robert C. Savage Director Director /s/Russell W. Maier /s/George M. Smart - --------------------------------- ------------------------------------------ Russell W. Maier George M. Smart Director Director /s/John M. Pietruski /s/Carlisle A. H. Trost - --------------------------------- ------------------------------------------ John M. Pietruski Carlisle A. H. Trost Director Director /s/Robert N. Pokelwaldt /s/Jesse T. Williams, Sr. - --------------------------------- ------------------------------------------ Robert N. Pokelwaldt Jesse T. Williams, Sr. Director Director /s/Patricia K. Woolf ------------------------------------------ Date: March 28, 2002 Patricia K. Woolf Director SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OHIO EDISON COMPANY BY /s/H. Peter Burg ------------------------------------- H. Peter Burg President Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. Peter Burg /s/ Richard H. Marsh - ------------------------------- ----------------------------------- H. Peter Burg Richard H. Marsh President and Director Senior Vice President and Director (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ Anthony J. Alexander - -------------------------------- ----------------------------------- Harvey L. Wagner Anthony J. Alexander Vice President and Controller Director (Principal Accounting Officer) Date: March 28, 2002 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY BY /s/H. Peter Burg --------------------------------------- H. Peter Burg President Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. Peter Burg /s/ Richard H. Marsh - --------------------------------------- -------------------------------------- H. Peter Burg Richard H. Marsh President and Director Senior Vice President and Director (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ Anthony J. Alexander - --------------------------------------- -------------------------------------- Harvey L. Wagner Anthony J. Alexander Vice President and Controller Director (Principal Accounting Officer) Date: March 28, 2002 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TOLEDO EDISON COMPANY BY /s/H. Peter Burg ---------------------- H. Peter Burg President Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. Peter Burg /s/ Richard H. Marsh - --------------------------------------- --------------------------------------- H. Peter Burg Richard H. Marsh President and Director Senior Vice President and Director (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ Anthony J. Alexander - --------------------------------------- --------------------------------------- Harvey L. Wagner Anthony J. Alexander Vice President and Controller Director (Principal Accounting Officer) Date: March 28, 2002 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JERSEY CENTRAL POWER & LIGHT COMPANY BY /s/Earl T. Carey --------------------------------- Earl T. Carey President Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ Earl T. Carey /s/Richard H. Marsh - ------------------------------------------ ------------------------------------- Earl T. Carey Richard H. Marsh President and Director Senior Vice President (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/Leila L. Vespoli - ------------------------------------------ ------------------------------------- Harvey L. Wagner Leila L. Vespoli Vice President and Controller Senior Vice President and Director (Principal Accounting Officer) /s/ Charles E. Jones /s/Stanley C. Van Ness - ------------------------------------------ ------------------------------------- Charles E. Jones Stanley C. Van Ness Director Director /s/ Gelorma E. Persson - ----------------------------------------- /s/ Gelorma E. Persson Director Date: March 28, 2002 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. METROPOLITAN EDISON COMPANY BY /s/H. Peter Burg ------------------------------ H. Peter Burg President Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. Peter Burg /s/Richard H. Marsh - ------------------------------------- --------------------------------------- H. Peter Burg Richard H. Marsh President and Director Senior Vice President and Director (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/Anthony J. Alexander - ------------------------------------- --------------------------------------- Harvey L. Wagner Anthony J. Alexander Vice President and Controller Director (Principal Accounting Officer) Date: March 28, 2002 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENNSYLVANIA ELECTRIC COMPANY BY /s/H. Peter Burg ------------------------------ H. Peter Burg President Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. Peter Burg /s/Richard H. Marsh - --------------------------------------- --------------------------------------- H. Peter Burg Richard H. Marsh President and Director Senior Vice President and Director (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/Anthony J. Alexander - --------------------------------------- --------------------------------------- Harvey L. Wagner Anthony J. Alexander Vice President and Controller Director (Principal Accounting Officer) Date: March 28, 2002 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENNSYLVANIA POWER COMPANY BY /s/H. Peter Burg --------------------------------- H. Peter Burg Chairman of the Board and Chief Executive Officer Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. Peter Burg /s/Richard H. Marsh - ---------------------------------------- ------------------------------------- H. Peter Burg Richard H. Marsh Chairman of the Board and Senior Vice President and Director Chief Executive Officer (Principal Financial Officer) (Principal Executive Officer) /s/ Harvey L. Wagner /s/Anthony J. Alexander - ---------------------------------------- ------------------------------------- Harvey L. Wagner Anthony J. Alexander Vice President and Controller Director (Principal Accounting Officer) Date: March 28, 2002 EX-4 3 ex4.txt FIRSTENERGY CORP. TO THE BANK OF NEW YORK, (successor by merger to United States Trust Company of New York) Trustee under the GPU, Inc. Indenture, dated as of December 1, 2000 -------------------------------------- Supplemental Indenture Providing for Succession By Merger -------------------------------------- Dated as of November 7, 2001 SUPPLEMENTAL INDENTURE ---------------------- SUPPLEMENTAL INDENTURE, dated as of November 7, 2001, between FIRSTENERGY CORP., a corporation of the State of Ohio, whose address is 76 South Main Street, Akron, Ohio 44308, (hereinafter sometimes called the Successor Company) and THE BANK OF NEW YORK (successor to United States Trust Company of New York), a corporation of the State of New York, whose address is 5 Penn Plaza, New York, New York 10001 (hereinafter sometimes called the Trustee), Trustee under the Indenture, dated as of December 1, 2000 (hereinafter called the Indenture), from GPU, INC., a corporation of the Commonwealth of Pennsylvania, whose address is 300 Madison Avenue, Morristown, New Jersey 07962 (hereinafter sometimes called the Predecessor Company), to United States Trust Company of New York, this Supplemental Indenture (hereinafter called the Supplemental Indenture) being supplemental thereto. WHEREAS, Effective June 26, 2001, The Bank of New York acquired all or substantially all of the corporate trust business of United States Trust Company of New York, and by virtue of the provisions of Section 912 of the Indenture, The Bank of New York became the successor Trustee under the Indenture, without the execution or filing of any paper or any further act on the part of any parties to the Indenture; and WHEREAS, the Predecessor Company has heretofore issued and the Trustee has heretofore authenticated and delivered, in accordance with the provisions of the Indenture, $300,000,000 principal amount of 7.70% Debentures, Series A due 2005; and WHEREAS, Article Eleven of the Indenture provides upon any merger of the Predecessor Company into any other entity (herein sometimes called a Merger), for the execution and delivery to the Trustee by the successor corporation of a supplemental indenture whereby the successor corporation shall expressly assume the due and punctual payment of the principal of and premium, if any, and interest, if any, on all Outstanding Securities issued under the Indenture and the performance and observance of every covenant and obligation under the Indenture on the part of the Company to be performed or observed; and WHEREAS, Article Eleven of the Indenture provides that upon the Merger, the successor corporation, into which the Predecessor Company is merged, shall succeed to, and be substituted for, the Predecessor Company and may exercise any right and power of the Predecessor Company under the Indenture with the same effect as if such successor corporation had been named the Predecessor Company therein, and thereafter, the Predecessor Company shall be relieved of all obligations and covenants under the Indenture and the Outstanding Securities thereunder; and WHEREAS, on November 7, 2001 (Effective Time), the Predecessor Company will merge into the Successor Company upon such terms as to fully comply with the provisions of Article Eleven of the Indenture; and WHEREAS, the Successor Company, pursuant to appropriate resolutions of its Board of Directors, has authorized the execution of this Supplemental Indenture to provide, among other things, for the assumption of the Indenture by the Successor Company in compliance with Article Eleven and as hereinafter set forth; and WHEREAS, pursuant to Section 1201 of the Indenture, the Trustee is authorized to enter into one or more supplemental indentures to evidence the succession of another entity to the Predecessor Company and the assumption by any such successor of the covenants of the Predecessor Company contained in the Indenture and the Securities, all as provided in Article Eleven of the Indenture. ARTICLE I. PROVISIONS RELATING TO ARTICLE ELEVEN OF THE INDENTURE SECTION 1.1 The Successor Company does as of the Effective Time hereby expressly assume (i) the due and punctual payment of the principal of and premium, if any, and interest on all Outstanding Securities issued under the Indenture according to their tenor and (ii) the due and punctual performance and observance of every covenant and obligation under the Indenture on the part of the Predecessor Company to be performed and observed. SECTION 1.2 It is hereby declared that, in accordance with the provisions of Section 1102 of the Indenture, the Successor Company, having expressly assumed (i) the due and punctual payment of the principal premium, if any, and interest on all Outstanding Securities issued under the Indenture according to their tenor and (ii) the due and punctual performance and observance of each covenant and obligation under the Indenture on the part of the Predecessor Company to be performed or observed, shall succeed to, and be substituted for, and may exercise every right and power of the Predecessor Company under the Indenture as of the Effective Time with the same effect as if the Successor Company had been named as the Predecessor Company therein, and the Predecessor Company shall be relieved of all obligations and covenants under the Indenture and the Securities Outstanding thereunder. ARTICLE II. MISCELLANEOUS PROVISIONS SECTION 2.1 Subject to the amendments provided for in this Supplemental Indenture, the terms defined in the Indenture, as heretofore supplemented, shall for all purposes of this Supplemental Indenture have the meanings specified in the Indenture, as heretofore supplemented. SECTION 2.2 The Trustee hereby accepts the trusts herein declared, provided, created or supplemented and agrees to perform the same upon the terms and conditions herein and in the Indenture, as heretofore supplemented, set forth and upon the following terms and conditions: The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Successor Company. In general, each and every term and condition contained in Article Nine of the Indenture shall apply to and form part of this Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Supplemental Indenture. SECTION 2.3 Whenever in this Supplemental Indenture any one of the parties hereto is named or referred to, this shall, subject to the provisions of Articles Nine and Eleven of the Indenture, be deemed to include the successors and assigns of such party, and all the covenants and agreements in this Supplemental Indenture contained, by or on behalf of the Successor Company, or by or on behalf of the Trustee, shall, subject as aforesaid, bind and inure to the respective benefits of the respective successors and assigns of such parties, whether so expressed or not. SECTION 2.4 Nothing in this Supplemental Indenture expressed or implied, is intended, or shall be construed to confer upon, or to give to, any person, firm or corporation, other than the parties hereto and the holders of the Securities Outstanding under the Indenture, any right, remedy or claim under or by reason of this Supplemental Indenture or any covenant, condition, stipulation, promise or agreement hereof, and all the covenants, conditions, stipulations, promises and agreements in this Supplemental Indenture contained, by or on behalf of the Successor Company, shall be for the sole and exclusive benefit of the parties hereto, and of the holders of the Securities Outstanding under the Indenture. SECTION 2.5 This Supplemental Indenture shall be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. SECTION 2.6 This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, as of the day and year first above written. FIRSTENERGY CORP. By ---------------------------- THE BANK OF NEW YORK, Trustee By ---------------------------- Louis P. Young Vice President EX-10 4 ex10-1.txt EXEC. & DIR. INCENTIVE COMP - 5/15/01 FIRSTENERGY CORP. EXECUTIVE AND DIRECTOR INCENTIVE COMPENSATION PLAN FE Plan effective May 1, 1998 Revised November 16, 1998 Revised November 16, 1999 Amendment to Plan approved by Shareholders on May 15, 2001 Table of Contents Page Article 1 Establishment, Purpose, and Duration 1.1 Establishment of the Plan 1 1.2 Purpose of the Plan 1 1.3 Duration of the Plan 1 Article 2 Definitions and Construction 2.1 Definitions 2.1.1 Beneficial Owner 1 2.1.3 Black-Scholes Value 1 2.1.4 Board or Board of Directors 1 2.1.5 Cash Award 1 2.1.6 Cause 1 2.1.7 Change in Control 2 2.1.8 Code 4 2.1.9 Committee 4 2.1.10 Company 4 2.1.11 Covered Employee 4 2.1.12 Directors' Award 4 2.1.13 Exchange Act 4 2.1.14 Fair Market Value 4 2.1.15 Incentive Stock Option or ISO 4 2.1.16 Key Employee 4 2.1.17 Nonqualified Stock Option or NSO 5 2.1.18 Option 5 2.1.19 Outside Director 5 2.1.20 Participant 5 2.1.21 Performance Share 5 2.1.22 Period of Restriction 5 2.1.23 Person 5 2.1.24 Plan 5 2.1.25 Restricted Stock 5 2.1.26 Subsidiary 5 2.1.27 Standard Rate 5 2.1.28 Stock 5 2.1.29 Stock Appreciation Right or SAR 5 2.1.30 Voting Stock 5 2.2 Gender and Number 5 2.3 Severability 5 Table of Contents Article 3 Administration 3.1 The Committee 5 3.2 Authority of the Committee 6 3.3 Selection of Participants 6 3.4 Decisions Binding 6 3.5 Delegation of Certain Responsibilities 6 3.6 Procedures of the Committee 7 3.7 Award Agreements 7 3.8 Conditions on Awards 7 3.9 Saturdays, Sundays, and Holidays 7 Article 4 Stock Subject to the Plan 4.1 Number of Shares 7 4.2 Lapsed Awards 8 4.3 Adjustments in Authorized Shares 8 Article 5 Eligibility and Participation 5.1 Eligibility 8 5.2 Actual Participation 8 Article 6 Stock Options 6.1 Grant of Options 8 6.2 Option Agreement 9 6.3 Option Price 9 6.4 Duration of Options 9 6.5 Exercise of Options 9 6.6 Payment 9 6.7 Restrictions on Stock Transferability 10 6.8 Termination of Employment Due to Death, Disability, 10 or Retirement 6.9 Termination of Employment for Other Reasons 10 6.10 Nontransferability of Options 11 Table of Contents Article 7 Stock Appreciation Rights 7.1 Grant of Stock Appreciation Rights 11 7.2 Exercise of SARS in Lieu of Options 11 7.3 Exercise of SARS in Addition to Options 11 7.4 Exercise of SARS Independent of Options 12 7.5 Payment of SAR Amount 12 7.6 Form and Timing of Payment 12 7.7 Term of SAR 12 7.8 Termination of Employment 12 7.9 Nontransferability of SARs 12 Article 8 Restricted Stock 8.1 Grant of Restricted Stock 12 8.2 Restricted Stock Agreement 12 8.3 Transferability 13 8.4 Other Restrictions 13 8.5 Certificate Legend 13 8.6 Removal of Restrictions 13 8.7 Voting Rights 13 8.8 Dividends and Other Distributions 13 8.9 Termination of Employment Due to Retirement 13 8.10 Termination of Employment Due to Death or Disability 14 8.11 Termination of Employment for Other Reasons 14 Article 9 Performance Shares 9.1 Grant of Performance Shares 14 9.2 Value of Performance Shares 14 9.3 Payment of Performance Shares 15 9.4 Committee Discretion to Adjust Awards 15 9.5 Form and Timing of Payment 15 9.6 Termination of Employment Due to Death, Disability, 15 or Retirement 9.7 Termination of Employment for Other Reasons 15 9.8 Nontransferability 16 Article 10 Cash Awards 10.1 Grant of Cash Award 16 10.2 Cash Award Performance Criteria 16 10.3 Payout of Cash awards 16 10.4 Conversion of Cash Award Payout to Restricted Stock 16 Table of Contents Article 11 Directors' Awards 11.1 Grant of Director's Awards 17 11.2 Conversion of Retainer to Stock 17 11.3 Conversion of Retainer to Restricted Stock 17 11.4 Conversion of Retainer to Stock Options 17 Article 12 Beneficiary Designation 17 Article 13 Rights of Employees 13.1 Employment 18 13.2 Participation 18 13.3 No Implied Rights; Rights on Termination of Service 18 13.4 No Right to Company Assets 18 Article 14 Change in Control 14.1 Stock Based Awards 18 14.2 All Awards Other than Stock Based Awards 18 Article 15 Amendment, Modification, and Termination 15.1 Amendment, Modification, and Termination 19 15.2 Awards Previously Granted 19 15.3 Deferral of Payments and Distributions 19 Article 16 Withholding and Deferral 16.1 Tax Withholding 19 16.2 Stock Delivery or Withholding 19 Article 17 Successors 20 Article 18 Requirements of Law 18.1 Requirements of Law 20 18.2 Governing Law 20 Scope of Revision - ----------------- Rev. 3 Clairfy that 6.8 includes early retirement. Put 6.8 in plain English. Increase the number of shares under the Plan and the limits as approved by Shareholders on May 15, 2001. Add "vesting or forfeiture" to 8.4 to strengthen the substantial forfeiture clause as required by IRS. Rev. 2 Change definition of Fair Market Value from 20 day average to high and low on date of grant. Rev. 1 Reformatted from Landscape to Portrait, made numbering consistence throughout document. Included Table of Contents and Scope of Revision pages. Changed the NQSO acronym to NSO throughout. Clarified that the Chief Executive Officer could grant awards for all Key employees, except those defined as Covered Employees. Incorporated the changes to Rule 16b-3 requirements. Clarified how dates referenced in the Agreements are to be handled when the date falls on a Saturday, Sunday, or Holiday. Clarified how cashless exercises are handled. Clarified that exercising portions of grants are permissible. Added language to 18.2 regarding conflicts of law. Rev. 0 Plan approved by FirstEnergy Board of Directors on February 17, 1998 Plan approved by common shareholders on April 30, 1998 Plan became effective on May 1, 1998. FirstEnergy Corp. Executive and Director Incentive Compensation Plan ARTICLE 1 ESTABLISHMENT, PURPOSE, AND DURATION ------------------------------------ 1.1 ESTABLISHMENT OF THE PLAN. FirstEnergy Corp. (hereinafter referred to as "FirstEnergy"), established, effective May 1, 1998, an incentive compensation plan known as the "Executive and Director Incentive Compensation Plan" (hereinafter referred to as the "Plan"), which permits the grant of Incentive Stock Options, Non-qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares, Cash Awards and Directors' Awards. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success of the Company and its Subsidiaries by providing incentives to Key Employees and Directors that will link their personal interests to the long-term financial success of the Company and its Subsidiaries, and to growth in shareholder value. The Plan is designed to provide flexibility to the Company and its Subsidiaries in their ability to motivate, attract, and retain the services of Key Employees upon whose judgment, interest, and special effort the successful conduct of their operations is largely dependent. The Plan is intended to preserve maximum deductibility of all awards made under the plan within the structure of Section 162(m) of the Internal Revenue Code of 1986 as amended "the Code". 1.3 DURATION OF THE PLAN. The Plan will commence on May 1, 1998, as described in Section 1.1 herein. The Plan shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time, until all Shares subject to it shall have been purchased or acquired according to the provisions herein. ARTICLE 2 DEFINITIONS AND CONSTRUCTION ---------------------------- 2.1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: 2.1.1 "Award" means, individually or collectively, a grant under this Plan of Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares, Cash Awards or Directors' Awards. 2.1.2 "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. 2.1.3 "Black-Scholes Value" means the value of one stock option as as calculated by the Black-Scholes Valuation Model as prescribed under Financial Accounting Standard 123. 2.1.4 "Board" or "Board of Directors" means the Board of Directors of the Company. 2.1.5 "Cash Award" means an award in the form of cash that is a bonus bonus made pursuant to the terms of Article 10. 2.1.6 "Cause"shall mean the occurrence of any one of the following: (i) the willful and continued failure by a Participant to substantially perform his/her duties (other than any such failure resulting from the Participant's disability), after a written demand for substantial performance is delivered to the Participant that specifically identifies the manner in which the Company or any of its Subsidiaries, as the case may be, believes that the Participant has not substantially performed 1 his/her duties, and the Participant has failed to remedy the situation within ten (10) business days of receiving such notice; or (ii) the Participant's conviction for committing a felony or a crime involving an act of moral turpitude, dishonesty or misfeasance; or (iii) the willful engaging by the Participant in gross misconduct materially and demonstrably injurious to the Company or any of its Subsidiaries. However, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his/her action or omission was in the best interest of the Company or any of its Subsidiaries. 2.1.7 "Change in Control" shall mean: (i) The acquisition by Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% (25%if such Person proposes any individual for election to the Board or any member of the Board is the representative of such Person) or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (a), (b) and (c) of subsection (iii) of this subsection 2.1.7 are satisfied; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of the Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, 2 (a) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding the Company, an employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition (1) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding 3 Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding share of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. However, in no event shall a Change in Control be deemed to have occurred, with respect to a Participant, if the Participant is part of a purchasing group, which consummates the Change in Control transaction. The Participant shall be deemed "part of a purchasing group. ." for purposes of the preceding sentence if the Participant is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than 5% of the voting securities of the purchasing company or (ii) ownership of equity participation in the purchasing company or group which is otherwise not deemed to be significant, as determined prior to the Change in Control by a majority of the non-employee continuing members of the Board). 2.1.8 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.1.9 "Committee" means the Compensation Committee of the Board. 2.1.10 "Company" means FirstEnergy Corp., an Ohio corporation, or any successor thereto as provided in Article 17 herein. 2.1.11 "Covered Employee" means any Participant designated prior to the grant of Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Cash Award by the Committee who is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which such Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Cash Award are taxable to such Participant. 2.1.12 "Directors' Award" means an Award made pursuant to Article 11 of this Plan. 2.1.13 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. 2.1.14 "Fair Market Value" means the average of the high and low sale prices of the common stock as reported on the composite tape of the New York Stock Exchange for the date in which the determination of the fair market value is made, or, if there are no sales of common stock on that date, then on the next preceding date on which there were sales of common stock. 2.1.15 "Incentive Stock Option" or "ISO" means an option to purchase Stock, granted under Article 6 herein, which is designated as an incentive stock option and is intended to meet the requirements of Section 422 of the Code. 2.1.16 "Key Employee" means an employee of the Company or any of its Subsidiaries, including an employee who is an officer or a director of the Company or any of its Subsidiaries, who, in the opinion of the Committee, can contribute significantly to the growth and profitability of the Company and its Subsidiaries. "Key Employee" also may include any other employee, identified by the Committee, in special situations involving extraordinary performance, promotion, retention, or recruitment. The granting of an Award under this Plan shall be deemed a determination by the Committee that such employee is a Key Employee, but shall not create a right to remain a Key Employee. 4 2.1.17 "Nonqualified Stock Option" or "NSO" means an option to purchase Stock, granted under Article 6 herein, which is not intended to be an Incentive Stock Option. 2.1.18 "Option" means an Incentive Stock Option or a Nonqualified Stock Option. 2.1.19 "Outside Director" means any director who qualifies as an "outside director" as that term is defined in Code Section 162(m) and the regulations issued thereunder. 2.1.20 "Participant" means a Key Employee or Director who has been granted an Award under the Plan. 2.1.21 "Performance Share" means an Award, designated as a performance share, granted to a Participant pursuant to Article 9 herein. 2.1.22 "Period of Restriction" means the period during which the transfer or sale of Shares of Restricted Stock by the participant is restricted. 2.1.23 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. 2.1.24 "Plan" means this Executive and Director Incentive Compensation Plan of FirstEnergy Corp., as herein described and as hereafter from time to time amended. 2.1.25 "Restricted Stock" means an Award of Stock granted to a Participant pursuant to Article 8 herein. 2.1.26 "Subsidiary" shall mean any corporation of which more than 50% (by number of votes) of the Voting Stock at the time outstanding is owned, directly or indirectly, by the Company. 2.1.27 "Standard Rate" means the electric utility median base salary level for a given position as determined in the judgment of the Committee. 2.1.28 "Stock" or "Shares" means the common stock with a 10 cent par value of the Company. 2.1.29 "Stock Appreciation Right" or "SAR" means an Award, designated as a Stock Appreciation Right, granted to a Participant pursuant to Article 7 herein. 2.1.30 "Voting Stock" shall mean securities of any class or classes of stock of a corporation, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors. 2.2 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 2.3. SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3 ADMINISTRATION -------------- 3.1 THE COMMITTEE. The Plan shall be administered by the Committee, which consists of not less than three Directors who shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. To the extent required to comply with Rule 16b-3 under the Exchange Act, each member of the Committee shall qualify as a "Non-Employee Director" as defined in Rule 16b-3 or any successor definition adopted by the Securities and Exchange Commission. To the extent required to comply with Code Section 162(m), each member of the Committee shall also be an Outside Director. 5 3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have full power to construe and interpret the Plan; to establish, amend or waive rules and regulations for its administration; to accelerate the exercisability of any Award or the end of a performance period or the termination of any Period of Restriction or any award agreement, or any other instrument relating to an Award under the Plan; and (subject to the provisions of Article 15 herein) to amend the terms and conditions of any outstanding Option, Stock Appreciation Right or other Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Notwithstanding the foregoing, the Committee shall have no authority to adjust upwards the amount payable to a Covered Employee with respect to a particular Award, to take any of the foregoing actions, or to take any other action to the extent that such action or the Committee's ability to take such action would cause any Award under the Plan to any Covered Employee to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the regulations issued thereunder. Subject to section 4.3, in no event shall the Committee have the right to i) cancel outstanding Options or SARs for the purpose of replacing or regranting such Options or SARs with an exercise price that is less than the original exercise price of the Option or SAR, or ii) change the Option Price of an Option or SAR to an exercise price that is less than the original Option or SAR exercise price, without first obtaining the approval of shareholders. Also notwithstanding the foregoing, no action of the Committee (other than pursuant to Section 4.3 hereof or Section 9.4 hereof) may, without the consent of the person or persons entitled to exercise any outstanding Option or Stock Appreciation Right or to receive payment of any other outstanding Award, adversely affect the rights of such person or persons. 3.3 SELECTION OF PARTICIPANTS. The Committee shall have the authority to grant Awards under the Plan, from time to time, to such Key Employees and Directors as may be selected by it. The Committee shall select Participants from among those who they have identified as being Key Employees or Directors. 3.4 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board of Directors shall be final, conclusive and binding on all persons, including the Company and its Subsidiaries, its stockholders, employees, and Participants and their estates and beneficiaries, and such determinations and decisions shall not be reviewable. 3.5 DELEGATION OF CERTAIN RESPONSIBILITIES. The Committee may, in its sole discretion, delegate to an officer or officers of the Company the administration of the Plan under this Article 3; provided, however, that no such delegation by the Committee shall be made with respect to the administration of the Plan as it affects Directors of the Company or Covered Employees and provided further that the Committee may not delegate its authority to correct errors, omissions or inconsistencies in the Plan. The Committee may delegate to the Chief Executive Officer of the Company its authority under this Article 3 to grant Awards to Key Employees who are not Covered Employees. All authority delegated by the Committee under this Section 3.5 shall be exercised in accordance with the provisions of the Plan and any guidelines for the exercise of such authority that may from time to time be established by the Committee. 6 3.6 PROCEDURES OF THE COMMITTEE. All determinations of the Committee shall be made by not less than a majority of its members present at the meeting (in person or otherwise) at which a quorum is present. A majority of the entire Committee shall constitute a quorum for the transaction of business. Any action required or permitted to be taken at a meeting of the Committee may be taken without a meeting if a unanimous written consent, which sets forth the action, is signed by each member of the Committee and filed with the minutes for proceedings of the Committee. Service on the Committee shall constitute service as a director of the Company so that members of the Committee shall be entitled to indemnification, limitation of liability and reimbursement of expenses with respect to their services as members of the Committee to the same extent that they are entitled under the Company's Articles of Incorporation and Ohio law for their services as directors of the Company. 3.7 AWARD AGREEMENTS. Stock-based Awards under the Plan shall be evidenced by an award agreement, which shall be signed by an authorized officer of the Company or delegate and by the Participant, and shall contain such terms and conditions as may be approved by the Committee. Such terms and conditions need not be the same in all cases. 3.8 CONDITIONS ON AWARDS. Notwithstanding any other provision of the Plan, the Board or the Committee may impose such conditions on any Award (including, without limitation, the right of the Board or the Committee to limit the time of exercise to specified periods). Notwithstanding any other provisions of the Plan, all Awards under this Plan shall be subject to the following conditions: (i) Except in the case of death, no SAR, ISO, NSO or other option granted pursuant to Article 6 shall be exercisable for at least six months after its grant; and (ii) Except in the case of death, no Restricted Stock or Performance Share (or a Share issued in payment thereof) shall be sold for at least six months after its grant. 3.9 SATURDAYS, SUNDAYS AND HOLIDAYS. When a date referenced in an award Agreement falls on a Saturday, Sunday or other day when the FirstEnergy General Office is closed, the date reference will revert back to the day prior to such date. ARTICLE 4 STOCK SUBJECT TO THE PLAN ------------------------- 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3 herein, the aggregate number of Shares that may be delivered under the Plan at any time shall not exceed 15,000,000 Shares of common stock of the Company. No more than three-quarters of such aggregate number of such Shares shall be issued as Restricted Stock under Article 8 of the Plan or as Performance Shares under Article 9. Stock delivered under the Plan may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares purchased on the open market. The exercise of a Stock Appreciation Right, whether paid in cash or Stock, shall be deemed to be an issuance of Stock under the Plan. 7 4.2 LAPSED AWARDS. If any Award granted under this Plan terminates, expires, or lapses for any reason, any Stock subject to such Award again shall be available for the grant of an Award under the Plan, subject to Section 7.2 herein. If the value of any Performance Shares issued under Article 9 are paid in cash after a Performance Period has ended, such stock subject to such award shall again be available for the grant of an award under the Plan. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination, or other change in the corporate structure of the Company affecting the Stock, such adjustment shall be made in the number and class of shares which may be delivered under the Plan, and in the number and class of and/or price of shares subject to outstanding Options, Stock Appreciation Rights, Restricted Stock Awards and Performance Shares, granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of shares subject to any Award shall always be a whole number. Any adjustment of an Incentive Stock Option under this paragraph shall be made in such a manner so as not to constitute a modification within the meaning of Section 425(h)(3) of the Code. ARTICLE 5 ELIGIBILITY AND PARTICIPATION ----------------------------- 5.1 ELIGIBILITY. Persons eligible to receive Awards under all Articles of this Plan except Article 11 include all employees of the Company and its Subsidiaries who, in the opinion of the Committee, are Key Employees. Key Employees may include employees who are members of the Board, but may not include Directors who are not employees. Directors who are not employees may receive Awards under this Plan exclusively under Articles 6 and 8, subject to Article 11. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may from time to time select those Key Employees to whom Awards shall be granted and determine the nature and amount of each Award. No employee shall have any right to be granted an Award under this Plan even if previously granted an Award. ARTICLE 6 STOCK OPTIONS ------------- 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Participants at any time and from time to time as shall be determined by the Committee. The maximum number of Shares subject to Options granted to any individual Participant in any calendar year shall be five hundred thousand (500,000) Shares. The Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of Shares subject to Options granted to any Participant. The Committee may grant any type of Option to purchase Stock that is permitted by law at the time of grant, including, but not limited to, ISO's and NSO's. However, no employee may receive an Award of Incentive Stock Options that are first exercisable during any calendar year to the extent that the 8 aggregate Fair Market Value of the Stock(determined at the time the options are granted) exceeds $100,000. Nothing in this Article 6 shall be deemed to prevent the grant of NSO's in excess of the maximum established by Section 422 of the Code. Unless otherwise expressly provided at the time of grant, Options granted under the Plan will be NSO's. Notwithstanding any other provision of the Plan, no ISO shall be granted after May 1, 2008. 6.2 OPTION AGREEMENT. Each Option grant shall be evidenced by an Option agreement that shall specify the type of Option granted, the Option price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. The Option agreement shall specify whether the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, or a Nonqualified Stock Option whose grant is not intended to be subject to the provisions of Code Section 422. 6.3 OPTION PRICE. The purchase price per share of Stock covered by an Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of such Stock on the date the Option is granted. An Incentive Stock Option granted to an Employee who, at the time of grant, owns (within the meaning of Section 425(d) of the Code) Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, shall have an exercise price which is at least 110% of the Fair Market Value of the Stock subject to the Option. 6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 6.5 EXERCISE OF OPTIONS. Subject to Section 3.8 herein, Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for all Participants. All options within a single grant need not be exercised at one time. 6.6 PAYMENT. Options shall be exercised by the delivery of a written notice to the Company setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent; (b) by tendering Shares of previously acquired Stock having a Fair Market Value at the time of exercise equal to the total Option price, (c) by foregoing compensation under rules established by the Committee, (d) by delivery by the Participant of irrevocable instructions to an approved broker to promptly deliver to the Company the amount of the sale or loan proceeds to pay the exercise price, or (e) such other consideration as the Committee may deem appropriate. 9 The proceeds from such a payment shall be added to the general funds of the Company and shall be used for general corporate purposes. As soon as practicable, after the Company's receipt of written notification and payment, the Participant shall receive either: (i) stock certificates in an appropriate amount based upon the number of Options exercised, issued in the Participant's name: (ii) cash in an amount equal to the difference between the sale price of such Shares and the Option price less taxes and administrative expenses; or (iii)a combination of the foregoing. 6.7 RESTRICTIONS ON STOCK TRANSFERABILITY. The Committee shall impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under applicable Federal securities law, under the requirements of any stock exchange upon which such Shares are then listed and under any blue sky or state securities laws applicable to such Shares. 6.8 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event the employment of a Participant is terminated by reason of death, any of such Participant's outstanding Options shall become immediately exercisable at any time prior to the expiration date of the Options or within one year after such date of termination of employment, whichever period is shorter, by such person or persons as shall have acquired the Participant's rights under the Option pursuant to Article 12 hereof or by will or by the laws of descent and distribution. In the event the employment of a Participant is terminated by reason of disability or retirement, including early retirement, (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), any of such Participant's outstanding Options shall continue to vest per the vesting schedule of the Participant's Option Agreement; provided, however, that if the Participant subsequently dies with unexercised options, the vesting and exercisaeability will be governed by the first sentence of 6.8. Notwithstanding the foregoing to the contrary, the Committee may, in its sole discretion, lengthen the exercise period up to the expiration date for an individual participant if it deems this is in the best interest of the Company. In the case of Incentive Stock Options, the favorable tax treatment prescribed under Section 422 of the Internal Revenue Code of l986, as amended, may not be available if the Options are not exercised within the Code Section 422 prescribed time period after termination of employment for death, disability, or retirement. 6.9 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than death, disability, retirement (including early retirement) or for Cause, the Participant shall have the right to exercise such Participant's outstanding Options within 90 days after the date of his termination, but in no event beyond the expiration of the term of the Options and only to the extent that the Participant was entitled to exercise the Options at the date of his termination of employment. In its sole discretion, the Committee may extend the 90 days to up to one year but, however, in no event beyond the expiration date of the Option. If the employment of the Participant shall terminate for Cause, all of the Participant's outstanding Options shall be immediately forfeited back to the Company. 10 6.10 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. ARTICLE 7 STOCK APPRECIATION RIGHTS ------------------------- 7.1 GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions of the Plan, Stock Appreciation Rights may be granted to Participants, at the discretion of the Committee, in any of the following forms: (a) in lieu of Options; (b) in addition to Options; (c) independent of Options; or (d) in any combination of (a), (b), or (c). The maximum numbers of Shares subject to SARs granted to any individual Participant in any calendar year shall be five hundred thousand (500,000) Shares. Subject to the immediately preceding sentence, the Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of Shares subject to SARs granted to any Participant. 7.2 EXERCISE OF SARS IN LIEU OF OPTIONS. SARs granted in lieu of Options may be exercised for all or part of the Shares subject to the related Option upon the surrender of the related Options representing the right to purchase an equivalent number of Shares. The SAR may be exercised only with respect to the Shares of Stock for which its related Option is then exercisable. Option Stock with respect to which the SAR shall have been exercised may not be subject again to an Award under the Plan. Notwithstanding any other provision of the Plan to the contrary, with respect to a SAR granted in lieu of an Incentive Stock Option: (i) the SAR will expire no later than the expiration of the underlying Incentive Stock Option; (ii) the SAR amount may be forno more than one hundred percent (100%) of the difference between the exercise price of the underlying Incentive Stock Option and the Fair Market Value of the Stock subject to the underlying Incentive Stock Option at the time the SAR is exercised; and (iii) the SAR may be exercised only when the Fair Market Value of the Stock subject to the Incentive Stock Option exceeds the exercise price of the Incentive Stock Option. 7.3 EXERCISE OF SARS IN ADDITION TO OPTIONS. SARs granted in addition to Options shall be deemed to be exercised upon the exercise of the related Options. The deemed exercise of SARs granted in addition to Options shall not necessitate a reduction in the number of related Options. 11 7.4 EXERCISE OF SARS INDEPENDENT OF OPTIONS. Subject to Section 3.8 herein and Section 7.5 herein, SARs granted independently of Options may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon the SARs, including, but not limited to, a corresponding proportional reduction in previously granted Options. 7.5 PAYMENT OF SAR AMOUNT. Upon exercise of the SAR, the holder shall be entitled to receive payment of an amount determined by multiplying: (a) The difference between the market price of a Share on the date of exercise over the price fixed by the Committee at the date of grant (which price shall not be less than 100% of the market price of a Share on the date of grant) (the Exercise Price); by (b) The number of Shares with respect to which the SAR is exercised. 7.6 FORM AND TIMING OF PAYMENT. Payment to a Participant, upon SAR exercise, will be made in cash or stock, at the discretion of the Committee, as soon as administratively possible after exercise. 7.7 TERM OF SAR. The term of an SAR granted under the Plan shall not exceed ten years. 7.8 TERMINATION OF EMPLOYMENT. In the event the employment of a Participant is terminated by reason of death, disability, retirement (including early retirement), or any other reason, the exercisability of any outstanding SAR granted in lieu of or in addition to an Option shall terminate in the same manner as its related Option as specified under Sections 6.8 and 6.9 herein. The exercisability of any outstanding SARs granted independent of Options also shall terminate in the manner provided under Sections 6.8 and 6.9 hereof. 7.9 NONTRANSFERABILITY OF SARS. No SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all SARs granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. ARTICLE 8 RESTRICTED STOCK ---------------- 8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock under the Plan to such Participants and in such amounts, as it shall determine. The Committee may condition the vesting or lapse of the Period of Restriction established pursuant to Section 8.3 upon the attainment of one or more of the performance goals utilized for purposes of Performance Shares pursuant to Article 9 hereof. As required for valuation of grants under the Plan, Restricted Stock will be valued at its Fair Market Value. The maximum number of Shares subject to issuance as Restricted Stock granted to any individual Participant in any calendar year is two hundred fifty thousand (250,000) Shares. 8.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced by a Restricted Stock agreement that shall specify the Period of Restriction, or periods, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine. 12 8.3 TRANSFERABILITY. Except as provided in this Article 8 or in Section 3.8 herein, the Shares of Restricted Stock granted hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of the applicable Period of Restriction or for such period of time as shall be established by the Committee and as shall be specified in the Restricted Stock agreement, or upon earlier satisfaction of other conditions (including any performance goals) as specified by the Committee in its sole discretion and set forth in the Restricted Stock agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. 8.4 OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, vesting or forfeiture restrictions under applicable Federal or state securities laws, and the Committee may legend certificates representing Restricted Stock to give appropriate notice of such restrictions. 8.5 CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 8.4 herein, each certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the Executive and Director Incentive Compensation Plan of FirstEnergy Corp., in the rules and administrative procedures adopted pursuant to such Plan, and in a Restricted Stock Agreement dated __________. A copy of the Plan, such rules and procedures, and such Restricted Stock agreement may be obtained from the Secretary of FirstEnergy Corp." 8.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 8.5 removed from his Stock certificate. 8.7 VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 8.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to those Shares while they are so held. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability as the Shares of Restricted Stock with respect to which they were paid. 8.9 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT (including early retirement). In the event that a Participant terminates his employment with the Company or any of its Subsidiaries because of retirement (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), the Committee in its sole discretion (subject to Section 3.8 herein) may waive or modify the restrictions remaining on any or all Shares of Restricted Stock as it deems appropriate. 13 8.10 TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. In the event a Participant's employment is terminated because of death or disability (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be) during the Period of Restriction, any remaining Period of Restriction applicable to the Restricted Stock shall automatically terminate and, except as otherwise provided in Section 8.4. herein, the Shares of Restricted Stock shall thereby be free of restrictions and be fully transferable. 8.11 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant terminates his employment with the Company or any of its Subsidiaries for any reason other than for death, disability, or retirement (including early retirement), as set forth in Sections 8.9 and 8.10 herein, during the Period of Restriction, then any Shares of Restricted Stock still subject to restrictions as of the date of such termination shall automatically be forfeited and returned to the Company; provided, however, that in the event of a termination of the employment of a Participant by the Company or any of its Subsidiaries other than for Cause, the Committee, in its sole discretion (subject to Section 3.8 herein), may waive or modify the automatic forfeiture of any or all such Shares as it deems appropriate. ARTICLE 9 PERFORMANCE SHARES ------------------ 9.1 GRANT OF PERFORMANCE SHARES. Subject to the terms and provisions of the Plan, Performance Shares may be granted to Participants at any time and from time to time as shall be determined by the Committee. The maximum number of Shares that may be issued to any Participant in a calendar year shall not exceed two hundred fifty thousand (250,000), subject to adjustment as provided in Section 4.3. 9.2 VALUE OF PERFORMANCE SHARES. The Committee shall set performance goals over certain periods to be determined in advance by the Committee ("Performance Periods"). Prior to each grant of Performance Shares, the Committee shall establish an initial number of Shares for each Performance Share granted to each Participant for that Performance Period. Prior to each grant of Performance Shares, the Committee also shall set the performance goals that will be used to determine the extent to which the Participant receives a payment of the number of Shares for the Performance Shares awarded for such Performance Period. These goals will be based on the attainment by the Company or its Subsidiaries of certain objective performance measures, which may include, but are not limited to one or more of the following: total shareholder return, return on equity, return on capital, earnings per share, market share, stock price, sales, costs, net income, cash flow, retained earnings, results of customer satisfaction surveys, aggregate product price and other product price measures, safety record, service reliability, demand-side management (including conservation and load management), operating and maintenance cost management, and energy production availability performance measures. Such performance goals also may be based upon the attainment of specified levels of performance of the Company or one or more Subsidiaries under one or more of the measures described above, relative to the performance of other corporations. The Committee may provide for the crediting of dividend equivalents during the performance period. With respect to each such performance measure utilized 14 during a Performance Period, the Committee shall assign percentages to various levels of performance which shall be applied to determine the extent to which the Participant shall receive a payout of the number of Performance Shares awarded. With respect to Covered Employees, all performance goals shall be objective performance goals satisfying the requirements for "performance-based compensation" within the meaning of Section 162(m)(4) of the Code, and shall be set by the Committee within the time period prescribed by Section 162(m) of the Code and related regulations. 9.3 PAYMENT OF PERFORMANCE SHARES. After a Performance Period has ended, the holder of a Performance Share shall be entitled to receive the value thereof as determined by the Committee. The Committee shall make this determination by first determining the extent to which the performance goals set pursuant to Section 9.2 have been met. It will then determine the applicable percentage (which may exceed 100%) to be applied to, and will apply such percentage to, the number of Performance Shares to determine the payout to be received by the Participant. In addition, with respect to Performance Shares granted to any Covered Employee, no payout shall be made hereunder except upon written certification by the Committee that the applicable performance goal or goals have been satisfied to a particular extent. The amount payable in cash in a calendar year to any Participant with respect to any Performance Period pursuant to any Performance Share award shall not exceed $2,000,000. 9.4 COMMITTEE DISCRETION TO ADJUST AWARDS. Subject to Section 3.2 regarding Awards to Covered Employees, the Committee shall have the authority to modify, amend or adjust the terms and conditions of any Performance Share award, at any time or from time to time, including but not limited to the performance goals. 9.5 FORM AND TIMING OF PAYMENT. The payment described in Section 9.3 herein shall be made in cash, Stock, or a combination thereof as determined by the Committee. Payment may be made in a lump sum or installments as prescribed by the Committee. If any payment is to be made on a deferred basis, the Committee may provide for the payment of dividend equivalents or interest during the deferral period. Any stock issued in payment of a Performance Share shall be subject to the restrictions on transfer in Section 3.8 herein. 9.6 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT (including early retirement). In the case of death, disability, or retirement (each of disability and retirement as defined under the established rules of the Company or any of its Subsidiaries, as the case may be), the holder of a Performance Share shall receive a prorated payment based on the Participant's number of full months of service during the Performance Period, further adjusted based on the achievement of the performance goals, as computed by the Committee. The Committee may require that a Participant have a minimum number of full months of service during the Performance Period to qualify for an Award payout. 9.7 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant terminates employment with the Company or any of its Subsidiaries for any reason other than death, disability, or retirement (including early retirement), all Performance Shares shall be forfeited; provided, however, that in the event of a termination of the employment of the Participant by the Company or any of its Subsidiaries other than for Cause, the Committee in its sole discretion may waive the automatic forfeiture provisions. 15 9.8 NONTRANSFERABILITY. No Performance Shares granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution until the termination of the applicable Performance Period. All rights with respect to Performance Shares granted to a Participant under the Plan shall be exercisable during his/her lifetime only by such Participant. ARTICLE 10 CASH AWARDS ----------- 10.1 GRANT OF CASH AWARD. Subject to the terms of this Plan, Cash Awards may be made to Participants at any time and from time to time as shall be determined by the Committee. The Committee shall have complete discretion in the determining the form of the Cash Awards granted to Participants 10.2 CASH AWARD PERFORMANCE CRITERIA. All Cash Awards made under this Plan shall be subject to pre-established, objective, business-related Performance Measures. The performance measures shall be approved for use by the Committee and the Committee shall certify their attainment and the resulting payout of Cash Awards. Performance Measures for Cash Awards may be measurable for periods of one year to five years (allowing for prorated periods for new Participants). The Performance Measures may include, but shall not be limited to: operational measures (e.g. attaining merger milestones, customer satisfaction, service reliability, safety and tactical objectives), financial measures (e.g. expense control, revenue, margins and shareholder value added levels "SVA") and individual measures. Performance Measures can be made on overlapping cycles, (i.e. one-year cycles could emphasize operational measures and three-year cycles could emphasize SVA Performance Measures.) Each cycle of Performance Measures could have a distinct Cash Award associated with it. 10.3 PAYOUT OF CASH AWARDS. Payouts of Cash Awards are made in relationship to a target payout level determined prior to each cycle on a per Participant basis. Target levels under multiple cycles will be calibrated to provide, in total, an annualized level of incentives consistent with the Company's compensation philosophy as set by the Committee. Actual payouts of Cash Awards will vary with performance results as follows: actual payouts based upon operational or individual Performance Measures will vary from 50% (if threshold performance is attained) to 150% of the target level; actual payouts based upon Company SVA and other corporate financial measures will vary from 50% (if threshold performance is attained) up to 200% of the target level. The maximum Cash Award payable in a calendar year to any Participant with respect to any Performance Period shall not exceed $2,000,000. 10.4 CONVERSION OF CASH AWARD PAYOUT TO RESTRICTED STOCK. At the request of the Participant, but subject to the discretion of the Committee, any Cash Award payout may be converted to Restricted Stock at a discount. The conversion to Restricted Stock will occur by multiplying the Cash Award by a premium, but in no event more than 120% and dividing the product by the Fair Market Value of the Restricted Stock on the date of conversion, which shall be chosen by the Committee at least 10 days in advance, to determine the number of shares of Restricted Stock that will be provided as full settlement of the Cash Award. The shares of Restricted Stock provided to Participants in settlement of Cash Awards shall be Restricted Stock subject to Article 8. 16 ARTICLE 11 DIRECTORS' AWARDS ----------------- 11.1 GRANT OF DIRECTORS' AWARDS. In lieu of a portion of their retainer, Directors' Awards can be made in the form of Stock Options or Restricted Stock under Articles 6 and 8 respectively. No other Awards may be made to Directors under the Plan. 11.2 CONVERSION OF RETAINER TO STOCK. At the request of a Director but subject to the election of the Committee, a Director may convert any retainer otherwise due to be paid by the Company in cash to an aggregate equivalent value of either Stock Options, Restricted Stock or both. 11.3 CONVERSION OF RETAINER TO RESTRICTED STOCK. Retainer, otherwise payable in cash may be converted to Restricted Stock under Article 8. The conversion to Restricted Stock will occur by multiplying the retainer by a premium, but in no event more than 120% and dividing the product by the Fair Market Value of the Restricted Stock on the date of conversion, which shall be chosen by the Committee at least 10 days in advance, into the amount of the retainer to determine the number of shares of Restricted Stock that will be provided as full settlement of the retainer. 11.4 CONVERSION OF RETAINER TO STOCK OPTIONS. Retainer otherwise due to be paid in cash may be converted to Stock Options under Article 6 at the request of the Participant but subject to the election of the Committee. Retainer shall be converted by multiplying the retainer by a premium, but in no event more than 120% and dividing the product by the amount equal to the Black-Scholes Value of the Stock Option on the date of conversion. The quotient of which is the number of Stock Options that shall be awarded. ARTICLE 12 BENEFICIARY DESIGNATION ----------------------- Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively and who may include a trustee under a will or living trust) to whom any benefit under the Plan is to be paid in case of his/her death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation or if all designated beneficiaries predecease the Participant, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. 17 ARTICLE 13 RIGHTS OF EMPLOYEES ------------------- 13.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any of its Subsidiaries. 13.2 PARTICIPATION. No employee shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. 13.3 NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, neither the Company nor any of its Subsidiaries shall be required or be liable to make any payment under the Plan. 13.4 NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Company or any of its Subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company or any of its Subsidiaries, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company or the applicable subsidiary. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company or any of its Subsidiaries. Nothing contained in the Plan constitutes a guarantee by the Company or any of its Subsidiaries that the assets of the Company or the applicable subsidiary shall be sufficient to pay any benefit to any person. ARTICLE 14 CHANGE IN CONTROL ----------------- 14.1 STOCK BASED AWARDS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all Stock based awards granted under this Plan shall immediately vest 100% in each Participant (subject to Section 3.8 herein), including Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, and Restricted Stock. 14.2 ALL AWARDS OTHER THAN STOCK BASED AWARDS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all Awards other than Stock Based Awards granted under this Plan shall be immediately paid out in cash, including Performance Shares. The amount of the payout shall be based on the higher of: (i) the extent, as determined by the Committee, to which performance goals, established for the Performance Period then in progress have been met up through and including the effective date of the Change in Control or (ii) 100% of the value on the date of grant of the number of Performance Shares. 18 ARTICLE 15 AMENDMENT, MODIFICATION, AND TERMINATION ---------------------------------------- 15.1 AMENDMENT, MODIFICATION, AND TERMINATION. At any time and from time to time, the Board or Committee may terminate, amend, or modify the Plan. However, without the approval of the stockholders of the Company if required by the Code, by the insider trading rules of Section 16 of the Exchange Act, by any national securities exchange or system on which the Stock is then listed or reported, or by any regulatory body having jurisdiction with respect hereto, no such termination, amendment, or modification may: (a) Increase the total amount of Stock which may be issued under this Plan, except as provided in Section 4.3 herein; or (b) Change the class of Employees eligible to participate in the Plan; (c) Materially increase the cost of the Plan or materially increase the benefits to Participants; or (d) Extend the maximum period after the date of grant during which Options or Stock Appreciation Rights may be exercised. 15.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan other than pursuant to Section 4.3 hereof shall in any manner adversely affect any Award theretofore granted under the Plan, without the written consent of the Participant. 15.3 DEFERRAL OF PAYMENTS AND DISTRIBUTIONS. Cash Awards pursuant to Article 10 may be eligible for deferral by any plan(s) offered by the company, subject to the approval of the Committee and any administrative requirements imposed by the Committee. ARTICLE 16 WITHHOLDING AND DEFERRAL ------------------------ 16.1 TAX WITHHOLDING. The Company and any of its Subsidiaries shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company or any of its Subsidiaries, an amount sufficient to satisfy Federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any grant, exercise, or payment made under or as a result of this Plan. 16.2 STOCK DELIVERY OR WITHHOLDING. With respect to withholding required upon the exercise of Stock Options, or upon the lapse of restrictions on Restricted Stock, participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by tendering to the Company Shares of previously acquired Stock or by having the Company withhold Shares of Stock, in each such case in an amount having a Fair Market Value equal to the amount required to be withheld to satisfy the tax withholding obligations described in Section 16.1. The value of the Shares to be tendered or withheld is to be based on the Fair Market Value of the Stock on the date that the amount of tax to be withheld is to be determined. All Stock withholding elections shall be irrevocable and made in writing, signed by the Participant on forms approved by the Committee in advance of the day that the transaction becomes taxable. 19 Stock withholding elections made by Participants who are subject to the short-swing profit restrictions of Section 16 of the Exchange Act must comply with the additional restrictions of Section 16 and Rule 16b-3 in making their elections. ARTICLE 17 SUCCESSORS ---------- All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 18 REQUIREMENTS OF LAW ------------------- 18.1 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares of Stock under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 18.2 GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Ohio without giving effect to the principles of the conflicts of laws. 20 EX-10 5 ex10-2.txt AMENDED FE DEFERRED COMP AMENDED FIRSTENERGY CORP. DEFERRED COMPENSATION PLAN FOR DIRECTORS ------------- ARTICLE I Director Election ----------------- Any member of the Board of Directors ("Director") of FirstEnergy Corp. (the "Company") may elect from time to time, by written notice to the Company given on or before December 31 of any year, to defer receipt of all or any specified part of his or her fees (cash or equity instruments) for services as a Director during succeeding calendar years, including retainer fees, fees for attending meetings of the Board of Directors and its Committees and fees for serving as Chairman or other official of the Board or a Committee (collectively "Director's fees"). Any person elected to the Board who was not a Director on the preceding December 31 may elect, by written notice to the Company given within thirty (30) days after becoming a Director, to defer receipt of all or any specified part of his or her Director's fees during the balance of the calendar year following his or her becoming a Director and succeeding calendar years. With respect to the calendar year in which this Plan is adopted by the Board of Directors of the Company, any Director may elect, by written notice to the Company given within thirty (30) days after the date on which this Plan is adopted or, if later, within thirty (30) days after first becoming a Director, to defer receipt of all or any specified part of his or her Director's fees during the balance of that calendar year and succeeding calendar years. An election to defer Director's fees shall be irrevocable and shall continue from year to year unless the Director terminates it by written notice to the Company on or before December 31 of the year preceding the year to which the termination applies. Effective as of January 1, 2000, the Centerior Energy Corporation Deferred Compensation Plan for Directors (the "Centerior Plan") shall be merged into this Plan. Any election to defer director's fees made under the Centerior Plan prior to such date shall, to the extent such deferred fees and any earnings credited to such deferred fees have not been paid to the director or to his or her beneficiary prior to such date, be treated as having been made under this Plan and shall be subject to all of the rights and limitations imposed on elections made under this Plan. The individuals who made such elections shall be considered "Directors" for purposes of this Plan even if they have not served on the Board of Directors of the Company. ARTICLE II ---------- Deferred Fee Account--Balances ------------------------------ Any deferred Director's fees shall be credited by the Company to the Director's deferred fee account to be maintained by the Company as of the date the fees would otherwise be payable. Adjustments to the balance in the account for deemed interest or deemed investment gains and losses shall be made from time to time, as determined by the Compensation Committee of the Board of Directors of FirstEnergy Corp. (the "Committee"), but at least annually. The Committee, in its sole discretion shall determine whether adjustments to the account shall be made based upon deemed interest or deemed investment earnings. If deemed interest is selected by the Committee, the deemed interest rate shall be the "prime rate" then in effect at The Chase Manhattan Bank, N.A., of New York City, New York, or at another bank as the Committee may from time to time designate. If the Committee elects to make adjustments to the accounts in accordance with deemed investment gains and losses, the Committee, in its sole discretion, shall determine the investment vehicles to be used. In its the sole discretion, the Committee may permit the Director to designate that the balance of his or her account be invested in one or more investment vehicles selected by the Committee, and adjusted accordingly. The Company shall provide an annual statement to each Director who has elected to defer fees. One of the investment options for equity instruments and cash retainer fees, meeting fees, and/or chairperson fees, shall be an account whose value will be adjusted as if the deferred fees were invested in FirstEnergy Common Stock. This account shall be called the Deferred Stock Account (DSA). At the time cash retainer, meeting fees, and/or chairperson fees are designated for investment into this account, the initial account value shall be increased by 20 percent. If a Director separates from the Board for any reason other than death, retirement, or disability as defined by Section 22(e)(3) of the Internal Revenue Code and such retainer fees are not kept in this account for a minimum of three years from January 1 of the year of deferral, the Director shall forfeit the 20 percent bonus on such retainer fees and any earnings associated with it. A Director shall be immediately entitled to the 20 percent bonus and all associated earnings if a Change in Control occurs as defined in Article IX. Initial unit valuation for cash deferrals into this account shall be based on the Fair Market Value which is the average of the high and low price of FirstEnergy Common Stock on the day when payment would otherwise be received. Stock deferred into this account shall be valued at the actual purchase price, including any commissions. With respect to any Director who had a balance in his or her deferred fee account under the Centerior Plan immediately prior to January 1, 2000, the balance of such account shall be transferred to a deferred fee account under this Plan as of January 1, 2000. Such Directors shall be permitted to designate how such transferred account balances shall be deemed invested to the same extent that other Directors are permitted such designations under this Plan with respect to their deferred fee accounts. ARTICLE III ----------- Payment to Director ------------------- Amounts credited to a Director's deferred fee account, including deemed interest and earnings shall be paid to the Director in cash, either in a lump sum or in annual installments over a period not to exceed 10 years. For this purpose, a designation by a Director of the form of payment will be effective only if it is made at the time of his or her election to defer Director's fees; provided, however, that if a Director makes a designation, he or she may change that designation by filing a new superseding designation with the Company during the period beginning 120 days prior and ending on the day prior to the day on which the Director ceases to be a Director. Payment(s) shall be made on or commencing with the January 1 next following the day the Director ceases to be a Director unless during the foregoing 120 day election period, the Director designates a later payment or commencement date (not later than the January 1 next following the day he or she attains age 72). Payment of the balance of the DSA to the Director will be in the form of FirstEnergy Common Stock and will be paid out when a Director ceases to be a Director unless a separate election for the DSA is made. The election options are the same as described in the paragraph above. If a Director requests any change in the date of the pay-out of his DSA, the request must be approved by the Compensation Committee of the Board of Directors of the Company. A Director may at any time request an accelerated distribution of his or her account balances, subject to a 10 percent penalty and, if applicable, forfeiture of the 20 percent bonus and associated earnings described above if the three-year criterion is not met. Such a request must be made in writing, in a form and manner specified by the Committee. The Company will distribute to the Director the balance of his or her account minus any forfeitures and the 10 percent penalty as a lump sum within 90 days after the end of the month in which the Committee receives the request. Such distribution shall completely discharge the Company from all liability with respect to the Director's account. If the Director is an active Director, the Director may not resume any further deferrals into the Plan until January 1 of the second calendar year following the calendar year in which the Director receives such distribution. If a Director requests an accelerated distribution of his DSA, the request must be approved by the Compensation Committee of the Board of Directors of the Company. A Director who is an active Director and who has been a Plan Participant for at least five calendar years may request to withdraw a portion of his or her deferred fees and associated earnings. For this purpose, participation in the Centerior Plan shall be considered as participation in this Plan. All deferred cash fees must be disbursed prior to the disbursement of any deferred stock fees. Such request must be made in writing in a form and manner specified by the Committee and must specify the amount to be withdrawn and the future date or dates to be paid. The date(s) must be the first of a month in the second calendar year following the calendar year in which the request was made. The request will be irrevocable after December 31 of the calendar in which it is made unless, prior to payment, the Director separates from the Board or a Change in Control occurs as defined in Article IX. In these instances, the request will become null and void and the account balances will be paid as elected by the Director or as in the paragraph below. In the instance of a Change in Control as defined in Article IX, all cash account balances will be paid out immediately as a lump sum and the DSA in stock as soon as practicable. ARTICLE IV ---------- Payment to Beneficiary ---------------------- Upon the death of a Director or a former Director prior to the distribution of the entire balance in the Director's or former Director's deferred fee account and deferred stock account, the balance including interest, shall be paid to the beneficiary or beneficiaries designated by the Director or former Director in writing filed with the Company, or in the absence of a designation, paid to his or her estate, at the time and in the manner specified in the Director or former Director's beneficiary designation, which may be either (i) in a lump sum as soon as practicable after the date of death, (ii) in a lump sum on January 1 of the year following the year in which the death occurred or (iii) in one or more annual payments the last of which may occur no later than January 1 of the fifth year following the year in which the death occurred. ARTICLE V --------- Assignment ---------- Except to the extent that a Director or former Director may designate a beneficiary to receive any payment to be made following his or her death and except by will or the laws of descent and distribution, no rights under this Plan shall be assignable or transferable, or subject to encumbrance or charge of any nature. ARTICLE VI ---------- Administration -------------- This Plan shall be administered by the Committee as defined in Article II. Except as otherwise provided by action of the Board of Directors of the Company or the terms of the Plan: (a) a majority of the members of the Committee shall constitute a quorum for the transaction of business, and (b) all resolutions or other actions taken by the Committee at a meeting shall be by the vote of the majority of the committee members present, or, without a meeting, by an instrument in writing signed by all members of the Committee. The powers of the Committee shall include the power to construe, interpret, and apply this Plan, and to render nondiscriminatory rulings or determinations. Constructions, interpretations, and decisions of the committee shall be conclusive and binding on all persons. ARTICLE VII ----------- Amendment and Termination ------------------------- The Board of Directors of the Company may from time to time amend, suspend, terminate or reinstate any or all of the provisions of this Plan, except that no amendment, suspension, termination or reinstatement shall adversely affect the deferred fee account of any Director, former Director or beneficiary (collectively, "Eligible Persons") as it existed immediately before the amendment, suspension, termination or reinstatement or the manner of payments, unless the Eligible Person shall have consented in writing. The Board of Directors of the Company may at any time terminate its participation in this Plan and/or transfer its liabilities under this Plan to a similar plan established by the Committee. Upon the termination of its participation in this Plan, amounts credited to deferred fee accounts of Eligible Persons shall continue to be payable to those Eligible Persons in accordance with the terms of this Plan. Upon termination of the participation of the Company in this Plan, if the Board of Directors of the Company should transfer its liabilities to another plan, such transfer of liabilities shall not adversely affect the deferred fee account of any Eligible Person as it existed immediately prior to that transfer or the manner of payments, unless the Eligible Person shall have consented in writing. All liabilities of the Ohio Edison Company Deferred Compensation Plan for Directors shall be transferred to this Plan; and this Plan shall be an amendment, restatement and continuation of that Plan. If any deferred fee account is in pay status or is otherwise payable to an Eligible Person, it shall continue to be payable to that person under the same terms and conditions as were provided under the Plan. The balance in any deferred fee account under that Plan maintained with respect to an individual who is a Director of FirstEnergy Corp. at the time of the amendment or restatement of this Plan shall become payable under the terms and conditions of this Plan; provided, however, that the Director's deferral elections, commencement date elections, and beneficiary elections made under the Prior Plan shall continue to be effective under this Plan unless amended or changed under the terms of this Plan. All liabilities of the Centerior Plan shall be transferred to this Plan as of January 1, 2000. If any deferred fee account under the Centerior Plan is in pay status or is otherwise payable to an Eligible Person as of such date, it shall continue to be payable to that person under the same terms and conditions as were provided under the Centerior Plan. The balance of any deferred fee account under the Centerior Plan shall become payable under the terms and conditions of this Plan; provided, however, that the Director's deferral elections, commencement date elections, and beneficiary elections made under the Centerior Plan shall continue to be effective under this Plan unless amended or changed under the terms of this Plan. Notwithstanding any other provisions of the Plan, if the Plan is terminated and the liabilities of this Plan are not transferred to another plan, no subsequent Director's fees may be deferred under this Plan, the balance in a Director's deferred account shall continue to be credited with deemed interest or earnings in a manner similar to that described in Article II, and the entire balance in the account (including interest) shall become payable to the Director (or his or her beneficiary) in accordance with the provisions of this Plan in effect at the date of termination. ARTICLE VIII ------------ Unfunded Plan ------------- Deferred fee accounts maintained for purposes of this Plan shall constitute bookkeeping records of the Company and shall not constitute any allocation of any assets of the Company or be deemed to create any trust or special deposit with respect to any of the assets of the Company. The Company shall not be under any obligation to any Director, former Director or beneficiary to acquire, segregate or reserve any funds or other assets for purposes relating to this Plan. No Eligible Person shall have any rights whatsoever in or with respect to any funds or other assets owned or held by the Company; the rights of an Eligible Person under this Plan are solely those of a general creditor of the Company to the extent of the amount credited to his or her deferred fee account with the Company. The Company may, at its discretion, establish one or more trusts, purchase one or more insurance contracts or otherwise invest or segregate funds for purposes relating to this Plan, but the assets of such trusts, rights and assets of such insurance contracts or otherwise invested or segregated funds shall at all times remain subject to the claims of the general creditors of the Company except to the extent and at the time any payment is made to an Eligible Person under this Plan; and no Eligible Person shall have any rights whatsoever in or with respect to any trust, insurance contract or other investment or fund, or their assets. ARTICLE IX ---------- Change In Control ----------------- For purposes of the Plan, a "Change in Control" means any of the following: 1. An acquisition by any person or entity of at least 50% (25% if the acquiring person or entity proposes any individual for election to the Board of Directors or is represented by any member of the Board) of either the Company's outstanding common stock ("Outstanding Common Stock") or the combined voting power of the Company's outstanding voting securities ("Outstanding Voting Securities"). The following acquisitions will not constitute a Change in Control: a) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege); b) any acquisition by the Company; c) any acquisition by an employee benefit plan sponsored by the Company or one of its affiliates (e.g., the FirstEnergy Corp. Savings Plan); d) any acquisition pursuant to a merger or other form of reorganization or consolidation where the requirements of paragraph 3 below are satisfied. 2. The current members of the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board. For this purpose, any individual whose election or nomination to the Board was approved by at least a majority of the Directors then comprising the Incumbent Board shall be considered as though he or she were a member of the Incumbent board, unless the individual first assumed office as a result of an actual or threatened proxy or election contest. 3. Approval by the Company's shareholders of a reorganization, merger or consolidation, or of a sale or other disposition of all or substantially all of the assets of the Company, unless after the transaction each of the following requirements are satisfied: a) all or substantially all of the holders of the Company's Outstanding Common Stock and Outstanding Voting Securities immediately prior the transaction, continue to hold at least 75% of the outstanding common stock and the combined voting power of outstanding voting securities of the corporation resulting from the reorganization, merger or consolidation (or of the corporation that purchased the assets of the Company, as the case may be) in the same proportions as they held the Company's Outstanding Common Stock and Outstanding Voting Securities immediately before the transaction. b) no person or entity owns 25% or more of the outstanding common stock or the combined voting power of outstanding voting securities of the corporation resulting from the reorganization, merger or consolidation (or of the corporation that purchased the assets of the Company, as the case may be). This 25% limitation does not apply to the Company, any employee benefit plan sponsored by the Company or such other corporation, or any person or entity who owned at least 25% of the Company's Outstanding Common Stock or Outstanding Voting Securities immediately prior to the transaction; and c) at least a majority of the members of the Board of Directors of the corporation resulting from the reorganization, merger or consolidation (or of the corporation that purchased the assets of the Company, as the case may be), were members of the Incumbent Board of the Company at the time of the initial agreement providing for the reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company. 4. Approval by the Company's shareholders of the complete liquidation or dissolution of the Company. However in no event will a Change in Control be deemed to have occurred, with respect to a Director, if the Director is part of a purchasing group which consummates the Change in Control transaction. The Director will be deemed "part of a purchasing group" for purposes of the preceding sentence if the Director is an equity participant or has agreed to become an equity participant in the purchasing company or group (excluding passive ownership of less than 5% of the voting securities of the purchasing company or ownership of equity participation in the purchasing company or group which is otherwise not deemed to be significant, as determined prior to the Change in Control by a majority of the nonemployee, continuing members of the Board of Directors). ARTICLE X --------- Miscellaneous ------------- The invalidity or unenforceability of any particular provision of this Plan shall not affect any other provision, and the Plan shall be construed in all respects as if invalid or unenforceable provisions were omitted. This Plan shall be construed and governed in accordance with the laws of the State of Ohio without giving effect to principles of conflicts of laws. Scope of Changes Rev. 4 approved by the Compensation Committee on September 18, 2000 1. Clarify that a 20% bonus is not added to the equity instrument retainer. 2. Allow changes to the beneficiary form and how a beneficiary can receive payment. Rev. 3 approved by the Compensation Committee on September 19, 1999 and November 15, 1999 1. Article III, 2nd paragraph revised to allow directors to defer meeting fees and chairperson fees into the deferred stock account. 2. Changes made to Articles I, II, III, VII to allow the merging of the Centerior Plan into the FirstEnergy Plan. Rev. 2 approved by the Compensation Committee on February 15, 1999 1. Article III, added sentences to the end of paragraph 2 and 3 requiring that approval of the Compensation Committee when changing the date of a pay-out or when requesting an accelerated distribution. Unless these changes are specifically approved in accordance with Rule 16b-3 of Section 16, the Director may inadvertently incur liability under Section 16(b) for repayment to the Company of related profits involving the Company's equity securities. Rev. 1 approved by the Compensation Committee on November 16, 1998 1. Added the ability to defer stock and to receive a bonus for doing so. 2. Added the ability to withdrawal all funds from the Plan as long as there was a 10% penalty and forfeiture of any bonus that is not yet vested. 3. Added the ability to withdrawal funds from the Plan as long as the Director is an active Director and has been a Plan Participant for 5 years, and written notice is give 2 years in advance. 4. Added the ability to receive disbursement of funds in cash for the cash portion of the Plan and in stock for the stock portion of the Plan. 5. Revised the Administration portion of the Plan to bring it in line with the current Code. 6. Added Change in Control language to the Plan. EX-10 6 ex10-3.txt STOCK OPTION AGREE. - FE AND OFFICERS FirstEnergy Corp. ----------------- Executive and Directors Incentive Compensation Plan --------------------------------------------------- Non-Qualifying Stock Option (NSO) Agreement ------------------------------------------- Option No.: 11A Number of Options Granted: XXXX NSOs Option Price: $29.50 per share Option Closing Date: June 26, 2001 This Option Agreement ("Agreement") is entered into as of the 16th day of May, 2001, between FirstEnergy Corp., and _____________ ("Optionee") and is not in lieu of salary or any other compensation for services. For the purposes of this plan, the term "Company" or "FE" means FirstEnergy Corp. or its subsidiaries, singularly or collectively. SECTION ONE - AWARD On February 17, 1998, the Board of Directors ("Board") of FE adopted the FE Executive and Director Incentive Compensation Plan ("Plan"), which was approved by the common stock shareholders on April 30, 1998, and become effective May 1, 1998. As of the date of this Agreement, per the terms of the Plan, FE grants to the Optionee an option ("Option") to purchase the above number of shares of FE Common Stock ("Shares") at the option price reflected above. All Grants are considered NSOs, not subject to the provisions of section 422 of the Code. SECTION TWO - GENERAL TERMS This Agreement is subject to the following terms and conditions, many of which are described in greater detail in the Plan. Please consult the Plan document for further information. Vesting Provisions - ------------------ These Options will become fully vested on May 16, 2005, which is four (4) years after the date of grant unless they become exercisable prior to that date due to termination of employment (as described below). Expiration - ---------- These Options expire on May 16, 2011 at 2:00 PM, Akron time unless the Options expire earlier due to termination of employment (or 2:00 PM on the last business day prior to such date, if the date falls on a Saturday, Sunday, or other day when the FirstEnergy General Office is closed). Termination of Employment - -------------------------
Event of Optionee's Termination of Employment Vesting When Options Expire Further Information ------------------------- ------- ------------------- ------------------- Retirement (including Vesting continues Options expire on As defined under early retirement) per vesting schedule May 16, 2011 6.8 of the Plan Disability Vesting continues Options expire on As defined under Per vesting schedule May 16, 2011 6.8 of the Plan Death (including death 100% vesting on date All options expire Shares exercisable by after retirement, of death the earlier of one year the beneficiary (as disability, or Other after date of death or designated under Terminations other than expiration of the grant Article 12 of the Plan, for Cause) or by will or by the laws of descent and distribution) For "Cause" Vesting stops upon All vested and Termination for Cause date you leave unvested options are is defined in section Company immediately forfeited 2.1.6 of the Plan back to the Company Separation from Company in 25% of the unvested All options that have Refer to the Severance which you qualify for and options will vest for not vested in Benefits Plan elect benefits under the every whole year you accordance with the First Energy Severance have worked since the preceding box are Plan date of the grant, immediately forfeited effective upon the back to the Company. date that you leave All vested options the Company expire on the earlier of 90 days after you leave the Company or expiration of the grant Termination (including Vesting stops upon All unvested options You may be subject resignation) date you leave are immediately to the "Forfeiture Company forfeited back to the and Recovery" Company. All vested provisions below. options expire the earlier of 90 days after you leave the Company or expiration of the grant
Change in Control - ----------------- In the event of a Change in Control (as defined in section 2.1.7 of the Plan), all options under this Agreement become immediately exercisable as of the date of the Change of Control, and the provisions under the section entitled "Forfeiture and Recovery" shall not apply. Forfeiture and Recovery - ----------------------- If it is determined, in the sole discretion of the Compensation Committee (the "Committee") of the FirstEnergy Board of Directors or its delegate, that the Optionee has breached any of the covenants below, and unless such breach has been waived by the Committee or its delegate in writing, all outstanding Options shall be immediately forfeited back to FE, and any profits resulting from the exercise of Options realized in the twelve (12) months preceding the date of termination through the date of the breach shall be immediately returned to FE. During the term of his/her employment with the Company and for a period of twenty-four (24) months following termination of employment for any reason, including without limitation, termination by mutual agreement, the Optionee expressly covenants and agrees that he/she will not at any time for himself/herself or on behalf of any other person, firm, association or other entity do any of the following: 1. Participate or engage, by virtue of being employed or otherwise, directly or indirectly, in the business of selling, servicing, and/or manufacturing products, supplies or services of the kind, nature or description of those sold by the Company except pursuant to his/her employment with the Company; 2. Directly participate or engage, on the behalf of other parties, in the purchase of products, supplies or services of the kind, nature or description of those sold by the Company except pursuant to his/her employment with the Company; 3. Solicit, divert, take away or attempt to take away any of the Company's Customers or the business or patronage of any such Customers of the Company; 4. Solicit, entice, lure, employ or endeavor to employ any of the Company's employees; 5. Divulge to others or use to his/her own benefit any confidential information obtained during the course of his/her employment with Company relative to sales, services, processes, methods, machines, manufacturers, compositions, ideas, improvements, patents, trademarks, or inventions belonging to or relating to the affairs of Company; or 6. Divulge to others or use to his/her own benefit any trade secrets belonging to the Company obtained during the course of his/her employment or of which he/she became aware during the course of his/her employment with the Company. The term "Customer" shall mean any person, firm, association, corporation or other entity to which the Optionee or the Company has sold the Company's products or services within the twenty-four (24) month period immediately preceding the termination of Optionee's employment with the Company or to which the Optionee or the Company is in the process of selling its products or services, or to which the Optionee or the Company has submitted a bid, or is in the process of submitting a bid to sell the Company's products or services. FE may offset any amount owed against any compensation due to the Optionee or against any amounts otherwise due and distributable to the Optionee from any benefit plan of FE in which the Optionee has participated, in accordance with the terms of such benefit plan. Should it be necessary for FE to initiate legal action to recover any amounts due, FE shall be entitled to recover from Optionee, in addition to such amounts due, all costs, including reasonable attorneys fees, incurred as a result of such legal action. Effect on the Employment Relationship - ------------------------------------- Nothing in this Agreement guarantees employment with the Company, nor does it confer any special rights or privileges to the Optionee as to the terms of employment. Adjustments - ----------- In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, combination, distribution, or other change in corporate structure of FE affecting the Common Stock, the Committee will adjust the number and class of securities in this option in a manner determined appropriate to prevent dilution or diminution of the Option under this Agreement. Administration - -------------- 1. This Agreement is governed by the laws of the State of Ohio without giving effect to the principles of the conflicts of laws. 2. The terms and conditions of this Option may be modified by the Committee: (a) In any case permitted by the terms of the Plan or this Option, (b) with the written consent of the Optionee, and/or (c) without the consent of the Optionee if the amendment is either not adverse to the interests of the Optionee or is required by law. 3. The administration of this Agreement and the Plan will be performed in accordance with Article 3 of the Plan. All determinations and decisions made by the Committee, the Board, or any delegate of the Committee as to the provisions of the Plan shall be final, conclusive, and binding on all persons. 4. Except as provided otherwise herein, the terms of this Agreement are governed at all times by the official text of the Plan and in no way alter or modify the Plan. 5. If a term is capitalized but not defined in this Agreement, it has the meaning given to it in the Plan. 6. To the extent a conflict exists between the terms of this Agreement and the provisions of the Plan, the provisions of the Plan shall govern. SECTION THREE - METHODS OF EXERCISING THE OPTION Notification to Exercise - ------------------------ To exercise an option, the Optionee must submit to the Administrator of the Plan the information below either on a form provided by FE, a broker form, or a blank sheet of paper: 1. Number of shares being purchased, 2. The grant price, 3. The form of payment, 4. A statement of intention to exercise, 5. The signature of the Optionee, (or legal representative in the case of death or disability), and 6. Any representations or disclosures required by any applicable securities law. Method of Payment - ----------------- Payment for the transaction and associated brokerage fees may be made through the following methods: 1. Cash Exercise -- Delivering cash equal to the cost of the exercise. 2. Stock Swap Exercise -- Surrendering certificates of FE stock previously acquired having a Fair Market Value at the time of the exercise equal to the amount of the exercise, and, if necessary, a small amount of cash, not to exceed the price of one (1) share of stock. 3. Cashless Exercise-- Using the net proceeds from the immediate sale of stock to pay for the exercise of the Option, as directed in the written notification to exercise the option. A combination of any of the above based upon Plan administrative rules. Withholding Tax - --------------- FE shall have the right to deduct, withhold, or require the Optionee to surrender an amount sufficient to satisfy federal (including FICA and Medicare), state, and/or local taxes required by law to be withheld for any exercise. SECTION FOUR - TRANSFER OF OPTION The Option is not transferable during the life of the Optionee. Only the Optionee shall have the right to exercise an option, unless deceased, at which time the option may be exercised by the Optionee's beneficiary (as designated under Article 12 of the Plan or by will or by the laws of descent and distribution). FirstEnergy Corp. By _____________________________ Corporate Secretary I acknowledge receipt of this NSO Agreement and I accept and agree with the terms and conditions stated above. ________________________________ (Signature of Optionee) ______________________ (Date) EX-10 7 ex10-4.txt RESTRICTED STOCK AGREE. BETWEEN FE & OFFICERS FirstEnergy Corp. ----------------- Executive and Directors Incentive Compensation Plan --------------------------------------------------- Restricted Stock Agreement -------------------------- Award No.: 20 Number of Shares Awarded: ___ shares Date of Grant: February 20, 2002 This Restricted Stock Agreement ("Agreement") is entered into as of February 20, 2002 between FirstEnergy Corp. ("FE") and ______________ ("Recipient"). AWARD On February 17, 1998, The Board of Directors ("Directors") of FE adopted the FE Executive and Director Incentive Compensation Plan ("Plan"), which was approved by the common stock shareholders on April 30, 1998, and became effective May 1, 1998. As of the date of this Agreement, per the terms of the Plan, FE grants to the Recipient the above number of restricted shares of FE Common Stock ("Restricted Shares") per the terms and conditions of Article 8 of the Plan. GENERAL TERMS This Agreement is subject to the following terms and conditions as outlined in the Plan: Restricted Period - ----------------- 1. Restricted Shares shall not be sold, transferred, pledged, or assigned, until the earliest of: a) 5:00 p.m. Akron Time on February 20, 2006; b) The date of the Recipient's death; c) The date that the Recipient's employment is terminated due to Disability; d) The date that a Change in Control occurs. Registration and Certificate Legend - ----------------------------------- FE shall register a certificate(s) in the name of the Recipient for the number of Restricted Shares specified above. Each certificate will bear the following legend until the time that the restrictions lapse: "The sale or transfer of the shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the Executive and Director Incentive Compensation Plan of the FirstEnergy Corp., in the rules and administrative procedures adopted pursuant to such Plan, and in a Restricted Stock Agreement dated February 20, 2002. A copy of the Plan, such rules and procedures, and such Restricted Stock Agreement may be obtained from the Corporate Secretary of FirstEnergy Corp." Forfeiture - ---------- Recipient shall forfeit the Restricted Shares upon the occurrence of the following events: - - Termination of employment with FE or its subsidiaries for any reason other than death, Disability, involuntary termination under conditions in which the Recipient qualifies for and elects benefits under the FE Severance Benefits Plan, or unless the restrictions are waived or modified in the sole discretion of the Committee. - - Any attempt to sell, transfer, pledge, or assign the Restricted Shares in violation of the above. Under the occurrence of any of the above, the Restricted Shares shall be forfeited to FE and the Recipient's interest in the Restricted Shares, including the right to vote and receive dividends, shall terminate immediately. Voting and Dividend Rights - -------------------------- Subject to the above restrictions, the Recipient shall be entitled to all other rights of ownership, including, but not limited to, the right to vote the Restricted Shares and to receive dividends. Dividends will be automatically reinvested in restricted shares that are subject to the same restrictions above. Expiration of Restricted Period - ------------------------------- Upon termination of the restricted period, Recipient shall be entitled to have the legend removed from the certificate. FE's obligation to remove the legend is subject to Recipient making the necessary arrangements with FE to satisfy any withholding obligations. Effect on the Employment Relationship - ------------------------------------- Nothing in this Agreement guarantees employment with FE, nor does it confer any special rights or privileges to the Optionee as to the terms of employment. Adjustments - ----------- In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, combination, distribution, or other change in corporate structure of FE affecting the Common Stock, the Committee will adjust the number and class of securities in this restricted stock grant in a manner determined appropriate to prevent dilution or diminution of the stock grant under this Agreement. Administration - -------------- 1. The administration of this Agreement and the Plan will be performed in accordance with Article 3 of the Plan. All determinations and decisions made by the Committee, the Board, or any delegate of the Committee as to the provisions of the Plan shall be final, conclusive, and binding on all persons. 2. The terms of this Agreement are governed at all times by the official text of the Plan and in no way alter or modify the Plan. 3. If a term is capitalized but not defined in this Agreement, it has the meaning given to it in the Plan. 4. To the extent a conflict exists between the terms of this Agreement and the provisions of the Plan, the provisions of the Plan shall govern. 5. This Agreement is governed by the laws of the State of Ohio without giving effect to the principles of the conflicts of laws. FirstEnergy Corp. By _____________________________ Corporate Secretary I acknowledge receipt of this Restricted Stock Agreement and I accept and agree with the terms and conditions stated above. ____________________________________ _______________________ (Signature of Recipient) (Date) EX-10 8 ex10-5.txt STOCK OPTION AGREE. BETWEEN FE AND ONE DIRECTOR Board of Director ----------------- Non-Qualifying Stock Option (NSO) Agreement ------------------------------------------- for Elected and Bonus Stock Options ----------------------------------- Option No.: 12 Number of Elected Options: 4,193 NSO's Number of Bonus Options: 839 NSO's Total Options Granted: 5,032 NSO's Exercise Price: $35.15 per share This Option Agreement ("Agreement") is entered into as of January 1, 2002, between FirstEnergy Corp. ("FE"), and ___________ ("Optionee") and is in lieu of the Board of Directors retainer fee. SECTION ONE - AWARD The Board of Directors ("Directors") of FE adopted the FE Executive and Director Incentive Compensation Plan ("Plan") on February 17, 1998. The Plan was subsequently approved by the common stock shareholders on April 30, 1998, and became effective May 1, 1998. According to the terms of the Plan, the Optionee shall receive, as of the above date, the number of Options ("Options") to purchase shares of FE Common Stock ("Shares"), at the above price, based upon the Optionee's elections indicated on the Election Form signed by the Optionee on November 16, 2001. All grants are considered NSO's, not subject to the provisions of section 422 of the Code. SECTION TWO - GENERAL TERMS This Agreement is subject to the following terms and conditions as outlined in the Plan: Options Accrued - --------------- All Options granted are earned in 2002 in proportion to each month served not to exceed 100%. A full month's credit will be given for time served after the first of the month. All Bonus options become fully vested after the director has served four years from the date of this grant, subject to the same restrictions as the grant. Exercise of Options - ------------------- These Options will become exerciseable as of January 1, 2006, which is four years after the grant unless it becomes exerciseable prior to that date due to termination from the Board. Expiration - ---------- These Options expire on December 31, 2011, at 2:00 PM, Akron Time, unless the Options expire earlier due to termination from the Board (or 2:00 PM on the last business day prior to such date, if the date falls on a Saturday, Sunday, or other day when the FirstEnergy General Office is closed). Termination from the Board - --------------------------
Event of Optionee Vesting When Options Expire Further Information - ----------------- ------- ------------------- ------------------- Retirement Vesting continues per Options expire on As defined by the vesting schedule December 31, 2011 Board on November 7, 1997 Disability Vesting continues per Options expire on As defined under vesting schedule December 31, 2011 Internal Revenue Code Section 22 (3) (3) Death, including 100% vesting on date All options expire the Shares exercisable by death after disability, of death earlier of one year after the beneficiary (per retirement, or date of death or expiration Article 12 of the Plan, resignation before of the grant or by will or by the January 1, 2006 laws of descent and distribution) Death after January 1, Vesting stops upon date All unvested options are 2006 for any reason you leave Board immediately forfeited back other than disability, to the Company. All vested vested retirement, or options expire the earlier For Cause of one year after you leave the Board or 90 days after death, if such death occurs prior to one year after termination, or the expiration of the grant Termination For Vesting stops upon date All vested and unvested Termination for Cause Cause you leave Board options are immediately is defined in section forfeited back to the 2.1.6 of the Plan Company Other Termination, Vesting stops upon date All unvested options are including resignation you leave Board immediately forfeited back before January 1, to the Company. All vested 2006 options expire the earlier of 90 days after you leave the Board or expiration of the grant Other Termination, Vesting stops upon date All unvested options are including resignation you leave Board immediately forfeited back after January 1, 2006 to the Company. All vested options expire the earlier of one year after you leave the Board or expiration of the grant
Change in Control - ----------------- In the event of a Change in Control (as defined in Section 2.1.7 of the Plan), all options under this Agreement become immediately exerciseable as of the date of the Change in Control. Effect on the Board Relationship - ------------------- ------------ Nothing in this Agreement guarantees Board membership with FE, nor does it confer any special rights or privileges to the Optionee. Adjustments - ----------- In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, combination, distribution, or other change in corporate structure of FE affecting the Common Stock, the Compensation Committee ("Committee") of the Board of Directors of FE will adjust the number and class of securities in this option in a manner determined appropriate to prevent dilution or diminution of the Option under this Agreement. Forfeiture - ---------- 1. All Options not earned in 2002 are immediately forfeited back to the Company upon termination from the Board. 2. All Bonus Options granted are forfeited back to the Company upon termination from the Board for any reason other than retirement, death, or disability prior to January 1, 2006. Administration - -------------- 1. This Agreement is governed by the laws of the State of Ohio without giving effect to the principles of the conflicts of laws. 2. The terms and conditions of this Option may be modified by the Committee: a) in any case permitted by the terms of the Plan or this Option, b) with the written consent of the Optionee, or c) without the consent of the Optionee if the amendment is either not adverse to the interests of the Optionee or is required by law. 3. The administration of this Agreement and the Plan will be performed in accordance with Article 3 of the Plan. All determinations and decisions made by the Committee, the Board, or any delegate of the Committee as to the provisions of the Plan shall be final, conclusive, and binding on all persons. 4. The terms of this Agreement are governed at all times by the official text of the Plan and in no way alter or modify the Plan. 5. If a term is capitalized but not defined in this Agreement, it has the meaning given to it in the Plan. 6. To the extent a conflict exists between the terms of this Agreement and the provisions of the Plan, the provisions of the Plan shall govern. SECTION THREE - METHODS OF EXERCISING THE OPTION Notification to Exercise - ------------ ----------- To exercise an option, the Optionee must submit to the Administrator of the Plan the information below either on a form provided by FE, a broker form, or on a blank sheet of paper: 1. Number of shares being purchased, 2. The grant price, 3. The form of payment, 4. A statement of intention to exercise, 5. The signature of the Optionee, (or legal representative in the case of death or disability), and 6. Any representations or disclosures required by any applicable securities law. Method of Payment - ----------------- Payment for the transaction and associated brokerage fees may be made through the following methods: 1. Cash Exercise -- Delivering cash equal to the cost of the exercise. 2. Stock Swap Exercise -- Surrendering certificates of FE stock previously acquired having a Fair Market Value at the time of the exercise equal to the amount of the exercise, along with a small amount of cash, not to exceed the price of one (1) share of stock. 3. Cashless Exercise - Using the net proceeds from the immediate sale of stock to pay for the exercise of the Option, as directed in the written notification to exercise the option. 4. A combination of any of the above based upon Plan administrative rules. Withholding Tax - --------------- Though taxes are the responsibility of the Optionee, FE shall have the right to deduct, withhold, or require the Optionee to surrender an amount sufficient to satisfy federal (including FICA and Medicare), state, and/or local taxes required by law to be withheld for any exercise. SECTION FOUR - TRANSFER OF OPTION The Option is not transferable during the life of the Optionee. Only the Optionee shall have the right to exercise an option, unless deceased, at which time the option may be exercised by Optionee's beneficiary (as described in Article 12 of the Plan or by will or by the laws of descent and distribution). FirstEnergy Corp. By _____________________________ Corporate Secretary I acknowledge receipt of this NSO Agreement and I accept and agree with the terms and conditions stated above. ________________________________ ______________________ (Signature of Optionee) (Date) EX-10 9 ex10-6.txt FE EXEC. DEFERRED COMP PLAN - -------------------------------------------------------------------------------- FirstEnergy Corp. Executive Deferred Compensation Plan 2002 Overview Effective January 1, 2002 - -------------------------------------------------------------------------------- INTRODUCTION Overview of the Plan o The Plan allows you to defer base salary, Annual Incentive Awards, and Long-Term Incentive Awards. o The Company retains amounts deferred and credits an account(s) in your name. o The Retirement Account, Retirement Stock Account and the FirstEnergy Stock Account may earn a very attractive return. Your base salary and/or the 2001 Annual Incentive Award payable in 2002 may be deferred into a Retirement Account. o Your 2001 Annual Incentive Award and/or your Long-Term Incentive Award, that are payable in 2002, may be deferred into a FirstEnergy Stock Account. Why the Plan is Provided To provide you with: o Additional funds at your retirement to supplement other existing benefit plans. o Supplemental benefits in the event of preretirement death or disability. o Another opportunity to build assets on the most favorable tax basis. o A vehicle to acquire additional FirstEnergy stock. 2 - -------------------------------------------------------------------------------- DEFERRAL OPTIONS Annual Deferral Periods:* January 1 through December 31 of each year. o Base Salary: You may defer from 1% to 50% of your Base Salary into the Retirement Account. o Annual Incentive Award: You may defer from 1% to 100% of your Annual Incentive Award (payable in 2002) into the Retirement and/or the FirstEnergy Stock Account. o Long-Term Incentive Award: You may defer from 1% to 100% of your Long-Term Incentive Award (payable in 2002) into the FirstEnergy Stock Account. o Roll-in of Savings Plan Excess. *Elections for annual deferral periods must be made during the open enrollment period ending no later than December 15 of the prior year. 3 - -------------------------------------------------------------------------------- EFFECT ON FIRSTENERGY SAVINGS PLAN 401(k) Impact Your decision to defer a portion of your salary and/or your Annual Incentive Award into this Plan will affect your decision regarding how much you would like to defer into the FirstEnergy Employee Savings Plan. In making your deferral elections in these plans, it is important to know that your deferrals into this Plan will be made first; therefore, the amount of base salary or Annual Incentive Award available to be deferred into the Employee Savings Plan will be reduced. Example Amount of Annual Incentive Award you elected to defer to this Plan: 50% Amount of salary and Annual Incentive you elected to defer to the Employee Savings Plan: 16% Annual Incentive Award $10,000 Deferral into this Plan 5,000 --------- Balance $5,000 Deferral into Savings Plan 800 --------- Payable in cash, subject to taxation $4,200 Please take a moment to consider how your election to defer into this Plan will affect the amount of money available on which to base your Employee Savings Plan deferral election. 4 - -------------------------------------------------------------------------------- INCOME TAX WITHHOLDING o On your deferrals to the Retirement and FirstEnergy Stock Accounts and on the Company 20% premium to the FirstEnergy Stock Account: o Federal: No. o State: No, except Resident of Pennsylvania working in Pennsylvania--Yes; Resident of Ohio or New Jersey working in Pennsylvania or resident of Pennsylvania working in Ohio or New Jersey--Depends upon your own tax election. o Local: Yes. o FICA: Yes. o Medicare: Yes. o On the interest credited to the Retirement Account: o IRS regulations may require the withholding and payment of FICA and Medicare taxes attributable to a portion of the interest credited annually to you each year. You will be notified if this is the case. 5 - -------------------------------------------------------------------------------- HOW A MINIMUM INVESTMENT SAVES TAXES The minimum salary deferral is 1% of base salary. If you earn $100,000 per year: Deferred Nondeferred ------------------------------------------------------ Annual Minimum Deferral $1,000 $1,000 Current Income Tax (40%* Bracket) 0 400 ------------------------------------------------------ Your Annual Dollars to Invest $1,000 $600 ------------------------------------------------------ *Includes federal and state income taxes. 6 - -------------------------------------------------------------------------------- YOUR RETIREMENT ACCOUNT If You Elect to Defer Into the Retirement Account Amounts you defer and interest earned will be tracked in an account in your name. The interest credited to your Retirement Account will be the annual equivalent of the Average* Moody's Rate plus 3%. The rate cannot exceed a maximum annual equivalent of a 15% yield. *Average for November through October of the prior year. 7 - -------------------------------------------------------------------------------- THE PLAN VERSUS OUTSIDE INVESTMENT One Dollar Deferred Under This Plan [GRAPHIC OMITTED] Assumptions: Deferral at age 45; tax bracket 40%; interest rate 10%. One Dollar Taken as Salary and Invested on the Outside [GRAPHIC OMITTED] Assumptions: Deferral at age 45; tax bracket 40%; interest rate 7% pretax, 4.2% after-tax. To obtain the same return under an outside investment, you would have to earn an equivalent pretax rate of 16.67%. 8 - -------------------------------------------------------------------------------- CREDITING EARNINGS Moody's Plus 3% Equals High Yields Retirement Account [GRAPHIC OMITTED] The EDCP crediting rate for 2002 will be 10.56%. The Moody's Index is a monthly average of long-term bond yields of industrials and public utilities rated AAA, AA, A and BAA, published by Moody's Investors' Service. 9 - -------------------------------------------------------------------------------- RETIREMENT How Your Retirement Account Grows If you defer $1,000 annually: Annual Pretax Total Account Payout Pretax Beginning Balance at Each Year Payout at Age Age 65* for 15 Years (15 Years) ------------------------------------------------------- 60 $ 6,716 $ 803 $12,045 55 17,531 2,095 31,425 50 34,950 4,177 62,655 45 63,002 7,530 112,950 40 108,182 12,930 193,950 ------------------------------------------------------- *Assuming 10% interest credited annually. 10 - -------------------------------------------------------------------------------- YOUR DISTRIBU- TION OPTIONS Retirement Account If You Retire on or After Age 55 and Are Eligible for a Pension Plan Benefit o Installments: Paid monthly for up to 25 years at the Average Moody's Rate plus 3% interest rate. Rate cannot exceed an annual equivalent of a 15% yield. If your Account balance, that is paid in installments, is less than $100,000 on the date payments begin, monthly installments will be paid for not more than 15 years. o Lump sum. o Combination of the above. o Defer commencement of payouts to age 70. o Your retirement benefit payout election may be amended up to 90 days prior to retirement. If You Leave the Company Prior to Age 55 and You Are Not Eligible for Benefits Under the FirstEnergy Severance Plan or Are Not Eligible for a Pension Plan Benefit o Lump sum. 11 - -------------------------------------------------------------------------------- YOUR DISTRIBU- TION OPTIONS Retirement Account If You Leave the Company and You Are Eligible for and Elect to Receive Benefits Under the FirstEnergy Severance Plan o Lump sum. o Three annual installments beginning on your date of termination and on January 1 of the following two calendar years. You make your payout election during open enrollment. It may be amended at any time up to 90 days prior to termination. 12 DISABILITY FEATURE Retirement Account Your Distribution Options o Installments: Paid monthly for up to 25 years at the Average Moody's Rate plus 3%. Rate cannot exceed an annual equivalent of a 15% yield. If the portion of your Account balance that is to be paid in installments is less than $100,000 on the date payments begin, monthly installments will be paid for not more than 15 years. o Lump sum. o Combination of the above. o Your disability benefit payout election may be amended anytime prior to disability. 13 - -------------------------------------------------------------------------------- PRERETIREMENT DEATH BENEFITS Retirement Account Your Distribution Options for Your Beneficiary o Installments: Paid monthly for up to 25 years at the Average Moody's Rate plus 3%. Rate cannot exceed an annual equivalent of a 15% yield. If the portion of your balance that is to be paid in installments is less than $100,000 on your date of death, monthly installments will be paid for not more than 15 years. o Lump sum. o Combination of the above. o Your preretirement death benefit payout election may be amended anytime prior to death. POSTRETIRE- MENT DEATH BENEFITS Retirement Account Your beneficiary will receive your remaining Retirement Account balance on the same basis as you had elected. If you elected to defer commencement of benefit payments and you die prior to commencement, benefit payments to your beneficiary will begin immediately. 14 - -------------------------------------------------------------------------------- INCOME TAXATION Taxation of Your Retirement Account Distribution After Separation of Employment o Federal: Yes. o State: Based on the regulations and rates of the state in which you live. Note: Recent federal legislation prohibits any state from taxing plan distributions of former residents if the distributions are made over a ten-year or more period. o Local: Check with your local taxing authority. o FICA and Medicare: IRS regulations may require the withholding and payment of FICA and Medicare taxes attributable to a portion of the interest credited annually to you each year. You will be notified if this is the case. 15 - -------------------------------------------------------------------------------- FIRSTENERGY STOCK ACCOUNT If You Elect to Defer Into the First-Energy Stock Account* o You may defer from 1% to 100% of the Annual Incentive Award, less what you defer into the Retirement Account, payable to you in 2002, to the FirstEnergy Stock Account. o You may defer from 1% to 100% of the Long-Term Incentive Award, payable to you in 2002, to the FirstEnergy Stock Account. o The Company will add a 20% premium to any deferrals made into the FirstEnergy Stock Account. o Your deferrals, plus the Company-provided 20% premium, less applicable income tax withholding, will be converted to equivalent stock units and credited to your FirstEnergy Stock Account. o Your deferrals into the Stock Account and your vested company premiums, plus earnings and dividends, will be distributed to you in the form of FirstEnergy Stock three years after the deferral is originally credited to your Account. *Elections for annual deferral periods must be made during the open enrollment period ending no later than December 15 of the prior year. 16 - -------------------------------------------------------------------------------- FIRSTENERGY STOCK ACCOUNT About the FirstEnergy Stock Account o The Company will credit a 20% premium to your Stock Account when you defer compensation into the Account. Example: If you elect to defer $1,000, 20% of that amount or $200 will be added to your deferral amount for a total of $1,200. This $1,200 will then be converted to stock units and held in your FirstEnergy Stock Account. o The number of stock units credited to your account will be determined by dividing the total, after applicable taxes, of your deferral and the Company-provided 20% premium by the average daily closing price of FirstEnergy common stock during February, 2002. o At the time dividend payments are made to FirstEnergy shareholders additional stock units will be credited to your account. The number of additional units credited will be based on the number of units in your account and the market price of the stock at the close of that business day. 17 - -------------------------------------------------------------------------------- FIRSTENERGY STOCK ACCOUNT Vesting of the FirstEnergy Stock Account o The FirstEnergy Stock Account will have a three-year restriction period attached to the 20% premium and any appreciation on it. o You will be fully vested in the 20% premium and associated appreciation at the end of three years, assuming you are still employed by FirstEnergy, or have retired at or after age 60.The three-year premium restriction will continue to apply beyond your retirement at or after age 60. o You will be fully vested immediately if you terminate employment due to: Death. Disability. Involuntary Termination under conditions where you become eligible for and elect to accept a FirstEnergy severance benefit. o You will be fully vested immediately in the event of a Change of Control that results in FirstEnergy not being the controlling company. o You will forfeit the nonvested 20% premium and associated appreciation if you retire prior to age 60 or if you terminate employment during the three-year restriction period for reasons other than death, disability, Involuntary Termination, or change in control as described above. 18 - -------------------------------------------------------------------------------- FIRSTENERGY STOCK ACCOUNT Distributions From the FirstEnergy Stock Account Normally, your Stock Account will be paid to you in a lump sum three years after the deferral was first made to the Stock Account. It will be paid to you in the form of FirstEnergy stock. If you terminate employment prior to age 60 with a Stock Account balance, the balance, less any nonvested Company-paid premium, will be converted to cash and transferred to your Retirement Account. If you retire at or after reaching age 60 and you have a balance in the Stock Account, at the end of the three year restriction period, the Stock Account balance will be paid as elected. You may elect to receive the distribution in FirstEnergy stock or have the balance converted to cash and transferred to your Retirement Account. 19 - -------------------------------------------------------------------------------- FIRSTENERGY STOCK ACCOUNT Income Taxation of the FirstEnergy Stock Account When you receive a distribution of stock from your Stock Account, you will be taxed as follows: o Federal: Yes. o State: Based on the regulations and rates of the state in which you live and the state in which you earned the compensation. o Local: Check with your local taxing authority. o FICA/Medicare: Withheld as you deferred compensation into the Stock Account and on the 20% premium as it vests. 20 - -------------------------------------------------------------------------------- FIRSTENERGY RETIREMENT STOCK ACCOUNT The Retirement Stock Account As of January 1, 2002, a new account, called the Retirement Stock Account, will be added to the Plan. This Account has been established so that you can maintain an account based on the value of FirstEnergy stock until you terminate your employment with FirstEnergy. Transferring to the Retirement Stock Account During the open enrollment period, immediately prior to the end of the three-year vesting period, you will have the opportunity to elect to defer receiving the Stock Account balance, which would otherwise be payable to you during the following calendar year. If you make this election, the value of the Stock Account, including the vested 20% premium, will be transferred to your Retirement Stock Account. The Retirement Stock Account will be credited with gains, losses and dividends just as in the Stock Account and will maintain its tax-deferred status until you receive a distribution. During the 2001 enrollment period for the 2002 Plan year, you may, if you have a 1999 Stock Account: o Elect to transfer your 1999 Stock Account balance, including the vested 20% premium, to the Retirement Stock Account. o Make no election. In March 2002 when the premium vests, your Stock Account balance will, after withholding the appropriate taxes, be deposited as stock into a FirstEnergy Dividend Reinvestment Account in your name. 21 - -------------------------------------------------------------------------------- FIRSTENERGY RETIREMENT STOCK ACCOUNT Distributions From the Retirement Stock Account When you terminate employment for any reason, including death and disability, the balance in the Retirement Stock Account will be converted to cash, transferred to your Retirement Account and paid out according to your elections for the Retirement Account. 22 - -------------------------------------------------------------------------------- IN-SERVICE WITHDRAWAL FEATURE In-Service Withdrawal o If you are an employee of the Company, who has been a Plan Participant for at least five years, you may elect to withdraw all or a portion of your Retirement Account and Retirement Stock Account. The amount available to you is based on your account balance as of the request date not the date that you actually receive payment. o You may make one request per year. The request must specify the amount to be withdrawn and the future date paid, which must be the first of a month in the second calendar year following the calendar year in which you make the request. o Withdrawals must be taken from your Accounts in the following order and you must exhaust the Retirement Account before withdrawing from the Retirement Stock Account: o Retirement Account o Retirement Stock Account o A request will be irrevocable after December 31 of the calendar year in which you make it unless, prior to payment, you leave the Company or die, at which time the request will become null and void and your Accounts will be paid as you have previously elected or as dictated by the Plan. o The Plan also provides for another form of distribution called an Accelerated Distribution. You may receive a distribution of your entire Account balance, which is explained in detail under "Benefit Security Provisions." 23 - -------------------------------------------------------------------------------- SUPPLEMENTAL PENSION BENEFIT Benefits from the Company's Pension Plan are based on an executive's nondeferred earnings, which do not include Annual Incentive Awards, and are subject to limitations imposed by the Internal Revenue Code. The Supplemental Pension Benefit is provided by the Company to make up for any reduction in an executive's pension as a result of participation in the Executive Deferred Compensation Plan, or due to Internal Revenue Code limitations, or due to the exclusion of Annual Incentive Awards from pension earnings. INCOME TAXATION Taxation of Supplemental Pension Benefit o Federal: Yes. o State: Based on the regulations and rates of the state in which you live. o Local: Check with your local taxing authority. o FICA/Medicare: Withheld and paid on the present value of the supplemental pension benefit in the year the executive or beneficiary starts to receive a benefit. There is no further FICA or Medicare taxation on the monthly supplemental pension payments. 24 - -------------------------------------------------------------------------------- OTHER PROVISIONS o You are an unsecured general creditor of the Company. This provision is required in order to avoid taxation of your benefits before receipt. In the event of insolvency or bankruptcy, any payments from the Plan within the preference period before bankruptcy may be subject to recoupment by the Federal Bankruptcy Court. This preference period is 90 days in most cases but one year for insiders. Any payments made after bankruptcy may be subject to the disposition of the Federal Bankruptcy Court. o The percent of salary and/or Annual Incentive and/or Long-Term Incentive Award you elect to defer remains in effect unless changed by you. Changes, effective January 1, must be made no later than December 15 of the prior year. o Modification or waiver of the deferral commitment and distributions prior to separation of employment will only be granted in rare instances if you suffer a sudden and unforeseen financial emergency. o The Company reserves the right to amend the Plan, including the interest rate, or terminate the Plan at any time on a prospective basis. 25 - -------------------------------------------------------------------------------- COMPANY'S INVESTMENT OF AMOUNT DEFERRED Cost Recovery Insurance o Insurance contracts may be purchased on each participant. o Owned by and payable to the Executive Benefit Plans Security Trust (participant has no right to policy or proceeds). CLAIMS PROCEDURE (ARTICLE VIII) o If you do not receive your benefits when due under the terms of this Plan, you may file a claim in writing to: FirstEnergy Corp. 76 South Main Street Akron, Ohio 44308 Attention: Chairman, Executive Deferred Compensation Plan Committee o If your claim is denied or you do not receive a response within 63 days after the end of the month in which the request was received, you may request a review by the Compensation Committee of the Board of Directors. o The final decision on review will normally be made within 60 days but may be extended to 120 days due to special circumstances. The final decision will be binding on all parties concerned. 26 - -------------------------------------------------------------------------------- BENEFIT SECURITY PROVISIONS o Plan provisions are binding on the Company and its successors. o The Plan may be amended at any time, except that: o No amendment shall decrease the amount of your Retirement Account, Retirement Stock Account and your Stock Account, or your accrued Supplemental Pension Benefit. o No amendment shall restrict your right to receive a lump sum form of benefit payment of your Retirement Account, Retirement Stock Account or your Stock Account. o No amendment shall decrease the interest rate credited to the Retirement Account below the Average Moody's Rate less 1% or else the Retirement Account balance will be paid to all participants within 60 days. o If the Plan is terminated, the Retirement Account, Retirement Stock Account and Stock Account balances will be paid to all participants within 60 days and will not adversely affect your accrued Supplemental Pension Benefit. 27 - -------------------------------------------------------------------------------- BENEFIT SECURITY PROVISIONS Accelerated Distribution o You may request an accelerated distribution of your Retirement Account and Retirement Stock Account, subject to a 10% penalty. You will receive 90% of your Account balances as a lump sum in cash and stock, if applicable. This distribution will completely discharge the Company from all liability with respect to your Retirement Account and Retirement Stock Account. If you are actively employed by the Company, you will not be permitted to resume any further deferrals into the Plan until January 1 of the second calendar year following the calendar year in which you receive the lump-sum distribution. o You may request an accelerated distribution of your FirstEnergy Stock Account, subject to the loss of the 20% premium and associated earnings plus a 10% penalty on the balance. The remaining balance will be paid as a lump sum in Company stock. This distribution will completely discharge the Company from all liability with respect to your FirstEnergy Stock Account. If you are actively employed by the Company, you will not be permitted to resume any further deferrals into the Plan until January 1 of the second calendar year following the calendar year in which you receive the lump sum stock distribution. 28 - -------------------------------------------------------------------------------- ANNUAL SALARY DEFERRAL ELECTION To enroll or change your deferral commitments for the next annual deferral period: o Determine the percentage of salary, Annual Incentive Award, and/or Long-Term Incentive Award you wish to defer. o Complete the forms provided to you: o Participation Agreement. o Beneficiary Designation (at enrollment and to change your beneficiary, if desired). o Form of Benefit Payout (at enrollment and to change your form of benefit payout, if desired). o Return the forms by the date specified. 29 - -------------------------------------------------------------------------------- The FirstEnergy Corp. Executive Deferred Compensation Plan was established effective January 1, 1999 and is amended as of January 1, 2002. This Overview has been prepared to give you a better understanding of the benefits and features of the Plan. Each employee's benefits and rights under the Plan are at all times governed by the official text of the Executive Deferred Compensation Plan document and are in no way altered or modified by the contents of this Overview. 30 EX-10 10 ex10-7.txt EXEC. INCENTIVE - TIER 2 FirstEnergy Executive Incentive Compensation Plan 2001 Purpose - ------- The purpose of the Executive Incentive Compensation Plan (EICP) is to attract, retain and motivate skilled executives; to more closely align the interests of the executives and shareholders; and to promote growth in shareholder value. Total Compensation Philosophy - ----------------------------- FirstEnergy's total compensation philosophy is based on the following principles: - - A "pay-for-performance" orientation under which total compensation reflects corporate, business unit and individual success; - - A focus on total compensation wherein base salaries and incentives are targeted generally at or near median competitive market levels, with opportunities to achieve total compensation at the 75th percentile level if both corporate and business unit performance are superior; - - A mix between short-term and long-term compensation opportunities designed to reward both short and long-term strategic results and facilitate executive retention; - - An escalating proportion of an executive's total compensation opportunity at risk through performance incentives and stock as an executive's level of responsibility increases; and - - The use of various equity based incentive vehicles to promote FirstEnergy stock ownership and more closely align the interests of executives with the long-term interests of shareholders. Plan Components - --------------- The Plan consists of a Short-Term Incentive Program (STIP) for 2001, a Long-Term Incentive Program (LTIP) for the period 2001 - 2003, and a Stock Option Program. Target incentive opportunities for each program are shown in Attachment 1. Discretionary Award - ------------------- There may be instances where an executive has demonstrated extraordinary responsiveness to an unforeseen circumstance or has made a substantial contribution that will not be properly recognized in the normal award process. In these cases, FirstEnergy (the Compensation Committee of the Board of Directors in the case of a member of the Senior Management Committee), in its sole discretion, may grant a special incentive award to the executive. Short-Term Incentive Program (STIP) ----------------------------------- Eligibility - ----------- Employees with a 2001 standard rate at or above $92,119 and are in approved positions that report to members of the Senior Management Committee, regional presidents, consolidated plant managers, nuclear directors, and general office department heads, are eligible to participate in this plan. Eligible executives also must perform their jobs for a minimum of 1000 regular work hours (actual on-the-job work hours exclusive of any time off) during the year. Therefore, separation due to retirement, death or disability generally must occur during the second half of the year in order to meet the 1000 hour requirement. If an employee is promoted into the executive group or reassigned to another position outside the executive group, all hours worked during the year are counted toward the 1000-hour requirement. Eligible executives must be actively employed as of December 31, 2001 or have separated employment during the year due to retirement, disability, death, or under conditions in which the executive qualifies for and elects benefits under the FirstEnergy Severance Benefits Plan. Thus, an executive who voluntarily resigns or is involuntarily separated for cause is ineligible to receive a short-term award. Also, an executive who has been involuntarily separated for cause between December 31, 2001 and the date that any awards are paid is ineligible to receive and award. Executives must receive or would have received a performance rating of Meets Expectations or above. An executive with a rating "Does Not Meet Expectations" is ineligible to receive an annual award. Transfer between Plans - ---------------------- Annual incentive awards are based on whole months of eligibility in an incentive plan. Thus, employees who transfer from one incentive plan to another and work the full year, will have their incentive awards prorated between the two plans in whole month increments that total 12 months. Whole month increments are determined by the effective date of the employee's move. For a move resulting in a change in incentive plan eligibility that is effective between the 1st and 15th of any month except December, the employee becomes eligible for the plan into which they are moving for that entire month. If the move is effective on or after the 16th of any month except January, the employee becomes eligible for the plan into which they are moving on the 1st of the following month. Employees hired or changing plans at any time during January will be credited with plan eligibility for the entire month of January. Employees who change plans at any time on or after November 16 will continue their eligibility in the "old" plan for the entire month of December, and will become eligible for the "new" plan in January. Key Performance Indicators (KPIs) - --------------------------------- Performance goals are allocated between FirstEnergy Financial KPIs and Operational KPIs. FirstEnergy Financial KPIs apply to all executives. Operational KPIs are established by each Group Vice President. The weighting of Financial KPIs and Operational KPIs varies among executives depending upon their job level. Award Leverage - -------------- Each KPI has a threshold, target and maximum level of achievement. The achievement of Financial KPIs at or above threshold will generate a payout from 50% to 200% of the target award. The achievement of Operational KPIs at or above threshold will generate a payout from 50% to 150% of target. Results achieved between threshold and target, and target and maximum, will be interpolated. Award Payments - -------------- Annual awards will be paid in March 2002. If an executive meets the eligibility criteria and works in an executive position for less than the full performance year, his/her annual award will be prorated to reflect the number of months that he/she has worked in an eligible position. If an executive changes his/her job within the executive group or is reassigned to another position outside the executive group during the plan year, the executive's total annual incentive award will be the sum of the prorated awards earned in each position and incentive plan. Plan participants may elect to defer the receipt of any STIP award under the terms of the Executive Deferred Compensation Plan. Shareowner Protection - --------------------- Short-term incentive awards will not be paid unless total earnings exceed the amount of dividends paid plus the maximum annual awards from all incentive plans. Long-Term Incentive Program (LTIP) ---------------------------------- Eligibility - ----------- An employee who is hired or promoted into the executive group on or after February 1, 2001 will not be eligible for the LTIP until 2002, assuming he/she remains eligible for EICP. An executive must work a minimum of 12 months in an eligible position during the three-year (36-month) plan cycle to be eligible for an award. Thus, an executive who separates for any reason during 2001 will be ineligible to receive a long-term award from the 2001 program. An executive must be actively employed as of December 31, 2003, or have separated due to retirement, disability or death; or under conditions in which the executive qualifies for and elects benefits under the FirstEnergy Severance Benefits Plan between December 31, 2001 and the award payment date. Thus, an executive who voluntarily resigns or who is involuntarily separated for cause during this time frame will be ineligible to receive an LTIP award. Performance Shares - ------------------ On January 1, 2001, each eligible employees LTIP award will be converted into equivalent "Performance Shares" of FirstEnergy common stock based on the average of the high and low stock prices of the common stock on the last trading day in 2000. These shares are placed into a Performance Share Account for three years (2001 - 2003). During the 2001 - 2003 performance period, dividend equivalents will be converted into additional shares based on the closing stock price on the date the dividends are paid. At the end of the three-year performance period, the executive's account will be valued based on the average of the high and low prices on the last trading day in December 2003. The value may be adjusted upward or downward based upon the total shareholder return (TSR) of FirstEnergy common stock relative to an energy services company index during this three-year period. If the TSR is at the 63rd percentile, the award payout will be 100% of the account value. If the TSR rating is at or above the 86th percentile, the award payout will be 150% of the account value. If the TSR is at the 41st percentile, the award payout will be 50% of the account value. Award payouts for a ranking above the 41st and below the 86th percentile will be interpolated. For a TSR ranking below the 41st percentile, no long-term award will be paid. The purpose of this award structure is to strengthen the linkage between an executive's total compensation and the long-term growth of shareholder value. Award Payments - -------------- Awards for the 2001 - 2003 cycle will be paid in March 2004. If an executive meets the eligibility criteria and is no longer employed in an executive position, his/her original LTIP target award will be prorated to reflect the number of months worked in an eligible position during the performance cycle. Plan participants may elect to defer the receipt of any LTIP award under the provisions of the Executive Deferred Compensation Plan. Attachment 2 illustrates a Long-Term Incentive Program example. Stock Option Program -------------------- In 2001, eligible employees will receive stock option grants that will allow them to purchase a specified number of common stock shares at a fixed grant price over a defined period of time. The number of stock options granted and a stock option agreement will be communicated to recipients at the time of the grant. Terms ----- For the purposes of this Plan, the term FirstEnergy is defined as FirstEnergy Corp. and all of its operating companies to which this Plan has been extended. The term "Company" refers to FirstEnergy Corp. or its operating companies individually, as appropriate. Each employee's rights under the Plan are at all times governed by the official text of the Executive and Directors Incentive Compensation Plan Document and are in no way altered or modified by the contents of this summary. Each executive may, at any time, designate one or more persons as the executive's primary or contingent beneficiary (ies) to whom awards earned under this Plan shall be paid in the event of the executive's death prior to payment of such awards to the executive. In the absence of an effective beneficiary designation, or if all beneficiaries predecease the executive, the executive's designated beneficiary shall be the person in the first of the following classes in which there is a survivor: the executive's surviving spouse; the executive's estate. Right to Modify or Terminate - ---------------------------- This Plan may be amended or terminated at any time with or without notice by the Compensation Committee of the Board of Directors of FirstEnergy. The Plan may change from year to year or even be discontinued in the future. If it is determined that significant unusual events occurred that impacted the FirstEnergy's reported earnings but do not truly reflect the achieved operating results of the FirstEnergy, then the Compensation Committee may, in its sole discretion, increase or decrease the amount of any awards determined by this Plan or even determine that no awards will be paid. Not withstanding, the Committee shall have no authority to adjust upwards the amount payable to a Covered Employee with respect to a particular Award, to take any of the foregoing actions or to take any other action to the extent that such action or the Committee's ability to take such action would cause any Award under the Plan to any Covered Employee to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the regulations issued thereunder. No Employment Guarantee - ----------------------- Nothing in this Plan shall be construed as giving any participant the right to be retained in the employ of any Company, nor shall any Company be required, by virtue of the existence of this Plan, to maintain the employment of any participant through any specified date. Not A Funded Trust - ------------------ All awards paid under this Plan shall at all times constitute general unsecured liabilities of any Company, payable out of its own general assets. In no event shall any Company be obliged to reserve any funds or assets to secure the payment of such amounts and nothing contained in the Plan shall confer upon any participant the right, title or interest of any assets of any Company. Administration - -------------- The Plan is administered by the Human Resources Department. Attachment 1 Executive Incentive Compensation Plan Total Compensation Opportunity 2001 SHORT-TERM PROGRAM LONG-TERM PROGRAM TOTAL - ------------------------------------------------------------------------ Performance Stock Annual Incentive Shares Options - --------------------------------------------------------------------------- Target Target Target Total Incentive Tier Incentive* KPI % Mix Incentive* Award* Opportunity* - --------------------------------------------------------------------------- II 45% Fin 50% 40% 75% 160% Oper 50% - --------------------------------------------------------------------------- * Incentive opportunity as a percent of standard rate. STIP Award Leverage ---------------------------------------- KPIs THR TGT MAX ---------------------------------------- Financial 50% 100% 200% ---------------------------------------- Operational 50% 100% 150% ---------------------------------------- Total 50% 100% 175% ======================================== Attachment 2 Performance Share Example Tier: II Standard Rate: $300,000 Target Incentive: 40% Target Opportunity: 40% x $300,000 = $120,000 Performance Share Award: 4,000 shares ($120,000 @ $30/share) Performance shares mature at the end of 2003 and are payable in March 2004 based on the following factors: - Quarterly dividend equivalents that may be credited to the executive's account during the performance period. - The average of the high and low price of the Company's common stock on the last trading day of 2003. - The total shareholder return (TSR) of the Company's common stock during the performance period relative to the peer company index. The following table illustrates potential awards at various TSR percentile rankings based on the target opportunity. This illustration assumes that no dividends are paid and that the common stock price does not appreciate during the three-year performance period. TSR Ranking* Award Payout Percent Earned ----------------------------------------------------- 86 - 100th Percentile $180,000 150% 75th Percentile $150,000 125% 63rd Percentile $120,000 100% 52nd Percentile $90,000 75% 41st Percentile $60,000 50% 1 - 40th Percentile $0 0% * For 2001, the method of representing our TSR ranking is being changed to reflect our percentile ranking in the more traditional way. This year, the TSR ranking is shown in the inverse of how it has been represented in the past. Previously, top performance was reflected as the "1st percentile"; this year, top performance is represented as the "100th percentile". This change has no impact on the "Award Payout" or the "Percent Earned". EX-10 11 ex10-8.txt EXEC. INCENTIVE - TIER 3 FirstEnergy Executive Incentive Compensation Plan 2001 Purpose - ------- The purpose of the Executive Incentive Compensation Plan (EICP) is to attract, retain and motivate skilled executives; to more closely align the interests of the executives and shareholders; and to promote growth in shareholder value. Total Compensation Philosophy - ----------------------------- FirstEnergy's total compensation philosophy is based on the following principles: - - A "pay-for-performance" orientation under which total compensation reflects corporate, business unit and individual success; - - A focus on total compensation wherein base salaries and incentives are targeted generally at or near median competitive market levels, with opportunities to achieve total compensation at the 75th percentile level if both corporate and business unit performance are superior; - - A mix between short-term and long-term compensation opportunities designed to reward both short and long-term strategic results and facilitate executive retention; - - An escalating proportion of an executive's total compensation opportunity at risk through performance incentives and stock as an executive's level of responsibility increases; and - - The use of various equity based incentive vehicles to promote FirstEnergy stock ownership and more closely align the interests of executives with the long-term interests of shareholders. Plan Components - --------------- The Plan consists of a Short-Term Incentive Program (STIP) for 2001, a Long-Term Incentive Program (LTIP) for the period 2001 - 2003, and a Stock Option Program. Target incentive opportunities for each program are shown in Attachment 1. Discretionary Award - ------------------- There may be instances where an executive has demonstrated extraordinary responsiveness to an unforeseen circumstance or has made a substantial contribution that will not be properly recognized in the normal award process. In these cases, FirstEnergy (the Compensation Committee of the Board of Directors in the case of a member of the Senior Management Committee), in its sole discretion, may grant a special incentive award to the executive. Short-Term Incentive Program (STIP) ----------------------------------- Eligibility - ----------- Employees with a 2001 standard rate at or above $92,119 and are in approved positions that report to members of the Senior Management Committee, regional presidents, consolidated plant managers, nuclear directors, and general office department heads, are eligible to participate in this plan. Eligible executives also must perform their jobs for a minimum of 1000 regular work hours (actual on-the-job work hours exclusive of any time off) during the year. Therefore, separation due to retirement, death or disability generally must occur during the second half of the year in order to meet the 1000 hour requirement. If an employee is promoted into the executive group or reassigned to another position outside the executive group, all hours worked during the year are counted toward the 1000-hour requirement. Eligible executives must be actively employed as of December 31, 2001 or have separated employment during the year due to retirement, disability, death, or under conditions in which the executive qualifies for and elects benefits under the FirstEnergy Severance Benefits Plan. Thus, an executive who voluntarily resigns or is involuntarily separated for cause is ineligible to receive a short-term award. Also, an executive who has been involuntarily separated for cause between December 31, 2001 and the date that any awards are paid is ineligible to receive and award. Executives must receive or would have received a performance rating of Meets Expectations or above. An executive with a rating "Does Not Meet Expectations" is ineligible to receive an annual award. Transfer between Plans - ---------------------- Annual incentive awards are based on whole months of eligibility in an incentive plan. Thus, employees who transfer from one incentive plan to another and work the full year, will have their incentive awards prorated between the two plans in whole month increments that total 12 months. Whole month increments are determined by the effective date of the employee's move. For a move resulting in a change in incentive plan eligibility that is effective between the 1st and 15th of any month except December, the employee becomes eligible for the plan into which they are moving for that entire month. If the move is effective on or after the 16th of any month except January, the employee becomes eligible for the plan into which they are moving on the 1st of the following month. Employees hired or changing plans at any time during January will be credited with plan eligibility for the entire month of January. Employees who change plans at any time on or after November 16 will continue their eligibility in the "old" plan for the entire month of December, and will become eligible for the "new" plan in January. Key Performance Indicators (KPIs) - --------------------------------- Performance goals are allocated between FirstEnergy Financial KPIs and Operational KPIs. FirstEnergy Financial KPIs apply to all executives. Operational KPIs are established by each Group Vice President. The weighting of Financial KPIs and Operational KPIs varies among executives depending upon their job level. Award Leverage - -------------- Each KPI has a threshold, target and maximum level of achievement. The achievement of Financial KPIs at or above threshold will generate a payout from 50% to 200% of the target award. The achievement of Operational KPIs at or above threshold will generate a payout from 50% to 150% of target. Results achieved between threshold and target, and target and maximum, will be interpolated. Award Payments - -------------- Annual awards will be paid in March 2002. If an executive meets the eligibility criteria and works in an executive position for less than the full performance year, his/her annual award will be prorated to reflect the number of months that he/she has worked in an eligible position. If an executive changes his/her job within the executive group or is reassigned to another position outside the executive group during the plan year, the executive's total annual incentive award will be the sum of the prorated awards earned in each position and incentive plan. Plan participants may elect to defer the receipt of any STIP award under the terms of the Executive Deferred Compensation Plan. Shareowner Protection - --------------------- Short-term incentive awards will not be paid unless total earnings exceed the amount of dividends paid plus the maximum annual awards from all incentive plans. Long-Term Incentive Program (LTIP) ---------------------------------- Eligibility - ----------- An employee who is hired or promoted into the executive group on or after February 1, 2001 will not be eligible for the LTIP until 2002, assuming he/she remains eligible for EICP. An executive must work a minimum of 12 months in an eligible position during the three-year (36-month) plan cycle to be eligible for an award. Thus, an executive who separates for any reason during 2001 will be ineligible to receive a long-term award from the 2001 program. An executive must be actively employed as of December 31, 2003, or have separated due to retirement, disability or death; or under conditions in which the executive qualifies for and elects benefits under the FirstEnergy Severance Benefits Plan between December 31, 2001 and the award payment date. Thus, an executive who voluntarily resigns or who is involuntarily separated for cause during this time frame will be ineligible to receive an LTIP award. Performance Shares - ------------------ On January 1, 2001, each eligible employees LTIP award will be converted into equivalent "Performance Shares" of FirstEnergy common stock based on the average of the high and low stock prices of the common stock on the last trading day in 2000. These shares are placed into a Performance Share Account for three years (2001 - 2003). During the 2001 - 2003 performance period, dividend equivalents will be converted into additional shares based on the closing stock price on the date the dividends are paid. At the end of the three-year performance period, the executive's account will be valued based on the average of the high and low prices on the last trading day in December 2003. The value may be adjusted upward or downward based upon the total shareholder return (TSR) of FirstEnergy common stock relative to an energy services company index during this three-year period. If the TSR is at the 63rd percentile, the award payout will be 100% of the account value. If the TSR rating is at or above the 86th percentile, the award payout will be 150% of the account value. If the TSR is at the 41st percentile, the award payout will be 50% of the account value. Award payouts for a ranking above the 41st and below the 86th percentile will be interpolated. For a TSR ranking below the 41st percentile, no long-term award will be paid. The purpose of this award structure is to strengthen the linkage between an executive's total compensation and the long-term growth of shareholder value. Award Payments - -------------- Awards for the 2001 - 2003 cycle will be paid in March 2004. If an executive meets the eligibility criteria and is no longer employed in an executive position, his/her original LTIP target award will be prorated to reflect the number of months worked in an eligible position during the performance cycle. Plan participants may elect to defer the receipt of any LTIP award under the provisions of the Executive Deferred Compensation Plan. Attachment 2 illustrates a Long-Term Incentive Program example. Stock Option Program -------------------- In 2001, eligible employees will receive stock option grants that will allow them to purchase a specified number of common stock shares at a fixed grant price over a defined period of time. The number of stock options granted and a stock option agreement will be communicated to recipients at the time of the grant. Terms ----- For the purposes of this Plan, the term FirstEnergy is defined as FirstEnergy Corp. and all of its operating companies to which this Plan has been extended. The term "Company" refers to FirstEnergy Corp. or its operating companies individually, as appropriate. Each employee's rights under the Plan are at all times governed by the official text of the Executive and Directors Incentive Compensation Plan Document and are in no way altered or modified by the contents of this summary. Each executive may, at any time, designate one or more persons as the executive's primary or contingent beneficiary (ies) to whom awards earned under this Plan shall be paid in the event of the executive's death prior to payment of such awards to the executive. In the absence of an effective beneficiary designation, or if all beneficiaries predecease the executive, the executive's designated beneficiary shall be the person in the first of the following classes in which there is a survivor: the executive's surviving spouse; the executive's estate. Right to Modify or Terminate - ---------------------------- This Plan may be amended or terminated at any time with or without notice by the Compensation Committee of the Board of Directors of FirstEnergy. The Plan may change from year to year or even be discontinued in the future. If it is determined that significant unusual events occurred that impacted the FirstEnergy's reported earnings but do not truly reflect the achieved operating results of the FirstEnergy, then the Compensation Committee may, in its sole discretion, increase or decrease the amount of any awards determined by this Plan or even determine that no awards will be paid. Not withstanding, the Committee shall have no authority to adjust upwards the amount payable to a Covered Employee with respect to a particular Award, to take any of the foregoing actions or to take any other action to the extent that such action or the Committee's ability to take such action would cause any Award under the Plan to any Covered Employee to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the regulations issued thereunder. No Employment Guarantee - ----------------------- Nothing in this Plan shall be construed as giving any participant the right to be retained in the employ of any Company, nor shall any Company be required, by virtue of the existence of this Plan, to maintain the employment of any participant through any specified date. Not A Funded Trust - ------------------ All awards paid under this Plan shall at all times constitute general unsecured liabilities of any Company, payable out of its own general assets. In no event shall any Company be obliged to reserve any funds or assets to secure the payment of such amounts and nothing contained in the Plan shall confer upon any participant the right, title or interest of any assets of any Company. Administration - -------------- The Plan is administered by the Human Resources Department. Attachment 1 Executive Incentive Compensation Plan Total Compensation Opportunity 2001 SHORT-TERM PROGRAM LONG-TERM PROGRAM TOTAL - ----------------------------------------------------------------------------- Performance Stock Annual Incentive Shares Options - ----------------------------------------------------------------------------- Target Target Target Total Incentive Tier Incentive* KPI % Mix Incentive* Award* Opportunity* - ----------------------------------------------------------------------------- III 35% Fin 40% 25% 40% 100% Oper 60% *Incentive opportunity as a percent of standard rate. STIP Award Leverage ----------------------------------------- KPIs THR TGT MAX ----------------------------------------- Financial 50% 100% 200% ----------------------------------------- Operational 50% 100% 150% ----------------------------------------- Total 50% 100% 170% ========================================= Attachment 2 Performance Share Example Tier: III Standard Rate: $210,000 Target Incentive: 25% Target Opportunity: 25% x $210,000 = $52,500 Performance Share Award: 1,750 shares ($52,500 @ $30/share) Performance shares mature at the end of 2003 and are payable in March 2004 based on the following factors: - - Quarterly dividend equivalents that may be credited to the executive's account during the performance period. - - The average of the high and low price of the Company's common stock on the last trading day of 2003. - - The total shareholder return (TSR) of the Company's common stock during the performance period relative to the peer company index. The following table illustrates potential awards at various TSR percentile rankings based on the target opportunity. This illustration assumes that no dividends are paid and that the common stock price does not appreciate during the three-year performance period. TSR Ranking* Award Payout Percent Earned ----------------------------------------------------- 86 - 100th Percentile $78,750 150% 75th Percentile $65,625 125% 63rd Percentile $52,500 100% 52nd Percentile $39,375 75% 41st Percentile $26,250 50% 1 - 40th Percentile $0 0% * For 2001, the method of representing our TSR ranking is being changed to reflect our percentile ranking in the more traditional way. This year, the TSR ranking is shown in the inverse of how it has been represented in the past. Previously, top performance was reflected as the "1st percentile"; this year, top performance is represented as the "100th percentile". This change has no impact on the "Award Payout" or the "Percent Earned". EX-10 12 ex10-9.txt EXEC. INCENTIVE - TIER 4 FirstEnergy Executive Incentive Compensation Plan 2001 Purpose - ------- The purpose of the Executive Incentive Compensation Plan (EICP) is to attract, retain and motivate skilled executives; to more closely align the interests of the executives and shareholders; and to promote growth in shareholder value. Total Compensation Philosophy - ----------------------------- FirstEnergy's total compensation philosophy is based on the following principles: - - A "pay-for-performance" orientation under which total compensation reflects corporate, business unit and individual success; - - A focus on total compensation wherein base salaries and incentives are targeted generally at or near median competitive market levels, with opportunities to achieve total compensation at the 75th percentile level if both corporate and business unit performance are superior; - - A mix between short-term and long-term compensation opportunities designed to reward both short and long-term strategic results and facilitate executive retention; - - An escalating proportion of an executive's total compensation opportunity at risk through performance incentives and stock as an executive's level of responsibility increases; and - - The use of various equity based incentive vehicles to promote FirstEnergy stock ownership and more closely align the interests of executives with the long-term interests of shareholders. Plan Components - --------------- The Plan consists of a Short-Term Incentive Program (STIP) for 2001, a Long-Term Incentive Program (LTIP) for the period 2001 - 2003, and a Stock Option Program. Target incentive opportunities for each program are shown in Attachment 1. Discretionary Award - ------------------- There may be instances where an executive has demonstrated extraordinary responsiveness to an unforeseen circumstance or has made a substantial contribution that will not be properly recognized in the normal award process. In these cases, FirstEnergy (the Compensation Committee of the Board of Directors in the case of a member of the Senior Management Committee), in its sole discretion, may grant a special incentive award to the executive. Short-Term Incentive Program (STIP) ----------------------------------- Eligibility - ----------- Employees with a 2001 standard rate at or above $92,119 and are in approved positions that report to members of the Senior Management Committee, regional presidents, consolidated plant managers, nuclear directors, and general office department heads, are eligible to participate in this plan. Eligible executives also must perform their jobs for a minimum of 1000 regular work hours (actual on-the-job work hours exclusive of any time off) during the year. Therefore, separation due to retirement, death or disability generally must occur during the second half of the year in order to meet the 1000 hour requirement. If an employee is promoted into the executive group or reassigned to another position outside the executive group, all hours worked during the year are counted toward the 1000-hour requirement. Eligible executives must be actively employed as of December 31, 2001 or have separated employment during the year due to retirement, disability, death, or under conditions in which the executive qualifies for and elects benefits under the FirstEnergy Severance Benefits Plan. Thus, an executive who voluntarily resigns or is involuntarily separated for cause is ineligible to receive a short-term award. Also, an executive who has been involuntarily separated for cause between December 31, 2001 and the date that any awards are paid is ineligible to receive and award. Executives must receive or would have received a performance rating of Meets Expectations or above. An executive with a rating "Does Not Meet Expectations" is ineligible to receive an annual award. Transfer between Plans - ---------------------- Annual incentive awards are based on whole months of eligibility in an incentive plan. Thus, employees who transfer from one incentive plan to another and work the full year, will have their incentive awards prorated between the two plans in whole month increments that total 12 months. Whole month increments are determined by the effective date of the employee's move. For a move resulting in a change in incentive plan eligibility that is effective between the 1st and 15th of any month except December, the employee becomes eligible for the plan into which they are moving for that entire month. If the move is effective on or after the 16th of any month except January, the employee becomes eligible for the plan into which they are moving on the 1st of the following month. Employees hired or changing plans at any time during January will be credited with plan eligibility for the entire month of January. Employees who change plans at any time on or after November 16 will continue their eligibility in the "old" plan for the entire month of December, and will become eligible for the "new" plan in January. Key Performance Indicators (KPIs) - --------------------------------- Performance goals are allocated between FirstEnergy Financial KPIs and Operational KPIs. FirstEnergy Financial KPIs apply to all executives. Operational KPIs are established by each Group Vice President. The weighting of Financial KPIs and Operational KPIs varies among executives depending upon their job level. Award Leverage - -------------- Each KPI has a threshold, target and maximum level of achievement. The achievement of Financial KPIs at or above threshold will generate a payout from 50% to 200% of the target award. The achievement of Operational KPIs at or above threshold will generate a payout from 50% to 150% of target. Results achieved between threshold and target, and target and maximum, will be interpolated. Award Payments - -------------- Annual awards will be paid in March 2002. If an executive meets the eligibility criteria and works in an executive position for less than the full performance year, his/her annual award will be prorated to reflect the number of months that he/she has worked in an eligible position. If an executive changes his/her job within the executive group or is reassigned to another position outside the executive group during the plan year, the executive's total annual incentive award will be the sum of the prorated awards earned in each position and incentive plan. Plan participants may elect to defer the receipt of any STIP award under the terms of the Executive Deferred Compensation Plan. Shareowner Protection - --------------------- Short-term incentive awards will not be paid unless total earnings exceed the amount of dividends paid plus the maximum annual awards from all incentive plans. Long-Term Incentive Program (LTIP) ---------------------------------- Eligibility - ----------- An employee who is hired or promoted into the executive group on or after February 1, 2001 will not be eligible for the LTIP until 2002, assuming he/she remains eligible for EICP. An executive must work a minimum of 12 months in an eligible position during the three-year (36-month) plan cycle to be eligible for an award. Thus, an executive who separates for any reason during 2001 will be ineligible to receive a long-term award from the 2001 program. An executive must be actively employed as of December 31, 2003, or have separated due to retirement, disability or death; or under conditions in which the executive qualifies for and elects benefits under the FirstEnergy Severance Benefits Plan between December 31, 2001 and the award payment date. Thus, an executive who voluntarily resigns or who is involuntarily separated for cause during this time frame will be ineligible to receive an LTIP award. Performance Shares - ------------------ On January 1, 2001, each eligible employees LTIP award will be converted into equivalent "Performance Shares" of FirstEnergy common stock based on the average of the high and low stock prices of the common stock on the last trading day in 2000. These shares are placed into a Performance Share Account for three years (2001 - 2003). During the 2001 - 2003 performance period, dividend equivalents will be converted into additional shares based on the closing stock price on the date the dividends are paid. At the end of the three-year performance period, the executive's account will be valued based on the average of the high and low prices on the last trading day in December 2003. The value may be adjusted upward or downward based upon the total shareholder return (TSR) of FirstEnergy common stock relative to an energy services company index during this three-year period. If the TSR is at the 63rd percentile, the award payout will be 100% of the account value. If the TSR rating is at or above the 86th percentile, the award payout will be 150% of the account value. If the TSR is at the 41st percentile, the award payout will be 50% of the account value. Award payouts for a ranking above the 41st and below the 86th percentile will be interpolated. For a TSR ranking below the 41st percentile, no long-term award will be paid. The purpose of this award structure is to strengthen the linkage between an executive's total compensation and the long-term growth of shareholder value. Award Payments - -------------- Awards for the 2001 - 2003 cycle will be paid in March 2004. If an executive meets the eligibility criteria and is no longer employed in an executive position, his/her original LTIP target award will be prorated to reflect the number of months worked in an eligible position during the performance cycle. Plan participants may elect to defer the receipt of any LTIP award under the provisions of the Executive Deferred Compensation Plan. Attachment 2 illustrates a Long-Term Incentive Program example. Stock Option Program -------------------- In 2001, eligible employees will receive stock option grants that will allow them to purchase a specified number of common stock shares at a fixed grant price over a defined period of time. The number of stock options granted and a stock option agreement will be communicated to recipients at the time of the grant. Terms ----- For the purposes of this Plan, the term FirstEnergy is defined as FirstEnergy Corp. and all of its operating companies to which this Plan has been extended. The term "Company" refers to FirstEnergy Corp. or its operating companies individually, as appropriate. Each employee's rights under the Plan are at all times governed by the official text of the Executive and Directors Incentive Compensation Plan Document and are in no way altered or modified by the contents of this summary. Each executive may, at any time, designate one or more persons as the executive's primary or contingent beneficiary (ies) to whom awards earned under this Plan shall be paid in the event of the executive's death prior to payment of such awards to the executive. In the absence of an effective beneficiary designation, or if all beneficiaries predecease the executive, the executive's designated beneficiary shall be the person in the first of the following classes in which there is a survivor: the executive's surviving spouse; the executive's estate. Right to Modify or Terminate - ---------------------------- This Plan may be amended or terminated at any time with or without notice by the Compensation Committee of the Board of Directors of FirstEnergy. The Plan may change from year to year or even be discontinued in the future. If it is determined that significant unusual events occurred that impacted the FirstEnergy's reported earnings but do not truly reflect the achieved operating results of the FirstEnergy, then the Compensation Committee may, in its sole discretion, increase or decrease the amount of any awards determined by this Plan or even determine that no awards will be paid. Not withstanding, the Committee shall have no authority to adjust upwards the amount payable to a Covered Employee with respect to a particular Award, to take any of the foregoing actions or to take any other action to the extent that such action or the Committee's ability to take such action would cause any Award under the Plan to any Covered Employee to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the regulations issued thereunder. No Employment Guarantee - ----------------------- Nothing in this Plan shall be construed as giving any participant the right to be retained in the employ of any Company, nor shall any Company be required, by virtue of the existence of this Plan, to maintain the employment of any participant through any specified date. Not A Funded Trust - ------------------ All awards paid under this Plan shall at all times constitute general unsecured liabilities of any Company, payable out of its own general assets. In no event shall any Company be obliged to reserve any funds or assets to secure the payment of such amounts and nothing contained in the Plan shall confer upon any participant the right, title or interest of any assets of any Company. Administration - -------------- The Plan is administered by the Human Resources Department. Attachment 1 Executive Incentive Compensation Plan Total Compensation Opportunity 2001 SHORT-TERM PROGRAM LONG-TERM PROGRAM TOTAL - ----------------------------------------------------------------------------- Performance Stock Annual Incentive Shares Options - ----------------------------------------------------------------------------- Target Target Target Total Incentive Tier Incentive* KPI % Mix Incentive* Award* Opportunity* - ----------------------------------------------------------------------------- IV 30% Fin 30% 15% 35% 80% Oper 70% *Incentive opportunity as a percent of standard rate. STIP Award Leverage ---------------------------------------- KPIs THR TGT MAX ---------------------------------------- Financial 50% 100% 200% ---------------------------------------- Operational 50% 100% 150% ---------------------------------------- Total 50% 100% 165% ======================================== Attachment 2 Performance Share Example Tier: IV Standard Rate: $150,000 Target Incentive: 15% Target Opportunity: 15% x $150,000 = $22,500 Performance Share Award: 750 shares ($22,500 @ $30/share) Performance shares mature at the end of 2003 and are payable in March 2004 based on the following factors: - Quarterly dividend equivalents that may be credited to the executive's account during the performance period. - The average of the high and low price of the Company's common stock on the last trading day of 2003. - The total shareholder return (TSR) of the Company's common stock during the performance period relative to the peer company index. The following table illustrates potential awards at various TSR percentile rankings based on the target opportunity. This illustration assumes that no dividends are paid and that the common stock price does not appreciate during the three-year performance period. TSR Ranking* Award Payout Percent Earned --------------------- ----------- -------------- 86 - 100th Percentile $33,750 150% 75th Percentile $28,125 125% 63rd Percentile $22,500 100% 52nd Percentile $16,875 75% 41st Percentile $11,250 50% 1 - 40th Percentile $0 0% * For 2001, the method of representing our TSR ranking is being changed to reflect our percentile ranking in the more traditional way. This year, the TSR ranking is shown in the inverse of how it has been represented in the past. Previously, top performance was reflected as the "1st percentile"; this year, top performance is represented as the "100th percentile". This change has no impact on the "Award Payout" or the "Percent Earned". EX-10 13 ex10-10.txt EXEC. INCENTIVE - TIER 5 FirstEnergy Executive Incentive Compensation Plan 2001 Purpose - ------- The purpose of the Executive Incentive Compensation Plan (EICP) is to attract, retain and motivate skilled executives; to more closely align the interests of the executives and shareholders; and to promote growth in shareholder value. Total Compensation Philosophy - ----------------------------- FirstEnergy's total compensation philosophy is based on the following principles: - - A "pay-for-performance" orientation under which total compensation reflects corporate, business unit and individual success; - - A focus on total compensation wherein base salaries and incentives are targeted generally at or near median competitive market levels, with opportunities to achieve total compensation at the 75th percentile level if both corporate and business unit performance are superior; - - A mix between short-term and long-term compensation opportunities designed to reward both short and long-term strategic results and facilitate executive retention; - - An escalating proportion of an executive's total compensation opportunity at risk through performance incentives and stock as an executive's level of responsibility increases; and - - The use of various equity based incentive vehicles to promote FirstEnergy stock ownership and more closely align the interests of executives with the long-term interests of shareholders. Plan Components - --------------- The Plan consists of a Short-Term Incentive Program (STIP) for 2001, a Long-Term Incentive Program (LTIP) for the period 2001 - 2003, and a Stock Option Program. Target incentive opportunities for each program are shown in Attachment 1. Discretionary Award - ------------------- There may be instances where an executive has demonstrated extraordinary responsiveness to an unforeseen circumstance or has made a substantial contribution that will not be properly recognized in the normal award process. In these cases, FirstEnergy (the Compensation Committee of the Board of Directors in the case of a member of the Senior Management Committee), in its sole discretion, may grant a special incentive award to the executive. Short-Term Incentive Program (STIP) ----------------------------------- Eligibility - ----------- Employees with a 2001 standard rate at or above $92,119 and are in approved positions that report to members of the Senior Management Committee, regional presidents, consolidated plant managers, nuclear directors, and general office department heads, are eligible to participate in this plan. Eligible executives also must perform their jobs for a minimum of 1000 regular work hours (actual on-the-job work hours exclusive of any time off) during the year. Therefore, separation due to retirement, death or disability generally must occur during the second half of the year in order to meet the 1000 hour requirement. If an employee is promoted into the executive group or reassigned to another position outside the executive group, all hours worked during the year are counted toward the 1000-hour requirement. Eligible executives must be actively employed as of December 31, 2001 or have separated employment during the year due to retirement, disability, death, or under conditions in which the executive qualifies for and elects benefits under the FirstEnergy Severance Benefits Plan. Thus, an executive who voluntarily resigns or is involuntarily separated for cause is ineligible to receive a short-term award. Also, an executive who has been involuntarily separated for cause between December 31, 2001 and the date that any awards are paid is ineligible to receive and award. Executives must receive or would have received a performance rating of Meets Expectations or above. An executive with a rating "Does Not Meet Expectations" is ineligible to receive an annual award. Transfer between Plans - ---------------------- Annual incentive awards are based on whole months of eligibility in an incentive plan. Thus, employees who transfer from one incentive plan to another and work the full year, will have their incentive awards prorated between the two plans in whole month increments that total 12 months. Whole month increments are determined by the effective date of the employee's move. For a move resulting in a change in incentive plan eligibility that is effective between the 1st and 15th of any month except December, the employee becomes eligible for the plan into which they are moving for that entire month. If the move is effective on or after the 16th of any month except January, the employee becomes eligible for the plan into which they are moving on the 1st of the following month. Employees hired or changing plans at any time during January will be credited with plan eligibility for the entire month of January. Employees who change plans at any time on or after November 16 will continue their eligibility in the "old" plan for the entire month of December, and will become eligible for the "new" plan in January. Key Performance Indicators (KPIs) - --------------------------------- Performance goals are allocated between FirstEnergy Financial KPIs and Operational KPIs. FirstEnergy Financial KPIs apply to all executives. Operational KPIs are established by each Group Vice President. The weighting of Financial KPIs and Operational KPIs varies among executives depending upon their job level. Award Leverage - -------------- Each KPI has a threshold, target and maximum level of achievement. The achievement of Financial KPIs at or above threshold will generate a payout from 50% to 200% of the target award. The achievement of Operational KPIs at or above threshold will generate a payout from 50% to 150% of target. Results achieved between threshold and target, and target and maximum, will be interpolated. Award Payments - -------------- Annual awards will be paid in March 2002. If an executive meets the eligibility criteria and works in an executive position for less than the full performance year, his/her annual award will be prorated to reflect the number of months that he/she has worked in an eligible position. If an executive changes his/her job within the executive group or is reassigned to another position outside the executive group during the plan year, the executive's total annual incentive award will be the sum of the prorated awards earned in each position and incentive plan. Plan participants may elect to defer the receipt of any STIP award under the terms of the Executive Deferred Compensation Plan. Shareowner Protection - --------------------- Short-term incentive awards will not be paid unless total earnings exceed the amount of dividends paid plus the maximum annual awards from all incentive plans. Long-Term Incentive Program (LTIP) ---------------------------------- Eligibility - ----------- An employee who is hired or promoted into the executive group on or after February 1, 2001 will not be eligible for the LTIP until 2002, assuming he/she remains eligible for EICP. An executive must work a minimum of 12 months in an eligible position during the three-year (36-month) plan cycle to be eligible for an award. Thus, an executive who separates for any reason during 2001 will be ineligible to receive a long-term award from the 2001 program. An executive must be actively employed as of December 31, 2003, or have separated due to retirement, disability or death; or under conditions in which the executive qualifies for and elects benefits under the FirstEnergy Severance Benefits Plan between December 31, 2001 and the award payment date. Thus, an executive who voluntarily resigns or who is involuntarily separated for cause during this time frame will be ineligible to receive an LTIP award. Performance Shares - ------------------ On January 1, 2001, each eligible employees LTIP award will be converted into equivalent "Performance Shares" of FirstEnergy common stock based on the average of the high and low stock prices of the common stock on the last trading day in 2000. These shares are placed into a Performance Share Account for three years (2001 - 2003). During the 2001 - 2003 performance period, dividend equivalents will be converted into additional shares based on the closing stock price on the date the dividends are paid. At the end of the three-year performance period, the executive's account will be valued based on the average of the high and low prices on the last trading day in December 2003. The value may be adjusted upward or downward based upon the total shareholder return (TSR) of FirstEnergy common stock relative to an energy services company index during this three-year period. If the TSR is at the 63rd percentile, the award payout will be 100% of the account value. If the TSR rating is at or above the 86th percentile, the award payout will be 150% of the account value. If the TSR is at the 41st percentile, the award payout will be 50% of the account value. Award payouts for a ranking above the 41st and below the 86th percentile will be interpolated. For a TSR ranking below the 41st percentile, no long-term award will be paid. The purpose of this award structure is to strengthen the linkage between an executive's total compensation and the long-term growth of shareholder value. Award Payments - -------------- Awards for the 2001 - 2003 cycle will be paid in March 2004. If an executive meets the eligibility criteria and is no longer employed in an executive position, his/her original LTIP target award will be prorated to reflect the number of months worked in an eligible position during the performance cycle. Plan participants may elect to defer the receipt of any LTIP award under the provisions of the Executive Deferred Compensation Plan. Attachment 2 illustrates a Long-Term Incentive Program example. Stock Option Program -------------------- In 2001, eligible employees will receive stock option grants that will allow them to purchase a specified number of common stock shares at a fixed grant price over a defined period of time. The number of stock options granted and a stock option agreement will be communicated to recipients at the time of the grant. Terms ----- For the purposes of this Plan, the term FirstEnergy is defined as FirstEnergy Corp. and all of its operating companies to which this Plan has been extended. The term "Company" refers to FirstEnergy Corp. or its operating companies individually, as appropriate. Each employee's rights under the Plan are at all times governed by the official text of the Executive and Directors Incentive Compensation Plan Document and are in no way altered or modified by the contents of this summary. Each executive may, at any time, designate one or more persons as the executive's primary or contingent beneficiary (ies) to whom awards earned under this Plan shall be paid in the event of the executive's death prior to payment of such awards to the executive. In the absence of an effective beneficiary designation, or if all beneficiaries predecease the executive, the executive's designated beneficiary shall be the person in the first of the following classes in which there is a survivor: the executive's surviving spouse; the executive's estate. Right to Modify or Terminate - ---------------------------- This Plan may be amended or terminated at any time with or without notice by the Compensation Committee of the Board of Directors of FirstEnergy. The Plan may change from year to year or even be discontinued in the future. If it is determined that significant unusual events occurred that impacted the FirstEnergy's reported earnings but do not truly reflect the achieved operating results of the FirstEnergy, then the Compensation Committee may, in its sole discretion, increase or decrease the amount of any awards determined by this Plan or even determine that no awards will be paid. Not withstanding, the Committee shall have no authority to adjust upwards the amount payable to a Covered Employee with respect to a particular Award, to take any of the foregoing actions or to take any other action to the extent that such action or the Committee's ability to take such action would cause any Award under the Plan to any Covered Employee to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the regulations issued thereunder. No Employment Guarantee - ----------------------- Nothing in this Plan shall be construed as giving any participant the right to be retained in the employ of any Company, nor shall any Company be required, by virtue of the existence of this Plan, to maintain the employment of any participant through any specified date. Not A Funded Trust - ------------------ All awards paid under this Plan shall at all times constitute general unsecured liabilities of any Company, payable out of its own general assets. In no event shall any Company be obliged to reserve any funds or assets to secure the payment of such amounts and nothing contained in the Plan shall confer upon any participant the right, title or interest of any assets of any Company. Administration - -------------- The Plan is administered by the Human Resources Department. Attachment 1 Executive Incentive Compensation Plan Total Compensation Opportunity 2001 SHORT-TERM PROGRAM LONG-TERM PROGRAM TOTAL - --------------------------------------------------------------------------- Performance Stock Annual Incentive Shares Options - --------------------------------------------------------------------------- Target Target Target Total Incentive Tier Incentive* KPI % Mix Incentive* Award* Opportunity* - --------------------------------------------------------------------------- V 25% Fin 20% 5% 35% 65% Oper 80% * Incentive opportunity as a percent of standard rate. STIP Award Leverage ---------------------------------------- KPIs THR TGT MAX ---------------------------------------- Financial 50% 100% 200% ---------------------------------------- Operational 50% 100% 150% --------------------------------------- Total 50% 100% 160% ======================================== Attachment 2 Performance Share Example Tier: V Standard Rate: $120,000 Target Incentive: 5% Target Opportunity: 5% x $120,000 = $6,000 Performance Share Award: 200 shares ($6,000 @ $30/share) Performance shares mature at the end of 2003 and are payable in March 2004 based on the following factors: - Quarterly dividend equivalents that may be credited to the executive's accounhe performance period. - The average of the high and low price of the Company's common stock on the last trading day of 2003. - The total shareholder return (TSR) of the Company's common stock during the performance period relative to the peer company index. The following table illustrates potential awards at various TSR percentile rankings based on the target opportunity. This illustration assumes that no dividends are paid and that the common stock price does not appreciate during the three-year performance period. TSR Ranking Award Payout Percent Earned ----------------------------------------------------- 86 - 100th Percentile $9,000 150% 75th Percentile $7,500 125% 63rd Percentile $6,000 100% 52nd Percentile $4,500 75% 41st Percentile $3,000 50% 1 - 40th Percentile $0 0% * For 2001, the method of representing our TSR ranking is being changed to reflect our percentile ranking in the more traditional way. This year, the TSR ranking is shown in the inverse of how it has been represented in the past. Previously, top performance was reflected as the "1st percentile"; this year, top performance is represented as the "100th percentile". This change has no impact on the "Award Payout" or the "Percent Earned". EX-10 14 ex10-11.txt AMEND TO GPU 1990 STOCK PLAN AMENDMENT TO GPU INC. 1990 STOCK PLAN The GPU Inc. 1990 Stock Plan for Employees of GPU, Inc. and Subsidiaries, as amended and restated to reflect amendments through June 3, 1999, is hereby further amended effective as of April 5, 2001 by adding at the end thereof a new Section 17 which shall read as follows: 17. FirstEnergy Merger Provisions. Notwithstanding any other provision to the contrary in this Plan, the provisions of this Section 17 shall apply upon the merger (the "Merger") of the Corporation with FirstEnergy Corp. ("FirstEnergy") pursuant to the Agreement and Plan of Merger between FirstEnergy and the Corporation dated as of August 8, 2000 (the "Merger Agreement"). Unless otherwise defined in this Section 17 or elsewhere in the Plan, each capitalized term used in this Section 17 shall have the meaning given to such term in the Merger Agreement. (a) On the fifth Business Day preceding the date which FirstEnergy publicly announces as the Election Deadline for purposes of the Merger Agreement in accordance with Section 2.01(c) thereof (the "Accelerated Vesting Date"), each outstanding option previously granted under the Plan on or after June 3,1999 , to the extent it had not otherwise become exercisable prior to the Accelerated Vesting Date ( a "Non-Vested Option"), shall become immediately and fully exercisable, and may be exercised on the Accelerated Vesting Date as to any or all shares of Common Stock that are then still subject to the option. The holder of a Non-Vested Option may exercise it by delivering to the Corporation, at any time during the period beginning on the 20th Business Day preceding the Election Deadline and ending at the close of business on the Accelerated Vesting Date, an executed notice of exercise on a form furnished by the Corporation to the holder for such purpose (the "Notice of Exercise Form"), together with a check in the amount of the aggregate purchase price for the shares of Common Stock to be purchased pursuant to the holder's exercise of such option. By no later than the 20th Business Day preceding the Election Deadline, each holder of a Non-Vested Option shall be furnished with (i) a Notice of Exercise Form, and (ii) copies of the Form of Election, Joint Proxy Statement, and all other related materials, which FirstEnergy furnishes to recordholders of GPU Common Stock pursuant to Section 2.01(k) of the Merger Agreement in connection with their right to make an election regarding the form in which the Merger Consideration for their GPU Common Stock is to be paid. (b) At the Effective Time, each outstanding option granted under the Plan on or after June 3,1999 (including any Non-Vested Option), to the extent then still unexercised (each such option, a "GPU Option"), shall automatically become an option (a "FirstEnergy Option") to purchase a number of shares of FirstEnergy Common Stock equal to the number of shares of GPU Common Stock that remained subject to the GPU Option immediately prior to the Effective Time multiplied by the Exchange Ratio as adjusted in accordance with Section 2.01(m) of the Merger Agreement (with the resulting number of shares rounded up or down to the nearest whole share), at an exercise price per share of FirstEnergy Common Stock equal to the exercise price for the purchase of shares under the GPU Option divided by the Exchange Ratio as adjusted in accordance with Section 2.01(m) of the Merger Agreement (with the resulting exercise price rounded up or down to the nearest whole cent). (c) In the case of each option granted under the Plan prior to June 3, 1999 that is outstanding immediately prior to the Effective Time, the holder thereof may elect, in lieu of having such option cancelled and receiving a lump sum cash payment therefor as provided in Sections 7(c) and (d) of the Plan, to have such option converted into a FirstEnergy Option entitling the holder to purchase a number of shares of FirstEnergy Common Stock, at an exercise price per share of FirstEnergy Common Stock, determined in the same manner as set forth in subsection (b) above. Any such election shall be made in writing, on a form furnished to the option holder by FirstEnergy for such purpose. The election form shall be signed by the option holder and filed with FirstEnergy within 30 days after the Closing Date. Any election so made shall be irrevocable. (d) Each FirstEnergy Option issued to an employee pursuant to subsection (b) or (c) above shall be subject to the same terms and conditions as the option for which it was issued, as set forth in this Plan and in the written agreements evidencing the grant of such options under this Plan to the employee. (e) In the case of all performance units and deferred vested units standing to an employee's credit under the Plan which, pursuant to the terms of the Plan or the written agreements evidencing the grant of such units to the employee (or pursuant to any payment election made by the employee in accordance with the provisions of such agreements), will become payable upon the consummation of the Merger, payment with respect to such units (collectively, the employee's "GPU Stock Units") shall be made as soon as practicable after the Effective Time, in cash, or in shares of FirstEnergy Common Stock, or in any combination of cash and such shares, as the employee may elect. Any such election shall be made in writing, on a form furnished to the employee by the Corporation for such purpose. In such form the employee shall specify by number or percentage (which percentage must be an even multiple of 10%) the portion of his or her GPU Stock Units to be paid in cash and the portion of such units to be paid in shares of FirstEnergy Common Stock. The election form shall be signed by the employee and delivered to the Corporation by no later than the close of business on the Accelerated Vesting Date. Any election so made shall be irrevocable. In the case of any employee who fails to make a timely election in accordance with this subsection (e), payment with respect to all of the employee's GPU Stock Units shall be made in cash. (f) If payment with respect to any of an employee's GPU Stock Units is to be made in cash pursuant to the employee's election (or as a result of the employee's failure to make a timely election) under subsection (e) above , the amount of cash to be paid for such units shall be equal to the product of the number of such units multiplied by the highest closing price per share of GPU Common Stock, as reported on the New York Stock Exchange Composite Tape, occurring during the 90-day period immediately preceding the Closing Date (the "GPU Stock Price"). If payment with respect to any of an employee's GPU Stock Units is to be made in shares of FirstEnergy Common Stock pursuant to the employee's election under subsection (e) above, the number of shares of FirstEnergy Common Stock to be delivered to the employee in payment for such units shall be equal to the quotient of (i) the product of the number of such units multiplied by the GPU Stock Price, divided by (ii) the per share closing price of FirstEnergy Common Stock on the last Business Day preceding the Closing Date; provided, however, that if the resulting number of shares of FirstEnergy Common Stock includes a fraction of a share, payment with respect to such fraction shall be made in cash, in an amount based on the per share closing price of FirstEnergy Common Stock on the last Business Day preceding the Closing Date. (g) Unless an employee otherwise elects under subsection (h) below, all deferred vested units standing to the employee's credit under the Plan immediately prior to the Effective Time which do not become payable upon consummation of the Merger shall be automatically converted at the Effective Time into deferred cash accounts to be established and maintained for the employee by FirstEnergy or one of its Subsidiaries. A separate deferred cash account shall be so established and maintained for all of the deferred vested units that are subject to the same payment commencement date and payment method selected by the employee in the election made by the employee to defer payment with respect to such units. Each deferred cash account so established shall have an initial balance equal to the product of the number of deferred vested units the conversion of which is to be reflected in such account, multiplied by the GPU Stock Price. Payment with respect to each account so established shall be made in cash, and payment shall be made or commence on the payment commencement date, and under the payment method, selected by the employee in his or her election to defer payment with respect to the units the conversion of which is reflected in such account. Until payment with respect to any deferred cash account maintained for an employee has been made in full, interest, compounded monthly, shall be credited to the balance of such account at the end of each calendar quarter, at a rate not less than the simple average of Citibank, N.A. of New York Prime Rates for the last business day of each of the three months in the calendar quarter. (h) In lieu of the deferred cash accounts that otherwise would be established for an employee with respect to his or her deferred vested units pursuant to subsection (g) above, the employee may elect to have the deferred vested units standing to his or her credit under the Plan immediately prior to the Effective Time that do not become payable upon consummation of the Merger converted, as of the Effective Time, into deferred vested units ("FirstEnergy Deferred Units") in respect of a number of shares of FirstEnergy Common Stock equal to the quotient of (i) the product of the number of such deferred vested units, multiplied by the GPU Stock Price, divided by (ii) the per share closing price of FirstEnergy Common Stock on the last Business Day immediately preceding the Closing Date. Any such election shall be made in writing, on a form furnished to the employee by FirstEnergy for such purpose and filed with FirstEnergy within 30 days after the Closing Date. The FirstEnergy Deferred Units credited to an employee pursuant to his or her election under this subsection (h) shall be subject to the same terms and conditions as the deferred vested units with respect to which the FirstEnergy Deferred Units were credited, as set forth in this Plan and in the written agreements evidencing the grant of such deferred vested units to the employee. (i) Notwithstanding any other provision in this Section 17 to the contrary, no shares of Common Stock will be delivered to an employee upon his or her exercise of a Non-Vested Option pursuant to subsection (a) above, and no payment of cash or delivery of shares of FirstEnergy Common Stock will be made to an employee with respect to his or her GPU Stock Units pursuant to subsection (e) above, unless the employee has paid all Federal, state and local taxes required to be withheld with respect to the employee's exercise of such option or with respect to the employee's receipt of such cash payment or shares of FirstEnergy Common Stock. (j) The provisions of each agreement evidencing the grant of stock options, performance units, or deferred vested units to an employee under the Plan that are still outstanding immediately prior to the Effective Time shall be deemed to have been amended as of the Effective Time to the extent necessary to conform to and reflect the provisions of this Section 17. EX-10 15 ex10-12.txt AMEND TO GPU 1990 STOCK PLAN - 11/7/01 Exhibit _________ FORM OF AMENDMENT TO GPU, INC. 1990 STOCK PLAN FOR EMPLOYEES OF GPU, INC. AND SUBSIDIARIES; DEFERRED REMUNERATION PLAN FOR OUTSIDE DIRECTORS OF GPU, INC.; RETIREMENT PLAN FOR OUTSIDE DIRECTORS OF GPU, INC. WHEREAS, GPU, Inc. sponsored and maintained the [____________] (the "Plan"); and WHEREAS, GPU, Inc. reserved the right to amend the Plan; and WHEREAS, GPU, Inc. was merged into FirstEnergy Corp. (hereinafter "FirstEnergy"), effective as of November 7, 2001 ("Effective Date") and FirstEnergy is the successor to all powers, authorities and rights of GPU, Inc. under the Plan; and WHEREAS, the FirstEnergy Corp. Board of Directors ("Board") authorized an amendment to the Plan which replaces the administrative body named in the Plan with the [__________] of FirstEnergy Corp.; and WHEREAS, the Board also authorized an amendment to the Plan which suspends and freezes all rights and accruals of benefits under the Plan; and WHEREAS, the Board authorized the amendments to be effective as of the Effective Date; NOW THEREFORE, as of the Effective Date, the Plan is amended as follows: 1. Section [____] of the Plan is amended by the deletion of the relevant portions of said Section and the substitution in lieu thereof of the following: "[__] The Plan shall be administered by the [____________] of FirstEnergy Corp. and any reference to the "Committee" refers to the entity named in this Section. The [_____________] shall have all the rights and powers afforded it consistent with the terms of the Plan." 2. The Plan is amended by the addition of the following Section [__]: "[__]. Suspension and Freezing of Plan -------------------------------- Notwithstanding any other provision of the Plan to the contrary, this Plan is frozen and no individual shall accrue any further benefit or right under the Plan including, to the extent applicable, any right to receive awards or defer all or any portion of his or her compensation for any plan year or any increase in his or her pension benefit, if any, except that interest equivalents shall continue to be credited on the balance of each account maintained for a Director hereunder (to the extent applicable). No compensation earned and no service rendered after the effective date of this provision shall be used in the calculation and determination of benefits under the Plan and no individual shall enter the Plan or become eligible to receive awards of any benefits. No compensation earned and no service rendered as a Director of FirstEnergy Corp. shall be used in the calculation and determination of benefits under the Plan." IN WITNESS WHEREOF, FirstEnergy Corp., by its duly Authorized Officer, hereby executes this amendment to the [________________________] this ____ day of ___________, 2001. FIRSTENERGY CORP. By: ___________________________ Title: ________________________ EX-10 16 ex10-13.txt GPU STOCK OPTION PLAN FOR MYR GPU, INC. STOCK OPTION AND RESTRICTED STOCK PLAN FOR MYR GROUP INC. EMPLOYEES Set forth below are the provisions of the GPU, Inc. Stock Option and Restricted Stock Plan for MYR Group Inc. Employees, as adopted effective April 21, 2000 and as amended through October 4, 2001: 1. Purpose. The purpose of the Plan is to provide for the grant of GPU Stock Options and GPU Restricted Shares to those persons whose MYR Stock Options and MYR Restricted Shares were cancelled upon consummation of the acquisition of MYR Group Inc. by GPU, Inc. pursuant to the Agreement and Plan of Merger by and among GPU, Inc., MYR Group Inc. and GPX Acquisition Corp. dated as of December 21, 1999 (the "Acquisition Agreement"), and who made timely elections under Section 15(d) of the applicable MYR Stock Plan to receive such GPU Stock Options and GPU Restricted Shares in lieu of the cashout payments otherwise payable to them under such plan in respect of their cancelled MYR Stock Options and MYR Restricted Shares. 2. Definitions. As used herein the following terms shall have the following meanings: Applicable MYR Stock Plan shall mean, with respect to any MYR Stock Option or MYR Restricted Shares, the MYR Stock Plan pursuant to which such option or shares were granted and any written agreement or certificate (including all amendments thereof) evidencing such grant. Board of Directors shall mean the Board of Directors of the Corporation. Committee shall mean the Personnel, Compensation and Nominating Committee of the Board of Directors. Corporation shall mean GPU, Inc. Effective Time shall have the meaning given to such term in the Acquisition Agreement, for purposes of Sections 3 and 4; and such term shall have the meaning given to it in the Merger Agreement, for purposes of Section 8. GPU Common Stock shall mean shares of the common stock of the Corporation. GPU Restricted Shares shall mean shares of GPU Common Stock awarded subject to restrictions under Section 4 of this Plan. GPU Stock Option shall mean an option granted under this Plan to purchase shares of GPU Common Stock. Merger Agreement shall mean the Agreement and Plan of Merger between FirstEnergy and the Corporation dated as of August 8, 2000. MYR Common Stock shall mean shares of the common stock of MYR Group Inc. MYR Restricted Shares shall mean shares of MYR Common Stock awarded subject to restrictions under any Applicable MYR Stock Plan. MYR Stock Option shall mean an option to purchase shares of MYR Common Stock granted under any Applicable MYR Plan. MYR Stock Plan shall mean the MYR Group Inc. 1989 Stock Option and Restricted Stock Plan, as amended and restated March 20, 1996 and as further amended July 28, 1998 and April 20, 2000, the MYR Group Inc. 1990 Stock Option and Restricted Stock Plan, as amended and restated March 20, 1996 and as further amended July 28, 1998 and April 20, 2000, the MYR Group Inc. 1992 Stock Option and Restricted Stock Plan, as amended and restated March 20, 1996 and as further amended July 28, 1998 and April 20, 2000, the MYR Group Inc. 1995 Stock Option and Restricted Stock Plan, as amended and restated March 20, 1996 and as further amended July 28, 1998 and April 20, 2000, or the MYR Group Inc. 1999 Stock Option and Restricted Stock Plan, as amended April 20, 2000. Plan shall mean the GPU, Inc. Stock Option and Restricted Stock Plan for MYR Group Inc. Employees, as set forth herein and as amended from time to time. 3. Grant of GPU Stock Options. With respect to each MYR Stock Option as to which the holder thereof made a timely Conversion Election under Section 15(d) of the Applicable MYR Stock Plan, there is hereby granted to such holder a GPU Stock Option subject to the following terms and conditions: (a) The number of shares that may be purchased under the GPU Stock Option so granted shall be equal to the product of the number of shares of MYR Common Stock that remained subject to the holder's MYR Stock Option immediately prior to the Effective Time, multiplied by 1.0199, with the resulting number of shares rounded up to the nearest whole share. (b) The per share price at which shares may be purchased under the GPU Stock Option so granted shall be equal to quotient of the per share price at which shares of MYR Common Stock could have been purchased upon exercise of the holder's MYR Stock Option, divided by 1.0199, with the resulting per share price rounded down to the nearest whole cent. (c) Except as otherwise provided herein, each GPU Stock Option granted hereunder shall be subject to the same terms and conditions (including, without limitation, the same date of grant, the same date or dates on which the option becomes exercisable, the same percentages of the shares subject to the option that can be purchased on each exercise date, and the same date of expiration of the term of the option) as the MYR Stock Option in respect of which such GPU Stock Option was granted, as set forth in the Applicable MYR Stock Plan, except that no payments shall be made to the holder of a GPU Stock Option in respect of dividends paid on shares of GPU Common Stock covered by such option. 4. Grant of GPU Restricted Shares. With respect to all MYR Restricted Shares which were awarded to the holder thereof on the same date and as to which the holder made a timely Conversion Election under Section 15(d) of the Applicable MYR Stock Plan, there is hereby granted to such holder a number of GPU Restricted Shares equal to the product of the number of such MYR shares, multiplied by 1.0199, with the resulting number of GPU Restricted Shares rounded up to the nearest whole share. Except as otherwise provided herein, the GPU Restricted Shares so granted shall be subject to the same terms and conditions (including, without limitation, the same restrictions on the transfer of such shares, the same period during which the shares are to remain subject to such restrictions, and the same provisions for forfeiture of the shares upon termination of employment before the expiration of such period) to which the holder's MYR Restricted Shares were subject, as set forth in the Applicable MYR Stock Plan. 5. Administration. The Plan shall be administered by the Committee. A majority of the members of the Committee shall constitute a quorum. The Committee may act at a meeting, including a telephone meeting, by action of a majority of the members present, or without a meeting by unanimous written consent. The Committee shall have the authority, in its discretion, to establish from time to time guidelines or regulations for the administration of the Plan, interpret the Plan, and make all determinations considered necessary or advisable for the administration of the Plan. The Committee also shall have all of the rights, powers and authority with respect to the GPU Stock Options and GPU Restricted Shares granted under this Plan as the "Committee", as defined in the Applicable MYR Plan, had with respect to the MYR Stock Options and MYR Restricted Shares in respect of which such GPU Stock Options or GPU Restricted Shares were granted. The Committee may delegate any ministerial or nondiscretionary function pertaining to the administration of the Plan to any one or more officers or employees of the Corporation or any subsidiary of the Corporation. All decisions, actions or interpretations of the Committee under the Plan shall be final, conclusive and binding upon all parties. 6. Amendment. The Board of Directors may, with prospective or retroactive effect, amend the Plan or any portion thereof at any time; provided, however, that no amendment of the Plan shall deprive any holder of a GPU Stock Option or any GPU Restricted Shares of any rights with respect to such option or shares without his or her written consent. 7. Successor Corporation. The obligations of the Corporation under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Corporation, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Corporation. 8. FirstEnergy Merger Provisions. Notwithstanding any other provision to the contrary in this Plan, the provisions of this Section 8 shall apply upon the merger of the Corporation with FirstEnergy Corp. ("FirstEnergy") pursuant to the Merger Agreement (the "Merger"). Unless otherwise defined in this Section 8 or elsewhere in the Plan, each capitalized term used in this Section 8 shall have the meaning given to such term in the Merger Agreement. (a) At the Effective Time, each outstanding GPU Stock Option granted under Section 3 of the Plan shall automatically become an option (a "FirstEnergy Option") to purchase a number of shares of FirstEnergy Common Stock equal to the product of the number of shares of GPU Common Stock that are then still subject to the GPU Option multiplied by the Exchange Ratio as adjusted in accordance with Section 2.01(m) of the Merger Agreement (with the resulting number of shares rounded up or down to the nearest whole share), at an exercise price per share of FirstEnergy Common Stock equal to the quotient of the exercise price for the purchase of shares under the GPU Option divided by the Exchange Ratio as adjusted in accordance with Section 2.01(m) of the Merger Agreement (with the resulting exercise price rounded up or down to the nearest whole cent). (b) Except as otherwise provided in subsection (a) above, each FirstEnergy Option issued pursuant to subsection (a) shall be subject to the same terms and conditions as the GPU Stock Option with respect to which it was issued, as provided in this Plan and in any written agreement or certificate evidencing the grant of such option hereunder. (c) At the Effective Time, each of the GPU Restricted Shares granted under Section 4 of the Plan that are then still subject to restrictions shall be automatically converted into the right to receive the Merger Consideration with respect to such shares upon the same terms and conditions (including the right to make an Election as to the form in which the Merger Consideration will be paid with respect to such shares, subject to the terms of the Merger Agreement) as are applicable under the Merger Agreement to all shares of GPU Common Stock (other than Dissenting Shares and shares canceled under Section 2.01(b) of the Merger Agreement) outstanding immediately prior to the Effective Time, subject however to the following: (i) The amount of cash included in the Merger Consideration payable with respect to any of a holder's GPU Restricted Shares shall be paid to the holder in cash in a single lump sum, without interest, on the Lapse Date applicable to such shares, or as soon as practicable thereafter. As used herein, the term "Lapse Date" shall mean, with respect to any of a holder's GPU Restricted Shares, the date on which the restrictions to which such shares were subject immediately prior to the Effective Time would have lapsed under the provisions of Section 4 hereof and the Restricted Share Agreement evidencing the grant of such shares, in the absence of the Merger. (ii) The shares of FirstEnergy Common Stock included in the Merger Consideration payable with respect to any of a holder's GPU Restricted Shares shall be registered in the name of the holder, or for his or her benefit, either individually or collectively with others, as of the date on which the Merger becomes effective, but they shall be issued subject to the same terms and conditions (including, without limitation, the same restrictions on the transfer of such shares, the same periods during which the shares are to remain subject to such restrictions, and the same provisions for forfeiture of the shares upon termination of employment before the expiration of such periods) as were applicable to the GPU Restricted Shares with respect to which such shares are issued, as set forth in Section 4 hereof and in the Restricted Share Agreements evidencing the grant of such GPU Restricted Shares. (iii) If the holder of any GPU Restricted Shares should terminate employment with the Corporation and its subsidiaries prior to the Lapse Date applicable to such shares, the holder's right to receive the Merger Consideration otherwise payable with respect to such shares shall be forfeited, except to the extent the Committee, in its discretion, otherwise determines. (iv) A proportionate part of the total amount of cash, and a proportionate part of the total number of shares of FirstEnergy Common Stock, included in the Merger Consideration payable with respect to all of a holder's GPU Restricted Shares that are still subject to restrictions immediately prior to the Effective Time shall be treated as included in the Merger Consideration payable with respect to each such GPU Restricted Share. (d) With respect to all periods beginning after the Effective Time, the terms "Corporation" and "Committee", as used in this Plan, shall mean FirstEnergy Corp. and the Compensation Committee of the Board of Directors respectively. EX-12 17 ex12-1fe.txt FIXED CHARGE RATIO - FE
EXHIBIT 12.1 FIRSTENERGY CORP. CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ---------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items and cumulative effect of accounting changes..................................... $318,166 $ 441,396 $ 568,299 $ 598,970 $ 654,946 Interest and other charges, before reduction for amounts capitalized...................................... 299,606 608,618 585,648 556,194 591,192 Provision for income taxes................................. 207,985 321,699 394,827 376,802 474,457 Interest element of rentals charged to income (a).......... 142,363 283,869 279,519 271,471 258,561 -------- ---------- ---------- ---------- ---------- Earnings as defined...................................... $968,120 $1,655,582 $1,828,293 $1,803,437 $1,979,156 ======== ========== ========== ========== ========== FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest expense........................................... $284,180 $ 542,819 $ 509,169 $ 493,473 $ 519,131 Subsidiaries' preferred stock dividend requirements........ 15,426 65,299 76,479 62,721 72,061 Adjustments to subsidiaries' preferred stock dividends to state on a pre-income tax basis....................... 2,918 43,370 44,829 32,098 43,931 Interest element of rentals charged to income (a).......... 142,363 283,869 279,519 271,471 258,561 -------- ---------- ---------- ---------- ---------- Fixed charges as defined................................. $444,887 $ 935,357 $ 909,996 $ 859,763 $ 893,684 ======== ========== ========== ========== ========== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (b)................................................ 2.18 1.77 2.01 2.10 2.21 ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $3,828,000 and $2,209,000 for each of the two years ended December 31, 1998, respectively. The guarantee and related coal supply contract debt expired December 31, 1999.
EX-13 18 ex13fe1.txt ANNUAL REPORT - FE Management Report The consolidated financial statements were prepared by the management of FirstEnergy Corp., who takes responsibility for their integrity and objectivity. The statements were prepared in conformity with accounting principles generally accepted in the United States and are consistent with other financial information appearing elsewhere in this report. Arthur Andersen LLP, independent public accountants, have expressed an unqualified opinion on the Company's consolidated financial statements. The Company's internal auditors, who are responsible to the Audit Committee of the Board of Directors, review the results and performance of operating units within the Company for adequacy, effectiveness and reliability of accounting and reporting systems, as well as managerial and operating controls. The Audit Committee consists of six nonemployee directors whose duties include: consideration of the adequacy of the internal controls of the Company and the objectivity of financial reporting; inquiry into the number, extent, adequacy and validity of regular and special audits conducted by independent public accountants and the internal auditors; recommendation to the Board of Directors of independent accountants to conduct the normal annual audit and special purpose audits as may be required; and reporting to the Board of Directors the Committee's findings and any recommendation for changes in scope, methods or procedures of the auditing functions. The Committee also reviews the results of management's programs to monitor compliance with the Company's policies on business ethics and risk management. The Audit Committee held four meetings in 2001. Richard H. Marsh Senior Vice President and Chief Financial Officer Harvey L. Wagner Vice President, Controller and Chief Accounting Officer Report of Independent Public Accountants To the Stockholders and Board of Directors of FirstEnergy Corp.: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, common stockholders' equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities by adopting Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002.
FIRSTENERGY CORP. SELECTED FINANCIAL DATA For the Years Ended December 31, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Revenues....................................... $ 7,999,362 $ 7,028,961 $ 6,319,647 $ 5,874,906 $ 2,961,125 ----------------------------------------------------------------------- Income Before Extraordinary Item and Cumulative Effect of Accounting Change...... $ 654,946 $ 598,970 $ 568,299 $ 441,396 $ 305,774 ----------------------------------------------------------------------- Net Income..................................... $ 646,447 $ 598,970 $ 568,299 $ 410,874 $ 305,774 ----------------------------------------------------------------------- Basic Earnings per Share of Common Stock: Before Extraordinary Item and Cumulative Effect of Accounting Change $2.85 $2.69 $2.50 $1.95 $1.94 After Extraordinary Item and Cumulative Effect of Accounting Change............... $2.82 $2.69 $2.50 $1.82 $1.94 ----------------------------------------------------------------------- Diluted Earnings per Share of Common Stock: Before Extraordinary Item and Cumulative Effect of Accounting Change............... $2.84 $2.69 $2.50 $1.95 $1.94 After Extraordinary Item and Cumulative Effect of Accounting Change............... $2.81 $2.69 $2.50 $1.82 $1.94 ----------------------------------------------------------------------- Dividends Declared per Share of Common Stock... $1.50 $1.50 $1.50 $1.50 $1.50 ----------------------------------------------------------------------- Total Assets................................... $37,351,513 $17,941,294 $18,224,047 $18,192,177 $18,261,481 ----------------------------------------------------------------------- Capitalization at December 31: Common Stockholders' Equity................. $ 7,398,599 $ 4,653,126 $ 4,563,890 $ 4,449,158 $ 4,159,598 Preferred Stock: Not Subject to Mandatory Redemption....... 480,194 648,395 648,395 660,195 660,195 Subject to Mandatory Redemption........... 594,856 161,105 256,246 294,710 334,864 Long-Term Debt*............................. 12,865,352 5,742,048 6,001,264 6,352,359 6,969,835 ----------------------------------------------------------------------- Total Capitalization*..................... $21,339,001 $11,204,674 $11,469,795 $11,756,422 $12,124,492 ======================================================================= * 2001 includes approximately $1.4 billion of long-term debt (excluding long-term debt due to be repaid within one year) included in "Liabilities Related to Assets Pending Sale" on the Consolidated Balance Sheet as of December 31, 2001.
PRICE RANGE OF COMMON STOCK The Common Stock of FirstEnergy Corp. is listed on the New York Stock Exchange and is traded on other registered exchanges. 2001 2000 - ---------------------------------------------------------------------------- First Quarter High-Low....... $31.75 $25.10 $23.56 $18.00 Second Quarter High-Low...... 32.20 26.80 26.88 20.56 Third Quarter High-Low....... 36.28 29.60 27.88 22.94 Fourth Quarter High-Low...... 36.98 32.85 32.13 24.11 Yearly High-Low.............. 36.98 25.10 32.13 18.00 - ---------------------------------------------------------------------------- Prices are based on reports published in The Wall Street Journal for New York ----------------------- Stock Exchange Composite Transactions. HOLDERS OF COMMON STOCK There were 173,121 and 172,285 holders of 297,636,276 shares of FirstEnergy's Common Stock as of December 31, 2001 and January 31, 2002, respectively. Information regarding retained earnings available for payment of cash dividends is given in Note 4A. FIRSTENERGY CORP. Management's Discussion and Analysis of Results of Operations and Financial Condition This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), the availability and cost of capital, our ability to accomplish or realize anticipated benefits from strategic initiatives and other similar factors. FirstEnergy Corp. is a holding company that provides regulated and competitive energy services (see Results of Operations - Business Segments) domestically and internationally. The international operations were acquired as part of FirstEnergy's acquisition of GPU, Inc. in November 2001. GPU Capital, Inc. and its subsidiaries provide electric distribution services in foreign countries. GPU Power, Inc. and its subsidiaries develop, own and operate generation facilities in foreign countries. Sales are pending for portions of the international operations (see Capital Resources and Liquidity). Prior to the GPU merger, regulated electric distribution services were provided to portions of Ohio and Pennsylvania by our wholly owned subsidiaries - Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), Pennsylvania Power Company (Penn) and The Toledo Edison Company (TE) with American Transmission Systems, Inc. (ATSI) providing transmission services. Following the GPU merger, regulated services are also provided through wholly owned subsidiaries - Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec) - which provide electric distribution and transmission services to portions of Pennsylvania and New Jersey. The coordinated delivery of energy and energy-related products to customers in unregulated markets is provided through a number of subsidiaries, often under master contracts providing for the delivery of multiple energy and energy-related services. Prior to the GPU merger, competitive services were principally provided by FirstEnergy Solutions Corp. (FES), FirstEnergy Facilities Services Group, LLC (FEFSG) and MARBEL Energy Corporation. Following the GPU merger, competitive services are also provided through GPU Advanced Resources, Inc. and MYR Group, Inc. GPU Merger On November 7, 2001, the merger of FirstEnergy and GPU became effective with FirstEnergy being the surviving company. The merger was accounted for using purchase accounting under the guidelines of Statement of Financial Accounting Standards No. (SFAS) 141, "Business Combinations." Under purchase accounting, the results of operations for the combined entity are reported from the point of consummation forward. As a result, FirstEnergy's financial statements for 2001 reflect twelve months of operations for FirstEnergy's pre-merger organization and only seven weeks of operations (November 7, 2001 to December 31, 2001) for the former GPU companies. Additional goodwill resulting from the merger ($2.3 billion) plus goodwill existing at GPU ($1.9 billion) at the time of the merger is not being amortized, reflecting the application of SFAS 142, "Goodwill and Other Intangible Assets." Goodwill continues to be subject to review for potential impairment (see Recently Issued Accounting Standards). Prior to consummation of the GPU merger we identified certain GPU international operations (see Note 2 - Divestitures-International Operations) providing gas transmission and electric distribution services for divestiture within twelve months of the merger date. These operations constitute individual "lines of business" as defined in Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with physically and operationally separable activities. Application of Emerging Issues Task Force (EITF) Issue No. 87-11, "Allocation of Purchase Price to Assets to Be Sold," requires that expected, pre-sale cash flows (including incremental interest costs on related acquisition debt) of these operations be considered part of the purchase price allocation. Accordingly, subsequent to the merger date, results of operations (and related interest expense) of these international subsidiaries have not been included in FirstEnergy's Consolidated Statement of Income. Additionally, assets and liabilities of these international operations have been segregated under separate captions - "Assets Pending Sale" and "Liabilities Related to Assets Pending Sale" on FirstEnergy's Consolidated Balance Sheet. Results of Operations Net income increased to $646.4 million in 2001, compared to $599.0 million in 2000 and $568.3 million in 1999. Net income in 2001 included an after-tax charge of $8.5 million resulting from the cumulative effect of an accounting change due to the adoption of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." Excluding the seven weeks of the former GPU companies' results (and related interest expense on acquisition debt), net income increased to $613.7 million in 2001 due to reduced depreciation and amortization, general taxes and net interest charges. The benefit of these reductions was offset in part by lower retail electric sales, increased other operating expenses and higher gas costs. In 2000, lower fuel costs, increased generation output, reduced financing costs and gains realized on the sale of emission allowances contributed to the increase in net income from the prior year. Total revenues increased $970.4 million in 2001 compared to 2000. Excluding the seven weeks of results from the former GPU companies, total revenues increased $336.7 million following a $709.3 million increase in 2000. In both 2001 and 2000, the additional sales resulted from an expansion of our unregulated businesses, which more than offset lower sales from our electric utility operating companies (EUOC). Sources of changes in pre-merger and post-merger companies' revenues during 2001 and 2000, compared to the prior year, are summarized in the following table: Sources of Revenue Changes 2001 2000 ---------------------------------------------------------------------- Increase (Decrease) (In millions) Pre-Merger Companies: Electric Utilities (Regulated Services): Retail electric sales................... $(240.5) $(36.8) Other revenues.......................... (22.6) 4.7 ---------------------------------------------------------------------- Total Electric Utilities.................. (263.1) (32.1) ---------------------------------------------------------------------- Unregulated Businesses (Competitive Services): Retail electric sales................... (19.9) 170.7 Wholesale electric sales................ 287.1 105.7 Gas sales............................... 226.1 376.3 Other revenues.......................... 106.5 88.7 ---------------------------------------------------------------------- Total Unregulated Businesses.............. 599.8 741.4 ---------------------------------------------------------------------- Total Pre-Merger Companies................ 336.7 709.3 ---------------------------------------------------------------------- Former GPU Companies: Electric utilities...................... 570.4 -- Unregulated businesses.................. 101.9 -- ---------------------------------------------------------------------- Total Former GPU Companies................ 672.3 -- Intercompany Revenues..................... (38.6) -- ---------------------------------------------------------------------- Net Revenue Increase...................... $970.4 $709.3 ====================================================================== Electric Sales EUOC retail electric sales revenues for our pre-merger companies decreased by $240.5 million in 2001, compared to 2000, primarily due to lower generation kilowatt-hour sales reflecting the result of customer choice in Ohio and the influence of a declining national economy on our regional business activity, which reduced our distribution deliveries. Both unit prices and sales volumes declined from the prior year. As a result of opening Ohio to competing generation suppliers in 2001, sales of electric generation by alternative suppliers in our franchise area increased to 11.3% of total energy delivered, compared to 0.8% in 2000. Consequently, generation kilowatt-hour sales to retail customers were 12.2% lower in 2001 than the prior year. Implementation of a 5% reduction in generation charges for residential customers as part of Ohio's electric utility restructuring implemented in 2001, also contributed $51.2 million to the reduced electric sales revenues. Weather in 2001 had a minor influence on sales with mild weather in the fourth quarter substantially offsetting a net increase in weather-related sales revenue through the third quarter. Kilowatt-hour deliveries to franchise customers were down a more moderate 1.7% due in part to the decline in economic conditions, which was a major factor resulting in a 3.1% decrease in kilowatt-hour deliveries to commercial and industrial customers. Other regulated electric revenues decreased by $22.6 million in 2001, compared to the prior year, due in part to reduced customer reservation of transmission capacity. Total electric generation sales increased by 8.3% in 2001 compared to the prior year with sales to the wholesale market being the largest single factor contributing to this increase. While revenues from the wholesale market increased $287.1 million in 2001 from the prior year, kilowatt-hour sales to that market more than doubled as nonaffiliated energy suppliers made use of the 1,120 megawatts (MW) supply commitment under our Ohio transition plan, and reduced sales to the regulated retail market made additional energy available to pursue opportunities in the wholesale market. Retail kilowatt-hour sales by our competitive services segment increased by 10.6% in 2001, compared to 2000. The increase resulted from expanding kilowatt-hour sales within Ohio as a result of retail customers switching to FES, our unregulated 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. Declining sales to higher-priced eastern markets contributed to an overall decline in retail competitive sales revenue in 2001 from the prior year, despite an increase in kilowatt hour sales in Ohio's competitive market. EUOC retail revenues decreased by $36.8 million in 2000 compared to 1999, as a result of lower unit prices, which were partially offset by increased generation sales volume. Despite a milder summer, retail electric generation sales were 2% higher in 2000 than the previous year. Total electric generation sales (including unregulated sales) increased 8.4% in 2000, compared to 1999. Unregulated retail sales more than tripled in 2000 reflecting our marketing efforts to expand retail electric sales to targeted unregulated markets in the eastern seaboard states, principally the commercial and industrial sectors. The cooler summer weather reduced retail customer demand, making more of our energy available to the wholesale market. As a result, we were able to achieve moderate growth in kilowatt-hour sales to that market in 2000. EUOC kilowatt-hour deliveries (to customers in our franchise areas) increased in 2000 from the prior year due to additional sales to commercial and industrial customers. Kilowatt-hour sales to residential customers declined. Other electric utility revenues increased in 2000 from the previous year primarily due to additional transmission service revenue. Changes in electric generation sales and distribution deliveries in 2001 and 2000 for our pre-merger companies are summarized in the following table: Changes in Kilowatt-hour Sales 2001 2000 ------------------------------------------------------------------ Increase (Decrease) Electric Generation Sales: Retail -- Regulated services............... (12.2)% 2.0% Competitive services............. 10.6% 229.6% Wholesale.......................... 165.5% 7.4% ------------------------------------------------------------------ Total Electric Generation Sales...... 8.3% 8.4% ================================================================== EUOC Distribution Deliveries: Residential........................ 1.7% (1.2)% Commercial and industrial.......... (3.1)% 2.9% ------------------------------------------------------------------ Total Distribution Deliveries........ (1.7)% 1.7% ================================================================== Other Sales Natural gas revenues were the largest source of increases in other sales in 2001. Beginning November 1, 2000, residential and small business customers in the service area of Dominion East Ohio, a nonaffiliated gas utility, began shopping among alternative gas suppliers as part of a customer choice program. FES took advantage of this opportunity to expand its customer base. The average number of retail gas customers served by FES increased to approximately 161,000 in 2001 from approximately 44,000 in 2000. Total gas sales increased by $226.1 million or 40% from the prior year. In 2000, retail natural gas revenues were the largest source of increase in other sales. Collectively, three gas acquisitions in 1999 (Atlas Gas Marketing Inc., Belden Energy Services Company and Volunteer Energy LLC), as well as increased retail marketing efforts, significantly expanded retail gas revenues. Wholesale gas revenues were also higher. Expenses Total expenses increased $790.2 million in 2001, which included $542.4 million of incremental expenses for the former GPU companies during the last seven weeks of 2001. For our pre-merger companies, total expenses increased $280.4 million in 2001 and $739.8 million in 2000, compared to the prior year. Sources of changes in pre-merger and post-merger companies' expenses in 2001 and 2000, compared to the prior year, are summarized in the following table: Sources of Expense Changes 2001 2000 ------------------------------------------------------------------- Increase (Decrease) (In millions) Pre-Merger Companies: Fuel and purchased power................ $ 48.7 $125.9 Purchased gas........................... 266.5 382.9 Other operating expenses................ 178.2 231.7 Depreciation and amortization........... (99.0) (4.3) General taxes........................... (114.0) 3.6 ------------------------------------------------------------------- Total Pre-Merger Companies................ 280.4 739.8 ------------------------------------------------------------------- Former GPU Companies...................... 542.4 -- Intercompany Expenses..................... (32.6) -- ------------------------------------------------------------------- Net Expense Increase...................... $790.2 $739.8 =================================================================== The following comparisons reflect variances for the pre-merger companies only, excluding the incremental expenses for the former GPU companies during the last seven weeks of 2001. The increase in fuel expense in 2001 compared to 2000 ($24.3 million) resulted from the substitution of coal and natural gas fired generation for nuclear generation (which has lower unit fuel costs than fossil fuel) during a period of reduced nuclear availability resulting from both planned and unplanned outages. Coal prices were also higher during that period. Purchased power costs increased early in 2001, compared to 2000, due to higher winter prices and additional purchased power requirements during that period, with the balance of the year offsetting all but $24.4 million of that increase, reflecting generally lower prices and reduced external power needs than last year's. In 2000, fuel and purchased power increased $125.9 million due to a $201.6 million increase in fuel and purchased power expense of FirstEnergy Trading Services Inc. (FETS), a wholly owned subsidiary, reflecting expansion of its operations to support our retail marketing efforts (FETS operations were assumed by FES in 2001). Excluding those competitive activities, fuel and purchased power costs decreased $75.7 million in 2000, compared to 1999. Lower fuel expense accounted for all of the reduction, declining $103.6 million from 1999, despite a 7% increase in the output from our generating units due to additional nuclear generation, the expiration of an above-market coal contract and continued improvement in coal blending strategies. Purchased power costs increased $27.9 million in 2000 from the prior year due to higher average prices and to additional kilowatt-hours purchased. Purchased gas costs increased 48% in 2001 and 224% in 2000 from the prior year. The increases were due principally to the expansion of FES's retail gas business. Other operating expenses increased by $178.2 million in 2001 and by $231.7 million in 2000 compared to the prior year. The significant reduction in 2001 of gains from the sale of emission allowances, higher fossil operating costs and additional employee benefit costs accounted for $144.5 million of the increase in 2001. Additionally, higher operating costs from the competitive services business segment due to expanded operations contributed $56.9 million to the increase. Partially offsetting these higher other operating expenses was a reduction in low-income payment plan customer costs and a $30.2 million decrease in nuclear operating costs in 2001, compared to the prior year, resulting from one less refueling outage. Fossil operating costs increased $44.3 million in 2001 from last year due principally to planned maintenance work at the Mansfield generating plant. Pension costs increased by $32.6 million in 2001 from the prior year primarily due to lower returns on pension plan assets (due to significant market-related reductions in the value of pension plan assets), the completion of the 15-year amortization of OE's pension transition asset and changes to plan benefits. Health care benefit costs also increased by $21.4 million in 2001, compared to 2000, principally due to an increase in the health care cost trend rate assumption for computing post-retirement health care benefit liabilities. In 2000, other operating expenses increased from 1999 due to several factors. A significant portion of the increase resulted from additional nuclear costs associated with three refueling outages in 2000 versus two during the previous year and increased nuclear ownership resulting from the Duquesne asset exchange. Costs incurred to improve the availability of our fossil generation fleet and leased portable diesel generators, acquired as part of our summer supply strategy, added to other expenses for the EUOC in 2000, compared to 1999. We also incurred increased reserves for potentially uncollectible accounts from customers in the steel sector as well as a reserve for expected construction contract losses at FEFSG. The increase in other operating costs in 2000 from 1999 also reflected an increase in expenses related to expanded operations of the competitive services business segment. Partially offsetting the higher costs were increased gains of $38.5 million realized from the sale of emission allowances in 2000 as well as the absence of nonrecurring costs recognized in the prior year. Charges for depreciation and amortization decreased by $99.0 million in 2001 and $4.3 million in 2000 from the prior year. Approximately $64.6 million of the decrease in 2001 resulted from lower incremental transition cost amortization under FirstEnergy's Ohio transition plan compared to accelerated cost recovery in connection with OE's prior rate plan. The reduction in depreciation and amortization also reflected additional cost deferrals of $51.2 million for recoverable shopping incentives under the Ohio transition plan, partially offset by increases associated with depreciation on recently completed combustion turbines. In November 2001, we announced an agreement to sell four of our coal-fired power plants to NRG Energy, Inc. The plants meet the criteria under SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and have been classified as assets to be disposed of since November 2001. Accordingly, depreciation of those plants ceased pending their sale. Due to the cessation of depreciation on those plants, depreciation was reduced by $6.6 million in 2001 from what it otherwise would have been. Under SFAS 121 guidance, the long-lived assets to be disposed of must be included on the balance sheet at the lower of their carrying amount or fair value less cost to sell (see Outlook - Optimizing the Use of Assets) and at year end continued to be reported at their carrying amount of $539 million. In 2000, depreciation and amortization was reduced by $9.8 million in the second half of the year, following approval by the Public Utilities Commission of Ohio (PUCO) of FirstEnergy's Ohio transition plan. Incremental transition costs recovered in 2001 and cost recovery accelerated under OE's rate plan and Penn's restructuring plan in 2000 and 1999 are summarized by income statement caption in the following table: Accelerated Cost Recovery 2001 2000 1999 ------------------------------------------------------------------------ (In millions) Depreciation and amortization.. $268.0 $332.6 $333.3 Income tax amortization........ 41.1 42.6 18.7 ------------------------------------------------------------------------ Total Accelerations............ $309.1 $375.2 $352.0 ======================================================================== General taxes declined $114.0 million from last year 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 2001. The reduction in general taxes was partially offset by $66.6 million of new Ohio franchise taxes, which are classified as state income taxes on the Consolidated Statements of Income. Net Interest Charges Net interest charges increased $26.6 million in 2001, compared to 2000. This increase reflects interest on $4 billion of long-term debt issued by FirstEnergy in connection with the merger and related bridge financing, which totaled $40.4 million. Excluding the results associated with the last seven weeks of 2001 for the former GPU companies and merger-related financing, net interest charges decreased $39.8 million in 2001, compared to a $43.2 million decrease in 2000 from the prior year. We continued to redeem and refinance our outstanding debt and preferred stock, maintaining a downward trend in financing costs during 2001, before the effects of the GPU merger. After the merger with GPU became probable, we established cash flow hedges under SFAS 133 covering a portion of our future interest payments in connection with the anticipated issuance of $4 billion of acquisition-related debt. The hedges provided us with protection against a possible upward move in interest rates but limited our ability to completely participate in the benefits of a downward move. Due to a decline in interest rates during the period in which cash flow hedges were in place, FirstEnergy incurred a net deferred loss in connection with this transaction and a related reduction in other comprehensive income totaling $134 million (after tax). The cash flow hedges were the primary contributor to the current net deferred loss of $169.4 million included in Accumulated Other Comprehensive Loss (AOCL) as of December 31, 2001 for derivative hedging activity. In accordance with the requirements of SFAS 133, this amount is being amortized from AOCL to interest expense over the corresponding interest payment periods hedged - 5, 10 and 30 years. Results of Operations - Business Segments We manage our business as two separate major business segments - regulated services and competitive services. The regulated services segment designs, constructs, operates and maintains our regulated domestic transmission and distribution systems. It also provides generation services to franchise customers who have not chosen an alternative generation supplier. OE, CEI and TE (Ohio Companies) and Penn obtain generation through a power supply agreement with the competitive services segment (see Outlook - Business Organization). 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, often under master contracts. Financial results discussed below include intersegment revenue. A reconciliation of segment financial results to consolidated financial results is provided in Note 7 to the consolidated financial statements. Regulated Services Net income increased to $640.2 million in 2001, compared to $464.4 million in 2000 and $413.9 million in 1999. Excluding the last seven weeks of 2001 results associated with the former GPU companies, net income increased by $98.7 million in 2001. The increases in pre-merger net income are summarized in the following table: Regulated Services 2001 2000 ---------------------------------------------------------------------- Increase (Decrease) (In millions) Revenues.................................... $(130.2) $ 57.5 Expenses.................................... (345.2) 54.1 --------------------------------------------------------------------- Income Before Interest and Income Taxes..... 215.0 3.4 --------------------------------------------------------------------- Net interest charges........................ (16.8) (55.9) Income taxes................................ 133.1 8.8 --------------------------------------------------------------------- Net Income Increase......................... $ 98.7 $ 50.5 ===================================================================== Distribution throughput was 1.7% lower in 2001, compared to 2000, reducing external revenues by $245.7 million. Partially offsetting the decrease in external revenues were revenues from FES for the rental of fossil generating facilities and the sale of generation from nuclear plants, resulting in a net $130.2 million reduction to total revenues. Expenses were $345.2 million lower in 2001 than 2000 due to lower purchased power, depreciation and amortization and general taxes, offset in part by higher other operating expenses. Lower generation sales reduced the need to purchase power from FES, with a resulting $269.0 million decline in those costs in 2001 from the prior year. Other operating expenses increased by $178.5 million in 2001 from the previous year reflecting a significant reduction in 2001 of gains from the sale of emission allowances, higher fossil operating costs and additional employee benefit costs. Lower incremental transition cost amortization and the new shopping incentive deferrals under FirstEnergy's Ohio transition in 2001 plan as compared with the accelerated cost recovery in connection with OE's prior rate plan in 2000 resulted in a $131.0 million reduction in depreciation and amortization in 2001. A $123.6 million decrease in general taxes in 2001 from the prior year primarily resulted from reduced property taxes and other state tax changes in connection with the Ohio electric industry restructuring. Lower unit prices in 2000 compared to 1999 produced a $33.2 million decrease in revenues from nonaffiliates despite a 1.7% increase in kilowatt-hour deliveries. Rental of fossil generating facilities and the sale of generation from nuclear plants more than offset the reduced external revenue resulting in a net $57.5 million increase in total revenues. Expenses increased $54.1 million in 2000 from 1999 primarily due to higher purchased power costs resulting from higher average prices and additional megawatt-hours purchased, as well as higher other operating costs. Interest charges in 2000 decreased $55.9 million compared to 1999, reflecting the impact of net debt redemptions and refinancings and was the primary contributor to the increase in net income. Competitive Services Net income decreased to $57.2 million in 2001, compared to $137.2 million in 2000 and $129.2 million in 1999. Excluding the last seven weeks of 2001 results associated with the former GPU companies, net income decreased $83.0 million in 2001. The changes to pre-merger net income are summarized in the following table: Competitive Services 2001 2000 ---------------------------------------------------------------------- Increase (Decrease) (In millions) Revenue..................................... $254.1 $789.6 Expenses.................................... 366.9 773.5 ---------------------------------------------------------------------- Income Before Interest and Income Taxes..... (112.8) 16.1 ---------------------------------------------------------------------- Net interest charges........................ 13.5 2.6 Income taxes................................ (51.8) 5.5 Cumulative effect of a change in accounting. (8.5) -- --------------------------------------------------------------------- Net Income Increase (Decrease).............. $(83.0) $ 8.0 ====================================================================== Sales to nonaffiliates increased $523.1 million in 2001, compared to the prior year, with electric revenues contributing $260.1 million, natural gas revenues $226.1 million and the balance of the increase from energy-related services. Reduced power requirements by the regulated services segment reduced internal revenues by $269.0 million. Expenses increased $366.9 million in 2001 from 2000 primarily due to a $266.5 million increase in purchased gas costs and increases resulting from additional fuel and purchased power costs (see Results of Operations) as well as higher expenses for energy-related services. Reduced margins for both major competitive product areas - electricity and natural gas - contributed to the reduction in net income, along with higher interest charges and the cumulative effect of the SFAS 133 accounting change. Margins for electricity and gas sales were both adversely affected by higher fuel costs. In 2000, sales to nonaffiliates increased $749.3 million, compared to the prior year, with electric revenues contributing $283.5 million, natural gas revenues $376.3 million and the balance of the increase from energy-related services. Additional power sales to the regulated services segment increased revenues by $40.3 million. Expenses increased $773.6 million in 2000 from 1999 primarily due to the additional purchased gas and purchased power costs resulting from the increased sales. The exchange of fossil assets for nuclear assets with Duquesne Light Company in December 1999 changed the mix of expenses, increasing plant operating costs and decreasing fuel expense. The resulting net income increase primarily reflected the contribution of competitive electric sales offset in part by higher interest charges. Capital Resources and Liquidity We had approximately $220.2 million of cash and temporary investments and $614.3 million of short-term indebtedness on December 31, 2001. Our unused borrowing capability included $1.115 billion under revolving lines of credit and $84 million from unused bank facilities. At the end of 2001, OE, CEI, TE and Penn had the capability to issue $2.2 billion of additional first mortgage bonds (FMB) on the basis of property additions and retired bonds. The former GPU EUOC will not issue FMB other than as collateral for senior notes, since their senior note indentures prohibit (subject to certain exceptions) the GPU EUOC from issuance of any debt which is senior to the senior notes. As of December 31, 2001, the GPU EUOC had the capability to issue $795 million of additional senior notes based upon FMB collateral. At year end 2001, based upon applicable earnings coverage tests and their respective charters, OE, Penn, TE and JCP&L could issue $7.0 billion of preferred stock (assuming no additional debt was issued). CEI, Met-Ed and Penelec have no restrictions on the issuance of preferred stock. At the end of 2001, our common equity as a percentage of capitalization, including debt relating to assets held for sale, stood at 35% compared to 42% at the end of 2000. This decrease resulted from the addition of $8.2 billion of debt, $378 million of preferred stock and $2.6 billion of common stock (issued to former GPU stockholders) to our capital structure as a result of the GPU acquisition. The incremental debt included $6.0 billion of the former GPU companies' debt, $1.5 billion of which was replaced with FirstEnergy debt and an additional $2.2 billion of FirstEnergy debt used to pay GPU shareholders as part of the merger. Following approval of our merger with GPU by the New Jersey Board of Public Utilities (NJBPU) on September 26, 2001 and by the Securities and Exchange Commission on October 29, 2001, Standard & Poor's (S&P) and Moody's Investors Service established initial credit ratings for FirstEnergy's holding company and adjusted those of our EUOC to reflect our new consolidated credit profile. S&P's outlook on all our credit ratings is stable. On February 22, 2002, Moody's announced a change in its outlook for the credit ratings of FirstEnergy, Met-Ed and Penelec from stable to negative. The change was based upon a decision by the Commonwealth Court of Pennsylvania to remand to the Pennsylvania Public Utility Commission (PPUC) for reconsideration its decision regarding rate relief, accounting deferrals and the mechanism for sharing merger savings rendered in connection with its approval of the GPU merger (see State Regulatory Matters-Pennsylvania). Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table:
Contractual Obligations 2002 2003 2004 2005 2006 Thereafter Total - ------------------------------------------------------------------------------------------------------------- (In millions) Long-term debt*................ $1,205 $ 711 $1,179 $ 854 $1,433 $ 7,596 $12,978 Short-term borrowings*......... 614 -- -- -- -- -- 614 Mandatory preferred stock...... 30 13 13 4 4 572 636 Capital leases ................ 6 6 6 5 6 10 39 Operating leases .............. 153 156 184 186 183 2,036 2,898 Unconditional fuel and power purchases................... 2,493 1,584 1,369 1,219 1,250 6,056 13,971 - -------------------------------------------------------------------------------------------------------------- Total* $4,501 $2,470 $2,751 $2,268 $2,876 $16,270 $31,136 ============================================================================================================== * Excludes approximately $1.75 billion of long-term debt and $233.8 million of short-term borrowings related to pending divestitures discussed below.
Our capital spending for the period 2002-2006 is expected to be about $3.4 billion (excluding nuclear fuel), of which approximately $850 million applies to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $536 million, of which about $54 million applies to 2002. During the same period, our nuclear fuel investments are expected to be reduced by approximately $507 million and $101 million, respectively, as the nuclear fuel is consumed. Off balance sheet obligations primarily consist of sale and leaseback arrangements involving Perry Unit 1, Beaver Valley Unit 2 and the Bruce Mansfield Plant, which are reflected in the operating lease payments disclosed above (see Note 3). The present value as of December 31, 2001, of these sale and leaseback operating lease commitments, net of trust investments, total $1.5 billion. CEI and TE sell substantially all of their retail customer receivables, which provided $200 million of off balance sheet financing as of December 31, 2001 (see Note 1 - Revenues). FirstEnergy's sale of the former GPU subsidiary, GasNet, in December 2001, eliminated $290 million of debt and also provided $125 million of net cash proceeds, which were used to reduce short-term borrowings. Expected proceeds from the pending sales of four fossil plants and Avon Energy Partners Holdings, a wholly owned subsidiary, are shown in the following table: Completed and Pending Divestitures Cash Debt Proceeds Removed Transaction Date** - -------------------------------------------------------------------------------- Completed Sale -------------- GasNet $125 million $290 million December 2001 Pending Sales: -------------- Avon Energy $238 million* $1.7 billion Second Quarter 2002 Lake Plants $1.355 billion $145 million Mid-2002 ------------------------------------------------------------------------------- * Based on receipt of $150 million at closing and the present value of $19 million per year to be received over six years beginning in 2003. ** Estimated closing dates for pending sales. FirstEnergy continues to pursue divestiture of the remainder of its international operations (see Outlook - Optimizing the Use of Assets). Market Risk Information We use various market risk sensitive instruments, including derivative contracts, primarily to manage the risk of price, interest rate and foreign currency fluctuations. Our Risk Policy Committee, comprised of executive officers, exercises an independent risk oversight function to ensure compliance with corporate risk management policies and prudent risk management practices. Commodity Price Risk We are exposed to market risk primarily due to fluctuations in electricity, natural gas and coal prices. To manage the volatility relating to these exposures, we use a variety of non-derivative and derivative instruments, including forward contracts, options, futures contracts and swaps. The derivatives are used principally for hedging purposes and, to a much lesser extent, for trading purposes. The change in the fair value of commodity derivative contracts related to energy production during 2001 is summarized in the following table: Increase (Decrease)in the Fair Value of Commodity Derivative Contracts ------------------------------------------------------------------------ (In millions) Outstanding as of January 1, 2001 with SFAS 133 cumulative adjustment......................... $ 60.5 Acquisition of GPU....................................... 14.9 Contract value when entered.............................. 0.6 Increase/(decrease) in value of existing contracts....... (97.1) Change in techniques/assumptions......................... -- Settled contracts........................................ (45.3) ---------------------------------------------------------------------- Outstanding as of December 31, 2001...................... $(66.4)* ====================================================================== * Does not include $11.6 million of derivative contract fair value increase, as of December 31, 2001, representing our 50% share of Great Lakes Energy Partners, LLC While the valuation of derivative contracts is always based on active market prices when they are available, longer-term contracts can require the use of model-based estimates of prices in later years due to the absence of published market prices. We currently use modeled prices for the later years of some electric contracts. Our model incorporates explicit assumptions regarding future supply and demand and fuel prices. The model provides estimates of the future prices for electricity and an estimate of price volatility. We make use of these results in developing estimates of fair value for the later years of those electric contracts for financial reporting purposes as well as for internal management decision making. Sources of information for the valuation of derivative contracts by year are summarized in the following table: Source of Information - Fair Value by Contract Year 2002 2003 2004 Thereafter Total - ----------------------------------------------------------------------------- (In millions) Prices actively quoted... $(54.1) $(19.9) $ (3.2) $ -- $(77.2) Prices based on models... -- -- (8.1) 18.9 10.8 -------------------------------------------------- Total................. $(54.1) $(19.9) $(11.3) $18.9 $(66.4) ============================================================================= We perform sensitivity analyses to estimate our exposure to the market risk of our commodity position. A hypothetical 10% adverse shift in quoted market prices in the near term on both our trading and nontrading derivative instruments would not have had a material effect on our consolidated financial position or cash flows as of December 31, 2001. We estimate that if energy commodity prices move on average 10 percent higher or lower, pretax income for the next twelve months would increase or decrease, respectively, by approximately $2.4 million. Interest Rate Risk Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table on the following page. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. As discussed in Note 3 to the consolidated financial statements, our investments in capital trusts effectively reduce future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 to the consolidated financial statements.
Comparison of Carrying Value to Fair Value - ------------------------------------------------------------------------------------------------------------------ There- Fair 2002 2003 2004 2005 2006 after Total Value - ------------------------------------------------------------------------------------------------------------------ (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income................. $ 101 $ 97 $314 $ 58 $ 75 $1,901 $ 2,546 $ 2,568 Average interest rate..... 6.7% 7.7% 7.8% 7.9% 7.9% 6.6% 6.9% - ------------------------------------------------------------------------------------------------------------------- ___________________________________________________________________________________________________________________ Liabilities - ------------------------------------------------------------------------------------------------------------------- Long-term Debt:* Fixed rate................... $1,089 $ 706 $923 $ 851 $1,411 $6,519 $11,499 $11,698 Average interest rate .... 8.2% 7.6% 7.2% 8.1% 5.8% 7.1% 7.2% Variable rate.............. ..$ 35 $ 5 $256 $ 3 $ 22 $1,077 $ 1,398 $ 1,399 Average interest rate..... 5.2% 11.5% 3.1% 10.2% 5.2% 3.0% 3.1% Short-term Borrowings*...... . $ 614 $ 614 $ 614 Average interest rate..... 2.8% 2.8% - ------------------------------------------------------------------------------------------------------------------- Preferred Stock............. .$ 30 $ 13 $ 13 $ 4 $ 4 $ 572 $ 636 $ 626 Average dividend rate .... 8.7% 8.3% 8.3% 7.5% 7.5% 8.3% 8.3% - ------------------------------------------------------------------------------------------------------------------- * Excludes approximately $1.75 billion of long-term debt and $233.8 million of short-term borrowings related to pending divestitures.
Interest Rate Swap Agreements Penelec, GPU Power through a subsidiary and GPU Electric, Inc. (through GPU Power UK) use interest rate swap agreements, denominated in dollars and sterling, to manage the risk of increases in variable interest rates. All of the agreements convert variable rate debt to fixed rate debt. As of December 31, 2001, interest rate swaps denominated in dollars had a weighted average fixed interest rate of 6.99%; those in sterling had a weighted average fixed interest rate of 6.00%. The following summarizes the principal characteristics of the swap agreements in effect as of December 31, 2001: Interest Rate Swaps as of December 31, 2001 ------------------------------------------------------------------ Notional Maturity Fair Denomination Amount Date Value ------------ ------ ---- ----- (Dollars/Sterling in millions) Dollars 50 2002 (1.8) Dollars 26 2005 (1.1) Sterling 125 2003 (2.3) ------------------------------------------------------------------ Foreign Currency Swap Agreements GPU Electric uses currency swap agreements to manage currency risk caused by fluctuations in the US dollar exchange rate related to bonds issued in the US by Avon Energy, which owns GPU Power UK. These swap agreements convert principal and interest payments on this US dollar debt to fixed sterling principal and interest payments, and expire on the maturity dates of the bonds. Interest expense is recorded based on the fixed sterling interest rate. Characteristics of currency swap agreements outstanding as of December 31, 2001 are summarized in the following table: Currency Swaps - Dollars/Sterling ----------------------------------------------------------------------- Weighted Notional Amount Maturity Average Interest Rate Fair --------------------- --------------------- USD Sterling Date USD Sterling Value --------- -------- ---- --- -------- ----- (Dollars/Sterling in millions) 350 212 2002 6.73% 7.66% $46.3 250 152 2007 7.05% 7.72% $26.3 250 153 2008 6.46% 6.94% $23.7 ----------------------------------------------------------------------- Outlook We continue to pursue our goal of being the leading regional supplier of energy and related services in the northeastern quadrant of the United States, where we see the best opportunities for growth. We intend to provide competitively priced, high-quality products and value-added services - energy sales and services, energy delivery, power supply and supplemental services related to our core business. As our industry changes to a more competitive environment, we have taken and expect to take actions designed to create a larger, stronger regional enterprise that will be positioned to compete in the changing energy marketplace. Business Organization Beginning in 2001, Ohio utilities that offered both competitive and regulated retail electric services were required to implement a corporate separation plan approved by the PUCO - one which provided a clear separation between regulated and competitive operations. Our business is separated into three distinct units - a competitive services unit, a regulated services unit and a corporate support unit. FES provides competitive retail energy services while the EUOC continue to provide regulated transmission and distribution services. FirstEnergy Generation Corp. (FGCO), a wholly owned subsidiary of FES, leases fossil and hydroelectric plants from the EUOC and operates those plants. We expect the transfer of ownership of EUOC generating assets to FGCO will be substantially completed by the end of the market development period in 2005. All of the EUOC power supply requirements for the Ohio Companies and Penn are provided by FES to satisfy their "provider of last resort" (PLR) obligations, as well as grandfathered wholesale contracts. Optimizing the Use of Assets A significant step toward being the leading regional supplier in our target market was achieved when we merged with GPU in November, making us the fourth largest investor-owned electric system in the nation based on the number of customers served. Through the merger we can create a stronger enterprise with greater resources and more opportunities to provide value to our customers, shareholders and employees. However, additional steps must be taken in order to deliver the full value of the merger. While GPU's former domestic electric utility companies fit well with our regional market focus, GPU's former international companies do not. In December 2001, we divested GasNet, an Australian gas transmission company. Also, the sale of most of our interest in Avon Energy - the holding company for Midlands Electricity plc - to Aquila, Inc. (formerly UtiliCorp United) is pending. The transaction must be completed by April 26, 2002, or either party may terminate the original agreement. On March 18, 2002, we announced that we finalized terms of the agreement under which Aquila will acquire a 79.9 percent interest in Avon for approximately $1.9 billion (including the transfer of $1.7 billion of debt). We and Aquila together will own all of the outstanding shares of Avon through a jointly owned subsidiary, with each company having a 50-percent voting interest. GPU's other foreign companies (excluding GPU Power) are held for sale including our investment in Empresa Distribuidora Electrica Regional S.A. The pending divestitures should increase our financial flexibility by reducing debt and preferred stock, and aid us in providing more competitively priced products and services. On November 29, 2001, we announced an agreement to sell four of our older coal-fired power plants located along Lake Erie in Ohio to NRG Energy, Inc. Under the agreement, the Ashtabula, Bay Shore, Eastlake and Lake Shore generating plants with a total net generating capacity of 2,535 MW will be sold. The transaction includes our purchase of up to 10.5 billion kilowatt-hours of electricity annually, similar to the average annual output of the plants, through 2005 (the end of the market development period under Ohio's Electric Choice Law). The transaction is subject to the receipt of necessary regulatory approvals. This transaction is consistent with our strategy of aggressively pursuing cost savings to maintain competitively priced products and services. The sale will allow us to more closely match our generating capabilities to the load profiles of our customers, resulting in more efficient operation of our remaining generating units. It also enables us to concentrate on our coal-fired generation along the Ohio River, which should contribute to added supply efficiencies. The net, after-tax gain from the sale, based on the difference between the sale price of the plants and their market price used in our Ohio restructuring transition plan, will be credited to customers by reducing the transition cost recovery period. We expect to use the net proceeds from the sale for the redemption of high cost debt and preferred stock or to reduce other outstanding obligations to provide additional cost savings. State Regulatory Matters As of January 1, 2001, customers in all of our service areas, covering portions of Ohio, Pennsylvania and New Jersey, could select alternative energy suppliers. Our EUOC continue to deliver power to homes and businesses through their existing distribution systems, which remain regulated. Customer rates have been restructured into separate components to support customer choice. In each of the states, we have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier, subject to certain limits. However, despite similarities, the specific approach taken by each state and for each of our regulated companies varies. Regulatory assets are costs which the respective regulatory agencies have authorized for recovery from customers in future periods and, without such authorization, would have been charged to income when incurred. The increase in those assets in 2001 is primarily the result of the acquisition of the former GPU companies. All of the regulatory assets are expected to continue to be recovered under the provisions of the respective transition and regulatory plans as discussed below. The regulatory assets of the individual companies are as follows: Regulatory Assets as of December 31, - ----------------------------------------------------- Company 2001 2000 - ------- ---- ---- (In millions) OE....................... $2,025.4 $2,238.6 CEI...................... 874.5 816.2 TE....................... 388.8 412.7 Penn..................... 208.8 260.2 Met-Ed................... 1,320.5 -- Penelec.................. 769.8 -- JCP&L.................... 3,324.8 -- -------- -------- Total................. $8,912.6 $3,727.7 ======== ======== Ohio - Beginning on January 1, 2001, Ohio customers were able to choose their electricity suppliers. Customer rates of OE, CEI and TE were restructured to establish separate charges for transmission and distribution, transition cost recovery and a generation-related component. When one of our Ohio customers elects to obtain power from an alternative supplier, the regulated utility company reduces the customer's bill with a "generation shopping credit," based on the regulated generation component plus an incentive, and the customer receives a generation charge from the alternative supplier. Our Ohio EUOC have continuing responsibility to provide energy to service-area customers as PLR through December 31, 2005. The transition cost portion of rates provides for recovery of certain amounts not otherwise recoverable in a competitive generation market (such as regulatory assets). Transition costs are paid by all customers whether or not they choose an alternative supplier. Under the PUCO-approved transition plan, we assumed the risk of not recovering up to $500 million of transition revenue if the rate of customers (excluding contracts and full-service accounts) switching their service from OE, CEI and TE does not reach 20% for any consecutive twelve-month period by December 31, 2005 - the end of the market development period. As of December 31, 2001, the customer switching rate, on an annualized basis, implies that our risk of not recovering transition revenue has been reduced to approximately $174 million. We are also committed under the transition agreement to make available 1,120 MW of our generating capacity to marketers, brokers, and aggregators at set prices, to be used for sales only to retail customers in our Ohio service areas. Through December 31, 2001, approximately 1,032 MW of the 1,120 MW supply commitment had been secured by alternative suppliers. We began accepting customer applications for switching to alternative suppliers on December 8, 2000; as of December 31, 2001 our Ohio EUOC had been notified that over 600,000 of their customers requested generation services from other authorized suppliers, including FES, a wholly owned subsidiary. Pennsylvania - Choice of energy suppliers by Pennsylvania customers was phased in starting in 1999 and was completed by January 1, 2001. The Pennsylvania Public Utility Commission (PPUC) authorized rate restructuring plans for Penn, Met-Ed and Penelec, establishing separate charges for transmission, distribution, generation and stranded cost recovery, which is recovered through a "competitive transition charge" (CTC). Pennsylvania customers electing to obtain power from an alternative supplier have their bills reduced based on the regulated generation component, and the customers receive a generation charge from the alternative supplier. In June 2001, Met-Ed, Penelec and FirstEnergy entered into a settlement agreement with major parties in the combined merger and rate proceedings that, in addition to resolving certain issues concerning the PPUC's approval of the GPU merger, also addressed Met-Ed's and Penelec's request for PLR rate relief. Met-Ed and Penelec are permitted to defer, for future recovery, the difference between their actual energy costs and those reflected in their capped generation rates. Those costs will continue to be deferred through December 31, 2005. If energy costs incurred by Met-Ed and Penelec during that period are below their respective capped generation rates, the difference would be used to reduce their recoverable deferred costs. Met-Ed's and Penelec's PLR obligations were extended through December 31, 2010. Met-Ed's and Penelec's CTC revenues will be applied first to PLR costs, then to stranded costs other than for non-utility generation (NUG) and finally to NUG stranded costs through December 31, 2010. Met-Ed and Penelec would be permitted to recover any remaining stranded costs through a continuation of the CTC, after December 31, 2010, however, such recovery would extend to no later than December 31, 2015. Any amounts not expected to be recovered by December 31, 2015 would be written off at the time such nonrecovery becomes probable. Several parties had appealed this PPUC decision to the Commonwealth Court of Pennsylvania. On February 21, 2002, the Court affirmed the PPUC decision regarding approval of the GPU merger, remanding the decision to the PPUC only with respect to the issue of merger savings. The Court reversed the PPUC's decision regarding the PLR obligations of Met-Ed and Penelec, and denied the related requests for rate relief by Met-Ed and Penelec. We are considering our response to the Court's decision, which could include asking the Pennsylvania Supreme Court to review the decision. We are unable to predict the outcome of these matters. New Jersey - Customers of JCP&L were able to choose among alternative energy suppliers beginning in late 1999. To support customer choice, rates were restructured into unbundled service charges and additional non-bypassable charges to recover stranded costs (confirmed by a NJBPU Final Decision and Order issued in March 2001). JCP&L has a PLR obligation, referred to as Basic Generation Service (BGS), until July 31, 2002. For the period from August 1, 2002 to July 31, 2003, the NJBPU has authorized the auctioning of BGS to meet the electric demands of customers who have not selected an alternative supplier. The auction was successfully concluded on February 13, 2002, thereby eliminating JCP&L's obligation to provide for the energy requirements of BGS during that period. Beginning August 1, 2003, the approach to be taken in procuring the energy needs for BGS has not been determined. The NJBPU recently initiated a formal proceeding to decide how BGS will be handled after the transition period. JCP&L is permitted to defer, for future recovery, the amount by which its reasonable and prudently incurred costs for providing BGS to non-shopping customers and costs incurred under NUG agreements exceed amounts currently reflected in its BGS rate and market transition charge rate (for the recovery of stranded costs). On September 26, 2001, the NJBPU approved the GPU merger subject to the terms and conditions set forth in a settlement agreement with major intervenors. As part of the settlement, we agreed to reduce JCP&L's costs deferred for future recovery by $300 million, in order to ensure that customers receive the benefit of future merger savings. JCP&L wrote off $300 million of its deferred costs in October 2001 upon receipt of the final regulatory approval for the merger, which occurred on October 29, 2001. On February 6, 2002, JCP&L received a Financing Order from the NJBPU with authorization to issue $320 million of transition bonds to securitize the recovery of bondable stranded costs associated with the previously divested Oyster Creek nuclear generating station. The Order grants JCP&L the right to charge a usage-based, non-bypassable transition bond charge (TBC) and provide for the transfer of the bondable transition property relating to the TBC to JCP&L Transition Funding LLC (Transition Funding), a wholly owned limited liability corporation. Transition Funding is expected to issue and sell up to $320 million of transition bonds that will be recognized on our Consolidated Balance Sheet in the second quarter of 2002, with the TBC providing recovery of principal, interest and related fees on the transition bonds. FERC Regulatory Matters On December 19, 2001, the Federal Energy Regulatory Commission (FERC) issued an order in which it stated that the Alliance Regional Transmission Organization (Alliance TransCo) did not meet agency requirements to operate the Alliance TransCo as an approved Regional Transmission Organization (RTO). It further concluded that National Grid could be the independent Managing Member of the Alliance TransCo. FERC ordered the Alliance TransCo and National Grid to refile their business plan to consider operating as an independent transmission company within the Midwest ISO or another RTO. The order gave the Alliance TransCo 60 days to file a status report. On January 22, 2002, the Alliance TransCo companies filed a series of rehearing applications with FERC. Supply Plan As part of the Restructuring Orders for the States of Ohio, Pennsylvania, and New Jersey, the FirstEnergy companies are obligated to supply electricity to customers who do not choose an alternate supplier. The total forecasted peak of this obligation in 2002 is 20,300 MW (10,100 MW in Ohio, 5,400 MW in New Jersey, and 4,800 MW in Pennsylvania). The successful BGS auction in New Jersey removed JCP&L's BGS obligation for 5,100 MW for the period from August 1, 2002 to July 31, 2003. In that auction FES was a successful bidder to provide 1,700 MW during the same period to JCP&L and two other electric utilities in New Jersey. Our current supply portfolio contains 13,283 MW of owned generation and approximately 1,600 MW of long-term purchases from non-utility generators. The remaining obligation is expected to be met through a mix of multi-year forward purchases, short-term forward (less than one year) purchases and spot market purchases. The announced sale of four fossil generating plants expected to close in mid-2002, will have little impact on our supply plan. As part of the asset sale, FirstEnergy has a power purchase agreement under which the purchaser will provide a similar amount of electricity as was expected before the sale. This power purchase agreement runs from the close of the sale transaction, through December 31, 2005, which is the end of the market development period for the Ohio operating companies. Unregulated retail sales are generally short-term arrangements (less than 18 months) at prevailing market prices. They are primarily hedged through short-term purchased power contracts, supplemented by any of our excess generation when available and economical. Environmental Matters We are in compliance with the current sulfur dioxide (SO2) and nitrogen oxide (NOx) reduction requirements under the Clean Air Act Amendments of 1990. In 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions in the future from our Ohio and Pennsylvania facilities. Various regulatory and judicial actions have since sought to further define NOx reduction requirements (see Note 6 - Environmental Matters). We continue to evaluate our compliance plans and other compliance options. Violations of federally approved SO2 regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day a unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. We cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to nine utilities covering 44 power plants, including the W.H. Sammis Plant. In addition, the U.S. Department of Justice filed eight civil complaints against various investor-owned utilities, which included a complaint against OE and Penn. The NOV and complaint allege violations of the Clean Air Act (CAA). The civil complaint against OE and Penn requests installation of "best available control technology" as well as civil penalties of up to $27,500 per day. Although unable to predict the outcome of these proceedings, we believe the Sammis Plant is in full compliance with the CAA and that the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while these proceedings are pending. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, the Companies' proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. The Companies 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. In addition, JCP&L has accrued liabilities for environmental remediation of former manufactured gas plants in New Jersey; those costs are being recovered by JCP&L through a non-bypassable societal benefits charge. The Companies have total accrued liabilities aggregating approximately $60 million as of December 31, 2001. We do not believe environmental remediation costs will have a material adverse effect on financial condition, cash flows or results of operations. Legal Matters Various lawsuits, claims and proceedings related to FirstEnergy's normal business operations are pending against FirstEnergy and its subsidiaries. The most significant are described below. Due to our merger with GPU, we own Unit 2 of the Three Mile Island (TMI-2) Nuclear Plant. As a result of the 1979 TMI-2 accident, claims for alleged personal injury against JCP&L, Met-Ed, Penelec and GPU were filed in the U.S. District Court for the Middle District of Pennsylvania. In 1996, the District Court granted a motion for summary judgment filed by the GPU companies and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. In November 1999, the U.S. Court of Appeals for the Third Circuit affirmed the District Court's dismissal of the ten test cases, but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. Following the resolution of judicial proceedings dealing with admissible evidence, we have again requested summary judgment of the remaining 2,100 claims in the District Court. On January 15, 2002, the District Court granted our motion. On February 14, 2002, the plaintiffs filed a notice of appeal of this decision (see Note 6 - Other Legal Proceedings). Although unable to predict the outcome of this litigation, we believe that any liability to which we might be subject by reason of the TMI-2 accident will not exceed our financial protection under the Price-Anderson Act. In July 1999, the Mid-Atlantic states experienced a severe heat storm which resulted in power outages throughout the service areas of many electric utilities, including JCP&L. In an investigation into the causes of the outages and the reliability of the transmission and distribution systems of all four New Jersey electric utilities, the NJBPU concluded that there was not a prima facie case demonstrating that, overall, JCP&L provided unsafe, inadequate or improper service to its customers. Two class action lawsuits (subsequently consolidated into a single proceeding) were filed in New Jersey Superior Court in July 1999 against JCP&L, GPU and other GPU companies seeking compensatory and punitive damages arising from the service interruptions of July 1999 in the JCP&L territory. In May 2001, the court denied without prejudice the defendant's motion seeking decertification of the class. Discovery continues in the class action, but no trial date has been set. The judge has set a schedule under which factual legal discovery would conclude in March 2002, and expert reports would be exchanged by June 2002. In October 2001, the court held argument on the plaintiffs' motion for partial summary judgment, which contends that JCP&L is bound to several findings of the NJBPU investigation. The plaintiffs' motion was denied by the Court in November 2001 and the plaintiffs' motion seeking permission to file an appeal on this denial of their motion was rejected by the New Jersey Appellate Division. We have also filed a motion for partial summary judgment that is currently pending before the Superior Court. We are unable to predict the outcome of these matters. Other Commitments, Guarantees and Contingencies GPU had made significant investments in foreign businesses and facilities through its GPU Electric and GPU Power subsidiaries. Although we will attempt to mitigate our risks related to foreign investments, we face additional risks inherent in operating in such locations, including foreign currency fluctuations. GPU Electric, through its subsidiary, Midlands, has a 40% equity interest in a 586 MW power project in Pakistan (the Uch Power Project), which commenced commercial operations in October 2000. GPU Electric's investment in this project as of December 31, 2001 was approximately $38 million, plus a guaranty letter of credit of $3.6 million, and its share of the projected completion costs represents an additional $4.8 million commitment. Cinergy (the former owner of 50% of Midlands Electricity plc) agreed to fund up to an aggregate of $20 million of the required capital contributions and has reimbursed GPU Electric $4.9 million through December 31, 2001, leaving a remaining commitment for future cash losses of up to $15.1 million. Midlands also has a 31% equity interest in a 478 MW power project in Turkey (the Trakya Power Project). Trakya is presently engaged in a foreign currency conversion issue with TETTAS (the state owned electricity purchaser). Midlands established a $16.5 million reserve for non-recovery relating to that issue as of December 31, 2001. These commitments and contingencies associated with Midlands will transfer to the new partnership upon completion of the sale discussed in Note 2 - - Merger, and we will be responsible for our lower proportionate interest. El Barranquilla, a wholly owned subsidiary of GPU Power, is an equity investor in Termobarranquilla S.A., Empresa de Servicios Publicos (TEBSA), which owns a Colombian independent power generation project. As of December 31, 2001, GPU Power had an investment of approximately $109.4 million in TEBSA and is committed, under certain circumstances, to make additional standby equity contributions of $21.3 million, which we have guaranteed. The total outstanding senior debt of the TEBSA project is $315 million at December 31, 2001. The lenders include the Overseas Private Investment Corporation, US Export Import Bank and a commercial bank syndicate. GPU had guaranteed the obligations of the operators of the TEBSA project, up to a maximum of $5.8 million (subject to escalation) under the project's operations and maintenance agreement. GPU believed that various events of default have occurred under the loan agreements relating to the TEBSA project. In addition, questions have been raised as to the accuracy and completeness of information provided to various parties to the project in connection with the project's formation. We continue to discuss these issues and related matters with the project lenders, CORELCA (the government owned Colombian electric utility with an ownership interest in the project) and the Government of Colombia. Moreover, in September 2001, the DIAN (the Colombian national tax authority) had presented TEBSA with a statement of charges alleging that certain lease payments made under the Lease Agreement with Los Amigos Leasing Company (an indirect wholly owned subsidiary of GPU Power) violated Colombian foreign exchange regulations and were, therefore, subject to substantial penalties. The DIAN has calculated a statutory penalty amounting to approximately $200 million and gave TEBSA two months to respond to the statement of charges. In November 2001, TEBSA filed a formal response to this statement of charges. TEBSA is continuing to review the DIAN's position and has been advised by its Colombian counsel that the DIAN's position is without substantial legal merit. We are unable to predict the outcome of these matters. Significant Accounting Policies We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often require a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting these specific factors. Our more significant accounting policies are described below: Purchase Accounting - Acquisition of GPU Purchase accounting requires judgment regarding the allocation of the purchase price based on the fair values of the assets acquired (including intangible assets) and the liabilities assumed. The fair values of the acquired assets and assumed liabilities for GPU were based primarily on estimates. The more significant of these included the estimation of the fair value of the international operations, certain domestic operations and the fair value of the pension and other postretirement benefit assets and liabilities. The preliminary purchase price allocations for the GPU acquisition are subject to adjustment in 2002 when finalized. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which will be reviewed for impairment at least annually. As of December 31, 2001, we had $5.6 billion of goodwill (excluding the goodwill in "Assets Pending Sale" on the Consolidated Balance Sheet) that primarily relates to our regulated services segment. Regulatory Accounting Our regulated services segment is subject to regulation that sets the prices (rates) we are permitted to charge our customers based on our costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in each state in which we operate, a significant amount of regulatory assets have been recorded. As of December 31, 2001, we had regulatory assets of $8.9 billion. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future. As disclosed in Note 1 - Regulatory Plans, the full recovery of transition costs for the Ohio EUOC is dependent on achieving 20% customer shopping levels in any twelve-month period by December 31, 2005. Derivative Accounting Determination of appropriate accounting for derivative transactions requires the involvement of management representing operations, finance and risk assessment. In order to determine the appropriate accounting for derivative transactions, the provisions of the contract need to be carefully assessed in accordance with the authoritative accounting literature and management's intended use of the derivative. New authoritative guidance continues to shape the application of derivative accounting. Management's expectations and intentions are key factors in determining the appropriate accounting for a derivative transaction and, as a result, such expectations and intentions must be documented. Derivative contracts that are determined to fall within the scope of SFAS 133, as amended, must be recorded at their fair value. Active market prices are not always available to determine the fair value of the later years of a contract, requiring that various assumptions and estimates be used in the valuation. We continually monitor our derivative contracts to determine if our activities, expectations, intentions, assumptions and estimates remain valid. As part of our normal operations we enter into significant commodities contracts, which increase the impact of derivative accounting judgments. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hour sales that have been delivered but not yet been billed through the end of the year. The determination of unbilled revenues requires management to make various estimated including: o Net energy generated or purchased for retail load o Losses of energy over distribution lines o Mix of kilowatt-hour usage by residential, commercial and industrial customers o Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) approved SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 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 have been applied to the GPU merger, which was accounted for as a purchase transaction, and have not materially affected the accounting for this transaction. Under SFAS 142, amortization of existing goodwill will cease 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 a preliminary analysis. Prior to the GPU merger, FirstEnergy amortized about $57 million ($.25 per share of common stock) of goodwill annually. There was no goodwill amortization in 2001 associated with the GPU merger under the provisions of the new standard. In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of APB 30. Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) REVENUES: Electric utilities.................................................... $5,729,036 $5,421,668 $5,453,763 Unregulated businesses................................................ 2,270,326 1,607,293 865,884 ---------- ---------- ---------- Total revenues.................................................... 7,999,362 7,028,961 6,319,647 ---------- ---------- ---------- EXPENSES: Fuel and purchased power.............................................. 1,421,525 1,110,845 984,941 Purchased gas......................................................... 820,031 553,548 170,630 Other operating expenses.............................................. 2,727,794 2,378,296 2,146,629 Provision for depreciation and amortization........................... 889,550 933,684 937,976 General taxes......................................................... 455,340 547,681 544,052 ---------- ---------- ---------- Total expenses.................................................... 6,314,240 5,524,054 4,784,228 ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES.................................. 1,685,122 1,504,907 1,535,419 ---------- ---------- ---------- NET INTEREST CHARGES: Interest expense...................................................... 519,131 493,473 509,169 Capitalized interest.................................................. (35,473) (27,059) (13,355) Subsidiaries' preferred stock dividends............................... 72,061 62,721 76,479 ---------- ---------- ---------- Net interest charges.............................................. 555,719 529,135 572,293 ---------- ---------- ---------- INCOME TAXES............................................................. 474,457 376,802 394,827 ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING......................................................... 654,946 598,970 568,299 ---------- ---------- ---------- CUMULATIVE EFFECT OF ACCOUNTING CHANGE (NET OF INCOME TAX BENEFIT OF $5,839,000) (Note 1)............................ (8,499) -- -- ---------- ---------- ---------- NET INCOME............................................................... $ 646,447 $ 598,970 $ 568,299 ========== ========== ========== BASIC EARNINGS PER SHARE OF COMMON STOCK (Note 4C): Income before cumulative effect of accounting change.................. $2.85 $2.69 $2.50 Cumulative effect of accounting change (Net of income taxes) (Note 1). (.03) -- -- ----- ----- ----- Net income............................................................ $2.82 $2.69 $2.50 ===== ===== ===== WEIGHTED AVERAGE NUMBER OF BASIC SHARES OUTSTANDING................... 229,512 222,444 227,227 ======= ======= ======= DILUTED EARNINGS PER SHARE OF COMMON STOCK (Note 4C): Income before cumulative effect of accounting change.................. $2.84 $2.69 $2.50 Cumulative effect of accounting change (Net of income taxes) (Note 1). (.03) -- -- ----- ----- ----- Net income............................................................ $2.81 $2.69 $2.50 ===== ===== ===== WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING................. 230,430 222,726 227,299 ======= ======= ======= DIVIDENDS DECLARED PER SHARE OF COMMON STOCK............................. $1.50 $1.50 $1.50 ===== ===== ===== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS As of December 31, 2001 2000 - --------------------------------------------------------------------------------------------------------------------- (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................................... $ 220,178 $ 49,258 Receivables- Customers (less accumulated provisions of $65,358,000 and $32,251,000, respectively, for uncollectible accounts)...................................... 1,074,664 541,924 Other (less accumulated provisions of $7,947,000 and $4,035,000, respectively, for uncollectible accounts)...................................... 473,550 376,525 Materials and supplies, at average cost- Owned............................................................................ 256,516 171,563 Under consignment................................................................ 141,002 112,155 Prepayments and other.............................................................. 336,610 189,869 ----------- ----------- 2,502,520 1,441,294 ----------- ----------- ASSETS PENDING SALE (Note 2)......................................................... 3,418,225 -- ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: In service......................................................................... 19,981,749 12,417,684 Less--Accumulated provision for depreciation....................................... 8,161,022 5,263,483 ----------- ----------- 11,820,727 7,154,201 Construction work in progress...................................................... 607,702 420,875 ----------- ----------- 12,428,429 7,575,076 ----------- ----------- INVESTMENTS: Capital trust investments (Note 3)................................................. 1,166,714 1,223,794 Nuclear plant decommissioning trusts............................................... 1,014,234 584,288 Letter of credit collateralization (Note 3)........................................ 277,763 277,763 Pension investments................................................................ 273,542 200,178 Other.............................................................................. 898,311 468,879 ----------- ----------- 3,630,564 2,754,902 ----------- ----------- DEFERRED CHARGES: Regulatory assets.................................................................. 8,912,584 3,727,662 Goodwill........................................................................... 5,600,918 2,088,770 Other.............................................................................. 858,273 353,590 ----------- ----------- 15,371,775 6,170,022 ----------- ----------- $37,351,513 $17,941,294 =========== =========== LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES: Currently payable long-term debt and preferred stock............................... $ 1,867,657 $ 536,482 Short-term borrowings (Note 5)..................................................... 614,298 699,765 Accounts payable................................................................... 704,184 478,661 Accrued taxes...................................................................... 418,555 409,640 Other.............................................................................. 1,064,763 469,257 ----------- ----------- 4,669,457 2,593,805 ----------- ----------- LIABILITIES RELATED TO ASSETS PENDING SALE (Note 2).................................. 2,954,753 -- ----------- ----------- CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholders' equity........................................................ 7,398,599 4,653,126 Preferred stock of consolidated subsidiaries-- Not subject to mandatory redemption.............................................. 480,194 648,395 Subject to mandatory redemption.................................................. 65,406 41,105 Subsidiary-obligated mandatorily redeemable preferred securities (Note 4F)......... 529,450 120,000 Long-term debt..................................................................... 11,433,313 5,742,048 ----------- ----------- 19,906,962 11,204,674 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes.................................................. 2,684,219 2,094,107 Accumulated deferred investment tax credits........................................ 260,532 241,005 Nuclear plant decommissioning costs................................................ 1,201,599 598,985 Power purchase contract loss liability............................................. 3,566,531 -- Other postretirement benefits...................................................... 838,943 544,541 Other.............................................................................. 1,268,517 664,177 ----------- ----------- 9,820,341 4,142,815 ----------- ----------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 3 and 6)............................. ----------- ----------- $37,351,513 $17,941,294 =========== =========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION As of December 31, 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDERS' EQUITY: Common stock, $0.10 par value - authorized 375,000,000 shares- 297,636,276 and 224,531,580 shares outstanding, respectively......................... $ 29,764 $ 22,453 Other paid-in capital.................................................................. 6,113,260 3,531,821 Accumulated other comprehensive income (loss) (Note 4H)................................ (169,003) 593 Retained earnings (Note 4A)............................................................ 1,521,805 1,209,991 Unallocated employee stock ownership plan common stock- 5,117,375 and 5,952,032 shares, respectively (Note 4B)............................... (97,227) (111,732) ----------- ----------- Total common stockholders' equity.................................................... 7,398,599 4,653,126 ----------- ----------- Number of Shares Optional Outstanding Redemption Price ---------------- --------------------- 2001 2000 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK OF CONSOLIDATED SUBSIDIARIES (Note 4D): Ohio Edison Company Cumulative, $100 par value- Authorized 6,000,000 shares Not Subject to Mandatory Redemption: 3.90%.............................. 152,510 152,510 $103.63 $ 15,804 15,251 15,251 4.40%.............................. 176,280 176,280 108.00 19,038 17,628 17,628 4.44%.............................. 136,560 136,560 103.50 14,134 13,656 13,656 4.56%.............................. 144,300 144,300 103.38 14,917 14,430 14,430 --------- --------- -------- ----------- ----------- 609,650 609,650 63,893 60,965 60,965 --------- --------- -------- ----------- ----------- Cumulative, $25 par value- Authorized 8,000,000 shares Not Subject to Mandatory Redemption: 7.75%.............................. 4,000,000 4,000,000 25.00 100,000 100,000 100,000 --------- --------- -------- ----------- ----------- Total Not Subject to Mandatory Redemption............... 4,609,650 4,609,650 $163,893 160,965 160,965 ========= ========= ======== ----------- ----------- Cumulative, $100 par value- Subject to Mandatory Redemption: 8.45%.............................. -- 50,000 -- $ -- -- 5,000 Redemption Within One Year........... -- (5,000) --------- --------- -------- ----------- ----------- Total Subject to Mandatory Redemption -- 50,000 $ -- -- -- ========= ========= ======== ----------- ----------- Pennsylvania Power Company Cumulative, $100 par value- Authorized 1,200,000 shares Not Subject to Mandatory Redemption: 4.24%.............................. 40,000 40,000 103.13 $ 4,125 4,000 4,000 4.25%.............................. 41,049 41,049 105.00 4,310 4,105 4,105 4.64%.............................. 60,000 60,000 102.98 6,179 6,000 6,000 7.75%.............................. 250,000 250,000 -- -- 25,000 25,000 --------- --------- -------- ----------- ----------- Total Not Subject to Mandatory Redemption......................... 391,049 391,049 $ 14,614 39,105 39,105 ========= ========= ======== ----------- ----------- Subject to Mandatory Redemption (Note 4E): 7.625%............................. 150,000 150,000 104.58 $ 15,687 15,000 15,000 Redemption Within One Year........... (750) -- --------- --------- -------- ----------- ----------- Total Subject to Mandatory Redemption 150,000 150,000 $ 15,687 14,250 15,000 ========= ========= ======== ----------- ----------- Cleveland Electric Illuminating Company Cumulative, without par value- Authorized 4,000,000 shares Not Subject to Mandatory Redemption: $ 7.40 Series A................... 500,000 500,000 101.00 $ 50,500 50,000 50,000 $ 7.56 Series B................... 450,000 450,000 102.26 46,017 45,071 45,071 Adjustable Series L................ 474,000 474,000 100.00 47,400 46,404 46,404 $42.40 Series T.................... 200,000 200,000 500.00 100,000 96,850 96,850 --------- --------- -------- ----------- ----------- 1,624,000 1,624,000 243,917 238,325 238,325 Redemption Within One Year (Note 4D). (96,850) -- --------- --------- -------- ----------- ----------- Total Not Subject to Mandatory Redemption......................... 1,624,000 1,624,000 $243,917 141,475 238,325 ========= ========= ======== ----------- ----------- Subject to Mandatory Redemption (Note 4E): $ 7.35 Series C................... 70,000 80,000 101.00 $ 7,070 7,030 8,041 $91.50 Series Q.................... -- 10,716 -- -- -- 10,716 $88.00 Series R.................... -- 50,000 -- -- -- 51,128 $90.00 Series S.................... 17,750 36,500 -- -- 17,268 36,686 --------- --------- -------- ----------- ----------- 87,750 177,216 7,070 24,298 106,571 Redemption Within One Year........... (18,010) (80,466) --------- --------- -------- ----------- ----------- Total Subject to Mandatory Redemption 87,750 177,216 $ 7,070 6,288 26,105 ========= ========= ======== ----------- -----------
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd) As of December 31, 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) Number of Shares Optional Outstanding Redemption Price ---------------- --------------------- 2001 2000 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK OF CONSOLIDATED SUBSIDIARIES (Cont'd) Toledo Edison Company Cumulative, $100 par value- Authorized 3,000,000 shares Not Subject to Mandatory Redemption: $ 4.25............................ 160,000 160,000 $104.63 $ 16,740 $ 16,000 $ 16,000 $ 4.56............................ 50,000 50,000 101.00 5,050 5,000 5,000 $ 4.25............................ 100,000 100,000 102.00 10,200 10,000 10,000 $ 8.32............................ 100,000 100,000 102.46 10,246 10,000 10,000 $ 7.76............................ 150,000 150,000 102.44 15,366 15,000 15,000 $ 7.80............................ 150,000 150,000 101.65 15,248 15,000 15,000 $10.00............................. 190,000 190,000 101.00 19,190 19,000 19,000 --------- --------- -------- ----------- ----------- 900,000 900,000 92,040 90,000 90,000 Redemption Within One Year (Note 4D). (59,000) -- --------- --------- -------- ----------- ----------- 900,000 900,000 92,040 31,000 90,000 --------- --------- -------- ----------- ----------- Cumulative, $25 par value- Authorized 12,000,000 shares Not Subject to Mandatory Redemption: $2.21.............................. 1,000,000 1,000,000 25.25 25,250 25,000 25,000 2.365............................. 1,400,000 1,400,000 27.75 38,850 35,000 35,000 Adjustable Series A................ 1,200,000 1,200,000 25.00 30,000 30,000 30,000 Adjustable Series B................ 1,200,000 1,200,000 25.00 30,000 30,000 30,000 --------- --------- -------- ----------- ----------- 4,800,000 4,800,000 124,100 120,000 120,000 --------- --------- -------- Redemption Within One Year (Note 4D). (25,000) -- --------- --------- -------- ----------- ----------- 4,800,000 4,800,000 124,100 95,000 120,000 --------- --------- -------- ----------- ----------- Total Not Subject to Mandatory Redemption....................... 5,700,000 5,700,000 $216,140 126,000 210,000 ========= ========= ======== ----------- ----------- Jersey Central Power & Light Company Cumulative, $100 stated value- Authorized 15,600,000 shares Not Subject to Mandatory Redemption: 4.00% Series....................... 125,000 -- 106.50 $ 13,313 12,649 -- ========= ========= ======== ----------- ----------- Subject to Mandatory Redemption (Note 4E): 8.65% Series J..................... 250,001 -- 101.30 $ 25,325 26,750 -- 7.52% Series K..................... 265,000 -- 103.76 27,496 28,951 -- --------- --------- -------- ----------- ----------- 515,001 -- 52,821 55,701 -- Redemption Within One Year........... (10,833) -- --------- --------- -------- ----------- ----------- Total Subject to Mandatory Redemption 515,001 -- $ 52,821 44,868 -- ========= ========= ======== ----------- ----------- SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST OR LIMITED PARTNERSHIP HOLDING SOLELY SUBORDINATED DEBENTURES OF SUBSIDIARIES (NOTE 4F): Ohio Edison Co. Cumulative, $25 stated value- Authorized 4,800,000 shares 9.00%................................ 4,800,000 4,800,000 25.00 $120,000 120,000 120,000 ========= ========= ======== ----------- ----------- Cleveland Electric Illuminating Co. Cumulative, $25 stated value- Authorized 4,000,000 shares 9.00%................................ 4,000,000 -- -- $ -- 100,000 -- ========= ========= ======== ----------- ----------- Jersey Central Power & Light Co. Cumulative, $25 stated value- Authorized 5,000,000 shares 8.56%................................ 5,000,000 -- 25.00 $125,000 125,250 -- ========= ========== ======== ----------- ----------- Metropolitan Edison Co. Cumulative, $25 stated value- Authorized 4,000,000 shares 7.35%................................ 4,000,000 -- -- $ -- 92,200 -- ========= ========= ======== ----------- ----------- Pennsylvania Electric Co. Cumulative, $25 stated value- Authorized 4,000,000 shares 7.34%................................ 4,000,000 -- -- $ -- 92,000 -- ========= ========= ======== ----------- -----------
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd) LONG-TERM DEBT (Note 4G) (Interest rates reflect weighted average rates) (In thousands) - --------------------------------------------------------------------------------------------------------------------------------- FIRST MORTGAGE BONDS SECURED NOTES UNSECURED NOTES TOTAL - --------------------------------------------------------------------------------------------------------------------------------- As of December 31, 2001 2000 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- ---- ---- Ohio Edison Co. - Due 2001-2006 7.89% $ 509,265 $ 509,265 7.60% $ 227,122 $ 235,838 4.28% $ 441,725 $541,725 Due 2007-2011 -- -- -- 7.22% 10,253 4,336 -- -- -- Due 2012-2016 -- -- -- 5.17% 59,000 59,000 -- -- -- Due 2017-2021 -- -- -- 7.01% 60,443 129,943 -- -- -- Due 2022-2026 7.99% 219,460 219,460 -- -- -- -- -- -- Due 2027-2031 -- -- -- 3.72% 249,634 180,134 -- -- -- Due 2032-2036 -- -- -- 2.63% 71,900 71,900 -- -- -- ---------- ---------- ---------- ---------- ---------- -------- Total-Ohio Edison 728,725 728,725 678,352 681,151 441,725 541,725 $ 1,848,802 $ 1,951,601 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Cleveland Electric Illuminating Co. - Due 2001-2006 8.53% 595,000 595,000 5.84% 593,175 384,680 5.58% 27,700 27,700 Due 2007-2011 6.86% 125,000 125,000 7.29% 271,640 271,640 -- -- -- Due 2012-2016 -- -- -- 8.00% 78,700 118,535 -- -- -- Due 2017-2021 -- -- -- 7.36% 440,560 560,855 -- -- -- Due 2022-2026 9.00% 150,000 150,000 7.64% 218,950 218,950 -- -- -- Due 2027-2031 -- -- -- 5.38% 5,993 110,888 -- -- -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Cleveland Electric 870,000 870,000 1,609,018 1,665,548 27,700 27,700 2,506,718 2,563,248 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Toledo Edison Co. - Due 2001-2006 7.90% 179,125 179,525 6.40% 228,700 190,400 7.25% 226,100 226,130 Due 2007-2011 -- -- -- 7.13% 30,000 30,000 10.00% 790 790 Due 2012-2016 -- -- -- -- -- -- -- -- -- Due 2017-2021 -- -- -- 8.14% 129,000 129,000 -- -- -- Due 2022-2026 -- -- -- 7.55% 50,700 118,000 -- -- -- Due 2027-2031 -- -- -- 5.90% 13,851 13,851 -- -- -- Due 2032-2036 -- -- -- 2.20% 30,900 30,900 -- -- -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Toledo Edison 179,125 179,525 483,151 512,151 226,890 226,920 889,166 918,596 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Pennsylvania Power Co. - Due 2001-2006 7.19% 79,370 80,344 3.02% 10,300 -- 5.90% 5,200 5,200 Due 2007-2011 9.74% 4,870 4,870 -- -- -- -- -- -- Due 2012-2016 9.74% 4,870 4,870 5.40% 1,000 1,000 -- -- -- Due 2017-2021 9.74% 2,955 2,955 3.78% 59,807 59,807 -- -- -- Due 2022-2026 8.33% 33,750 33,750 6.15% 12,700 12,700 -- -- -- Due 2027-2031 -- -- -- 6.04% 37,672 47,972 -- -- -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Penn Power 125,815 126,789 121,479 121,479 5,200 5,200 252,494 253,468 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Jersey Central Power & Light Co. - Due 2001-2006 7.14% 500,945 -- 6.45% 150,000 -- 7.69% 86 -- Due 2007-2011 7.81% 45,355 -- -- -- -- 7.69% 124 -- Due 2012-2016 7.10% 12,200 -- -- -- -- 7.69% 180 -- Due 2017-2021 9.20% 50,000 -- -- -- -- 7.69% 260 -- Due 2022-2026 7.68% 485,000 -- -- -- -- 7.69% 377 -- Due 2027-2031 -- -- -- -- -- -- 7.69% 546 -- Due 2032-2036 -- -- -- -- -- -- 7.69% 790 -- Due 2037-2041 -- -- -- -- -- -- 7.69% 635 -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Jersey Central 1,093,500 -- 150,000 -- 2,998 -- 1,246,498 -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Metropolitan Edison Co. - Due 2001-2006 7.14% 261,740 -- 5.72% 100,000 -- 7.69% 171 -- Due 2007-2011 6.00% 6,960 -- -- -- -- 7.69% 248 -- Due 2012-2016 -- -- -- -- -- -- 7.69% 359 -- Due 2017-2021 6.10% 28,500 -- -- -- -- 7.69% 521 -- Due 2022-2026 8.05% 180,000 -- -- -- -- 7.69% 754 -- Due 2027-2031 5.95% 13,690 -- -- -- -- 7.69% 1,092 -- Due 2032-2036 -- -- -- -- -- -- 7.69% 1,581 -- Due 2037-2041 -- -- -- -- -- -- 7.69% 1,271 -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Metropolitan Edison 490,890 -- 100,000 -- 5,997 -- 596,887 -- ---------- ---------- ---------- ---------- ---------- -------- ----------- -----------
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd) LONG-TERM DEBT (Interest rates reflect weighted average rates) (Cont'd) (In thousands) FIRST MORTGAGE BONDS SECURED NOTES UNSECURED NOTES TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- As of December 31, 2001 2000 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- ---- ---- Pennsylvania Electric Co. - Due 2001-2006 6.13% $ 1,025 $ -- -- $ -- $ -- 6.02% $ 183,086 $ -- Due 2007-2011 5.44% 27,395 -- -- -- -- 6.55% 135,124 -- Due 2012-2016 -- -- -- -- -- -- 7.69% 180 -- Due 2017-2021 5.80% 20,000 -- -- -- -- 6.63% 125,260 -- Due 2022-2026 6.05% 25,000 -- -- -- -- 7.69% 377 -- Due 2027-2031 -- -- -- -- -- -- 7.69% 546 -- Due 2032-2036 -- -- -- -- -- -- 7.69% 790 -- Due 2037-2041 -- -- -- -- -- -- 7.69% 635 -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Pennsylvania Electric 73,420 -- -- -- 445,998 -- $ 519,418 $ -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- FirstEnergy Corp. - Due 2001-2006 -- -- -- -- -- -- 5.59% 1,550,000 -- Due 2007-2011 -- -- -- -- -- -- 6.45% 1,500,000 -- Due 2012-2016 -- -- -- -- -- -- -- -- -- Due 2017-2021 -- -- -- -- -- -- -- -- -- Due 2022-2026 -- -- -- -- -- -- -- -- -- Due 2027-2031 -- -- -- -- -- -- 7.38% 1,500,000 -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-FirstEnergy -- -- -- -- 4,550,000 -- 4,550,000 -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- OES Fuel -- -- 2.72% 81,515 91,620 -- -- -- 81,515 91,620 AFN Finance Co. No. 1 -- -- 4.18% 15,000 -- -- -- -- 15,000 -- AFN Finance Co. No. 3 -- -- 4.18% 4,000 -- -- -- -- 4,000 -- Bay Shore Power -- -- 6.23% 145,400 147,500 -- -- -- 145,400 147,500 MARBEL Energy Corp. -- -- -- -- -- 4.72% 569 638 569 638 Facilities Services Group -- -- 6.12% 15,735 17,601 -- -- -- 15,735 17,601 FirstEnergy Properties -- -- 7.89% 9,902 -- -- -- -- 9,902 -- Warrenton River Terminal -- -- 6.00% 776 -- -- -- -- 776 -- GPU Capital* -- -- -- -- -- 6.69% 1,629,582 -- 1,629,582 -- GPU Power -- -- 7.42% 239,373 -- 13.50% 56,048 -- 295,421 -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total $3,561,475 $1,905,039 $3,653,701 $3,237,050 $7,392,707 $802,183 14,607,883 5,944,272 ========== ========== ========== ========== ========== ======== ----------- ----------- Capital lease obligations..................................................................... 19,390 163,242 ----------- ----------- Net unamortized premium on debt*.............................................................. 213,834 85,550 ----------- ----------- Long-term debt due within one year*.......................................................... (1,975,755) (451,016) ----------- ----------- Total long-term debt*......................................................................... 12,865,352 5,742,048 ----------- ----------- TOTAL CAPITALIZATION* $21,339,001 $11,204,674 - ---------------------------------------------------------------------------------------------------------------------------------- * 2001 includes amounts in "Liabilities Related to Assets Pending Sale" on the Consolidated Balance Sheet as of December 31, 2001. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY Accumulated Unallocated Other Other ESOP Comprehensive Number Par Paid-In Comprehensive Retained Common Income of Shares Value Capital Income (Loss) Earnings Stock ------------- --------- ----- ------- ------------- -------- ----------- (Dollars in thousands) Balance, January 1, 1999............ 237,069,087 $23,707 $3,846,513 $ (439) $ 718,409 $(139,032) Net income....................... $568,299 568,299 Minimum liability for unfunded retirement benefits, net of $160,000 of income taxes....... 244 244 -------- Comprehensive income............. $568,543 ======== Reacquired common stock.......... (4,614,800) (462) (129,671) Centerior acquisition adjustment. (468) Allocation of ESOP shares........ 6,001 12,256 Cash dividends on common stock... (341,467) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999.......... 232,454,287 23,245 3,722,375 (195) 945,241 (126,776) Net income....................... $598,970 598,970 Minimum liability for unfunded retirement benefits, net of ($85,000) of income taxes...... (134) (134) Unrealized gain on investment in securities available for sale.. 922 922 -------- Comprehensive income............. $599,758 ======== Reacquired common stock.......... (7,922,707) (792) (194,210) Allocation of ESOP shares........ 3,656 15,044 Cash dividends on common stock... (334,220) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000.......... 224,531,580 22,453 3,531,821 593 1,209,991 (111,732) GPU acquisition.................. 73,654,696 7,366 2,586,097 Net income....................... $646,447 646,447 Minimum liability for unfunded retirement benefits, net of $(182,000) of income taxes.... (268) (268) Unrealized loss on derivative hedges, net of $(116,521,000) of income taxes (169,408) (169,408) Unrealized gain on investments, net of $56,000 of income taxes..... 81 81 Unrealized currency translation adjustments, net of $(1,000) of income taxes (1) (1) -------- Comprehensive income............. $476,851 ======== Reacquired common stock.......... (550,000) (55) (15,253) Allocation of ESOP shares........ 10,595 14,505 Cash dividends on common stock... (334,633) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001.......... 297,636,276 $29,764 $6,113,260 $(169,003) $1,521,805 $(97,227) ========================================================================================================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Par or Par or Number Stated Number Stated of Shares Value of Shares Value --------- ------ --------- ----- (Dollars in thousands) Balance, January 1, 1999 12,442,699 $660,195 5,379,044 $334,864 Redemptions- 7.64% Series (60,000) (6,000) 8.00% Series (58,000) (5,800) 8.45% Series (50,000) (5,000) $ 7.35 Series C (10,000) (1,000) $88.00 Series E (3,000) (3,000) $91.50 Series Q (10,714) (10,714) $90.00 Series S (18,750) (18,750) $9.375 Series (16,900) (1,690) - -------------------------------------------------------------------------------------------------- Balance, December 31, 1999 12,324,699 648,395 5,269,680 294,710 Redemptions- 8.45% Series (50,000) (5,000) $ 7.35 Series C (10,000) (1,000) $88.00 Series E (3,000) (3,000) $91.50 Series Q (10,714) (10,714) $90.00 Series S (18,750) (18,750) Amortization of fair market value adjustments- $ 7.35 Series C (69) $88.00 Series R (3,872) $90.00 Series S (5,734) ----------------------------------------------------------------------------------- Balance, December 31, 2000 12,324,699 648,395 5,177,216 246,571 GPU acquisition 125,000 12,649 13,515,001 365,151 Issues- 9.00% Series 4,000,000 100,000 Redemptions- 8.45% Series (50,000) (5,000) $ 7.35 Series C (10,000) (1,000) $88.00 Series R (50,000) (50,000) $91.50 Series Q (10,716) (10,716) $90.00 Series S (18,750) (18,750) Amortization of fair market value adjustments- $ 7.35 Series C (11) $88.00 Series R (1,128) $90.00 Series S (668) ----------------------------------------------------------------------------------- Balance, December 31, 2001 12,449,699 $661,044 22,552,751 $624,449 =================================================================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income...................................................... $ 646,447 $ 598,970 $ 568,299 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization................ 889,550 933,684 937,976 Nuclear fuel and lease amortization........................ 98,178 113,330 104,928 Other amortization, net.................................... (11,927) (11,635) (10,730) Deferred costs recoverable as regulatory assets............ (31,893) -- -- Deferred income taxes, net................................. 31,625 (79,429) (45,054) Investment tax credits, net................................ (22,545) (30,732) (19,661) Cumulative effect of accounting change..................... 14,338 -- -- Receivables................................................ 53,099 (150,520) (203,567) Materials and supplies..................................... (50,052) (29,653) 19,631 Accounts payable........................................... (84,572) 118,282 82,578 Other...................................................... (250,564) 45,529 53,906 ---------- ---------- ---------- Net cash provided from operating activities.............. 1,281,684 1,507,826 1,488,306 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Preferred stock.............................................. 96,739 -- -- Long-term debt............................................... 4,338,080 307,512 364,832 Short-term borrowings, net................................... -- 281,946 163,327 Redemptions and Repayments- Common stock................................................. 15,308 195,002 130,133 Preferred stock.............................................. 85,466 38,464 52,159 Long-term debt............................................... 394,017 901,764 847,006 Short-term borrowings, net................................... 1,641,484 -- -- Common Stock Dividend Payments.................................. 334,633 334,220 341,467 ---------- ---------- ---------- Net cash provided from (used for) financing activities... 1,963,911 (879,992) (842,606) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: GPU acquisition, net of cash.................................... 2,013,218 -- -- Property additions.............................................. 852,449 587,618 624,901 Cash investments................................................ (24,518) (17,449) (41,213) Other........................................................... 233,526 120,195 28,022 ---------- ---------- ---------- Net cash used for investing activities................... 3,074,675 690,364 611,710 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents............ 170,920 (62,530) 33,990 Cash and cash equivalents at beginning of year.................. 49,258 111,788 77,798 ---------- ---------- ---------- Cash and cash equivalents at end of year*....................... $ 220,178 $ 49,258 $ 111,788 ========== ========== ========== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year- Interest (net of amounts capitalized)........................ $ 425,737 $ 485,374 $ 520,072 Income taxes................................................. $ 433,640 $ 512,182 $ 441,067 * 2001 excludes amounts in "Assets Pending Sale" in the Consolidated Balance Sheet as of December 31, 2001. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF TAXES For the Years Ended December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property........................................... $ 176,916 $ 281,374 $ 276,227 State gross receipts................................................. 102,335 221,385 220,117 Ohio kilowatt-hour excise............................................ 117,979 -- -- Social security and unemployment..................................... 44,480 39,134 37,019 Other................................................................ 13,630 5,788 10,689 ---------- ---------- ---------- Total general taxes........................................... $ 455,340 $ 547,681 $ 544,052 ========== ========== ========== PROVISION FOR INCOME TAXES: Currently payable- Federal........................................................... $ 375,108 $ 467,045 $ 433,872 State............................................................. 84,322 19,918 25,670 Foreign........................................................... 108 -- -- ---------- ---------- ---------- 459,538 486,963 459,542 ---------- ---------- ---------- Deferred, net- Federal........................................................... 37,888 (60,831) (36,021) State............................................................. (6,177) (18,598) (9,033) Foreign........................................................... (86) -- -- ---------- ---------- ---------- 31,625 (79,429) (45,054) ---------- ---------- ---------- Investment tax credit amortization................................... (22,545) (30,732) (19,661) ---------- ---------- ---------- Total provision for income taxes.............................. $ 468,618 $ 376,802 $ 394,827 ========== ========== ========== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes........................ $1,115,065 $ 975,772 $ 963,126 ========== ========== ========== Federal income tax expense at statutory rate......................... $ 390,273 $ 341,520 $ 337,094 Increases (reductions) in taxes resulting from- Amortization of investment tax credits............................ (22,545) (30,732) (19,661) State income taxes, net of federal income tax benefit............. 50,794 1,133 10,814 Amortization of tax regulatory assets............................. 30,419 38,702 23,908 Amortization of goodwill.......................................... 18,416 18,420 19,341 Preferred stock dividends......................................... 19,733 18,172 22,988 Other, net........................................................ (18,472) (10,413) 343 ---------- ---------- ---------- Total provision for income taxes.............................. $ 468,618 $ 376,802 $ 394,827 ========== ========== ========== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences........................................... $1,996,937 $1,245,297 $1,878,904 Customer receivables for future income taxes......................... 178,683 62,527 159,577 Competitive transition charge........................................ 1,289,438 1,070,161 537,114 Deferred sale and leaseback costs.................................... (77,099) (128,298) (129,775) Nonutility generation costs.......................................... (178,393) -- -- Unamortized investment tax credits................................... (86,256) (85,641) (96,036) Unused alternative minimum tax credits............................... -- (32,215) (101,185) Other comprehensive income........................................... (115,395) -- -- Other................................................................ (323,696) (37,724) (17,334) ---------- ---------- ---------- Net deferred income tax liability*............................ $2,684,219 $2,094,107 $2,231,265 ========== ========== ========== * 2001 excludes amounts in "Liabilities Related to Assets Pending Sale" on the Consolidated Balance Sheet as of December 31, 2001. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include FirstEnergy Corp., a public utility holding company, and its principal electric utility operating subsidiaries, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), Pennsylvania Power Company (Penn), The Toledo Edison Company (TE), American Transmission Systems, Inc. (ATSI), Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). These utility subsidiaries are referred to throughout as "Companies." FirstEnergy's 2001 results include the results of JCP&L, Met-Ed and Penelec for the period November 7, 2001 through December 31, 2001 (see Note 2 - Merger).The consolidated financial statements also include FirstEnergy's other principal subsidiaries: FirstEnergy Solutions Corp. (FES); FirstEnergy Facilities Services Group, LLC (FEFSG); MYR Group, Inc. (MYR); MARBEL Energy Corporation (MARBEL); FirstEnergy Nuclear Operating Company (FENOC); GPU Capital, Inc.; GPU Power, Inc.; FirstEnergy Service Company (FECO); and GPU Service, Inc. (GPUS). FES provides energy-related products and services and, through its FirstEnergy Generation Corp. (FGCO) subsidiary, operates FirstEnergy's nonnuclear generation business. FENOC operates the Companies' nuclear generating facilities. FEFSG is the parent company of several heating, ventilating, air conditioning and energy management companies, and MYR is a utility infrastructure construction service company. MARBEL is a fully integrated natural gas company. GPU Capital owns and operates electric distribution systems in foreign countries (see Note 2 - Merger) and GPU Power owns and operates generation facilities in foreign countries. FECO and GPUS provide legal, financial and other corporate support services to affiliated FirstEnergy companies. Significant intercompany transactions have been eliminated in consolidation. The Companies follow the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO), the Pennsylvania Public Utility Commission (PPUC), the New Jersey Board of Public Utilities (NJBPU) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES- The Companies' principal business is providing electric service to customers in Ohio, Pennsylvania and New Jersey. The Companies' retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service provided through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers and sales to wholesale customers. There was no material concentration of receivables as of December 31, 2001 or 2000, with respect to any particular segment of FirstEnergy's customers. CEI and TE sell substantially all of their retail customer receivables to Centerior Funding Corp. (CFC), a wholly owned subsidiary of CEI. CFC subsequently transfers the receivables to a trust under an asset-backed securitization agreement. The trust completed private sales of $50 million and $150 million of receivables-backed investor certificates in 2000 and 2001, respectively, in transactions that qualified for sale accounting treatment. CFC's creditors are entitled to be satisfied first out of the proceeds of CFC's assets. The 2001 private sale was used to repay a 1996 public sale of $150 million of receivables-backed investor certificates which was replaced under an amended securitization agreement. FirstEnergy's retained interest in the pool of receivables held by the trust (34% as of December 31, 2001) is stated at fair value, reflecting adjustments for anticipated credit losses. Sensitivity analyses reflecting a 10% and 20% increase in the rate of anticipated credit losses did not significantly affect FirstEnergy's retained interest in the pool of receivables. Of the $301 million sold to the trust and outstanding as of December 31, 2001, FirstEnergy had a retained interest in $101 million of the receivables. Accordingly, receivables recorded on the Consolidated Balance Sheets were reduced by approximately $200 million due to these sales. Collections of receivables previously transferred to the trust and used for the purchase of new receivables from CFC during 2001, totaled approximately $2.2 billion. CEI and TE processed receivables for the trust and received servicing fees of approximately $4.5 million in 2001. Expenses associated with the factoring discount related to the sale of receivables were $12 million in 2001. REGULATORY PLANS- Ohio's 1999 electric utility restructuring law allowed Ohio electric customers to select their generation suppliers beginning January 1, 2001, provided for a five percent reduction on the generation portion of residential customers' bills and the opportunity for utilities to recover transition costs, including regulatory assets. Under this law, the PUCO approved FirstEnergy's transition plan in 2000 as modified by a settlement agreement with major parties to the transition plan, which it filed on behalf of OE, CEI and TE (Ohio Companies). The settlement agreement included approval for recovery of the amounts of transition costs 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. The settlement also granted preferred access over FirstEnergy's subsidiaries to nonaffiliated marketers, brokers and aggregators to 1,120 megawatts (MW) of generation capacity through 2005 at established prices for sales to the Ohio Companies' retail customers. The Ohio Companies' base electric rates for distribution service under their prior respective regulatory plans were extended from December 31, 2005 through December 31, 2007. The transition rate credits for customers under their prior regulatory plans were also extended through the Ohio 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 resulted in the 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 planned changes in 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 a 5% reduction in the price of generation for residential customers. FirstEnergy's Ohio customers choosing 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. Based on annualized shopping levels as of December 31, 2001, FirstEnergy believes the maximum potential recovery reductions are approximately $174 million (OE - $87 million, CEI - $52 million and TE - $35 million). New Jersey is also evolving to a competitive electric utility marketplace. In March 2001, the NJBPU issued a Final Decision and Order (Final Order) with respect to JCP&L's rate unbundling, stranded cost and restructuring filings, which superseded its 1999 Summary Order. The Final Order confirms rate reductions set forth in the Summary Order, which remain in effect at increasing levels through July 2003 with rates after July 31, 2003 to be determined in a rate case commencing in 2002. The Final Order also confirms the right of customers to select their generation suppliers effective August 1, 1999, and includes the deregulation of electric generation service costs. The Final Order confirms the establishment of a non-bypassable societal benefits charge to recover costs which include nuclear plant decommissioning and manufactured gas plant remediation, as well as a non-bypassable market transition charge (MTC) primarily to recover stranded costs; however, the NJBPU deferred making a final determination of the net proceeds and stranded costs related to prior generating asset divestitures until JCP&L's request for an Internal Revenue Service (IRS) ruling regarding the treatment of associated federal income tax benefits is acted upon. Should the IRS ruling support the return of the tax benefits to ratepayers, JCP&L would need to record a corresponding charge to income of approximately $25 million; there would be no effect to FirstEnergy's net income as the contingency existed prior to the merger. JCP&L has an obligation to provide basic generation service (BGS), that is, it must act as provider of last resort (PLR) to non-shopping customers as a result of the NJBPU's restructuring plans. JCP&L obtains its supply of electricity to meet its BGS obligation to non-shopping customers almost entirely from contracted and open market purchases. JCP&L is permitted to defer for future collection from customers the amounts by which its costs of supplying BGS to non-shopping customers and costs incurred under nonutility generation (NUG) agreements exceed amounts collected through BGS and MTC rates. As of December 31, 2001, the accumulated deferred cost balance totaled approximately $300 million, after giving effect to the reduction discussed below. The Final Order provided for the ability to securitize stranded costs associated with the divested Oyster Creek Nuclear Generation Station. In February 2002, JCP&L received NJBPU authorization to issue $320 million of transition bonds to securitize the recovery of these costs. The NJBPU order also provides for a usage-based non-bypassable transition bond charge and for the transfer of the bondable transition property to another entity. JCP&L plans to sell transition bonds in the second quarter of 2002 which will be recognized on the Consolidated Balance Sheet. The Final Order also allows for additional securitization of JCP&L's deferred balance to the extent permitted by law upon application by JCP&L and a determination by the NJBPU that the conditions of the New Jersey restructuring legislation are met. There can be no assurance as to the extent, if any, that the NJBPU will permit such securitization. The obligation to provide BGS to non-shopping customers was bid out for the period commencing August 1, 2002. In June 2001, the four incumbent New Jersey electric distribution companies, including JCP&L, filed a joint proposal seeking NJBPU approval of a competitive bidding process to procure supply for the provision of BGS for the period of August 1, 2002 through July 31, 2003. In December 2001, the NJBPU authorized the auctioning of BGS to meet the electric demands of all customers who have not selected an alternative supplier. BGS for all four companies, for the period of August 1, 2002 to July 31, 2003, was simultaneously put out for bid. The auction, which ended on February 13, 2002 and was approved by the NJBPU on February 15, 2002, removed JCP&L's BGS obligation of 5,100 MW for the period from August 1, 2002 to July 31, 2003. The auction represents a transitional mechanism and a different model for the procurement of BGS commencing August 1, 2003 may be adopted. On September 26, 2001, the NJBPU approved the merger between FirstEnergy and GPU, Inc., (see Note 2 - Merger) subject to the terms and conditions set forth in a Stipulation of Settlement which had been signed by the major parties in the merger discussions. Under this Stipulation of Settlement, FirstEnergy agreed to reduce JCP&L's regulatory assets by $300 million, in order to ensure that customers receive the benefit of future merger savings. JCP&L wrote off $300 million of its deferred costs upon receipt of the final regulatory approval for the merger, which occurred on October 29, 2001. Pennsylvania enacted its electric utility competition law in 1996 with the phase-in of customer choice for generation suppliers completed as of January 1, 2001. The PPUC authorized 1998 rate restructuring plans for Penn, Met-Ed and Penelec which essentially resulted in the deregulation of their respective generation businesses. In 2000, the PPUC disallowed a portion of the requested additional stranded costs above those amounts granted in Met-Ed's and Penelec's 1998 rate restructuring plan orders. The PPUC required Met-Ed and Penelec to seek an IRS ruling regarding the return of certain unamortized investment tax credits and excess deferred income tax benefits to ratepayers. Similar to JCP&L's situation, if the IRS ruling ultimately supports returning these tax benefits to ratepayers, Met-Ed and Penelec would then reduce stranded costs by approximately $12 million and $25 million, respectively, plus interest and record a corresponding charge to income. Similar to JCP&L, there would be no effect to FirstEnergy's net income. As a result of their generating asset divestitures, Met-Ed and Penelec obtain their supply of electricity to meet their PLR obligations almost entirely from contracted and open market purchases. During 2000, their purchased power costs substantially exceeded the amounts they could recover under their capped generation rates which are in effect for varying periods, pursuant to their 1998 rate restructuring plans. In November 2000, Met-Ed and Penelec filed a petition with the PPUC seeking permission to defer for future recovery their energy costs in excess of amounts reflected in their capped generation rates. In January 2001, the PPUC consolidated this petition with the FirstEnergy/GPU merger proceeding (see Note 2 - Merger) for consideration and resolution in accordance with the merger procedural schedule. In June 2001, Met-Ed, Penelec and FirstEnergy entered into a Settlement Stipulation with all of the major parties in the combined merger and rate relief proceedings, that, in addition to resolving certain issues concerning the PPUC's approval of the FirstEnergy/GPU merger, also addressed Met-Ed's and Penelec's request for PLR rate relief. On June 20, 2001, the PPUC entered orders approving the Settlement Stipulation, which approved the merger and provided Met-Ed and Penelec PLR rate relief. Met-Ed and Penelec are permitted to defer for future recovery the difference between their actual energy costs and those reflected in their capped generation rates, retroactive to January 1, 2001. Deferral accounting will continue for such cost differences through December 31, 2005; should energy costs incurred by Met-Ed and Penelec during that period be below their respective capped generation rates, the difference would be used to reduce their recoverable deferred costs. Met-Ed's and Penelec's PLR obligations have been extended through December 31, 2010. Met-Ed's and Penelec's competitive transition charge (CTC) revenues will be applied first to PLR costs, then to non-NUG stranded costs and finally to NUG stranded costs through December 31, 2010. Met-Ed and Penelec would be permitted to recover any remaining stranded costs through a continuation of the CTC, after December 31, 2010, however, such recovery would extend to no later than December 31, 2015. Any amounts not expected to be recovered by December 31, 2015 would be written off at the time such nonrecovery becomes probable. Several parties had filed Petitions for Review with the Commonwealth Court of Pennsylvania regarding the PPUC's orders. On February 21, 2002, the Court affirmed the PPUC decision regarding the FirstEnergy/GPU merger, remanding the decision to the PPUC only with respect to the issue of merger savings. The Court reversed the PPUC's decision regarding the PLR obligations of Met-Ed and Penelec, and denied the related requests for rate relief by Met-Ed and Penelec. FirstEnergy is considering its response to the Court's decision, which could include asking the Pennsylvania Supreme Court to review the decision. FirstEnergy is unable to predict the outcome of these matters. All of the Companies' regulatory assets are expected to continue to be recovered under provisions of the Ohio transition plan and the respective Pennsylvania and New Jersey regulatory plans. Under the previous regulatory plan, the PUCO had authorized OE to recognize additional capital recovery related to its generating assets (which was reflected as additional depreciation expense) and additional amortization of regulatory assets during the prior regulatory plan period of at least $2 billion, and the PPUC had authorized Penn to accelerate at least $358 million, more than the amounts that would have been recognized if the prior regulatory plans were not in effect. These additional amounts were being recovered through rates. Under OE's prior regulatory plan, which was terminated at the end of 2000, and Penn's rate restructuring plan, OE's and Penn's cumulative additional capital recovery and regulatory asset amortization amounted to $1.424 billion. The application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), was discontinued in 1997 with respect to CEI's and TE's nuclear operations; in 1998 with respect to Penn's, Met-Ed's and Penelec's generation operations; in 1999 with respect to JCP&L's generation operations and in 2000 with respect to OE's generation business and the nonnuclear generation businesses of CEI and TE. JCP&L, Met-Ed and Penelec subsequently divested substantially all of their generating assets. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement, concluding that any supplemental regulated cash flows such as a CTC should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, $1.6 billion of impaired plant investments ($1.2 billion, $304 million and $53 million for OE, CEI and TE, respectively) were recognized as regulatory assets recoverable as transition costs through future regulatory cash flows. The following summarizes net assets included in property, plant and equipment relating to operations for which the application of SFAS 71 was discontinued, compared with the respective company's total assets as of December 31, 2001. SFAS 71 Discontinued Net Assets Total Assets -------------------------------------------------------- (In millions) OE.......... $ 984 $7,218 CEI......... 1,425 5,856 TE.......... 601 2,572 Penn........ 88 960 JCP&L....... 46 8,040 Met-Ed...... 18 3,607 -------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT- Property, plant and equipment reflects original cost (except for the Ohio Companies' and Penn's nuclear generating units and the former GPU companies' properties which were adjusted to fair value), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. In addition to FirstEnergy's wholly-owned facilities, JCP&L holds a 50% ownership interest in Yards Creek Pumped Storage Facility -- its net book value was approximately $21.5 million as of December 31, 2001. FirstEnergy also shares ownership interests in various foreign properties with an aggregate net book value of $1.9 billion, representing the fair value of FirstEnergy's interest. The Companies provide for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The respective annual composite rates for the Companies' electric plant in 2001, 2000 and 1999 (post merger periods only for JCP&L, Met-Ed and Penelec) are shown in the following table: Annual Composite Depreciation Rate --------------------------------------------------------- 2001 2000 1999 ---- ---- ---- OE............... 2.7% 2.8% 3.0% CEI.............. 3.2 3.4 3.4 TE............... 3.5 3.4 3.4 Penn............. 2.9 2.6 2.5 JCP&L............ 3.4 Met-Ed........... 3.0 Penelec.......... 2.9 --------------------------------------------------------- Annual depreciation expense in 2001 included approximately $128.7 million for future decommissioning costs applicable to the Companies' ownership and leasehold interests in five nuclear generating units, a demonstration nuclear reactor owned by a wholly-owned subsidiary of JCP&L, Met-Ed and Penelec and decommissioning liabilities for previously divested GPU nuclear generating units. The 2001 amounts reflected increases of approximately $60 million from implementing the Ohio utilities' transition plan in 2001. The Companies' share of the future obligation to decommission these units is approximately $2.5 billion in current dollars and (using a 4.0% escalation rate) approximately $5.4 billion in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Decommissioning of the demonstration nuclear reactor is expected to be completed in 2003; payments for decommissioning of the nuclear generating units are expected to begin in 2014, when actual decommissioning work is expected to begin. The Companies have recovered approximately $568 million for decommissioning through their electric rates from customers through December 31, 2001. The Companies have also recognized an estimated liability of approximately $46.5 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy (DOE), as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required by January 1, 2003. SFAS 143 requires the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the costs to settle the retirement obligation differ from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trusts will be recorded as investment income. FirstEnergy is currently assessing the new standard and has not yet quantified the impact on its financial statements. NUCLEAR FUEL- Nuclear fuel is recorded at original cost, which includes material, enrichment, fabrication and interest costs incurred prior to reactor load. The Companies amortize the cost of nuclear fuel based on the rate of consumption. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. RETIREMENT BENEFITS- FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the GPU pension plans were merged with the FirstEnergy plan. FirstEnergy uses the projected unit credit method for funding purposes and was not required to make pension contributions during the three years ended December 31, 2001. The assets of the pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. Costs for the year 2001 include the former GPU companies' pension and other postretirement benefit costs for the period November 7, 2001 through December 31, 2001. FirstEnergy provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. FirstEnergy pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by FirstEnergy. FirstEnergy recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on the Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1...... $1,506.1 $1,394.1 $ 752.0 $ 608.4 Service cost............................ 34.9 27.4 18.3 11.3 Interest cost........................... 133.3 104.8 64.4 45.7 Plan amendments......................... 3.6 41.3 -- -- Actuarial loss.......................... 123.1 17.3 73.3 121.7 Voluntary early retirement program...... -- 23.4 2.3 -- GPU acquisition......................... 1,878.3 -- 716.9 -- Benefits paid........................... (131.4) (102.2) (45.6) (35.1) ------------------------------------------------------------------------------------------- Benefit obligation as of December 31.... 3,547.9 1,506.1 1,581.6 752.0 ------------------------------------------------------------------------------------------- Change in fair value of plan assets: Fair value of plan assets as of January 1 1,706.0 1,807.5 23.0 4.9 Actual return on plan assets............ 8.1 0.7 12.7 (0.2) Company contribution.................... -- -- 43.3 18.3 GPU acquisition......................... 1,901.0 -- 462.0 -- Benefits paid........................... (131.4) (102.2) (6.0) -- ------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 3,483.7 1,706.0 535.0 23.0 ------------------------------------------------------------------------------------------- Funded status of plan................... (64.2) 199.9 (1,046.6) (729.0) Unrecognized actuarial loss (gain)...... 222.8 (90.9) 212.8 147.3 Unrecognized prior service cost......... 87.9 93.1 17.7 20.9 Unrecognized net transition obligation (asset)................................ -- (2.1) 101.6 110.9 ------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost.......... $ 246.5 $ 200.0 $ (714.5) $(449.9) =========================================================================================== Assumptions used as of December 31: Discount rate........................... 7.25% 7.75% 7.25% 7.75% Expected long-term return on plan assets 10.25% 10.25% 10.25% 10.25% Rate of compensation increase........... 4.00% 4.00% 4.00% 4.00% ===========================================================================================
Net pension and other postretirement benefit costs for the three years ended December 31, 2001 were computed as follows:
Other Pension Benefits Postretirement Benefits ------------------------ ------------------------- 2001 2000 1999 2001 2000 1999 ------------------------------------------------------------------------------------------------------ (In millions) Service cost............................ $ 34.9 $ 27.4 $ 28.3 $18.3 $11.3 $ 9.3 Interest cost........................... 133.3 104.8 102.0 64.4 45.7 40.7 Expected return on plan assets.......... (204.8) (181.0) (168.1) (9.9) (0.5) (0.4) Amortization of transition obligation (asset)................................ (2.1) (7.9) (7.9) 9.2 9.2 9.2 Amortization of prior service cost...... 8.8 5.7 5.7 3.2 3.2 3.3 Recognized net actuarial loss (gain).... -- (9.1) -- 4.9 -- -- Voluntary early retirement program...... 6.1 17.2 -- 2.3 -- -- ------------------------------------------------------------------------------------------------------ Net benefit cost........................ $ (23.8) $ (42.9) $ (40.0) $92.4 $68.9 $62.1 ======================================================================================================
The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Noncash financing and investing activities included the 2001 FirstEnergy common stock issuance of $2.6 billion for the GPU acquisition and capital lease transactions amounting to $3.1 million, $89.3 million and $36.2 million for the years 2001, 2000 and 1999, respectively. Commercial paper transactions of OES Fuel, Incorporated (a wholly owned subsidiary of OE) that have initial maturity periods of three months or less are reported net within financing activities under long-term debt and are reflected as currently payable long-term debt on the Consolidated Balance Sheets in anticipation of the expiration of the related long-term financing agreement in March 2002 (see Note 4G). All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 2001 2000 - ------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------- (In millions) Long-term debt*................... $12,897 $13,097 $5,853 $6,010 Preferred stock................... $ 636 $ 626 $ 247 $ 243 Investments other than cash and cash equivalents: Debt securities: Maturity (5-10 years)...... $ 439 $ 402 $ 460 $ 441 Maturity (more than 10 years) 990 1,009 1,026 1,051 Equity securities............. 15 15 16 16 All other..................... 1,730 1,734 924 935 - -------------------------------------------------------------------------------- $ 3,174 $ 3,160 $2,426 $2,443 ================================================================================ * Excluding approximately $1.75 billion of long-term in 2001 debt related to pending divestitures. The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to the Companies' ratings. Long-term debt and preferred stock subject to mandatory redemption of the former GPU companies were recognized at fair value in connection with the merger. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Companies have no securities held for trading purposes. Effective December 31, 1998, FirstEnergy began accounting for its commodity price derivatives, entered into specifically for trading purposes, on a mark-to-market basis in accordance with Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities," with gains and losses recognized in the Consolidated Statements of Income. On January 1, 2001, FirstEnergy adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", 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 $.03 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 non-derivative and derivative instruments, including forward contracts, options, futures contracts and swaps. The derivatives are used principally for hedging purposes and, to a lesser extent, for trading purposes. FirstEnergy's Risk Policy Committee, comprised of executive officers, 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 price, interest rate and foreign currency fluctuations. FirstEnergy's primary ongoing hedging activity involves cash flow hedges of electricity and natural gas purchases. The maximum periods over which the variability of electricity and natural gas cash flows are hedged are two and three years, respectively. Gains and losses from hedges of commodity price risks are included in net income when the underlying hedged commodities are delivered. FirstEnergy entered into interest rate derivative transactions during 2001 to hedge a portion of the anticipated interest payments on debt related to the GPU acquisition. Gains and losses from hedges of anticipated interest payments on acquisition debt will be included in net income over the periods that hedged interest payments are made - 5, 10 and 30 years. The current net deferred loss of $169.4 million included in Accumulated Other Comprehensive Loss (AOCL) as of December 31, 2001, for derivative hedging activity, as compared to the December 31, 2000 balance of $44.2 million (including the SFAS 133 cumulative adjustment) in deferred gains, resulted from a $181.1 million reduction related to current hedging activity and a $32.5 million reduction due to net hedge gains included in earnings during the year. Approximately $40.7 million (after tax) of the current net deferred loss on derivative instruments in AOCL is expected to be reclassified to earnings during the next twelve months as hedged transactions occur. However, the fair value of these derivative instruments will fluctuate from period to period based on various market factors and will generally be more than offset by the margin on related sales and revenues. REGULATORY ASSETS- The Companies recognize, as regulatory assets, costs which the FERC, PUCO, PPUC and NJBPU have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are expected to continue to be recovered from customers under the Companies' respective transition and regulatory plans. Based on those plans, the Companies continue to bill and collect cost-based rates for their transmission and distribution services, which remain regulated; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those operations. OE and Penn recognized additional cost recovery of $270 million in 2000 and $257 million in 1999, as additional regulatory asset amortization in accordance with their prior Ohio and current Pennsylvania regulatory plans. The Ohio companies and Penn recognized incremental transition cost recovery aggregating $309 million in accordance with the current Ohio transition plan and Pennsylvania regulatory plan. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: 2001 2000 ----------------------------------------------------------------------- (In millions) Regulatory transition charge................... $7,751.5 $3,489.0 Customer receivables for future income taxes... 433.0 139.9 Societal benefits charge....................... 166.6 -- Loss on reacquired debt........................ 80.0 51.0 Employee postretirement benefit costs.......... 98.6 15.3 Nuclear decommissioning, decontamination and spent fuel disposal costs.................... 80.2 -- Provider of last resort costs.................. 116.2 -- Property losses and unrecovered plant costs.... 104.1 -- Other.......................................... 82.4 32.5 ---------------------------------------------------------------------- Total $8,912.6 $3,727.7 ====================================================================== 2. MERGER: On November 7, 2001, the merger of FirstEnergy and GPU became effective pursuant to the Agreement and Plan of Merger, dated August 8, 2000 (Merger Agreement). As a result of the merger, GPU's former wholly owned subsidiaries, including JCP&L, Met-Ed and Penelec (collectively, the Former GPU Companies), became wholly owned subsidiaries of FirstEnergy. Under the terms of the Merger Agreement, GPU shareholders received the equivalent of $36.50 for each share of GPU common stock they owned, payable in cash and/or FirstEnergy common stock. GPU shareholders receiving FirstEnergy shares received 1.2318 shares of FirstEnergy common stock for each share of GPU common stock that they exchanged. The elections by GPU shareholders were subject to proration since the total elections received would have resulted in more than one-half of the GPU common stock being exchanged for FirstEnergy shares. FirstEnergy borrowed the funds for the cash portion of the merger consideration, approximately $2.2 billion, through a credit agreement dated as of October 2, 2001, from a group of banks led by Barclay's Bank Plc, as administrative agent; the borrowings were refinanced with long-term debt on November 15, 2001. FirstEnergy issued nearly 73.7 million shares of its common stock to GPU shareholders for the share portion of the transaction consideration. The merger was accounted for by the purchase method of accounting and, accordingly, the Consolidated Statements of Income include the results of the Former GPU Companies beginning November 7, 2001. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by FirstEnergy's management based on information currently available and on current assumptions as to future operations. The merger purchase accounting adjustments, which were recorded in the records of GPU's direct subsidiaries, primarily consist of: (1) revaluation of GPU's international operations to fair value; (2) revaluation of property, plant and equipment; (3) adjusting preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (4) recognizing additional obligations related to retirement benefits; and (5) recognizing estimated severance and other compensation liabilities. Other assets and liabilities were not adjusted since they remain subject to rate regulation on a historical cost basis. The severance and compensation liabilities are based on anticipated workforce reductions reflecting duplicate positions primarily related to corporate support groups including finance, legal, communications, human resources and information technology. The workforce reductions represent the expected reduction of approximately 1,000 employees at a cost of approximately $140 million. Merger related staffing reductions began in late 2001 and the remaining reductions are anticipated to occur through 2003 as merger-related transition assignments are completed. The merger greatly expanded the size and scope of our electric business and the goodwill recognized primarily relates to the regulated services segment. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price is subject to adjustment within one year of the merger. (In millions) ----------------------------------------------------------- Current assets................... $ 1,027 Goodwill......................... 3,698 Regulatory assets................ 4,352 Other............................ 5,595 ------- Total assets acquired........ 14,672 Current liabilities.............. (2,615) Long-term debt................... (2,992) Other............................ (4,785) -------- Total liabilities assumed.... (10,392) Net assets acquired pending sale. 566 -------- Net assets acquired.............. $ 4,846 DIVESTITURES-INTERNATIONAL OPERATIONS Prior to consummation of the GPU merger, FirstEnergy identified certain GPU international operations (see below) for divestiture within twelve months of the merger date. These operations constitute individual "lines of business" as defined in Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with physically and operationally separable activities. Application of EITF Issue No. 87-11, "Allocation of Purchase Price to Assets to Be Sold," required that expected, pre-sale cash flows, including incremental interest costs on related acquisition debt, of these operations be considered part of the purchase price allocation. Accordingly, subsequent to the merger date, results of operations and incremental interest costs related to these international subsidiaries have not been included in FirstEnergy's Consolidated Statement of Income. Additionally, assets and liabilities of these international operations have been segregated under separate captions on the Consolidated Balance Sheet as "Assets Pending Sale" and "Liabilities Related to Assets Pending Sale" (see the tables below). The following entities are included in such captions: Australia - Gas Transmission (GasNet) - ------------------------------------- GasNet Pty Ltd. and subsidiaries GPU GasNet Trading Pty Ltd. (and related trusts) United Kingdom - Electric Distribution - -------------------------------------- Avon Energy Partners Holdings Avon Energy Partners plc Midlands Electricity plc Midlands Power International Ltd. Argentina - Electric Distribution - --------------------------------- GPU Empresa Distribuidora Electrica Regional S.A. and affiliates In December 2001, FirstEnergy divested its Australian gas transmission companies through an initial public offering of GasNet's common stock. The IPO provided net proceeds of $125 million to FirstEnergy and immediately removed $290 million of GasNet-related debt from FirstEnergy's consolidated debt. On October 18, 2001, FirstEnergy and Aquila, Inc. (formerly UtiliCorp United) announced that Aquila made an offer to FirstEnergy to purchase Avon Energy Partners Holdings, FirstEnergy's wholly owned holding company of Midlands Electricity plc, for $2.1 billion including the assumption of $1.7 billion of debt. FirstEnergy accepted the offer upon completion of its merger with GPU and regulatory approvals for the transaction have been received by Aquila. One condition of regulatory approval requires that Aquila include a financial partner in the transaction. The transaction must be completed by April 26, 2002, or either party may terminate the original agreement. On March 18, 2002, FirstEnergy announced that it finalized terms of the agreement in which Aquila will acquire a 79.9 percent interest in Avon for approximately $1.9 billion (including the transfer of $1.7 billion of debt). FirstEnergy and Aquila together will own all of the outstanding shares of Avon through a jointly owned subsidiary, with each company having a 50-percent voting interest. Midlands maintains a defined benefit pension plan covering almost all full-time employees of Midlands. The plan is maintained separately from the FirstEnergy plan and will transfer upon completion of the sale. The pension benefit obligations as of the November 7, 2001 merger date and December 31, 2001 were approximately $1,263 million and $1,264 million, respectively, with the net change primarily due to actuarial gains of $12 million offset by benefits paid of $11 million. The fair values of plan assets as of November 7, 2001 and December 31, 2001, were approximately $1,313 million and $1,291 million, respectively, with the change including benefits paid of approximately $11 million. The 2001 post-merger net periodic benefit income for the last seven weeks of 2001 was approximately $3 million. The plan assumptions as of December 31, 2001 included a discount rate of 6.0%, an expected return on plan assets of 7.0% and a rate of compensation increase of 4.5%. As with the other international subsidiaries identified above, GPU's former Argentina operations, including GPU Empresa Distribuidora Electrica Regional S.A., were identified by FirstEnergy for divestiture within twelve months of the merger date. FirstEnergy is actively pursuing the sale of these operations. FirstEnergy has determined the fair value of the Argentina operations based on the best available information as of the date of the merger. Subsequent to that date, a number of economic events have occurred in Argentina which may have an impact on FirstEnergy's ability to realize the estimated fair value of the Argentina operations. These events include currency devaluation, restrictions on repatriation of cash, and the anticipation of future asset sales in that region by competitors. FirstEnergy has determined that the current economic conditions in Argentina have not eroded the fair value recorded for these operations, and as a result, an impairment writedown of this investment is not warranted as of December 31, 2001. FirstEnergy will continue to assess the potential impact of these and other related events on the realizability of the value recorded for the Argentina operations. Other international companies are being considered for sale, however; as of the merger date those sales were not judged to be probable of occurring within twelve months. Post-merger results of operations and incremental interest costs for the international operations included in "Assets Pending Sale" and "Liabilities Related to Assets Pending Sale" on FirstEnergy's Consolidated Balance Sheet as of December 31, 2001, are as follows: Post-Merger Deferred Results of Operations and Interest Costs International Operations ------------------------------------------- United Australia* Kingdom Argentina Total ---------- ------- --------- ----- (In millions) Revenues......................... $4.0 $ 99.4 $ 28.5 $131.9 Expenses......................... 2.9 58.3 62.8 124.0 Capitalized incremental interest costs.......................... 0.5 3.2 1.3 5.0 Net interest charges............. 1.2 20.2 3.2 24.6 Income taxes..................... 0.2 (20.5) (13.1) (33.4) -------------------------------------------- Net income (loss) capitalized. $0.2 $ 44.6 $(23.1) $ 21.7 ============================================ * Australian operations divested in December 2001 Consolidated Balance Sheets as of December 31, 2001 International Operations ---------------------------------- United Kingdom Argentina Total ------- --------- ----- Assets Pending Sale (In millions) Current assets........................ $ 554 $ 41 $ 595 Property, plant and equipment......... 1,738 177 1,915 Investments........................... 142 -- 142 Deferred charges...................... 691 75 766 ----------------------------------- Total.............................. $3,125 $293 $3,418 =================================== Liabilities Related to Assets Pending Sale Current liabilities: Currently payable long-term debt... $ 316 $ 2 $ 318 Short-term debt.................... 207 27 234 Other.............................. 501 2 503 Long-term debt........................ 1,347 85 1,432 Deferred credits*...................... 455 13 468 ------------------------------------ Total.............................. $2,826 $129 $2,955 ==================================== Net Assets Pending Sale............... $ 299 $164 $ 463 ==================================== * United Kingdom and Argentina are net of $3 million and $52 million, respectively, related to currency translation adjustments. SALE OF GENERATING ASSETS- On November 29, 2001, FirstEnergy reached an agreement to sell four coal-fired power plants (with an aggregate net book value of $539 million as of December 31, 2001) totaling 2,535 MW to NRG Energy, Inc. (NRG) for $1.5 billion ($1.355 billion in cash and $145 million in debt assumption). The net, after-tax gain from the sale, based on the difference between the sale price of the plants and their market price used in our Ohio restructuring transition plan, will be credited to customers by reducing the transition cost recovery period. FirstEnergy also entered into a power purchase agreement (PPA) with NRG. Under the terms of the PPA, NRG is obligated to sell to FirstEnergy up to 10.5 billion kilowatt-hours of electricity annually, similar to the average annual output of the plants, through 2005. The sale is expected to close in mid-2002. 3. LEASES: The Companies lease certain generating facilities, office space and other property and equipment under cancelable and noncancelable leases. OE sold portions of its ownership interests in Perry Unit 1 and Beaver Valley Unit 2 and entered into operating leases on the portions sold for basic lease terms of approximately 29 years. CEI and TE also sold portions of their ownership interests in Beaver Valley Unit 2 and Bruce Mansfield Units 1, 2 and 3 and entered into similar operating leases for lease terms of approximately 30 years. During the terms of their respective leases, OE, CEI and TE continue to be responsible, to the extent of their individual combined ownership and leasehold interests, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. They have the right, at the expiration of the respective basic lease terms, to renew their respective leases. They also have the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. The basic rental payments are adjusted when applicable federal tax law changes. OES Finance, Incorporated, a wholly owned subsidiary of OE, maintains deposits pledged as collateral to secure reimbursement obligations relating to certain letters of credit supporting OE's obligations to lessors under the Beaver Valley Unit 2 sale and leaseback arrangements. The deposits pledged to the financial institution providing those letters of credit are the sole property of OES Finance. In the event of liquidation, OES Finance, as a separate corporate entity, would have to satisfy its obligations to creditors before any of its assets could be made available to OE as sole owner of OES Finance common stock. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 2001, are summarized as follows: 2001 2000 1999 -------------------------------------------------------------------- (In millions) Operating leases Interest element............ $194.1 $202.4 $208.6 Other....................... 120.5 111.1 110.3 Capital leases Interest element............ 8.0 12.3 17.5 Other....................... 35.5 64.2 76.1 ------------------------------------------------------------------- Total rentals............ $358.1 $390.0 $412.5 =================================================================== The future minimum lease payments as of December 31, 2001, are: Operating Leases ----------------------------------- Capital Lease Capital Leases Payments Trusts Net - -------------------------------------------------------------------------------- (In millions) 2002.......................... $ 6.1 $ 322.2 $ 169.5 $ 152.7 2003.......................... 6.2 332.9 176.5 156.4 2004.......................... 6.0 294.9 110.7 184.2 2005.......................... 5.4 314.6 128.8 185.8 2006.......................... 5.4 323.2 140.2 183.0 Years thereafter.............. 9.8 3,131.8 1,095.4 2,036.4 ------------------------------------------------------------------------------ Total minimum lease payments.. 38.9 $4,719.6 $1,821.1 $2,898.5 ======== ======== ======== Executory costs............... 8.8 -------------------------------------- Net minimum lease payments.... 30.1 Interest portion.............. 10.7 -------------------------------------- Present value of net minimum lease payments.............. 19.4 Less current portion.......... 2.0 -------------------------------------- Noncurrent portion............ $17.4 ====================================== OE invested in the PNBV Capital Trust, which was established to purchase a portion of the lease obligation bonds issued on behalf of lessors in OE's Perry Unit 1 and Beaver Valley Unit 2 sale and leaseback transactions. CEI and TE established the Shippingport Capital Trust to purchase the lease obligation bonds issued on behalf of lessors in their Bruce Mansfield Units 1, 2 and 3 sale and leaseback transactions. The PNBV and Shippingport capital trust arrangements effectively reduce lease costs related to those transactions. 4. CAPITALIZATION: (A) RETAINED EARNINGS- There are no restrictions on retained earnings for payment of cash dividends on FirstEnergy's common stock. (B) EMPLOYEE STOCK OWNERSHIP PLAN- FirstEnergy funds the matching contribution for its 401(k) savings plan through an ESOP Trust. All full-time employees eligible for participation in the 401(k) savings plan are covered by the ESOP. The ESOP borrowed $200 million from OE and acquired 10,654,114 shares of OE's common stock (subsequently converted to FirstEnergy common stock) through market purchases. Dividends on ESOP shares are used to service the debt. Shares are released from the ESOP on a pro rata basis as debt service payments are made. In 2001, 2000 and 1999, 834,657 shares, 826,873 shares and 627,427 shares, respectively, were allocated to employees with the corresponding expense recognized based on the shares allocated method. The fair value of 5,117,375 shares unallocated as of December 31, 2001, was approximately $179.0 million. Total ESOP-related compensation expense was calculated as follows: 2001 2000 1999 - ----------------------------------------------------------------------------- (In millions) Base compensation........................... $25.1 $18.7 $18.3 Dividends on common stock held by the ESOP and used to service debt.................. (6.1) (6.4) (4.5) - ----------------------------------------------------------------------------- Net expense............................. $19.0 $12.3 $13.8 ============================================================================= (C) STOCK COMPENSATION PLANS- In 2001, FirstEnergy assumed responsibility for two new stock-based plans as a result of the merger with GPU. No further stock based compensation can be awarded under the GPU, Inc. Stock Option and Restricted Stock Plan for MYR Group Inc. Employees (MYR Plan) or the 1990 Stock Plan for Employees of GPU, Inc. and Subsidiaries (GPU Plan). All options and restricted stock under both Plans have been converted into FirstEnergy options and restricted stock. Options under the GPU Plan became fully vested on November 7, 2001, and will expire on or before June 1, 2010. Under the MYR Plan, all options and restricted stock maintained their original vesting periods, which range from one to four years, and will expire on or before December 17, 2006. Additional stock based plans administered by FirstEnergy include the Centerior Equity Plan (CE Plan) and the FirstEnergy Executive and Director Incentive Compensation Plan (FE Plan). All options are fully vested under the CE Plan, and no further awards are permitted. Outstanding options will expire on or before February 25, 2007. Under the FE Plan, total awards cannot exceed 15 million shares of common stock or their equivalent. Only stock options and restricted stock have been granted, with vesting periods ranging from six months to seven years. Collectively, the above plans are referred to as the FE Programs. Restricted common stock grants under the FE Programs were as follows: 2001 2000 1999 - --------------------------------------------------------------------------- Restricted common shares granted..... 133,162 208,400 8,000 Weighted average market price ....... $35.68 $26.63 $30.89 Weighted average vesting period (years) 3.7 3.8 5.8 Dividends restricted................. * Yes Yes ----------------------------------------------------------------------- * FE Plan dividends are paid as restricted stock on 4,500 shares; MYR Plan dividends are paid as unrestricted cash on 128,662 shares Stock option activity under the FE Programs was as follows: Number of Weighted Average Stock Option Activity Options Exercise Price - ----------------------------------------------------------------------------- Balance, December 31, 1998............ 364,286 $27.13 (182,330 options exercisable)......... 24.44 Options granted..................... 1,811,658 24.90 Options exercised................... 22,575 21.42 Balance, December 31, 1999............ 2,153,369 25.32 (159,755 options exercisable)......... 24.87 Options granted..................... 3,011,584 23.24 Options exercised................... 90,491 26.00 Options forfeited................... 52,600 22.20 Balance, December 31, 2000........... 5,021,862 24.09 (473,314 options exercisable)......... 24.11 Options granted..................... 4,240,273 28.11 Options exercised................... 694,403 24.24 Options forfeited................... 120,044 28.07 Balance, December 31, 2001............ 8,447,688 26.04 (1,828,341 options exercisable)....... 24.83 --------------------------------------------------------------------- As of December 31, 2001, the weighted average remaining contractual life of outstanding stock options was 7.8 years. Under the Executive Deferred Compensation Plan, covered employees can direct a portion of their Annual Incentive Award and/or Long Term Incentive Award into an unfunded FirstEnergy Stock Account to receive vested stock units. An additional 20% premium is received in the form of stock units based on the amount allocated to the FirstEnergy Stock Account. Dividends are calculated quarterly on stock units outstanding and are paid in the form of additional stock units. Upon withdrawal, stock units are converted to FirstEnergy shares. Payout occurs three years from the date of deferral. As of December 31, 2001, there were 234,558 stock units outstanding. FirstEnergy continues to apply APB 25, "Accounting for Stock Issued to Employees." As required by SFAS 123, "Accounting for Stock-Based Compensation," FirstEnergy has determined pro forma earnings as though FirstEnergy had accounted for employee stock options under the fair value method. The weighted average assumptions used in valuing the options and their resulting fair values are as follows: 2001 2000 1999 - ---------------------------------------------------------------------------- Valuation assumptions: Expected option term (years) 8.3 7.6 6.4 Expected volatility......... 23.45% 21.77% 20.03% Expected dividend yield..... 5.00% 6.68% 5.97% Risk-free interest rate..... 4.67% 5.28% 5.97% Fair value per option......... $4.97 $2.86 $3.42 --------------------------------------------------------------------------- The following table summarizes the pro forma effect of applying fair value accounting to FirstEnergy's stock options. 2001 2000 1999 - ----------------------------------------------------------------------------- Net Income (000) As Reported................. $646,447 $598,970 $568,299 Pro Forma................... $642,724 $597,378 $567,876 - -------------------------------------------------------------------------------- Earnings Per Share of Common Stock - Basic As Reported................. $2.82 $2.69 $2.50 Pro Forma................... $2.80 $2.69 $2.50 Diluted* As Reported................. $2.81 $2.69 $2.50 Pro Forma................... $2.79 $2.69 $2.50 * The denominator used in the calculation of diluted earnings per share of common stock includes the weighted average number of common shares outstanding (used as the denominator for the calculation of basic earnings per share of common stock) plus common stock equivalents resulting from the stock-based compensation plans discussed above-including 723,931 for options and 194,107 for stock units. (D) PREFERRED AND PREFERENCE STOCK- JCP&L's 7.52% Series K of preferred stock has a restriction which prevents early redemption prior to June 2002. Penn's 7.75% series has a restriction which prevents early redemption prior to July 2003. CEI's $90.00 Series S has no optional redemption provision. All other preferred stock may be redeemed by the Companies in whole, or in part, with 30-90 days' notice. TE exercised its option to redeem all outstanding shares of five series of preferred stock on February 1, 2002 as follows: Series Outstanding Shares Call Price ------------------------------------------------------ $ 7.76 150,000 $102.44 $ 7.80 150,000 $101.65 $ 8.32 100,000 $102.46 $ 10.00 190,000 $101.00 $ 2.21 1,000,000 $ 25.25 ----------------------------------------------------- CEI redeemed, pursuant to redemption provisions of its $42.40 Series T issue, all 200,000 shares outstanding on February 1, 2002 at a price of $500 per share. Met-Ed's and Penelec's preferred stock authorization consists of 10 million and 11.435 million shares, respectively, without par value. No preferred shares are currently outstanding for the two companies. The Companies' preference stock authorization consists of 8 million shares without par value for OE; 3 million shares without par value for CEI; and 5 million shares, $25 par value for TE. No preference shares are currently outstanding. (E) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Annual sinking fund provisions for the Companies' preferred stock are as follows: Redemption Price Per Series Shares Share - --------------------------------------------------------------------------- CEI $ 7.35 C 10,000 $ 100 90.00 S 17,750 1,000 JCP&L 8.65% J 83,333 100 7.52% K 25,000 100 Penn 7.625% 7,500 100 - --------------------------------------------------------------------------- Annual sinking fund requirements for the next five years are $30 million in 2002, $13 million in each year 2003 and 2004, and $4 million in each year 2005 and 2006. (F) SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST OR LIMITED PARTNERSHIP HOLDING SOLELY SUBORDINATED DEBENTURES OF SUBSIDIARIES- OE and CEI have each formed statutory business trusts as wholly owned financing subsidiaries for which they own all of the respective common securities. Each trust sold preferred securities and invested the gross proceeds in subordinated debentures of the applicable parent company and the sole assets of each trust are the applicable subordinated debentures. In each case, interest payment provisions of the subordinated debentures match the distribution payment provisions of the trust's preferred securities. In addition, upon redemption or payment at maturity of subordinated debentures, the applicable trust's preferred securities will be redeemed on a pro rata basis at their liquidation value. Under certain circumstances, the applicable subordinated debentures could be distributed to the holders of the outstanding preferred securities of the trust in the event that the trust is liquidated. The applicable parent company has effectively provided a full and unconditional guarantee of payments due on its trust's preferred securities. Their respective trust preferred securities are redeemable at 100% of their principal amount at the option of OE and, beginning in December 2006, at the option of CEI. Met-Ed and Penelec have each also formed statutory business trusts for substantially similar transactions as OE and CEI. However, ownership of the respective Met-Ed and Penelec trusts is through separate wholly-owned limited partnerships, of which a wholly-owned subsidiary of each company is the sole general partner. In these transactions, each trust invested the gross proceeds from the sale of its trust preferred securities in the preferred securities of the applicable limited partnership, which in turn invested those proceeds in the 7.35% and 7.34% subordinated debentures of Met-Ed and Penelec, respectively. In each case, the applicable parent company has effectively provided a full and unconditional guarantee of its obligations under its trust's preferred securities. The Met-Ed and Penelec trust preferred securities are redeemable at the option of Met-Ed and Penelec beginning in May 2004 and September 2004, respectively, at 100% of their principal amount. Additionally, JCP&L has formed a limited partnership for a substantially similar transaction; however, no statutory trust is involved. That limited partnership, of which JCP&L is the sole general partner, invested the gross proceeds from the sale of its monthly income preferred securities (MIPS) in JCP&L's 8.56% subordinated debentures. JCP&L has effectively provided a full and unconditional guarantee of its obligations under its limited partnership's MIPS. The limited partnership's MIPS are redeemable at the option of JCP&L at 100% of their principal amount. In all of these transactions, interest on the subordinated debentures (and therefore the distributions on trust preferred securities or MIPS) may be deferred for up to 60 months, but the parent company may not pay dividends on, or redeem or acquire, any of its cumulative preferred or common stock until deferred payments on its subordinated debentures are paid in full. The following table lists the subsidiary trusts and limited partnership and information regarding their preferred securities outstanding as of December 31, 2001.
- ----------------------------------------------------------------------------------------- Preferred Securities (a) ------------------------------ Stated Subordinated Maturity Rate Value Debentures - ------------------------------------------------------------------------------------------ (In millions) Ohio Edison Financing Trust (b)...... 2025 9.00% $120.0 $123.7 Cleveland Electric Financing Trust (b) 2031 9.00% $100.0 $103.1 Met-Ed Capital Trust (c)............. 2039 7.35% $100.0 $103.1 Penelec Capital Trust (c)............ 2039 7.34% $100.0 $103.1 JCP&L, Capital L.P. (b).............. 2044 8.56% $125.0 $128.9 ========================================================================================== (a) The liquidation value is $25 per security. (b) The sole assets of the trust or limited partnership are the parent company's subordinated debentures with the same rate and maturity date as the preferred securities. (c) The sole assets of the trust are the preferred securities of Met-Ed Capital II, L.P. and Penelec Capital II, L.P., respectively, whose sole assets are the parent company's subordinated debentures with the same rate and maturity date as the preferred securities.
(G) LONG-TERM DEBT- The first mortgage indentures and their supplements, which secure all of the Companies' first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Companies. Based on the amount of bonds authenticated by the Trustees through December 31, 2001, the Companies' annual sinking and improvement fund requirements for all bonds issued under the mortgages amounts to $66.9 million. OE, TE and Penn expect to deposit funds in 2002 that will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes against unfunded property additions or against previously retired bonds. This method can result in minor increases in the amount of the annual sinking fund requirement. JCP&L, Met-Ed and Penelec expect to fulfill their sinking and improvement fund obligation by providing bondable property additions and/or retired bonds to the Trustee to meet their annual sinking fund requirement. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases and long-term debt included in "Liabilities Related to Assets Pending Sale") for the next five years are: (In millions) --------------------------------- 2002.............. $1,654.7 2003.............. 928.1 2004.............. 1,421.1 2005.............. 853.3 2006.............. 1,432.5 --------------------------------- The Companies' obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $287.6 million and noncancelable municipal bond insurance policies of $493.9 million to pay principal of, or interest on, the pollution control revenue bonds. To the extent that drawings are made under the letters of credit, the Companies are entitled to a credit against their obligation to repay those bonds. The Companies pay annual fees of 1.00% to 1.375% of the amounts of the letters of credit to the issuing banks and are obligated to reimburse the banks for any drawings thereunder. FirstEnergy had unsecured borrowings of $250 million as of December 31, 2001, supported by a $500 million long-term revolving credit facility agreement which expires November 29, 2004. As of December 31, 2001, FirstEnergy currently pays an annual facility fee of 0.25% on the total credit facility amount. The fee is subject to change based on credit agency ratings for FirstEnergy. OE had no unsecured borrowings as of December 31, 2001 under a $250 million long-term revolving credit facility agreement which expires November 18, 2002. OE must pay an annual facility fee of 0.20% on the total credit facility amount. In addition, the credit agreement provides that OE maintain unused first mortgage bond capability for the full credit agreement amount under OE's indenture as potential security for the unsecured borrowings. CEI and TE have letters of credit of approximately $222 million in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in May 2002. The letters of credit are secured by first mortgage bonds of CEI and TE in the proportion of 40% and 60%, respectively (see Note 3). OE's and Penn's nuclear fuel purchases are financed through the issuance of OES Fuel commercial paper and loans, both of which are supported by a $141.5 million long-term bank credit agreement which expires March 31, 2002. FirstEnergy does not anticipate extending the credit agreement. Accordingly, the commercial paper and loans are reflected as currently payable long-term debt on the December 31, 2001 Consolidated Balance Sheet. OES Fuel must pay an annual facility fee of 0.20% on the total line of credit and an annual commitment fee of 0.0625% on any unused amount. (H) COMPREHENSIVE INCOME- Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholders' equity except those resulting from transactions with common stockholders. As of December 31, 2001, accumulated other comprehensive income (loss) consisted of a minimum liability for unfunded retirement benefits of $0.6 million, unrealized gains on investments in securities available for sale of $1.0 million and unrealized losses on derivative instrument hedges of $169.4 million. 5. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT: Short-term borrowings outstanding as of December 31, 2001, consisted of $688.3 million of bank borrowings and $159.8 million of OES Capital, Incorporated commercial paper. Total borrowings include $233.8 million related to pending divestitures (see Note 2 - Merger) that are included in "Liabilities Related to Assets Pending Sale" on the Consolidated Balance Sheet as of December 31, 2001. OES Capital is a wholly owned subsidiary of OE whose borrowings are secured by customer accounts receivable. OES Capital can borrow up to $170 million under a receivables financing agreement at rates based on certain bank commercial paper and is required to pay an annual fee of 0.20% on the amount of the entire finance limit. The receivables financing agreement expires in 2002. FirstEnergy and its subsidiaries have various credit facilities (including a FirstEnergy $1 billion short-term revolving credit facility) with domestic and foreign banks that provide for borrowings of up to $1.291 billion under various interest rate options. OE's short-term borrowings may be made under its lines of credit on its unsecured notes. To assure the availability of these lines, FirstEnergy and its subsidiaries are required to pay annual commitment fees that vary from 0.125% to 0.20%. These lines expire at various times during 2002. The weighted average interest rates on short-term borrowings outstanding as of December 31, 2001 and 2000, were 3.80% and 7.92%, respectively. 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- FirstEnergy's current forecast reflects expenditures of approximately $3.4 billion for property additions and improvements from 2002-2006, of which approximately $850 million is applicable to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $536 million, of which approximately $54 million applies to 2002. During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $507 million and $101 million, respectively, as the nuclear fuel is consumed. 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 were made on the open market, at prevailing prices, and were funded primarily through the use of operating cash flows. During 2001, 2000 and 1999, FirstEnergy repurchased and retired 550,000 shares (average price of $27.82 per share), 7.9 million shares (average price of $24.51 per share) and 4.6 million shares (average price of $28.08 per share), respectively. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. The Companies' maximum potential assessment under the industry retrospective rating plan would be $352.4 million per incident but not more than $40 million in any one year for each incident. The Companies are also insured under policies for each nuclear plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Companies have also obtained approximately $1.2 billion of insurance coverage for replacement power costs. Under these policies, the Companies can be assessed a maximum of approximately $71 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Companies intend to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Companies' plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Companies' insurance policies, or to the extent such insurance becomes unavailable in the future, the Companies would remain at risk for such costs. 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 $225 million, which is included in the construction forecast provided under "Capital Expenditures" for 2002 through 2006. 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 oxide (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 nineteen states and the District of Columbia, including New Jersey, Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. State Implementation Plans (SIP) must comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania submitted a SIP that requires compliance with the NOx budgets at the 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. 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 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. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, the Companies' proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. The Companies 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. In addition, JCP&L has accrued liabilities for environmental remediation of former manufactured gas plants in New Jersey; those costs are being recovered by JCP&L through a non-bypassable societal benefits charge. The Companies have total accrued liabilities aggregating approximately $60 million as of December 31, 2001. FirstEnergy does not believe environmental remediation costs will have a material adverse effect on its financial condition, cash flows or results of operations. OTHER LEGAL PROCEEDINGS- Various lawsuits, claims and proceedings related to FirstEnergy's normal business operations are pending against FirstEnergy and its subsidiaries. The most significant are described below. Unit 2 of the Three Mile Island Nuclear Plant (TMI-2) was acquired by FirstEnergy in 2001 as part of the merger with GPU. As a result of the 1979 TMI-2 accident, claims for alleged personal injury against JCP&L, Met-Ed, Penelec and GPU were filed in the U.S. District Court for the Middle District of Pennsylvania. In 1996, the District Court granted a motion for summary judgment filed by GPU and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. In November 1999, the U.S. Court of Appeals for the Third Circuit affirmed the District Court's dismissal of the ten "test cases," but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. In September 2000, GPU filed for a summary judgment in the District Court. Meanwhile, the plaintiffs appealed to the Third Circuit for a review of the District Court's decision placing limitations on the remaining plaintiffs' suits. In April 2001, the Third Circuit affirmed the District Court's decision. In July 2001, GPU renewed its motion for a summary judgment on the remaining 2,100 claims in the District Court. On January 15, 2002, the District Court granted GPU's amended motion for summary judgment. On February 14, 2002 plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. In addition to the approximately 2,100 claims for which summary judgment has been granted, there is other pending litigation arising out of the TMI-2 accident. This litigation consists of the following: eight personal injury cases that were not consolidated with the above-referenced approximately 2,100 claims; two class actions brought on behalf of plaintiffs alleging additional injuries diagnosed after the filing of the complaints in the above-referenced case; a case alleging exposure during the post-accident cleanup of the TMI-2 plant; and claims by individual businesses for economic loss resulting from the TMI-2 accident. Although unable to predict the outcome of this litigation, FirstEnergy believes that any liability to which it might be subject by reason of the TMI-2 accident will not exceed its financial protection under the Price-Anderson Act. In July 1999, the Mid-Atlantic states experienced a severe heat storm which resulted in power outages throughout the service territories of many electric utilities, including the territory of JCP&L. In an investigation into the causes of the outages and the reliability of the transmission and distribution systems of all four New Jersey electric utilities, the NJBPU concluded that there was not a prima facie case demonstrating that, overall, JCP&L provided unsafe, inadequate or improper service to its customers. Two class action lawsuits (subsequently consolidated into a single proceeding) were filed in New Jersey Superior Court in July 1999 against JCP&L, GPU and other GPU companies seeking compensatory and punitive damages arising from the July 1999 service interruptions in the JCP&L territory. In May 2001, the court denied without prejudice the defendants' motion seeking decertification of the class. Discovery continues in the class action, but no trial date has been set. The judge has set a schedule under which factual legal discovery would conclude in March 2002, and expert reports would be exchanged by June 2002. In October 2001, the court held argument on the plaintiffs' motion for partial summary judgment, which contends that JCP&L is bound to several findings of the NJBPU investigation. The plaintiffs' motion was denied by the Court in November 2001 and the plaintiffs' motion to file an appeal of this decision was denied by the New Jersey Appellate Division. JCP&L has also filed a motion for partial summary judgement that is currently pending before the Superior Court. FirstEnergy is unable to predict the outcome of these matters. OTHER COMMITMENTS, GUARANTEES AND CONTINGENCIES- GPU had made significant investments in foreign businesses and facilities through its GPU Electric and GPU Power subsidiaries. Although FirstEnergy will attempt to mitigate its risks related to foreign investments, it faces additional risks inherent in operating in such locations, including foreign currency fluctuations. GPU Electric, through its subsidiary, Midlands, has a 40% equity interest in a 586 MW power project in Pakistan (the Uch Power Project), which commenced commercial operations in October 2000. GPU Electric's investment in this project as of December 31, 2001 was approximately $38 million, plus a guaranty letter of credit of $3.6 million, and its share of the projected completion costs represents an additional $4.8 million commitment. Cinergy (the former owner of 50% of Midlands Electricity plc) agreed to fund up to an aggregate of $20 million of the required capital contributions, for a period of one year from July 15, 1999, and "cash losses" which could be incurred on the Uch Power Project, for a period of up to ten years from July 15, 1999. Cinergy has reimbursed GPU Electric $4.9 million through December 31, 2001, leaving a remaining commitment for future cash losses of up to $15.1 million. Midlands also has a 31% equity interest in a 478 MW power project in Turkey (the Trakya Power Project). Trakya is presently engaged in a foreign currency conversion issue with TETTAS (the state owned electricity purchaser). Midlands established a $16.5 million reserve for non-recovery relating to that issue as of December 31, 2001. These commitments and contingencies associated with Midlands will transfer to the new partnership upon completion of the sale discussed in Note 2 - - Merger, with FirstEnergy being responsible for its lower proportionate interest. EI Barranquilla, a wholly owned subsidiary of GPU Power, is an equity investor in Termobarranquilla S.A., Empresa de Servicios Publicos (TEBSA), which owns a Colombian independent power generation project. As of December 31, 2001, GPU Power has an investment of approximately $109.4 million in TEBSA and is committed, under certain circumstances, to make additional standby equity contributions of $21.3 million, which FirstEnergy has guaranteed. The total outstanding senior debt of the TEBSA project is $315 million at December 31, 2001. The lenders include the Overseas Private Investment Corporation, US Export Import Bank and a commercial bank syndicate. GPU had guaranteed the obligations of the operators of the TEBSA project, up to a maximum of $5.8 million (subject to escalation) under the project's operations and maintenance agreement. GPU believed that various events of default have occurred under the loan agreements relating to the TEBSA project. In addition, questions have been raised as to the accuracy and completeness of information provided to various parties to the project in connection with the project's formation. FirstEnergy continues to discuss these issues and related matters with the project lenders, CORELCA (the government owned Colombian electric utility with an ownership interest in the project) and the Government of Colombia. Moreover, in September 2001, the DIAN (the Colombian national tax authority) had presented TEBSA with a statement of charges alleging that certain lease payments made under the Lease Agreement with Los Amigos Leasing Company (an indirect wholly owned subsidiary of GPU Power) violated Colombian foreign exchange regulations and were, therefore, subject to substantial penalties. The DIAN has calculated a statutory penalty amounting to approximately $200 million and gave TEBSA two months to respond to the statement of charges. In November 2001, TEBSA filed a formal response to this statement of charges. TEBSA is continuing to review the DIAN's position and has been advised by its Colombian counsel that the DIAN's position is without substantial legal merit. FirstEnergy is unable to predict the outcome of these matters. 7. SEGMENT INFORMATION: FirstEnergy operates under the following reportable segments: regulated services, competitive services and other (primarily corporate support services and international operations acquired in the GPU merger). FirstEnergy's primary segment is its regulated services, which include eight electric utility operating companies in Ohio, Pennsylvania and New Jersey that formerly provided bundled electric service. Its other material business segment consists of the subsidiaries that operate unregulated energy and energy-related businesses. 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 a portion of its required generation through power supply agreements with the competitive services segment. The competitive services segment includes all domestic unregulated energy and energy-related services including commodity sales (both electricity and natural gas) in the retail and wholesale markets, marketing, generation and sourcing of commodity requirements, as well as other competitive energy-application services. Competitive products are increasingly marketed to customers as bundled services. 2000 and 1999 financial data are pro forma amounts to represent 2001 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) 2001 ---- External revenues..................... $ 5,729 $2,165 $ 11 $ 94 (a) $ 7,999 Internal revenues..................... 1,480 2,011 350 (3,841)(b) -- Total revenues..................... 7,209 4,176 361 (3,747) 7,999 Depreciation and amortization......... 841 21 28 -- 890 Net interest charges.................. 571 25 74 (114)(b) 556 Income taxes.......................... 469 45 (40) -- 474 Income before cumulative effect of a change in accounting............... 640 66 (51) -- 655 Net income............................ 640 57 (51) -- 646 Total assets.......................... 28,054 2,981 6,317 -- 37,352 Property additions.................... 447 375 30 -- 852 2000 ---- External revenues..................... $ 5,415 $1,545 $ 1 $ 68 (a) $ 7,029 Internal revenues..................... 1,364 2,280 306 (3,950)(b) -- Total revenues..................... 6,779 3,825 307 (3,882) 7,029 Depreciation and amortization......... 919 13 2 -- 934 Net interest charges.................. 558 10 19 (58)(b) 529 Income taxes.......................... 297 95 (15) -- 377 Net income............................ 465 137 (3) -- 599 Total assets.......................... 14,682 2,685 574 -- 17,941 Property additions.................... 422 126 40 -- 588 1999 ---- External revenues..................... $ 5,448 $ 796 $ 60 $ 16 (a) $ 6,320 Internal revenues..................... 1,274 2,240 184 (3,698)(b) -- Total revenues..................... 6,722 3,036 244 (3,682) 6,320 Depreciation and amortization......... 928 10 -- -- 938 Net interest charges.................. 613 8 6 (55)(b) 572 Income taxes.......................... 288 90 17 -- 395 Net income............................ 414 129 25 -- 568 Total assets.......................... 16,792 1,030 402 -- 18,224 Property additions.................... 418 207 -- -- 625 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.
Products and Services --------------------- Energy Related Electricity Oil & Gas Sales and Year Sales Sales Services ---- ----------- --------- -------------- (In millions) 2001 $6,078 $792 $693 2000 5,537 582 563 1999 5,253 203 503 2001 Geographic Information Revenues Assets --------------------------- -------- ------ (In millions) United States............... $7,991 $32,187 Foreign countries*.......... 8 5,165 ------ ------- Total..................... $7,999 $37,352 * See Note 2 for discussion of planned divestitures of international operations.
8. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 2001 and 2000. March 31, June 30, September 30, December 31, Three Months Ended 2001 2001 2001 2001(a) - ---------------------------------------------------------------------------------------------------------------- (In millions, except per share amounts) Revenues....................................... $1,985.7 $1,804.1 $1,951.6 $2,257.9 Expenses....................................... 1,669.4 1,416.7 1,412.1 1,816.0 - ---------------------------------------------------------------------------------------------------------------- Income Before Interest and Income Taxes........ 316.3 387.4 539.5 441.9 Net Interest Charges........................... 126.3 121.0 124.1 184.3 Income Taxes................................... 83.8 120.4 181.3 89.0 - ---------------------------------------------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change...... 106.2 146.0 234.1 168.6 Cumulative Effect of Accounting Change (Net of Income Taxes) (Note 1).............. (8.5) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Net Income..................................... $ 97.7 $ 146.0 $ 234.1 $ 168.6 ================================================================================================================ Basic Earnings Per Share of Common Stock: Before Cumulative Effect of Accounting Change $ .49 $ .67 $ 1.07 $ .64 Cumulative Effect of Accounting Change (Net of Income Taxes) (Note 1)............ (.04) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share of Common Stock....... $ .45 $ .67 $ 1.07 $ .64 - ---------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock: Before Cumulative Effect of Accounting Change $ .49 $ .67 $ 1.06 $ .64 Cumulative Effect of Accounting Change (Net of Income Taxes) (Note 1)............ (.04) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share of Common Stock..... $ .45 $ .67 $ 1.06 $ .64 ================================================================================================================ (a) Results for the former GPU companies are included from the November 7, 2001 acquisition date through December 31, 2001.
March 31, June 30, September 30, December 31, Three Months Ended 2000 2000 2000 2000 - ---------------------------------------------------------------------------------------------------------------- (In millions, except per share amounts) Revenues....................................... $1,607.9 $1,702.1 $1,891.7 $1,827.3 Expenses.................................... 1,234.1 1,338.0 1,433.1 1,518.9 - ---------------------------------------------------------------------------------------------------------------- Income Before Interest and Income Taxes........ 373.8 364.1 458.6 308.4 Net Interest Charges........................... 135.0 134.4 131.2 128.5 Income Taxes................................... 97.9 95.1 129.2 54.6 - ---------------------------------------------------------------------------------------------------------------- Net Income..................................... $ 140.9 $ 134.6 $ 198.2 $ 125.3 ================================================================================================================ Basic and Diluted Earnings per Share of Common Stock................................ $ .63 $ .60 $ .89 $ .57 ================================================================================================================
9. PRO FORMA COMBINED CONDENSED FIRSTENERGY STATEMENTS OF INCOME (UNAUDITED): The following pro forma combined condensed statements of income of FirstEnergy give effect to the FirstEnergy/GPU merger as if it had been consummated on January 1, 2000, with the purchase accounting adjustments actually recognized in the business combination (see Note 2 - Merger). The pro forma combined condensed financial statements have been prepared to reflect the merger under the purchase method of accounting with FirstEnergy acquiring GPU. Under the purchase method of accounting, tangible and identifiable intangible assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the purchase price, including estimated fees and expenses related to the merger, over the net assets acquired (which included existing goodwill of $1.9 billion) is classified as goodwill and amounts to an additional $2.3 billion. In addition, the pro forma adjustments reflect a reduction in debt from application of the proceeds from certain pending divestitures as well as the related reduction in interest costs. Year Ended December 31, ----------------------- 2001 2000 ---- ---- (In millions, except per share amounts) Revenues................................. $12,108 $11,703 Expenses................................. 9,768 9,377 - ------------------------------------------------------------------------- Income Before Interest and Income Taxes.. 2,340 2,326 Net Interest Charges..................... 941 977 Income Taxes............................. 561 527 - ------------------------------------------------------------------------- Net Income............................... $ 838 $ 822 - ------------------------------------------------------------------------- Earnings per Share of Common Stock....... $ 2.87 $ 2.77 - ------------------------------------------------------------------------- EX-21 19 ex21fe.txt LIST OF SUBS - FE EXHIBIT 21 FIRSTENERGY CORP. LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 2001 Ohio Edison Company - Incorporated in Ohio The Cleveland Electric Illuminating Company - Incorporated in Ohio The Toledo Edison Company - Incorporated in Ohio Centerior Service Company - Incorporated in Ohio FirstEnergy Properties Company - Incorporated in Ohio FirstEnergy Ventures Corporation - Incorporated in Ohio FirstEnergy Facilities Services Group, LLC - Incorporated in Ohio FirstEnergy Securities Transfer Company - Incorporated in Ohio FirstEnergy Service Company - Incorporated in Ohio FirstEnergy Solutions Corp. - Incorporated in Ohio MARBEL Energy Corporation - Incorporated in Ohio FirstEnergy Nuclear Operating Company - Incorporated in Ohio FirstEnergy Holdings, LLC - Incorporated in Ohio FE Acquisition Corp. - Incorporated in Ohio American Transmission Systems, Inc. - Incorporated in Ohio FELHC, Inc. - Incorporated in Ohio Jersey Central Power & Light Company - Incorporated in New Jersey Metropolitan Edison Company - Incorporated in Pennsylvania Pennsylvania Electric Company - Incorporated in Pennsylvania GPU Advanced Resources, Inc. - Incorporated in Delaware GPU Capital, Inc. - Incorporated in Delaware GPU Diversified Holdings, LLC - Incorporated in Delaware GPU Nuclear, Inc. - Incorporated in New Jersey GPU Power, Inc. - Incorporated in Delaware GPU Service, Inc. - Incorporated in Pennsylvania GPU Telecom Services, Inc. - Incorporated in Delaware MYR Group, Inc. - Incorporated in Delaware Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 2001, is not included in the printed document. EX-23 20 ex23fe.txt ARTHUR ANDERSEN CONSENT - FE EXHIBIT 23 FIRSTENERGY CORP. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into FirstEnergy Corp.'s previously filed Registration Statements, File No. 333-40063, No. 333-48587, No. 333-48651, No. 333-58279, No. 333-65409, No. 333-75985, No. 333-56094, No. 333-62886, No. 333-67798, No. 333-69856, No. 333-72764, No. 333-72766, No. 333-72768 and No. 333-81183. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 29, 2002. EX-99 21 ex99fe.txt LETTER TO SEC RE: ARTHUR ANDERSEN - FE Exhibit 99 March 29, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Temporary Note 3T to Article 3 of Regulation S-X Ladies and Gentlemen: In connection with the audit of the consolidated financial statements of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and for the year then ended, Arthur Andersen LLP (Andersen) has issued its report dated March 18, 2002. Andersen's report is included in FirstEnergy's Annual Report on Form 10-K for the year ended December 31, 2001. FirstEnergy has received the following representations from Andersen with respect to their audit: o The FirstEnergy audit was subject to Andersen's quality control system for their U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards. o There was appropriate continuity of Andersen personnel working on the FirstEnergy audit. o There was appropriate availability of national office consultation for the FirstEnergy audit. o There was appropriate availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the FirstEnergy audit. Sincerely, /s/Harvey L. Wagner ---------------------------------- Harvey L. Wagner Vice President and Controller EX-3 22 ex3-1.txt AMENDED & RESTATED CODE OF REGS - OE AMENDED AND RESTATED CODE OF REGULATIONS OF OHIO EDISON COMPANY (Effective March 15, 2002) MEETINGS OF SHAREHOLDERS Section 1. Annual Meetings. - ---------- ---------------- The annual meeting of shareholders shall be held on such date and at such time as the Board of Directors may determine each year. Such meetings may be held within or without the State of Ohio at such time and place as the directors may determine. Section 2. Special Meetings. - ---------- ----------------- Special meetings of the shareholders may be called at any time by (i) the Chairman of the Board, (ii) the President, (iii) the Directors, by action at a meeting or a majority of the Directors acting without a meeting, or (iv) the holders of 25% or more of the outstanding shares entitled to vote thereat. Such meetings may be held within or without the State of Ohio at such time and place as may be specified in the notice thereof. Section 3. Notice of Meetings. - ---------- ------------------- Written notice of every annual or special meeting of the shareholders stating the time, place and purposes thereof shall be given to each shareholder entitled to notice as provided by law, not less than seven (7) nor more than sixty (60) days before the date of the meeting. Such notice may be given by or at the direction of the Chairman of the Board, the President or the Corporate Secretary. Except to the full extent that notice is legally permitted (now or hereafter) to be given by any other form of media, including any form of electronic or other communications, notice shall be given by personal delivery or by mail addressed to the shareholder at his last address as it appears on the records of the Corporation. Any shareholder may waive in writing notice of any meeting, either before or after the holding of such meeting, and, by attending any meeting without protesting the lack of proper notice, shall be deemed to have waived notice thereof. Section 4. Business Transacted at Meetings. - ---------- -------------------------------- Business transacted at any meeting of shareholders shall be for the purposes stated in the notice. Section 5. Quorum and Adjournments. - ---------- ------------------------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 6. Required Vote; Inspectors. - ---------- -------------------------- (a) When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Articles of Incorporation a different vote is required in which case such express provision shall govern and control the decision of such question. (b) Inspectors of election may be appointed to act at any meeting of shareholders in accordance with Ohio law. Section 7. Voting Power of Shareholders. - ---------- ----------------------------- Every shareholder of record of the Corporation shall be entitled at each meeting of shareholders to one vote for each share of Common Stock held by such shareholder, one vote for each share of Preferred Stock, $100 par value, held by such shareholder, and one-quarter vote for each share of Class A Preferred Stock, $25 par value, held by such shareholder, in each case according to the books of the Corporation as of the date of such vote or, if a record date is set by the Board of Directors, as of such record date. Section 8. Voting by Proxy. - ---------- ---------------- At any meeting of the shareholders, any shareholder may be represented and vote by a proxy or proxies appointed by an instrument in writing or by any other form of verifiable communication, including any form of electronic or other communications, to the full extent legally permitted (now or hereafter). In the event that any such instrument shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or, if only one shall be present, then that one shall have and may exercise all of the powers conferred by such instrument upon all of the persons so designated unless the instrument shall otherwise provide. No such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force. Subject to the above, any proxy duly executed is not revoked and continues in full force and effect until an instrument or verifiable communication revoking it or a duly executed proxy bearing a later date is filed with the Secretary of the Corporation. Section 9. Action by Shareholders Without a Meeting. - ---------- ----------------------------------------- Any action which may be taken by the vote of the shareholders at a meeting may be taken without a meeting if authorized by the written consent of the shareholders holding at least a majority of the voting power, unless the provisions of the statutes or of the Articles of Incorporation provide that a greater proportion of written consents shall be required. Such written consent shall be filed with or entered upon the records of the Corporation. DIRECTORS Section 10. Authority of Directors. - ----------- ----------------------- (a) The business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, the Articles of Incorporation, or these Regulations directed or required to be exercised or done by the shareholders. (b) Any action required or permitted to be taken at a meeting of the Board of Directors or any committee of the Board of Directors may be taken without a meeting if, prior or subsequent to such action, all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing and such written consents are filed with the Secretary of the Corporation. Section 11. Number; Qualifications. - ----------- ----------------------- The number of Directors shall be not less than three (3) and not more than five (5) (plus any Directors separately elected by the holders of any class of stock other than the Common Stock as provided in the Articles of Incorporation as amended from time to time). The number of Directors may be determined (a) by the vote of the holders of a majority of the shares entitled to vote thereon at any annual meeting or special meeting called for the purpose of electing Directors or (b) by action of the Board of Directors at a meeting by the vote of a majority of the Directors in office at the time or in a writing signed by all the Directors in office at the time. When so fixed, such number shall continue to be the authorized number of Directors until changed by the shareholders or Directors in the manner described above. Any increase in the number of Directors shall be deemed to create a vacancy or vacancies which may be filled as provided in Section 14. A reduction in the number of Directors shall not be applied to remove any Director from office prior to the expiration of his term. Directors need not be shareholders of the Corporation. Section 12. Election of Directors. - ----------- ---------------------- At each meeting of the shareholders for the election of Directors, the persons receiving the greatest number of votes shall be the Directors. Such elections shall be by ballot whenever requested by any person entitled to vote at such meeting; but unless so requested, such election may be conducted in any way approved at such meeting. Section 13. Term of Office; Removal; Resignations. - ----------- -------------------------------------- (a) Directors shall hold office until the annual meeting of the shareholders next following their election and until their respective successors are elected, or until their earlier resignation, death or removal from office. (b) Any Director or the entire Board of Directors may be removed upon the affirmative vote of the holders of a majority of the voting power of the Corporation. (c) Any Director may resign at any time by giving written notice of his resignation to the President or Secretary. Any resignation will be effective upon actual receipt by such person or, if later, as of the date and time specified in such written notice. Section 14. Vacancies. - ----------- ---------- Vacancies, including those caused by an increase in the number of Directors, may be filled by a majority of the remaining Directors though less than a quorum. When one or more Directors shall give notice of his or their resignation to the Board, effective at a future date, the Board shall have the power to fill such vacancy or vacancies to take effect when such resignation or resignations shall become effective, each Director so appointed to hold office during the remainder of the term of office of the resigning Director or Directors. Whenever any vacancy shall occur among the Directors, the remaining Directors shall constitute the Directors of the Corporation until such vacancy is filled or until the number of Directors is changed as in Section 11 hereof. MEETINGS OF THE BOARD OF DIRECTORS Section 15. Organizational Meeting. - ----------- ----------------------- Immediately after each annual meeting of the shareholders at which Directors are elected, or each special meeting held in lieu thereof, the newly elected Directors, if a quorum thereof is present, shall hold an organizational meeting at the same place or at such other time and place as may be fixed by the shareholders at such meeting, for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. If for any reason such organizational meeting is not held at such time, a special meeting of the Directors for such purpose shall be held as soon thereafter as practicable. Section 16. Regular Meetings. - ----------- ----------------- Regular meetings of the Directors may be held without notice at such times and places within or without the State of Ohio as shall be determined by the Directors from time to time. Section 17. Special Meetings. - ----------- ----------------- Special meetings of the Directors may be held at any time within or without the State of Ohio upon call by the Chairman of the Board, the President, or the Corporate Secretary upon the written request of two Directors. Notice of each such meeting shall be given to each Director by letter, facsimile, telegram, telephone, or in person not less than forty-eight (48) hours prior to such meeting. Notices sent by mail shall be sent postage prepaid and shall be addressed to each Director at his address as it appears upon the records of the Corporation. Notice by mail shall be deemed to be given at the time when the notice is deposited in the mail, and notice by facsimile or telegram shall be deemed to be given at the time when confirmation of successful transmission is received. Such notice may be waived in writing by Directors either before or after the meeting, and such written waivers shall be filed with or entered upon the records of the meeting. The attendance of any Director at any such meeting without protesting the lack of proper notice, prior to or at the commencement of the meeting, shall be deemed to be a waiver by the Director of notice of the meeting. Unless otherwise limited in the notice thereof, any business may be transacted at any organizational, regular or special meeting. Section 18. Quorum and Adjournments; Participation by Communications - ------- --- -------------------------------------------------------- Equipment. --------- (a) A majority of the Directors, at a meeting duly called and held, shall be necessary to constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation. Any action required or permitted to be taken at a meeting of the Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Directors entitled to vote with respect to the subject matter thereof. Any meeting duly called, whether or not a quorum is present, may, by vote of a majority of the Directors present, be adjourned from time to time and place to place within or without the State of Ohio, in which case no further notice of the adjourned meeting need be given. (b) Meetings of the Board of Directors or of any committee of the Board of Directors may be held through any means of communications equipment if all persons participating can hear each other, and such participation will constitute presence in person at such meeting. Section 19. Committees. - ----------- ----------- The Board of Directors may, by resolution passed by a majority of the Directors, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation, which, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the Board when required. Section 20. Compensation. - ----------- ------------- The Directors may be paid their expenses, if any, for attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors. The sums may be different for different Directors, and the sum shall be established by resolution of the Board of Directors and may be changed from time to time by resolution. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. EXECUTIVE COMMITTEE Section 21. Executive Committee - ----------- ------------------- The Board of Directors at any time may elect from its members an Executive Committee which shall consist of not less than three (3) members. Each member of such Committee shall hold office during the pleasure of the Board and may be removed by a majority vote of the whole Board at any time with or without cause. Vacancies occurring in the Committee may be filled by the Board. The Committee shall prescribe its own rules for calling and holding meetings, and for transacting business, subject, however, to any rules prescribed by the Board of Directors, and the Committee shall keep minutes of its actions. Action by the Committee may be taken at meetings thereof attended by not less than a majority thereof, or without a meeting by instrument in writing signed by not less than a majority of the members. Except as the Committee's powers and duties may be limited or otherwise prescribed by the Board of Directors, the Committee, during the intervals between the meetings of the Board, shall possess and may exercise all of the powers and authority of the Board of Directors, however conferred, provided, however, that the Committee shall not be empowered to elect the officers (other than Assistant Secretaries and Assistant Treasurers) or to fill vacancies in the Board of Directors or in the Executive Committee. Subject to such exceptions, persons dealing with the Corporation shall be entitled to rely upon any action of the Committee with the same force and effect as though such action had been taken by the Board of Directors. OFFICERS Section 22. Generally. - ----------- ---------- The Corporation may have a Chairman, elected by the directors from among their number, and shall have a President, a Corporate Secretary and a Treasurer. The Corporation may also have one or more Vice Chairmen, Vice Presidents, Senior Vice Presidents and such other officers and assistant officers as the Board of Directors may deem appropriate. If the Board of Directors so desires, it may elect a Chief Executive Officer to manage the affairs of the Corporation, subject to the direction and control of the Board of Directors. All of the officers shall be elected by the Board of Directors. Notwithstanding the foregoing, by specific action, the Board of Directors may authorize the Chairman or the President to appoint any person to any office other than Chairman, President, Corporate Secretary, or Treasurer. Any number of offices may be held by the same person, and no two offices must be held by the same person. Any of the offices may be left vacant from time to time as the Board of Directors may determine. In case of the absence or disability of any officer of the Corporation or for any other reason deemed sufficient by a majority of the Board of Directors, the Board of Directors may delegate the absent or disabled officer's powers or duties to any other officer or to any director. Section 23. Authority and Duties of Officers. - ----------- --------------------------------- The officers of the Corporation shall have such authority and shall perform such duties as are customarily incident to their respective offices, or as may be specified from time to time by the Board of Directors, the Chairman or the President regardless of whether such authority and duties are customarily incident to such office. Section 24. Compensation. - ----------- ------------- The compensation of all officers and agents of the Corporation who are also members of the Board of Directors of the Corporation will be fixed by the Board of Directors or by a committee of the Board of Directors. The Board of Directors may fix, or delegate the power to fix, the compensation of the other officers and agents of the Corporation to the Chief Executive Officer or any other officer of the Corporation. Section 25. Succession. - ----------- ---------- The officers of the Corporation will hold office until their successors are elected. Any officer may be removed at any time by the affirmative vote of a majority of the whole Board. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors or by the Chairman or President as provided in Regulation 22. Section 26. Delegation of Duties. - ----------- --------------------- The Directors are authorized to delegate the duties of any officers to any other officer and generally to control the action of the officers and to require the performance of duties in addition to those mentioned herein. Section 27. Signing Checks and Other Instruments. - ----------- ------------------------------------- The Directors are authorized to determine or provide the method of determining how checks, notes, bills or exchange and similar instruments shall be signed, countersigned or endorsed. CERTIFICATES OF STOCK Section 28. Contents of Certificates. - ----------- ------------------------- Every shareholder shall be entitled to one or more certificates, signed by the President or a Vice President and by the Treasurer, an Assistant Treasurer, the Corporate Secretary, or an Assistant Corporate Secretary of the Corporation, certifying the number and class of shares owned by him in the Corporation. If the Corporation is authorized to issue shares of more than one class or more than one series of any class, there shall be set forth upon the face or back of the certificate a full or summary statement of the designations, preferences and relative, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, or the certificate shall have a statement that the Corporation will furnish such information to any shareholders upon request and without charge. If the Corporation shall be authorized to issue only special stock, such certificate shall set forth in full or summarize the rights of the holders of such stock. Section 29. Countersignature of Authentication by Transfer Agents or - ------- --- -------------------------------------------------------- Registrars. ---------- Whenever any certificate is countersigned or otherwise authenticated by a transfer agent or registrar, then a facsimile of the signatures of such officers of the Corporation may be engraved, stamped, or printed upon such certificate in lieu of the actual signatures. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be an officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be an officer or officers of such Corporation. LOST CERTIFICATES Section 30. Replacement of Lost Certificates. - ----------- --------------------------------- The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. TRANSFER OF STOCK Section 31. Transfer of Stock. - ----------- ------------------ Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on its books. RECORD DATES AND CLOSING OF TRANSFER BOOKS Section 32. Record Dates and Closing of Transfer Books. - ----------- ------------------------------------------- The Board of Directors may fix a time not exceeding sixty (60) days preceding the date of any meeting of shareholders or the date fixed for the payment of any dividend or distribution or the date for the allotment of rights as the record date for the determination of the shareholders entitled to notice of or to vote at any such meeting or entitled to receive payment of any such dividend, distribution or allotment of rights, and in such case only shareholders of record on the date so fixed shall be entitled to notice of or to vote at such meeting or to receive payment of such dividend, distribution or allotment of rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of the period between such record date and the date of the event in respect for which such record date was fixed. REGISTERED SHAREHOLDERS Section 33. Recognition of Record Ownership. - ----------- -------------------------------- The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Ohio. GENERAL PROVISIONS DIVIDENDS Section 34. Payment of Dividends. - ----------- --------------------- The Board of Directors may declare dividends upon the capital stock of the Corporation, subject to the provisions of the Articles of Incorporation, if any, at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Articles of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Directors shall think conducive to the interest of the Corporation and the Directors may modify or abolish any such reserves in the manner in which it was created. FISCAL YEAR Section 35. Fiscal Year. - ----------- ------------ The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SEAL Section 36. Corporate Seal. - ----------- --------------- The corporate seal of the Corporation shall be of such design, and shall contain such words, as may be prescribed by the Directors. TRANSFER AGENT AND REGISTRAR Section 37. Transfer Agent; Registrar. - ----------- -------------------------- The Corporation may open transfer books in any state of the United States or in any foreign country for the purpose of transferring securities issued by it, and it may employ an agent or agents to keep the records of its securities to transfer or to register securities or both, in Ohio or in other states or in a foreign country, or both, and the acts of such agents shall be binding on the Corporation. The duties and liabilities of such agent or agents shall be such as may be agreed to by the Corporation. If no such transfer agent is appointed to act in Ohio in respect to its shares, the Corporation shall keep an office in Ohio at which shares shall be transferable, and at which it shall keep books in which shall be recorded the names and addresses of all shareholders and all transfers of shares. PROVISIONS IN ARTICLES OF INCORPORATION Section 38. Governance By Articles of Incorporation. - ----------- ---------------------------------------- These Regulations are at all times subject to the provisions of the Articles of Incorporation of the Corporation (including in such term whenever used in these Regulations, amendments thereto), and in case of any conflict between any provision herein and in the Articles of Incorporation, the provisions in the Articles of Incorporation shall be deemed to govern. AMENDMENTS Section 39. Procedure for Amendments. - ----------- ------------------------- These Regulations may be altered, changed or amended in any respect or superseded by new Regulations in whole or in part, by the affirmative vote of the holders of record of shares entitling them to exercise a majority of the voting power of the Corporation at an annual or special meeting called for such purpose or without a meeting by the written consent of the holders of record of shares entitling them to exercise a majority of the voting power of the Corporation. In case of adoption of any Regulation or amendment by such written consent, the Corporate Secretary shall enter the same in the corporate records and mail a copy thereof to each shareholder who would have been entitled to vote thereon and did not participate in the adoption thereof. INDEMNIFICATION AND INSURANCE Section 40. Indemnification. - ----------- ---------------- The Corporation shall indemnify, to the full extent then permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a member of the Board of Directors or an officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall indemnify such person against expenses, including attorney's fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him by reason of the fact that he is or was such person to the full extent to which the Corporation is empowered or authorized to indemnify any person under the Ohio General Corporation Law as now in effect or as amended from time to time. The Corporation shall pay, to the full extent then permitted by law, expenses, including attorney's fees, incurred by a member of the Board of Directors in defending any such action, suit or proceeding as they are incurred, in advance of the final disposition thereof, and may pay, in the same manner and to the full extent then permitted by law, such expenses incurred by any other person. The indemnification and payment of expenses provided hereby shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under any law, the Articles of Incorporation, any agreement, vote of shareholders or disinterested members of the Board of Directors, or otherwise, both as to action in official capacities and as to action in another capacity while he or she is a member of the Board of Directors, or an officer, employee or agent of the Corporation, and shall continue as to a person who has ceased to be a member of the Board of Directors, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 41. Insurance. - ----------- ---------- The Corporation may, to the full extent then permitted by law and authorized by the Board of Directors, purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit or self-insurance, on behalf of or for any persons described in Section 40 against any liability asserted against and incurred by any such person in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such liability. Insurance may be purchased from or maintained with a person in which the Corporation has a financial interest. EMERGENCY REGULATIONS Section 42. Emergency Regulations. - ----------- ---------------------- The Board of Directors may adopt, at any meeting, either before or during "an emergency" as that term is defined in Section 1701.01 of the Ohio Revised Code, emergency regulations to be operative during, but only during, an emergency. The emergency regulations may contain any provisions which may be made by emergency regulations as provided in Section 1701.111 of the Ohio Revised Code. I, the undersigned, being Corporate Secretary of Ohio Edison Company, do hereby certify the foregoing to be the Regulations of said Corporation, as adopted in an action in writing of the shareholders dated the 15th day of March, 2002. ------------------------------------ Nancy C. Ashcom Corporate Secretary EX-4 23 ex4-1.txt SUPPLEMENTAL INDENTURE-OE OHIO EDISON COMPANY with THE BANK OF NEW YORK, As Trustee ----------------------- SEVENTY-THIRD SUPPLEMENTAL INDENTURE Providing among other things for FIRST MORTGAGE BONDS Class A Series A of 2001 due 2031 --------- Dated as of June 1, 2001 SUPPLEMENTAL INDENTURE, dated as of June 1, 2001 between OHIO EDISON COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company"), party of the first part, and THE BANK OF NEW YORK, a banking corporation organized and existing under the laws of the State of New York, as Trustee under the Indenture hereinafter referred to, party of the second part. WHEREAS, the Company has heretofore executed and delivered to BANKERS TRUST COMPANY (hereinafter called the "Old Trustee"), as trustee, a certain Indenture, dated as of August 1, 1930, to secure an issue of bonds of the Company, issued and to be issued in series, from time to time, in the manner and subject to the conditions set forth in the said Indenture; and the said Indenture has been supplemented by seventy-two supplemental indentures, which Indenture as so supplemented and to be hereby supplemented is hereinafter referred to as the "Indenture"; and WHEREAS, The Bank of New York has succeeded the Old Trustee as trustee under the Indenture (hereinafter called the "Trustee") pursuant to Article XVI thereof; and WHEREAS, the Indenture provides for the issuance of bonds thereunder in one or more series, the form of each series of bonds and of the coupons to be attached to the coupon bonds, if any, to be substantially in the forms set forth therein with such insertions, omissions and variations as the Board of Directors of the Company may determine; WHEREAS, the Company has entered into an Insurance Agreement, dated as of June 1, 2001 (the "Insurance Agreement"), with Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance corporation (the "Insurer"), in connection with the issuance of a series of municipal bonds pursuant to a loan agreement, dated as of June 1, 2001, between the Company and the Beaver County Industrial Development Authority; WHEREAS, the Company has agreed to issue to The Bank of New York, as Trustee under the Company's General Mortgage Indenture and Deed of Trust, dated as of January 1, 1998, as heretofore supplemented and as to be supplemented by a Supplemental Indenture to be dated as of June 1, 2001 (as so supplemented, the "General Mortgage"), a series of bonds under the Indenture, to secure the issue of bonds (the "General Mortgage Bonds") issued under the General Mortgage to the Insurer pursuant to the Insurance Agreement. WHEREAS, the Company, by appropriate corporate action in conformity with the terms of the Indenture, has duly determined to create a new series of bonds under the Indenture, as the basis for the issuance of the General Mortgage Bonds, such new series of bonds consisting of $69,500,000 in aggregate principal amount to be designated as "First Mortgage Bonds Class A Series A of 2001 due 2031" (hereinafter sometimes referred to as "the bonds of the 2001 Class A Series A"), the bonds of which series shall bear interest at the rate per annum set forth in, shall be subject to certain redemption rights and obligations set forth in, and will otherwise be in the form and have the terms and provisions provided for in this Supplemental Indenture and set forth in the form of such bonds below; and WHEREAS, the definitive registered bonds without coupons of the bonds of the 2001 Class A Series A and the Trustee's certificate of authentication to be borne by such bonds are to be substantially in the following form: [FORM OF BOND OF 2001 CLASS A SERIES A FACE] [FACE] This bond is not transferable except to a successor to The Bank of New York, as trustee under the General Mortgage Indenture and Deed of Trust, dated as of January 1, 1998, between the Company and The Bank of New York, as trustee, or in connection with the exercise of the rights and remedies of the holder hereof consequent upon a "default" as defined in the Indenture referred to herein. OHIO EDISON COMPANY FIRST MORTGAGE BOND CLASS A SERIES A OF 2001 DUE 2031 Due June 1, 2031 No. R- $ OHIO EDISON COMPANY, a corporation of the State of Ohio (hereinafter called the Company), for value received, hereby promises to pay to The Bank of New York, as trustee under the General Mortgage (hereinbelow defined), or registered assigns, ________________________________________________________ Dollars at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio, on June 1, 2031 in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, and to pay at said offices or agencies to the registered owner hereof, in like coin or currency, interest thereon from the Initial Interest Accrual Date (hereinbelow defined) at the rate from time to time borne by the Mortgage Bonds, Pledge Series A of 2001 due 2031 (the "General Mortgage Bonds") issued by the Company under the General Mortgage Indenture and Deed of Trust, dated as of January 1, 1998, as heretofore supplemented (the "General Mortgage"), by the Company to The Bank of New York, as trustee; provided, however, that in no event shall the rate of interest borne by the Bonds of this series exceed ten per centum per annum. Payments of principal of and interest on this bond shall be made at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio. Payment of principal of, or premium or interest on, the Company's General Mortgage Bonds shall, to the extent thereof, be deemed to satisfy and discharge the obligation of the Company, if any, to make a payment of principal, premium or interest, as the case may be, in respect of this bond which is then due. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. This bond shall not become obligatory until The Bank of New York, the Trustee under the Indenture referred to on the reverse hereof, or its successor thereunder, shall have authenticated the form of certificate endorsed hereon. IN WITNESS WHEREOF, Ohio Edison Company has caused this bond to be signed in its name by its President or a Vice President, by his signature or a facsimile thereof, and its corporate seal to be printed hereon, attested by its Corporate Secretary or an Assistant Corporate Secretary, by his signature or a facsimile thereof. OHIO EDISON COMPANY, By: ------------------------------------ Title: Vice President Attest: - ------------------------------- Title: Corporate Secretary [FORM OF TRUSTEE'S AUTHENTICATION CERTIFICATE] TRUSTEE'S AUTHENTICATION CERTIFICATE This bond is one of the bonds of the series designated therein, described in the within-mentioned Mortgage. Dated: THE BANK OF NEW YORK, as Trustee, By: ------------------------------------ Authorized Officer [FORM OF BOND OF 2001 CLASS A SERIES A] [REVERSE] OHIO EDISON COMPANY FIRST MORTGAGE BOND CLASS A SERIES A OF 2001 DUE 2031 This bond is one of an issue of bonds of the Company, issuable in series, and is one of a series known as its First Mortgage Bonds of the series designated in its title, all issued and to be issued under and equally secured (except as to any sinking fund established in accordance with the provisions of the Indenture hereinafter mentioned for the bonds of any particular series) by an Indenture, dated as of August 1, 1930, executed by the Company to The Bank of New York, as Trustee (the "Trustee"), as amended and supplemented by indentures supplemental thereto, to which Indenture as so amended and supplemented (herein referred to as the "Indenture") reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof and the terms and conditions upon which the bonds are secured. The Initial Interest Accrual Date for the bonds of this series shall be the date that interest begins to accrue on the General Mortgage Bonds. The Bonds of this series are subject to mandatory redemption, in whole or in part, as the case may be, on each date that General Mortgage Bonds are to be redeemed. The principal amount of the Bonds of this series to be redeemed on any such date shall be equal to the principal amount General Mortgage Bonds called for redemption on that date. All redemption of Bonds of this series shall be at 100 percent of the principal amount thereof, plus accrued interest to the redemption date . The Bonds of this series are not otherwise redeemable prior to their maturity. Notwithstanding the foregoing, Bonds of this series shall be deemed to be paid and no longer outstanding under the Indenture to the extent that General Mortgage Bonds are paid or deemed to be paid and are no longer outstanding and the Trustee has been notified to such effect by the Company. The Trustee may conclusively presume that the obligation of the Company to pay the principal of, and interest, if any, on the bonds of this series as the same shall become due and payable shall have been fully satisfied and discharged unless and until it shall have received a written notice from the trustee under the General Mortgage, signed by an authorized officer thereof, stating that any such principal of or interest on the General Mortgage Bonds has become due and payable and has not been fully paid and specifying the amount of funds required to make such payment. As more fully described in the supplemental indenture establishing the terms and provisions of the bonds of this series, the Company reserves the right, without any consent or other action by holders of the bonds of this series, to amend the Indenture to provide (a) that the Indenture, the rights and obligations of the Company and the rights of the bondholders may be modified with the consent of the holders of not less than 60% in principal amount of the bonds adversely affected; provided, however, that no modification shall (1) extend the time, or reduce the amount, of any payment on any bond, without the consent of the holder of each bond so affected, (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of the Indenture, without the consent of the holders of all bonds then outstanding, or (3) reduce the above percentage of the principal amount of bonds the holders of which are required to approve any such modification without the consent of the holders of all bonds then outstanding and (b) that (i) additional bonds may be issued against 70% of the value of the property which forms the basis for such issuance and (ii) the charge against property subject to a prior lien which is used to effectuate the release of property under the Indenture be similarly based. The principal hereof may be declared or may become due on the conditions, in the manner and at the time set forth in the Indenture, upon the occurrence of a completed default as in the Indenture provided. No recourse shall be had for the payment of the principal of or interest on this bond against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director of the Company or of any predecessor or successor corporation, either directly or through the Company or a predecessor or successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors being released by the registered owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture. The bonds of this series are issuable only as registered bonds without coupons in denominations of $1,000 and any multiple thereof. The Company and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner for the purpose of receiving payment of or on account of the principal and interest due hereon and for all other purposes. Registered bonds of this series shall be exchangeable at said offices or agencies of the Company for registered bonds of other authorized denominations having the same aggregate principal amount, in the manner and upon the conditions prescribed in the Indenture. Notwithstanding any provision of the Indenture, (a) neither the Company nor the Trustee shall be required to make transfers or exchanges of bonds of this series during the period between any interest payment date for such series and the record date next preceding such interest payment date, and (b) no charge shall be made upon any transfer or exchange of bonds of this series other than for any tax or taxes or other governmental charge required to be paid by the Company. [END OF FORM OF BOND OF 2001 CLASS A SERIES A] and WHEREAS, Section 115 of the Indenture provides that the Company and the Trustee may, from time to time and at any time, enter into such indentures supplemental thereto as shall be deemed necessary or desirable for one or more purposes, including, among others, to describe and set forth the particular terms and the form of additional series of bonds to be issued under the Indenture, to add other limitations on the issue of bonds, withdrawal of cash or release of property, to add to the covenants and agreements of the Company for the protection of the holders of the bonds and of the mortgaged and pledged property, to supplement defective or inconsistent provisions contained in the Indenture, and for any other purpose not inconsistent with the terms of the Indenture; and WHEREAS, all things necessary to make the bonds of the 2001 Class A Series A when authenticated by the Trustee and issued as in the Indenture provided, the valid, binding and legal obligations of the Company, entitled in all respects to the security of the Indenture, have been done and performed, and the creation, execution and delivery of this Supplemental Indenture have in all respects been duly authorized; and WHEREAS, the Company and Trustee deem it advisable to enter into this Supplemental Indenture for the purposes of describing the bonds of the 2001 Class A Series A and of establishing the terms and provisions thereof, confirming the mortgaging under the Indenture of additional property for the equal and proportionate benefit and security of the holders of all bonds at any time issued thereunder, amplifying the description of the property mortgaged, adding other limitations to the Indenture on the issue of bonds, withdrawal of cash or release of property, and adding to the covenants and agreements of the Company for the protection of the holders of bonds and of mortgaged and pledged property; NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That OHIO EDISON COMPANY, in consideration of the premises and of one dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and of the purchase and acceptance of the bonds issued or to be issued hereunder by the holders thereof, and in order to secure the payment both of the principal and interest of all bonds at any time issued and outstanding under the Indenture, according to their tenor and effect, and the performance of all the provisions of the Indenture and of said bonds, hath granted, bargained, sold, released, conveyed, assigned, transferred, pledged, set over and confirmed and by these presents doth grant, bargain, sell, release, convey, assign, transfer, pledge, set over and confirm unto THE BANK OF NEW YORK, as Trustee, and to its successor or successors in said trust, and to its and their assigns forever, all the properties of the Company, now owned or hereafter acquired, wherever located, described in the Indenture and not therein expressly excepted. TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Article XI of the Indenture) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. The Company does hereby agree and does hereby confirm and reaffirm the agreement made by it in the Indenture, dated as of August 1, 1930, that all property, rights and franchises acquired by the Company after the date of the Indenture, dated as of August 1, 1930 (except any hereinafter expressly excepted), shall be as fully embraced within the lien of the Indenture as if such property had been owned by the Company on the date of the Indenture, dated as of August 1, 1930 and was specifically described therein and conveyed thereby and does hereby confirm that the Company will not cause or consent to a partition, whether voluntary or through legal proceedings, of property, whether herein described or heretofore or hereafter acquired, in which its ownership shall be as a tenant in common except as permitted by and in conformity with the provisions of the Indenture and particularly of Article XI thereof. PROVIDED that the following are not and are not intended to be now or hereafter granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed hereunder and are hereby expressly excepted from the lien and operation of the Indenture, viz.: cash, shares of stock and obligations (including bonds, notes and other securities) not heretofore or hereafter specifically pledged, paid or deposited or delivered under the Indenture or covenanted so to be. TO HAVE AND TO HOLD all such properties, real, personal and mixed, mortgaged, pledged or conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors and assigns forever. IN TRUST, NEVERTHELESS, upon the terms and trusts of the Indenture for those who shall hold the bonds and coupons issued and to be issued thereunder, or any of them, without preference, priority or distinction as to lien of any of said bonds and coupons over any others thereof by reason of priority in the time of the issue or negotiations thereof, or otherwise howsoever, subject, however, to the provisions in reference to extended, transferred or pledged coupons and claims for interest set forth in the Indenture (and subject to any sinking funds that may be hereafter created for the benefit of any particular series). PROVIDED, HOWEVER, and these presents are upon the condition that if the Company, its successors or assigns, shall pay or caused to be paid, the principal of and interest on said bonds, at the times and in the manner stipulated therein and herein, and shall keep, perform and observe all and singular the covenants and promises in said bonds and in the Indenture expressed to be kept, performed and observed by or on the part of the Company, then this Supplemental Indenture and the estate and rights hereby granted shall cease, determine and be void, otherwise to be and remain in full force and effect. IT IS HEREBY COVENANTED, DECLARED AND AGREED, by the Company, that all such bonds and coupons are to be issued, authenticated and delivered, and that all property subject or to become subject hereto is to be held, subject to the further covenants, conditions, uses and trusts in the Indenture set forth, and the parties hereto mutually agree as follows: SECTION 1. Bonds of 2001 Class A Series A shall mature on June 1, 2031, and shall be designated as the Company's "First Mortgage Bonds Class A Series A of 2001 due 2031." Each bond of the 2001 Class A Series A shall bear interest from the Initial Interest Accrual Date (as defined in the form of such bond hereinabove set forth) at the rate from time to time borne by the series of the General Mortgage Bonds referred to in said form; provided, however that in no event shall the rate of interest borne by the bonds of the 2001 Class A Series A exceed ten per centum per annum. Principal and interest on the bonds of the 2001 Class A Series A shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio. Definitive bonds of the 2001 Class A Series A may be issued, originally or otherwise, only as registered bonds, substantially in the form of bond hereinbefore recited, and in the denominations of $1,000 and any multiple thereof. Delivery of a bond of the 2001 Class A Series A to the Trustee for authentication shall be conclusive evidence that its serial number has been duly approved by the Company. The bonds of the 2001 Class A Series A shall not be redeemable prior to their maturity. SECTION 2. Bonds of the 2001 Class A Series A shall be deemed to be paid and no longer outstanding under the Indenture to the extent that General Mortgage Bonds to which they relate are paid or deemed to be paid and are no longer outstanding and the Trustee has been notified to such effect by the Company. The Trustee may conclusively presume that the obligation of the Company to pay the principal of, and interest, if any, on the bonds of the 2001 Class A Series A as the same shall become due and payable shall have been fully satisfied and discharged unless and until it shall have received a written notice from the trustee under the General Mortgage, signed by an authorized officer thereof, stating that any such principal of or interest on the General Mortgage Bonds to which they relate has become due and payable and has not been fully paid and specifying the amount of funds required to make such payment. SECTION 3. Bonds of the 2001 Class A Series A may be transferred by the registered owners thereof, in person or by attorney duly authorized, at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio but only in the manner and upon the conditions prescribed in the Indenture and in the form of bond hereinbefore recited. Bonds of the 2001 Class A Series A shall be exchangeable for other registered bonds of the same series, in the manner and upon the conditions prescribed in the Indenture, and in the form of bond hereinbefore recited, upon the surrender of such bonds at said offices or agencies of the Company. However, notwithstanding the provisions of Section 14 or 15 of the Indenture, no charge shall be made upon any transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. SECTION 4. The Company reserves the right, without any consent or other action by holders of the bonds of the 2001 Class A Series A, or any subsequent series of bonds, to amend the Indenture by inserting the following language as Section 115A immediately following current Section 115 of the Indenture: With the consent of the holders of not less than sixty per centum (60%) in principal amount of the bonds at the time outstanding or their attorneys-in-fact duly authorized, or, if the rights of the holders of one or more, but not all, series then outstanding are affected, the consent of the holders of not less than sixty per centum (60%) in aggregate principal amount of the bonds at the time outstanding of all affected series, taken together, and not any other series, the Company, when authorized by a resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or modifying the rights and obligations of the Company and the rights of the holders of any of the bonds and coupons; provided, however, that no such supplemental indenture shall (1) extend the maturity of any of the bonds or reduce the rate or extend the time of payment of interest thereon, or reduce the amount of the principal thereof, or reduce any premium, payable on the redemption thereof or change the coin or currency in which any bond or interest thereon is payable, without the consent of the holder of each bond so affected, or (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of this Indenture, without the consent of the holders of all of the bonds then outstanding, or (3) reduce the aforesaid percentage of the principal amount of bonds the holders of which are required to approve any such supplemental indenture, without the consent of the holders of all the bonds then outstanding. For the purposes of this Section, bonds shall be deemed to be affected by a supplemental indenture if such supplemental indenture adversely affects or diminishes the right of holders thereof against the Company or against its property. Upon the written request of the Company, accompanied by a resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of bondholders as aforesaid (the instrument or instruments evidencing such consent to be dated within one year of such request), the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's owns rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. The Trustee shall be entitled to receive and, subject to Section 102 of the Indenture and Article Five of the Seventh Supplemental Indenture, may rely upon an opinion of counsel as conclusive evidence that any such supplemental indenture is authorized or permitted by the provisions of this Section. It shall not be necessary for the consent of the bondholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. The Company and the Trustee, if they so elect, and either before or after such 60% or greater consent has been obtained, may require the holder of any bond consenting to the execution of any such supplemental indenture to submit his bond to the Trustee or to such bank, banker or trust company as may be designated by the Trustee for the purpose, for the notation thereon of the fact that the holder of such bond has consented to the execution of such supplemental indenture, and in such case such notation, in form satisfactory to the Trustee, shall be made upon all bonds so submitted, and such bonds bearing such notation shall forthwith be returned to the persons entitled thereto. All subsequent holders of bonds bearing such notation shall be deemed to have consented to the execution of such supplemental indenture, and consent, once given or deemed to be given, may not be withdrawn. Prior to the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Company shall publish a notice, setting forth in general terms the substance of such supplemental indenture, at least once in one daily newspaper of general circulation in each city in which the principal of any of the bonds shall be payable, or, if all bonds outstanding shall be registered bonds without coupons or coupon bonds registered as to principal, such notice shall be sufficiently given if mailed, first class, postage prepaid, and registered if the Company so elects, to each registered holder of bonds at the last address of such holder appearing on the registry books, such publication or mailing, as the case may be, to be made not less than thirty days prior to such execution. Any failure of the Company to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 5. The Company reserves the right, without any consent or other action by the holders of the bonds of the 2001 Class A Series A, or any subsequent series of bonds, to amend the Indenture by deleting the phrase "sixty per centum (60%)" in Section 28 of the Indenture and substituting therefor the phrase "seventy per centum (70%)" and by deleting the phrase "One hundred sixty-six and two-thirds per cent. (166 2/3%)" in Sections 65 and 67 of the Indenture and substituting therefor the phrase "One hundred and forty-two and eighty-six hundredths per cent. (142.86%)". SECTION 6. Except as herein otherwise expressly provided, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture; the Trustee shall not be responsible for the recitals herein or in the bonds (except the Trustee's authentication certificate), all of which are made by the Company solely; and this Supplemental Indenture is executed and accepted by the Trustee, subject to all the terms and conditions set forth in the Indenture, as fully to all intents and purposes as if the terms and conditions of the Indenture were herein set forth at length. SECTION 7. As supplemented by this Supplemental Indenture, the Indenture is in all respects ratified and confirmed, and the Indenture as herein defined, and this Supplemental Indenture, shall be read, taken and construed as one and the same instrument. SECTION 8. Nothing in this Supplemental Indenture contained shall or shall be construed to confer upon any person other than a holder of bonds issued under the Indenture, the Company and the Trustee any right or interest to avail himself of any benefit under any provision of the Indenture or of this Supplemental Indenture. SECTION 9. This Supplemental Indenture may be simultaneously executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. [Remainder of this page intentionally left blank] IN WITNESS WHEREOF, OHIO EDISON COMPANY and THE BANK OF NEW YORK have caused these presents to be executed in their respective names by their respective Presidents or one of their Vice Presidents or Assistant Vice Presidents and their respective seals to be hereunto affixed and attested by their respective Secretaries or one of their Assistant Secretaries or Assistant Treasurers, all as of the day and year first above written. OHIO EDISON COMPANY By: ------------------------------------ Arthur R. Garfield, Vice President [Seal] Attest: ------------------------------------ Nancy C. Ashcom, Corporate Secretary Signed, Sealed and Acknowledged on behalf of OHIO EDISON COMPANY in the presence of: - -------------------------------- Jackie C. Pamfilie - -------------------------------- Michele K. Rankin THE BANK OF NEW YORK By: ------------------------------------ [Seal] Attest: ----------------------------- Signed, Sealed and Acknowledged on behalf of THE BANK OF NEW YORK in the presence of: - ------------------------------------ - ------------------------------------ STATE OF OHIO ) : ss.: COUNTY OF SUMMIT ) On the 27th day of June, 2001, personally appeared before me, a Notary Public in and for the said County and State aforesaid, Arthur R. Garfield and Nancy C. Ashcom, to me known and known to me to be a Vice President and Corporate Secretary, respectively, of OHIO EDISON COMPANY, the corporation which executed the foregoing instrument, and who severally acknowledged that they did sign and seal such instrument as such Vice President and Corporate Secretary, respectively, of OHIO EDISON COMPANY, the same is their free act and deed and the free and corporate act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal the 27th day of June, 2001. ----------------------------------- Susie M. Hoisten Notary Public Residence Summit County Statewide Jurisdiction Ohio My commission expires November 19, 2001 [SEAL] STATE OF OHIO ) : ss.: COUNTY OF SUMMIT ) On the 27th day of June, 2001, before me personally came Arthur R. Garfield, to me known, who, being by me duly sworn, did dispose and say that he resides at 3846 Wisewood Street, Uniontown, Ohio 44685; that he is a Vice President of OHIO EDISON COMPANY, one of the corporations described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. ----------------------------------- Susie M. Hoisten Notary Public Residence Summit County Statewide Jurisdiction Ohio My commission expires November 19, 2001 [SEAL] STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 27th day of June, 2001, personally appeared before me, a Notary Public in and for the said County and State aforesaid, MaryBeth Lewicki and Michal Pitfick, to me known and known to me to be a Vice President and Assistant Treasurer, respectively, of THE BANK OF NEW YORK, the corporation which executed the foregoing instrument, and who severally acknowledged that they did sign and seal such instrument as such Vice President and Assistant Treasurer for and on behalf of said corporation and that the same is their free act and deed and the free and corporation act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal the 27th day of June, 2001. ----------------------------------- William J. Cassels Notary Public, State of New York No. 01CA5027729 Qualified in Bronx County Commission Expires May 16, 2002 [SEAL] STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 27th day of June, 2001, before me personally came MaryBeth Lewicki, to me known, who, being by me duly sworn, did dispose and say that she resides at Staten Island, New York; that she is a Vice President of THE BANK OF NEW YORK, one of the parties described in and which executed the above instrument; that she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that she signed her name thereto by like authority. ----------------------------------- William J. Cassels Notary Public, State of New York No. 01CA5027729 Qualified in Bronx County Commission Expires May 16, 2002 [SEAL] The Bank of New York hereby certifies that its precise name and address as Trustee hereunder are: The Bank of New York 101 Barclay Street City, County and State of New York 10286 THE BANK OF NEW YORK By: ----------------------------------- Michal Pitfick Assistant Treasurer EX-12 24 ex12-2oe.txt FIXED CHARGE RATIO - OE
EXHIBIT 12.2 Page 1 OHIO EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ---------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items....................... $293,194 $301,320 $297,689 $336,456 $350,212 Interest and other charges, before reduction for amounts capitalized................................... 250,920 235,317 225,358 211,364 187,890 Provision for income taxes.............................. 187,805 191,261 191,835 212,580 239,135 Interest element of rentals charged to income (a)....... 117,409 115,310 113,804 109,497 104,507 -------- --------- --------- --------- --------- Earnings as defined................................... $849,328 $843,208 $828,686 $869,897 $881,744 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest on long-term debt.............................. $204,285 $184,915 $178,217 $165,409 $150,632 Other interest expense.................................. 31,209 34,976 31,971 31,451 22,754 Subsidiaries' preferred stock dividend requirements..... 15,426 15,426 15,170 14,504 14,504 Adjustments to subsidiaries' preferred stock dividends to state on a pre-income tax basis.................... 2,918 2,892 2,770 2,296 2,481 Interest element of rentals charged to income (a)....... 117,409 115,310 113,804 109,497 104,507 -------- --------- --------- --------- --------- Fixed charges as defined............................. $371,247 $353,519 $341,932 $323,157 $294,878 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (b)............................................. 2.29 2.39 2.42 2.69 2.99 ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $3,828,000 and $2,209,000 for each of the two years ended December 31, 1998, respectively. The guarantee and related coal supply contract debt expired December 31, 1999.
EXHIBIT 12.2 Page 2 OHIO EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) Year Ended December 31, ---------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items....................... $293,194 $301,320 $297,689 $336,456 $350,212 Interest and other charges, before reduction for amounts capitalized................................. 250,920 235,317 225,358 211,364 187,890 Provision for income taxes................................ 187,805 191,261 191,835 212,580 239,135 Interest element of rentals charged to income (a)......... 117,409 115,310 113,804 109,497 104,507 --------- -------- -------- -------- -------- Earnings as defined..................................... $849,328 $843,208 $828,686 $869,897 $881,744 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS): Interest on long-term debt................................ $204,285 $184,915 $178,217 $165,409 $150,632 Other interest expense.................................... 31,209 34,976 31,971 31,451 22,754 Preferred stock dividend requirements..................... 27,817 27,395 26,717 25,628 25,206 Adjustments to preferred stock dividends to state on a pre-income tax basis...................... 10,503 10,140 9,859 8,976 9,412 Interest element of rentals charged to income (a)......... 117,409 115,310 113,804 109,497 104,507 --------- -------- -------- -------- --------- Fixed charges as defined plus preferred stock dividend requirements (pre-income tax basis).......... $391,223 $372,736 $360,568 $340,961 $312,511 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) (b)................................ 2.17 2.26 2.30 2.55 2.82 ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $3,828,000 and $2,209,000 for each of the two years ended December 31, 1998, respectively. The guarantee and related coal supply contract debt expired December 31, 1999.
EX-13 25 ex13-1oe.txt ANNUAL REPORT - OE OHIO EDISON COMPANY 2001 ANNUAL REPORT TO STOCKHOLDERS Ohio Edison Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. Ohio Edison engages in the generation, distribution and sale of electric energy to communities in an area of 7,500 square miles in central and northeastern Ohio. It also engages in the sale, purchase and interchange of electric energy with other electric companies. Contents Page - -------- ---- Selected Financial Data........................................... 1 Management's Discussion and Analysis.............................. 2-7 Consolidated Statements of Income................................. 8 Consolidated Balance Sheets....................................... 9 Consolidated Statements of Capitalization......................... 10-11 Consolidated Statements of Common Stockholder's Equity............ 12 Consolidated Statements of Preferred Stock........................ 12 Consolidated Statements of Cash Flows............................. 13 Consolidated Statements of Taxes.................................. 14 Notes to Consolidated Financial Statements........................ 15-25 Report of Independent Public Accountants.......................... 26
OHIO EDISON COMPANY SELECTED FINANCIAL DATA 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (In thousands) Operating Revenues.......................... $3,056,464 $2,726,708 $2,686,949 $2,519,662 $2,473,582 --------------------------------------------------------------- Operating Income............................ $ 466,819 $ 482,321 $ 473,042 $ 486,920 $ 488,568 --------------------------------------------------------------- Income Before Extraordinary Item............ $ 350,212 $ 336,456 $ 297,689 $ 301,320 $ 293,194 --------------------------------------------------------------- Net Income.................................. $ 350,212 $ 336,456 $ 297,689 $ 270,798 $ 293,194 --------------------------------------------------------------- Earnings on Common Stock.................... $ 339,510 $ 325,332 $ 286,142 $ 258,828 $ 280,802 --------------------------------------------------------------- Total Assets................................ $7,915,953 $8,154,151 $8,700,746 $8,923,826 $9,158,141 --------------------------------------------------------------- Capitalization at December 31: Common Stockholder's Equity.............. $2,671,001 $2,556,992 $2,624,460 $2,681,873 $2,724,319 Preferred Stock: Not Subject to Mandatory Redemption.... 200,070 200,070 200,070 211,870 211,870 Subject to Mandatory Redemption........ 134,250 135,000 140,000 145,000 150,000 Long-Term Debt........................... 1,614,996 2,000,622 2,175,812 2,215,042 2,569,802 --------------------------------------------------------------- Total Capitalization................... $4,620,317 $4,892,684 $5,140,342 $5,253,785 $5,655,991 --------------------------------------------------------------- Capitalization Ratios: Common Stockholder's Equity.............. 57.8% 52.3% 51.1% 51.0% 48.2% Preferred Stock: Not Subject to Mandatory Redemption.... 4.3 4.1 3.9 4.0 3.7 Subject to Mandatory Redemption........ 2.9 2.7 2.7 2.8 2.7 Long-Term Debt........................... 35.0 40.9 42.3 42.2 45.4 --------------------------------------------------------------- Total Capitalization................... 100.0% 100.0% 100.0% 100.0% 100.0% --------------------------------------------------------------- Distribution Kilowatt-Hour Deliveries (Millions): Residential.............................. 9,646 9,432 9,483 8,773 8,631 Commercial............................... 7,967 8,221 8,238 7,590 7,335 Industrial............................... 10,995 11,631 11,310 10,803 11,202 Other.................................... 152 151 151 150 150 --------------------------------------------------------------- Total.................................... 28,760 29,435 29,182 27,316 27,318 --------------------------------------------------------------- Customers Served: Residential.............................. 1,033,414 1,014,379 1,016,793 1,004,552 995,605 Commercial............................... 118,469 116,931 115,581 113,820 111,189 Industrial............................... 4,573 4,569 4,627 4,598 4,568 Other.................................... 1,664 1,606 1,539 1,476 1,415 --------------------------------------------------------------- Total.................................... 1,158,120 1,137,485 1,138,540 1,124,446 1,112,777 --------------------------------------------------------------- Number of Employees (a)..................... 1,618 1,647 2,734 2,832 4,215 (a) Reduction in 2000 reflects transfer of responsibility for generation operations to FirstEnergy Corp.'s competitive services unit.
OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), and the availability and cost of capital. Corporate Separation - -------------------- Beginning on January 1, 2001, Ohio customers were able to choose their electricity suppliers as a result of legislation which restructured the electric utility industry. That legislation 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 Public Utilities Commission of Ohio (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 regulated services unit and a corporate support services unit. Ohio Edison (OE) and Pennsylvania Power (Penn) are included in the regulated services unit; they continue to deliver power to homes and businesses through their existing distribution systems and maintain the "provider of last resort" (PLR) obligations 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 FirstEnergy Solutions Corp. (FES) purchases all of the EUOC nuclear generation, as well as generation from leased fossil generating facilities. FirstEnergy Generation Corp. (FGCO), a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. The Ohio EUOC and Penn 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 (552 megawatts committed as of December 31, 2001). The effect on the OE's and Penn's (OE Companies) reported results of operations during 2001 from FirstEnergy's corporate separation plan and the OE Companies' sale of transmission assets to American Transmission Systems, Inc. (ATSI) in September 2000, are summarized in the following table: Corporate Restructuring - 2001 Income Statement Effects --------------------------------------------------------------------------- Increase (Decrease) Corporate Separation ATSI Total ---------- ---- ----- (In millions) Operating Revenues: Power supply agreement with FES.... $ 355.9 $ -- $ 355.9 Generating units rent.............. 178.8 -- 178.8 Ground lease with ATSI............. -- 3.1 3.1 ---------------------------------------------------------------------------- Total Operating Revenues Effect.... $ 534.7 $ 3.1 $ 537.8 ============================================================================ Operating Expenses and Taxes: Fossil fuel costs.................. $ (264.3)(a) $ -- $ (264.3) Purchased power costs.............. 1,025.9 (b) -- 1,025.9 Other operating costs.............. (157.1)(a) 28.6 (d) (128.5) Provision for depreciation and amortization -- (12.9)(e) (12.9) General taxes...................... (4.8) (c) (15.2)(e) (20.0) Income taxes....................... (23.4) 5.2 (18.2) ---------------------------------------------------------------------------- Total Operating Expenses Effect.... $ 576.3 $ 5.7 $ 582.0 ============================================================================ Other Income......................... $ -- $ 10.7 (f) $ 10.7 ============================================================================ (a) Transfer of fossil operations to FGCO. (b) Purchased power from power supply agreement (PSA). (c) Payroll taxes related to employees transferred to FGCO. (d) Transmission services received from ATSI. (e) Depreciation and property taxes related to transmission assets sold to ATSI. (f) Interest on note receivable from ATSI. Results of Operations - --------------------- Earnings on common stock in 2001 increased 4.4% to $339.5 million in 2001 from $325.3 million. Excluding the effects shown in the table above, earnings on common stock increased by 14.7% in 2001 from 2000, being favorably affected by reduced operating expenses and taxes, and lower net interest charges, which were substantially offset by reduced operating revenues. In 2000, earnings on common stock increased 13.7% to $325.3 million from $286.1 million primarily due to higher operating revenues, lower fuel expenses and reductions in general taxes and net interest charges, which were partially offset by higher nuclear and other operating costs. Excluding the effects shown in the table above, operating revenues decreased by $208.0 million or 7.6% in 2001 from 2000 following a $39.8 million increase in 2000 from the prior year. Customer choice in Ohio and the influence of a declining national economy on our regional business activity combined to lower operating revenues. Electric generation services provided by other suppliers in the OE Companies' service area increased to 12.5% of total energy delivered from 1.5% in 2000. Overall, retail generation sales declined in all customer categories resulting in an overall 13.1% reduction in kilowatt-hour sales from the prior year. As part of Ohio's electric utility restructuring law, the implementation of a 5% reduction in generation charges for residential customers reduced operating revenues by approximately $26.6 million in 2001, compared to 2000. Distribution deliveries declined 2.3% in 2001 from the prior year reflecting the impact of a weaker economy that contributed to lower commercial and industrial kilowatt-hour sales. Operating revenues were also lower in 2001 from the prior year due to the absence of revenues associated with the low-income payment plan now administered by the Ohio Department of Development; there was also a corresponding reduction in other operating costs associated with that change. Revenues from kilowatt-hour sales to wholesale customers declined $54.3 million in 2001 from last year, with a corresponding 42.0% reduction in kilowatt-hour sales. Additional kilowatt-hour sales to the wholesale market were the largest source of the increase in operating revenues in 2000, compared to the prior year, due to additional available generating capacity. Transmission-related revenues also contributed to the higher operating revenues. These increases were partially offset by lower retail sales, reflecting a softening in the service area economy and cooler summer weather during 2000, compared to the above-normal temperatures experienced in 1999. Changes in KWH Sales 2001 2000 --------------------------------------------------------------------- Increase (Decrease) Electric Generation: Retail................................ (13.1)% (0.5)% Wholesale............................. (42.0)%* 43.3% --------------------------------------------------------------------- Total Electric Generation Sales......... (20.5)% 7.8% ===================================================================== Distribution Deliveries: Residential........................... 2.3% (1.3)% Commercial and industrial............. (4.5)% (0.2)% --------------------------------------------------------------------- Total Distribution Deliveries........... (2.3)% (0.5)% ===================================================================== *Excluding PSA kilowatt-hour sales related to restructuring. Operating Expenses and Taxes Total operating expenses and taxes increased by $345.3 million in 2001 and by $30.5 million in 2000 from the prior year. Excluding the effects of restructuring, total 2001 operating expenses and taxes were $236.7 million lower than the prior year. The following table presents changes from the prior year by expense category excluding the impact of restructuring. Operating Expenses and Taxes - Changes 2001 2000 --------------------------------------------------------------------- Increase (Decrease) (In millions) Fuel and purchased power...................... $ (84.1) $(57.0) Nuclear operating costs....................... 14.7 54.1 Other operating costs......................... (14.6) 23.8 -------------------------------------------------------------------- Total operation and maintenance expenses.... (84.0) 20.9 Provision for depreciation and amortization... (140.8) (3.5) General taxes................................. (52.3) (14.4) Income taxes.................................. 40.4 27.5 -------------------------------------------------------------------- Total operating expenses and taxes.......... $(236.7) $ 30.5 ===================================================================== The following discussion excludes the effects shown in the preceding table related to the impact of restructuring. The decrease in fuel and purchased power costs in 2001, compared to 2000, reflects the transfer of fossil operations costs to FGCO, with the OE Companies' power requirements being provided under the PSA. In 2000, lower fuel expense accounted for almost all of the reduction in fuel and purchased power costs, declining $56.0 million from 1999, despite an 11.1% increase in output from our generating units due to additional nuclear generation, the expiration of an above-market coal contract and continued improvement in coal blending strategies. Nuclear operating costs increased by $14.7 million in 2001 from the prior year. Both 2001 and 2000 included two refueling outages; however, the Perry Plant also experienced two forced outages in 2001. In 2000, nuclear operating costs increased by $54.1 million due to refueling outage costs and increased ownership of the Beaver Valley Plant following the Duquesne asset swap in early December 1999. Other operating costs decreased $14.6 million in 2001 from the prior year reflecting a reduction in low-income payment plan customer costs, lower storm damage costs, (the absence of costs incurred in 2000 related to the development of a distribution communications system) reduced reserves for uncollectible accounts and customer program expense, offset in part by the absence in 2001 of gains from the sale of emission allowances. In 2000, other operating costs rose $23.8 million, compared to 1999, reflecting the sale of transmission assets to ATSI in September 2000, which resulted in new charges for transmission services. The higher transmission costs were offset in part by income received from ATSI under a ground lease arrangement and interest income from the promissory note received in connection with the sale. Also contributing to the increase in other operating costs in 2000 were higher reserves established for potentially uncollectible accounts of customers in the steel sector, and the cost of additional leased portable diesel generators. Partially offsetting those higher operating costs were gains realized from the sale of emission allowances. Depreciation and amortization decreased by $140.8 million in 2001 from the prior year due to lower incremental transition cost amortization and new deferrals for shopping incentives under FirstEnergy's Ohio transition plan compared to the accelerated cost recovery in connection with our prior regulatory plan. Incremental transition costs recovered in 2001 and cost recovery accelerated under OE's rate plan and Penn's restructuring plan in 2000 and 1999 are summarized by income statement caption in the table below: Accelerated Cost Recovery 2001 2000 1999 ------------------------------------------------------------------------ (In millions) Depreciation and amortization........... $232.4 $332.6 $333.3 Income tax amortization & other......... 41.4 42.6 18.7 -------------------------------------------------------------------------- Total Accelerations..................... $273.8 $375.2 $352.0 ========================================================================== General taxes decreased by $52.3 million in 2001 from 2000 due to reduced property taxes and other state tax changes in connection with the Ohio electric industry restructuring and the successful resolution of certain pending tax issues, which resulted in a one-time benefit of $15 million. The reduction in general taxes was partially offset by $38.0 million of new Ohio franchise taxes in 2001, which are classified as state income taxes on the Consolidated Statements of Income. Other Income In 2000, other income increased $10.1 million, compared to the previous year, principally due to the interest earned on long-term notes from ATSI and short-term loans to other affiliate companies. Net Interest Charges Net interest charges continued to trend lower, decreasing by $16.6 million in 2001 and by $19.4 million in 2000, compared to the prior year. We continued to redeem and refinance our outstanding debt and preferred stock during 2001 -- net redemptions and refinancing activities totaled $19.4 million and $102.4 million, respectively, and will result in annualized savings of $4.1 million. Capital Resources and Liquidity - ------------------------------- Our improving financial position reflects ongoing efforts to increase competitiveness and enhance shareholder value. We have continued to strengthen our financial position over the past five years by improving our fixed charge coverage ratios. Our corporate indenture ratio, which is used to measure our ability to issue first mortgage bonds, increased from 6.48 in 1996 to 7.42 in 2001, which enhances our financial flexibility. Over the same period, our charter ratio, a measure of our ability to issue preferred stock, improved from 2.25 to 3.41 and our common stockholder's equity as a percentage of capitalization rose from approximately 45% at the end of 1996 to 58% at the end of 2001. Over the last five years, we have reduced the average cost of long-term debt from 7.76% in 1996 to 6.21% at the end of 2001. We had about $113.2 million of cash and temporary investments and $245.8 million of short-term indebtedness as of December 31, 2001. Our unused borrowing capability included $250.0 million under revolving lines of credit and $34.0 million from unused bank facilities. At the end of 2001, we had the capability to issue $1.3 billion of additional first mortgage bonds on the basis of property additions and retired bonds. Based upon applicable earnings coverage tests and our respective charters, we could issue $2.3 billion of preferred stock (assuming no additional debt was issued). Following approval of the merger of FirstEnergy and GPU by the New Jersey Board of Public Utilities on September 26, 2001, Standard & Poor's upgraded the OE Companies' corporate credit ratings from BB+ to BBB, OE's senior secured debt rating from BB- to BBB and Penn's senior secured debt rating from BB+ to BBB. Ratings of junior securities were also upgraded to conform to typical rating relationships. The improved credit ratings resulted from FirstEnergy's new consolidated credit profile following the merger. The credit rating outlook of Standard & Poor's and Moody's are both stable for the OE Companies. Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table:
Contractual Obligations - --------------------------------------------------------------------------------------------------------- There- 2002 2003 2004 2005 2006 after Total - --------------------------------------------------------------------------------------------------------- (In millions) Long-term debt................ $409 $249 $97 $137 $ 6 $1,285 $2,183 Short-term borrowings......... 246 -- -- -- -- -- 246 Mandatory preferred stock..... 1 1 1 1 1 130 135 Capital leases ............... 4 5 5 4 4 4 26 Operating leases*............. 69 74 80 82 81 997 1,383 Unconditional fuel purchases.. 26 36 36 14 -- -- 112 - --------------------------------------------------------------------------------------------------------- Total......................... $755 $365 $219 $238 $92 $2,416 $4,085 ========================================================================================================= * Operating lease payments are net of capital trust receipts of $712.8 million (see Note 2).
Our capital spending for the period 2002-2006 is expected to be about $510 million (excluding nuclear fuel) of which approximately $128 million applies to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $240 million, of which about $23 million relates to 2002. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $230 million and $47 million, respectively, as the nuclear fuel is consumed. Off balance sheet obligations primarily consist of sale and leaseback arrangements involving Perry Unit 1 and the Beaver Valley Unit 2, which are reflected in the operating lease payments above (see Note 2 - Leases). The present value as of December 31, 2001, of these sale and leaseback operating lease commitments, net of trust investments, total $699 million. Interest Rate Risk - ------------------ Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent risks related to refinancing maturing debt by issuing new debt securities. As discussed in Note 2, our investment in the PNBV Capital Trust effectively reduces future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 - Utility Plant and Depreciation. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.
Comparison of Carrying Value to Fair Value - ------------------------------------------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value - -------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income................. $ 27 $ 31 $306 $184 $ 34 $680 $1,262 $1,284 Average interest rate..... 7.8% 7.9% 7.8% 7.9% 8.1% 7.7% 7.7% - ------------------------------------------------------------------------------------------------------------------- Liabilities - ------------------------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate................... $327 $249 $ 97 $137 $ 6 $589 $1,405 $1,480 Average interest rate .... 7.8% 8.2% 7.3% 7.2% 7.9% 7.1% 7.5% Variable rate................ $696 $ 696 $ 702 Average interest rate..... 3.0% 3.0% Short-term Borrowings........ $246 $ 246 $ 246 Average interest rate..... 2.4% 2.4% - ------------------------------------------------------------------------------------------------------------------- Preferred Stock.............. $ 1 $ 1 $ 1 $ 1 $ 1 $130 $ 135 $ 138 Average dividend rate .... 7.6% 7.6% 7.6% 7.6% 7.6% 8.9% 8.8% - -------------------------------------------------------------------------------------------------------------------
Outlook - ------- Our industry continues to transition to a more competitive environment. In 2001, all our customers could select alternative energy suppliers. We continue to deliver power to homes and businesses through our existing distribution systems, which remain regulated. Customer rates have been restructured into separate components to support customer choice. In Ohio and Pennsylvania, we have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier subject to certain limits. Adopting new approaches to regulation and experiencing new forms of competition have created new uncertainties. Regulatory Matters Beginning on January 1, 2001 Ohio customers were able to choose their electricity suppliers. Ohio customer rates were restructured to establish separate charges for transmission, distribution, transition cost recovery and a generation-related component. When one of our Ohio customers elects to obtain power from an alternative supplier, we reduce the customer's bill with a "generation shopping credit," based on the regulated generation component (plus an incentive for OE customers), and the customer receives a generation charge from the alternative supplier. OE has continuing PLR responsibility to its franchise customers through December 31, 2005. The transition cost portion of rates provides for recovery of certain amounts not otherwise recoverable in a competitive generation market (such as regulatory assets). Transition costs are paid by all customers whether or not they choose an alternative supplier. Under the PUCO-approved transition plan, we assumed the risk of not recovering up to $250 million of transition revenue if the rate of customers (excluding contracts and full-service accounts) switching from our service to an alternative supplier does not reach 20% for any consecutive twelve-month period by December 31, 2005 - the end of the market development period. As of December 31, 2001, the customer-switching rate, on an annualized basis, implies that our risk of not recovering transition revenue has been reduced to approximately $87 million. We are also committed under the transition agreement to make available 560 MW of our generating capacity to marketers, brokers, and aggregators at set prices, to be used for sales only to retail customers in our Ohio service areas. Through December 31, 2001, approximately 552 MW of the 560 MW supply commitment had been secured by alternative suppliers. We began accepting customer applications for switching to alternative suppliers on December 8, 2000; as of December 31, 2001 we had been notified that over 160,000 of our customers requested generation service from other authorized suppliers, including FES, an affiliated company. Environmental Matters We are in compliance with the current sulfur dioxide (SO2) and nitrogen oxide (NOx) reduction requirements under the Clean Air Act Amendments of 1990. In 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions in the future from our Ohio and Pennsylvania facilities. Various regulatory and judicial actions have since sought to further define NOx reduction requirements (see Note 5 - Environmental Matters). We continue to evaluate our compliance plans and other compliance options. Violations of federally approved SO2 regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day a unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. We cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to nine utilities covering 44 power plants, including the W.H. Sammis Plant. In addition, the U.S. Department of Justice filed eight civil complaints against various investor-owned utilities, which included a complaint against the OE Companies in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act (CAA) based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint against the OE Companies requests the installation of "best available control technology" as well as civil penalties of up to $27,500 per day. Although unable to predict the outcome of these proceedings, we believe the Sammis Plant is in full compliance with the CAA and that the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while these proceedings are pending. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. Legal Matters Various lawsuits, claims and proceedings related to our normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to us are described above. Significant Accounting Policies - ------------------------------- We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often requires a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting those specific factors. Our more significant accounting policies are described below. Regulatory Accounting The OE Companies are subject to regulation that sets the prices (rates) we are permitted to charge our customers based on our costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in Ohio and Pennsylvania, a significant amount of regulatory assets have been recorded. As of December 31, 2001, the OE Companies' regulatory assets totaled $2.2 billion. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future. As disclosed in Note 1 - Regulatory Plans, OE's full recovery of transition costs is dependent on achieving 20% customer shopping levels in any twelve-month period by December 31, 2005. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hours that have been delivered but not yet been billed through the end of the year. The determination of unbilled revenues requires management to make various estimates including: o Net energy generated or purchased for retail load o Losses of energy over distribution lines o Allocations to distribution companies within the FirstEnergy system o Mix of kilowatt-hour usage by residential, commercial and industrial customers o Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards - ------------------------------------ In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (SFAS) 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on the OE Companies' accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ (In thousands) OPERATING REVENUES...................................................... $3,056,464 $2,726,708 $2,686,949 ---------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power............................................. 1,096,317 418,790 475,792 Nuclear operating costs.............................................. 381,047 366,387 312,289 Other operating costs................................................ 313,177 456,246 432,476 ---------- ---------- ---------- Total operation and maintenance expenses........................... 1,790,541 1,241,423 1,220,557 Provision for depreciation and amortization.......................... 424,920 578,679 582,197 General taxes........................................................ 153,506 225,849 240,281 Income taxes......................................................... 220,678 198,436 170,872 ---------- ---------- ---------- Total operating expenses and taxes................................. 2,589,645 2,244,387 2,213,907 ---------- ---------- ---------- OPERATING INCOME........................................................ 466,819 482,321 473,042 OTHER INCOME............................................................ 68,681 55,976 45,846 ---------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES...................................... 535,500 538,297 518,888 ---------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt........................................... 150,632 165,409 178,217 Allowance for borrowed funds used during construction and capitalized interest.............................. (2,602) (9,523) (4,159) Other interest expense............................................... 22,754 31,451 31,971 Subsidiaries' preferred stock dividend requirements.................. 14,504 14,504 15,170 ---------- ---------- ---------- Net interest charges............................................... 185,288 201,841 221,199 ---------- ---------- ---------- NET INCOME.............................................................. 350,212 336,456 297,689 PREFERRED STOCK DIVIDEND REQUIREMENTS................................... 10,702 11,124 11,547 ---------- ---------- ---------- EARNINGS ON COMMON STOCK................................................ $ 339,510 $ 325,332 $ 286,142 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service...................................................................... $4,979,807 $4,930,844 Less-Accumulated provision for depreciation..................................... 2,461,972 2,376,457 ---------- ---------- 2,517,835 2,554,387 Construction work in progress- Electric plant................................................................ 87,061 219,623 Nuclear Fuel.................................................................. 11,822 18,898 ---------- ---------- 98,883 238,521 ---------- ---------- 2,616,718 2,792,908 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust (Note 2)..................................................... 429,040 452,128 Letter of credit collateralization (Note 2)..................................... 277,763 277,763 Nuclear plant decommissioning trusts............................................ 277,337 262,042 Long-term notes receivable from associated companies (Note 3B).................. 505,028 351,545 Other........................................................................... 303,409 305,848 ---------- ---------- 1,792,577 1,649,326 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents....................................................... 4,588 18,269 Receivables- Customers (less accumulated provisions of $4,522,000 and $11,777,000, respectively, for uncollectible accounts)................................... 311,744 304,719 Associated companies.......................................................... 523,884 476,993 Other (less accumulated provision of $1,000,000 for uncollectible accounts at both dates) 41,611 34,281 Notes receivable from associated companies...................................... 108,593 1,032 Materials and supplies, at average cost- Owned......................................................................... 53,900 80,534 Under consignment............................................................. 13,945 51,488 Prepayments and other........................................................... 50,541 76,934 ---------- ---------- 1,108,806 1,044,250 ---------- ---------- DEFERRED CHARGES: Regulatory assets............................................................... 2,234,227 2,498,837 Property taxes.................................................................. 58,244 56,429 Unamortized sale and leaseback costs............................................ 75,105 80,103 Other........................................................................... 30,276 32,298 ---------- ---------- 2,397,852 2,667,667 ---------- ---------- $7,915,953 $8,154,151 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholder's equity..................................................... $2,671,001 $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............................................... 14,250 15,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company subordinated debentures............... 120,000 120,000 Long-term debt.................................................................. 1,614,996 2,000,622 ---------- ---------- 4,620,317 4,892,684 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock............................ 576,962 311,358 Short-term borrowings (Note 4)- Associated companies.......................................................... 26,076 19,131 Other......................................................................... 219,750 296,301 Accounts payable- Associated companies.......................................................... 110,784 123,859 Other......................................................................... 19,819 60,332 Accrued taxes................................................................... 258,831 232,225 Accrued interest................................................................ 33,053 34,106 Other........................................................................... 63,140 75,288 ---------- ---------- 1,308,415 1,152,600 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes............................................... 1,175,395 1,298,845 Accumulated deferred investment tax credits..................................... 99,193 110,064 Nuclear plant decommissioning costs............................................. 276,500 261,204 Other postretirement benefits................................................... 166,594 160,719 Other........................................................................... 269,539 278,035 ---------- ---------- 1,987,221 2,108,867 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 5)................................................................. ---------- ---------- $7,915,953 $8,154,151 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION As of December 31, 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, without par value, authorized 175,000,000 shares-100 shares outstanding $2,098,729 $2,098,729 Retained earnings (Note 3A)...................................................... 572,272 458,263 ---------- ---------- Total common stockholder's equity............................................ 2,671,001 2,556,992 ---------- ---------- Number of Shares Optional Outstanding Redemption Price -------------------- -------------------- 2001 2000 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3D): Cumulative, $100 par value- Authorized 6,000,000 shares Not Subject to Mandatory Redemption: 3.90%................................ 152,510 152,510 $103.63 $ 15,804 15,251 15,251 4.40%................................ 176,280 176,280 108.00 19,038 17,628 17,628 4.44%................................ 136,560 136,560 103.50 14,134 13,656 13,656 4.56%................................ 144,300 144,300 103.38 14,917 14,430 14,430 --------- --------- -------- ---------- ---------- 609,650 609,650 63,893 60,965 60,965 --------- --------- -------- ---------- ---------- Cumulative, $25 par value- Authorized 8,000,000 shares Not Subject to Mandatory Redemption: 7.75%................................ 4,000,000 4,000,000 25.00 100,000 100,000 100,000 --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption............. 4,609,650 4,609,650 $163,893 160,965 160,965 ========= ========= ======== ---------- ---------- Cumulative, $100 par value- Subject to Mandatory Redemption (Note 3E): 8.45%................................ -- 50,000 -- $ -- -- 5,000 Redemption Within One Year........... -- (5,000) --------- --------- -------- ---------- ---------- Total Subject to Mandatory Redemption............. -- 50,000 $ -- -- -- ========= ========= ======== ---------- ---------- PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY (Note 3D): Pennsylvania Power Company- Cumulative, $100 par value- Authorized 1,200,000 shares Not Subject to Mandatory Redemption: 4.24%................................ 40,000 40,000 $103.13 $ 4,125 4,000 4,000 4.25%................................ 41,049 41,049 105.00 4,310 4,105 4,105 4.64%................................ 60,000 60,000 102.98 6,179 6,000 6,000 7.75%................................ 250,000 250,000 -- -- 25,000 25,000 --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption....................... 391,049 391,049 $ 14,614 39,105 39,105 ========= ========= ======== ---------- ---------- Subject to Mandatory Redemption (Note 3E): 7.625%............................... 150,000 150,000 104.58 $ 15,687 15,000 15,000 Redemption Within One Year........... (750) -- Total Subject to Mandatory --------- --------- -------- ---------- ---------- Redemption 150,000 150,000 $ 15,687 14,250 15,000 ========= ========= ======== ---------- ---------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (Note 3F): Cumulative, $25 par value- Authorized 4,800,000 shares Subject to Mandatory Redemption: 9.00%................................ 4,800,000 4,800,000 $ 25.00 $120,000 120,000 120,000 ========= ========= ======== ---------- ----------
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd) As of December 31, 2001 2000 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT (Note 3G): First mortgage bonds: Ohio Edison Company- Pennsylvania Power Company- 7.375% due 2002............... 120,000 120,000 9.740% due 2002-2019. 17,565 18,539 7.500% due 2002............... 34,265 34,265 7.500% due 2003...... 40,000 40,000 8.250% due 2002............... 125,000 125,000 6.375% due 2004...... 20,500 20,500 8.625% due 2003............... 150,000 150,000 6.625% due 2004...... 14,000 14,000 6.875% due 2005............... 80,000 80,000 8,500% due 2022...... 27,250 27,250 8.750% due 2022............... 50,960 50,960 7.625% due 2023...... 6,500 6,500 ------- ------- 7.625% due 2023............... 75,000 75,000 7.875% due 2023............... 93,500 93,500 ------- ------- Total first mortgage bonds......... 728,725 728,725 125,815 126,789 854,540 855,514 ------- ------- ------- -------- ---------- ---------- Secured notes: Ohio Edison Company- Pennsylvania Power Company- 7.930% due 2002............... 2,360 15,887 5.400% due 2013...... 1,000 1,000 7.680% due 2005............... 200,000 200,000 5.400% due 2017...... 10,600 10,600 *1.550% due 2015............... 19,000 19,000 *1.550% due 2017...... 17,925 -- 6.750% due 2015............... 40,000 40,000 7.150% due 2017...... -- 17,925 7.050% due 2020............... 60,000 60,000 5.900% due 2018...... 16,800 16,800 *1.550% due 2021............... 443 -- *1.550% due 2021...... 14,482 -- 7.000% due 2021............... -- 69,500 7.150% due 2021...... -- 14,482 7.150% due 2021............... -- 443 6.150% due 2023...... 12,700 12,700 5.375% due 2028............... 13,522 13,522 *1.750% due 2027...... 10,300 10,300 5.625% due 2029............... 50,000 50,000 6.450% due 2027...... 14,500 14,500 5.950% due 2029............... 56,212 56,212 5.375% due 2028...... 1,734 1,734 *1.550% due 2030............... 60,400 60,400 5.450% due 2028...... 6,950 6,950 *1.550% due 2031............... 69,500 -- 6.000% due 2028...... 14,250 14,250 *1.600% due 2033............... 57,100 57,100 5.950% due 2029...... 238 238 ------- -------- 5.450% due 2033............... 14,800 14,800 Limited Partnerships- 7.43% weighted average interest rate due 2002-2010. 35,015 24,287 ------- ------- 678,352 681,151 121,479 121,479 799,831 802,630 ------- ------- ------- -------- ---------- ---------- OES Fuel- 2.72% weighted average interest rate............................................................ 81,515 91,620 ---------- ---------- Total secured notes............................................................. 881,346 894,250 ---------- ---------- Unsecured notes: Ohio Edison Company- Pennsylvania Power Company- *7.475% due 2002............... -- 25,000 *5.900% due 2033...... 5,200 5,200 ------- -------- *7.413% due 2002............... -- 75,000 *1.550% due 2014............... 50,000 50,000 *4.850% due 2015............... 50,000 50,000 *5.800% due 2016............... 47,725 47,725 *1.850% due 2018............... 33,000 33,000 *2.000% due 2018............... 23,000 23,000 *1.900% due 2023............... 50,000 50,000 *4.300% due 2033............... 50,000 50,000 *4.650% due 2033............... 108,000 108,000 *4.400% due 2033............... 30,000 30,000 -------- ------- Total unsecured notes.............. 441,725 541,725 5,200 5,200 446,925 546,925 ------- ------- ------- -------- ---------- ---------- Capital lease obligations (Note 2)........................................................... 10,718 12,961 ---------- ---------- Net unamortized discount on debt............................................................. (2,321) (2,670) ---------- ---------- Long-term debt due within one year........................................................... (576,212) (306,358) ---------- ---------- Total long-term debt......................................................................... 1,614,996 2,000,622 ---------- ---------- TOTAL CAPITALIZATION......................................................................... $4,620,317 $4,892,684 ========== ========== * Denotes variable rate issue with December 31, 2001 interest rate shown for only December 31, 2001 balances and December 31, 2000 interest rate shown for only December 31, 2000 balances. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Comprehensive Number Carrying Retained Income of Shares Value Earnings ------------- --------- -------- -------- (Dollars in thousands) Balance, January 1, 1999................ 100 $2,098,729 $ 583,144 Net income........................... $297,689 297,689 ======== Transfer of Penn Power Energy to FirstEnergy Services Corp....... 3,302 Cash dividends on preferred stock.... (11,401) Cash dividends on common stock....... (347,003) - ------------------------------------------------------------------------------------------------- Balance, December 31, 1999.............. 100 2,098,729 525,731 Net income........................... $336,456 336,456 ======== Cash dividends on preferred stock.... (11,124) Cash dividends on common stock....... (392,800) - ------------------------------------------------------------------------------------------------- Balance, December 31, 2000.............. 100 2,098,729 458,263 Net income........................... $350,212 350,212 ======== Cash dividends on preferred stock.... (10,703) Cash dividends on common stock....... (225,500) - ------------------------------------------------------------------------------------------------- Balance, December 31, 2001.............. 100 $2,098,729 $ 572,272 ================================================================================================
CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Par Number Par of Shares Value of Shares Value --------- ----- --------- ----- (Dollars in thousands) Balance, January 1, 1999......... 5,118,699 $211,870 5,100,000 $150,000 Redemptions- 7.64% Series................. (60,000) (6,000) 8.00% Series................. (58,000) (5,800) 8.45% Series................. (50,000) (5,000) ------------------------------------------------------------------------------------- Balance, December 31, 1999....... 5,000,699 200,070 5,050,000 145,000 Redemptions- 8.45% Series................. (50,000) (5,000) ------------------------------------------------------------------------------------- Balance, December 31, 2000....... 5,000,699 200,070 5,000,000 140,000 Redemptions- 8.45% Series................. (50,000) (5,000) ------------------------------------------------------------------------------------- Balance, December 31, 2001....... 5,000,699 $200,070 4,950,000 $135,000 ===================================================================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income............................................................... $ 350,212 $ 336,456 $ 297,689 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization......................... 424,920 578,679 582,197 Nuclear fuel and lease amortization................................. 45,417 52,232 45,850 Deferred income taxes, net.......................................... (63,945) (110,038) (120,149) Investment tax credits, net......................................... (13,346) (25,035) (13,793) Receivables......................................................... (61,246) (279,575) (43,623) Materials and supplies.............................................. 64,177 (7,625) 18,257 Accounts payable.................................................... (53,588) 70,089 14,443 Other............................................................... (24,912) 8,753 14,442 --------- --------- --------- Net cash provided from operating activities....................... 667,689 623,936 795,313 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt........................................................ 111,584 207,283 242,601 Short-term borrowings, net............................................ -- -- 20,113 Redemptions and Repayments- Preferred stock....................................................... 5,000 5,000 17,005 Long-term debt........................................................ 233,158 485,178 396,410 Short-term borrowings, net............................................ 69,606 42,864 -- Dividend Payments- Common stock.......................................................... 225,500 392,800 347,003 Preferred stock....................................................... 10,703 11,124 11,512 --------- --------- --------- Net cash used for financing activities............................ 432,383 729,683 509,216 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions....................................................... 145,427 279,508 237,199 Loans to associated companies............................................ 262,076 206,901 -- Loan payments from associated companies.................................. (1,032) -- -- Sale of assets to associated companies................................... (154,596) (531,633) -- Other.................................................................... (2,888) 8,383 (5,064) --------- --------- --------- Net cash used for (provided from) investing activities............ 248,987 (36,841) 232,135 --------- --------- --------- Net increase (decrease) in cash and cash equivalents..................... (13,681) (68,906) 53,962 Cash and cash equivalents at beginning of year........................... 18,269 87,175 33,213 --------- --------- --------- Cash and cash equivalents at end of year................................. $ 4,588 $ 18,269 $ 87,175 ========= ========= ========= SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year- Interest (net of amounts capitalized)............................... $ 180,263 $ 183,117 $ 203,749 ========= ========= ========= Income taxes........................................................ $ 240,882 $ 305,644 $ 308,052 ========= ========= ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF TAXES For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ (In thousands) GENERAL TAXES: Real and personal property............................................. $ 45,132 $ 103,741 $ 111,222 State gross receipts................................................... 45,271 104,851 106,926 Ohio kilowatt-hour excise.............................................. 55,795 -- -- Social security and unemployment....................................... 4,159 11,964 14,432 Other.................................................................. 3,149 5,293 7,701 ---------- ---------- ---------- Total general taxes............................................... $ 153,506 $ 225,849 $ 240,281 ========== ========== ========== PROVISION FOR INCOME TAXES: Currently payable- Federal............................................................. $ 265,305 $ 329,616 $ 307,462 State............................................................... 51,121 18,037 18,315 ---------- ---------- ---------- 316,426 347,653 325,777 ---------- ---------- ---------- Deferred, net- Federal............................................................. (56,105) (102,692) (113,347) State............................................................... (7,840) (7,346) (6,802) ---------- ---------- ---------- (63,945) (110,038) (120,149) ---------- ---------- ---------- Investment tax credit amortization..................................... (13,346) (25,035) (13,793) ---------- ---------- ---------- Total provision for income taxes.................................. $ 239,135 $ 212,580 $ 191,835 ========== ========== ========== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating income....................................................... $ 220,678 $ 198,436 $ 170,872 Other income........................................................... 18,457 14,144 20,963 ---------- ---------- ---------- Total provision for income taxes.................................. $ 239,135 $ 212,580 $ 191,835 ========== ========== ========== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes.......................... $ 589,347 $ 549,036 $ 489,524 ========== ========== ========== Federal income tax expense at statutory rate........................... $ 206,271 $ 192,163 $ 171,333 Increases (reductions) in taxes resulting from- Amortization of investment tax credits.............................. (13,346) (25,035) (13,793) State income taxes, net of federal income tax benefit............... 28,133 6,949 7,483 Amortization of tax regulatory assets............................... 32,020 39,746 24,950 Other, net.......................................................... (13,943) (1,243) 1,862 ---------- ---------- ---------- Total provision for income taxes.................................. $ 239,135 $ 212,580 $ 191,835 ========== ========== ========== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences............................................. $ 374,138 $ 377,521 $ 847,479 Allowance for equity funds used during construction.................... 36,587 62,604 152,846 Competitive transition charge.......................................... 675,652 755,607 344,643 Customer receivables for future income taxes........................... 54,600 68,624 163,500 Deferred sale and leaseback costs...................................... (77,099) (30,151) (26,966) Unamortized investment tax credits..................................... (38,680) (39,369) (51,521) Deferred gain for asset sale to affiliated company..................... 85,311 73,312 -- Other.................................................................. 64,886 30,697 38,497 ---------- ---------- ---------- Net deferred income tax liability................................. $1,175,395 $1,298,845 $1,468,478 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include Ohio Edison Company (Company) and its wholly owned subsidiaries. Pennsylvania Power Company (Penn) is the Company's principal operating subsidiary. All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. FirstEnergy holds directly all of the issued and outstanding common shares of its principal electric utility operating subsidiaries, including, the Company and The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE), American Transmission Systems, Inc. (ATSI), Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). JCP&L, Met-Ed and Penelec were formerly wholly owned subsidiaries of GPU, Inc. which merged with FirstEnergy on November 7, 2001. The Company and Penn (Companies) follow the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO), the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. REVENUES- The Companies' principal business is providing electric service to customers in central and northeastern Ohio and western Pennsylvania. The Companies' retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Companies' service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 2001 or 2000, with respect to any particular segment of the Companies' customers. REGULATORY PLANS- Ohio's 1999 electric utility restructuring law allowed Ohio electric customers to select their generation suppliers beginning January 1, 2001, provided for a five percent reduction on the generation portion of residential customers' bills and the opportunity for utilities to recover transition costs, including regulatory assets. Under this law, the PUCO approved FirstEnergy's transition plan in 2000 as modified by a settlement agreement with major parties to the transition plan, which it filed on behalf of the Company, CEI and TE. The settlement agreement included approval for recovery of the amounts of transition costs filed in the transition plan through no later than 2006 for the Company, except where a longer period of recovery is provided for in the settlement agreement. The settlement also granted preferred access over FirstEnergy's subsidiaries to nonaffiliated marketers, brokers and aggregators to 560 megawatts of generation capacity through 2005 at established prices for sales to the Company's retail customers. The Company's base electric rates for distribution service under its prior regulatory plan were extended from December 31, 2005 through December 31, 2007. The transition rate credits for customers under its prior regulatory plan was also extended through the Company's transition cost recovery period. 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 resulted in the 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 planned changes in 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 a 5% reduction in the price of generation for residential customers. The Company's 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 period. If the customer shopping goals established in the agreement were not achieved by the end of 2005, the transition cost recovery period could have been shortened for the Company to reduce recovery by as much as $250 million, but any such adjustment would be computed on a class-by-class and pro-rata basis. Based on annualized shopping levels as of December 31, 2001, the Company believes that the maximum potential recovery reduction was approximately $87 million. Pennsylvania enacted its electric utility competition law in 1996 with the phase-in of customer choice for generation suppliers completed as of January 1, 2001. In 1998, the PPUC authorized a rate restructuring plan for Penn, which essentially resulted in the deregulation of Penn's generation business. The application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to the Company's generation business was discontinued with the issuance of the PUCO transition plan order and in 1998 to Penn's generation business. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement concluding that any supplemental regulated cash flows such as a competitive transition charge (CTC) should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, $1.2 billion of impaired plant investments were recognized by the Company as regulatory assets recoverable as transition costs through future regulatory cash flows and $227 million were recognized for Penn related to its 1998 impairment of its nuclear generating unit investments to be recovered through a CTC over a seven-year transition period. Net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued, compared to the respective company's total assets as of December 31, 2001 were $984 million and $7.218 billion, respectively, for the Company and $88 million and $960 million, respectively, for Penn. All of the Companies' regulatory assets are expected to continue to be recovered under provisions of the Ohio transition plan and the Pennsylvania rate restructuring plan. Under the previous regulatory plan, the PUCO had authorized the Company to recognize additional capital recovery related to its generating assets (which was reflected as additional depreciation expense) and additional amortization of regulatory assets during the prior regulatory plan period of at least $2 billion, and the PPUC had authorized Penn to accelerate at least $358 million more than the amounts that would have been recognized if the prior regulatory plans were not in effect. These additional amounts were being recovered through rates. Under the Company's prior regulatory plan, which was terminated at the end of 2000, and Penn's rate restructuring plan, the Companies' cumulative additional capital recovery and regulatory asset amortization amounted to $1.424 billion. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for the Companies' nuclear generating units which were adjusted to fair value as discussed above), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Companies provide for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annual composite rate for the Company's electric plant was approximately 2.7% in 2001, 2.8% in 2000 and 3.0% in 1999. The annual composite rate for Penn's electric plant was approximately 2.9% in 2001, 2.6% in 2000 and 2.5% in 1999. Annual depreciation expense in 2001 included approximately $31.5 million for future decommissioning costs applicable to the Companies' ownership and leasehold interests in three nuclear generating units. The 2001 amounts reflected an increase of approximately $24 million from implementing the Company's transition plan in 2001. The Companies' share of the future obligation to decommission these units is approximately $841 million in current dollars and (using a 4.0% escalation rate) approximately $1.9 billion in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work is expected to begin. The Companies have recovered approximately $129 million for decommissioning through their electric rates from customers through December 31, 2001. The Companies have also recognized an estimated liability of approximately $14.0 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required as of January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trust will be recorded as investment income. The Company is currently assessing the new standard and has not yet quantified the impact on its financial statements. COMMON OWNERSHIP OF GENERATING FACILITIES- The Companies, together with CEI and TE, own and/or lease, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Companies' portions of operating expenses associated with jointly owned facilities are included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 2001 include the following:
Companies' Utility Accumulated Construction Ownership/ Plant Provision for Work in Leasehold Generating Units in Service Depreciation Progress Interest - ---------------------------------------------------------------------------------------------------------------- (In millions) W. H. Sammis #7.............. $ 344.6 $ 158.5 $ -- 68.80% Bruce Mansfield #1, #2 and #3................. 990.2 578.8 8.2 67.18% Beaver Valley #1 and #2................. 45.9 12.5 -- 77.81% Perry........................ 326.8 304.3 3.5 35.24% - --------------------------------------------------------------------------------------------------------------- Total..................... $1,707.5 $1,054.1 $11.7 ===============================================================================================================
NUCLEAR FUEL- Nuclear fuel is recorded at original cost, which includes material, enrichment, fabrication and interest costs incurred prior to reactor load. The Companies amortize the cost of nuclear fuel based on the rate of consumption. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. The Companies are included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Companies recognizing any tax losses or credits they contributed to the consolidated return. RETIREMENT BENEFITS- FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Companies' full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the GPU pension plans were merged with the FirstEnergy plan. The Companies use the projected unit credit method for funding purposes and were not required to make pension contributions during the three years ended December 31, 2001. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. The Companies provide a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Companies pay insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Companies. The Companies recognize the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 2001 2000 2001 2000 --------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1...... $1,506.1 $1,394.1 $ 752.0 $ 608.4 Service cost............................ 34.9 27.4 18.3 11.3 Interest cost........................... 133.3 104.8 64.4 45.7 Plan amendments......................... 3.6 41.3 -- -- Actuarial loss.......................... 123.1 17.3 73.3 121.7 Voluntary early retirement program...... -- 23.4 2.3 -- GPU acquisition......................... 1,878.3 -- 716.9 -- Benefits paid........................... (131.4) (102.2) (45.6) (35.1) ------------------------------------------------------------------------------------------- Benefit obligation as of December 31.... 3,547.9 1,506.1 1,581.6 752.0 ------------------------------------------------------------------------------------------- Change in fair value of plan assets: Fair value of plan assets as of January 1 1,706.0 1,807.5 23.0 4.9 Actual return on plan assets............ 8.1 0.7 12.7 (0.2) Company contribution.................... -- -- 43.3 18.3 GPU acquisition......................... 1,901.0 -- 462.0 -- Benefits paid........................... (131.4) (102.2) (6.0) -- ------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 3,483.7 1,706.0 535.0 23.0 ------------------------------------------------------------------------------------------- Funded status of plan................... (64.2) 199.9 (1,046.6) (729.0) Unrecognized actuarial loss (gain)...... 222.8 (90.9) 212.8 147.3 Unrecognized prior service cost......... 87.9 93.1 17.7 20.9 Unrecognized net transition obligation (asset) -- (2.1) 101.6 110.9 -------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost.......... $ 246.5 $ 200.0 $ (714.5) $(449.9) ============================================================================================ Companies' share of prepaid (accrued) benefit cost.......................... $ 210.7 $ 213.9 $ (165.8) $(157.0) ============================================================================================ Assumptions used as of December 31: Discount rate........................... 7.25% 7.75% 7.25% 7.75% Expected long-term return on plan assets 10.25% 10.25% 10.25% 10.25% Rate of compensation increase........... 4.00% 4.00% 4.00% 4.00%
FirstEnergy's net pension and other postretirement benefit costs for the three years ended December 31, 2001 were computed as follows:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 2001 2000 1999 2001 2000 1999 ----------------------------------------------------------------------------------------------------- (In millions) Service cost............................ $ 34.9 $ 27.4 $ 28.3 $18.3 $11.3 $ 9.3 Interest cost........................... 133.3 104.8 102.0 64.4 45.7 40.7 Expected return on plan assets.......... (204.8) (181.0) (168.1) (9.9) (0.5) (0.4) Amortization of transition obligation (asset) (2.1) (7.9) (7.9) 9.2 9.2 9.2 Amortization of prior service cost...... 8.8 5.7 5.7 3.2 3.2 3.3 Recognized net actuarial loss (gain).... -- (9.1) -- 4.9 -- -- Voluntary early retirement program...... 6.1 17.2 -- 2.3 -- -- ------------------------------------------------------------------------------------------------------ Net benefit cost........................ $ (23.8) $ (42.9) $ (40.0) $92.4 $68.9 $62.1 ====================================================================================================== Companies' share of net benefit cost... . $ (3.2) $ (19.1) $ (16.9) $15.7 $24.7 $25.5 ------------------------------------------------------------------------------------------------------
The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and other income include transactions with affiliated companies, primarily CEI, TE, ATSI, FirstEnergy Solutions Corp. (FES) and FirstEnergy. The Ohio transition plan, as discussed in the "Regulatory Plans" section, resulted in the corporate separation of FirstEnergy's regulated and unregulated operations in 2001. Unregulated operations under FES now operate the generation businesses of the Companies, CEI and TE. As a result, the Companies entered into power supply agreements (PSA) whereby FES purchases all of the Companies' nuclear generation and the Companies purchase their power from FES to meet their "provider of last resort" obligations. The primary affiliated companies transactions, including the effects of the PSA beginning in 2001, the sale and leaseback of the Companies' transmission assets to ATSI in September 2000 and FirstEnergy's providing support services at cost, are as follows: 2001 2000 1999 - ------------------------------------------------------------------------ (In millions) Operating Revenues: PSA revenues with FES............... $ 355.9 $ -- $ -- Generating units rent with FES...... 178.8 -- -- Electric sales to CEI............... -- 53.4 27.7 Electric sales to TE................ -- 15.9 18.1 Ground lease with ATSI.............. 11.9 8.8 -- Operating Expenses: Purchased power under PSA........... 1,025.9 -- -- ATSI rent expense................... 61.0 32.4 -- FirstEnergy support services........ 146.8 119.0 118.2 Other Income: Interest income from ATSI........... 16.0 5.4 -- Interest income from FES............ 12.1 -- -- - ------------------------------------------------------------------------ SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $1.3 million and $1.4 million for the years 2000 and 1999, respectively. There were no capital lease transactions in 2001. Commercial paper transactions of OES Fuel, Incorporated (a wholly owned subsidiary of the Company) that have initial maturity periods of three months or less are reported net within financing activities under long-term debt and are reflected as currently payable long-term debt on the Consolidated Balance Sheets in anticipation of the expiration of the related long-term financing agreement in March 2002 (see Note 3F). All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31:
2001 2000 ------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------------------------------------------------------------------------------------- (In millions) Long-term debt................................. $2,101 $2,182 $2,205 $2,257 Preferred stock................................ $ 135 $ 138 $ 140 $ 138 Investments other than cash and cash equivalents: Debt securities: - Maturity (5-10 years)..................... $ 593 $ 562 $ 460 $ 441 - Maturity (more than 10 years)............. 461 514 464 512 Equity securities........................... 13 13 13 13 All other................................... 360 359 342 341 ------------------------------------------------------------------------------------------------------- $1,427 $1,448 $1,279 $1,307 =======================================================================================================
The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Companies' ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with corresponding changes to the decommissioning liability. The Companies have no securities held for trading purposes. REGULATORY ASSETS- The Companies recognize, as regulatory assets, costs which the FERC, PUCO and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are expected to continue to be recovered from customers under the Companies' respective transition and rate restructuring plans. Based on those plans, the Companies continue to bill and collect cost-based rates for their transmission and distribution services, which remain regulated; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those operations. The Companies also recognized additional cost recovery of $270 million in 2000 and $257 million in 1999, as additional regulatory asset amortization in accordance with their prior Ohio and current Pennsylvania regulatory plans. The Companies recognized incremental transition cost recovery aggregating $274 million in 2001 in accordance with the current Ohio transition plan and Pennsylvania restructuring plan. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: 2001 2000 - ------------------------------------------------------------------------------- (In millions) Regulatory transition costs...................... $2,050.1 $2,300.6 Customer receivables for future income taxes..... 139.5 151.9 Loss on reacquired debt.......................... 30.3 29.6 Employee postretirement benefit costs............ 12.3 15.3 Other............................................ 2.0 1.4 - ------------------------------------------------------------------------------- Total..................................... $2,234.2 $2,498.8 =============================================================================== 2. LEASES The Companies lease certain generating facilities, office space and other property and equipment under cancelable and noncancelable leases. The Company sold portions of its ownership interest in Perry Unit 1 and Beaver Valley Unit 2 and entered into operating leases on the portions sold for basic lease terms of approximately 29 years. During the terms of the leases, the Company continues to be responsible, to the extent of its individual combined ownership and leasehold interests, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company has the right, at the end of the respective basic lease terms, to renew the leases for up to two years. The Company also has the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. The basic rental payments are adjusted when applicable federal tax law changes. OES Finance, Incorporated, a wholly owned subsidiary of the Company, maintains deposits pledged as collateral to secure reimbursement obligations relating to certain letters of credit supporting the Company's obligations to lessors under the Beaver Valley Unit 2 sale and leaseback arrangements. The deposits pledged to the financial institution providing those letters of credit are the sole property of OES Finance. In the event of liquidation, OES Finance, as a separate corporate entity, would have to satisfy its obligations to creditors before any of its assets could be made available to the Company as sole owner of OES Finance common stock. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 2001, are summarized as follows: 2001 2000 1999 - -------------------------------------------------------------------- (In millions) Operating leases Interest element......... $102.7 $107.0 $108.5 Other.................... 31.6 35.1 34.4 Capital leases Interest element......... 1.9 2.5 5.3 Other.................... 1.9 2.6 4.4 - -------------------------------------------------------------------- Total rentals............ $138.1 $147.2 $152.6 ==================================================================== The future minimum lease payments as of December 31, 2001, are: Operating Leases ---------------- Capital Lease PNBV Capital Leases Payments Trust Net - ------------------------------------------------------------------------------- (In millions) 2002......................... $ 4.1 $ 130.5 $ 61.0 $ 69.5 2003......................... 4.6 136.9 62.6 74.3 2004......................... 4.4 137.8 58.3 79.5 2005......................... 4.4 138.8 56.3 82.5 2006......................... 4.4 139.9 59.3 80.6 Years thereafter............. 4.2 1,412.0 415.3 996.7 ---------------------------------------------------------------------------- Total minimum lease payments. 26.1 $2,095.9 $712.8 $1,383.1 ======== ====== ======== Executory costs.............. 8.8 ----------------------------------- Net minimum lease payments... 17.3 Interest portion............. 6.5 ----------------------------------- Present value of net minimum lease payments............. 10.8 Less current portion......... 1.4 ----------------------------------- Noncurrent portion........... $ 9.4 =================================== The Company invested in the PNBV Capital Trust, which was established to purchase a portion of the lease obligation bonds issued on behalf of lessors in the Company's Perry Unit 1 and Beaver Valley Unit 2 sale and leaseback transactions. The PNBV capital trust arrangement effectively reduces lease costs related to those transactions. 3. CAPITALIZATION: (A) RETAINED EARNINGS- Under the Company's first mortgage indenture, the Company's consolidated retained earnings unrestricted for payment of cash dividends on the Company's common stock were $505.5 million at December 31, 2001. (B) EMPLOYEE STOCK OWNERSHIP PLAN- FirstEnergy funds the matching contribution for its 401(k) savings plan through an ESOP Trust. All of the Companies' full-time employees eligible for participation in the 401(k) savings plan are covered by the ESOP. The ESOP borrowed $200 million from the Company and acquired 10,654,114 shares of the Company's common stock (subsequently converted to FirstEnergy common stock) through market purchases. The ESOP loan is included in Other Property and Investments on the Consolidated Balance Sheets as of December 31, 2001 and 2000 as an investment with FirstEnergy related to the FirstEnergy savings plan. Dividends on ESOP shares are used to service the debt. Shares are released from the ESOP on a pro rata basis as debt service payments are made. (C) STOCK COMPENSATION PLANS- Employees of the Company participate in the FirstEnergy Executive and Director Incentive Compensation Plan (FE Plan) administered by FirstEnergy. Under the FE Plan, total awards cannot exceed 15 million shares of common stock or their equivalent. Only stock options and restricted stock have been granted, with vesting periods ranging from six months to seven years. Under the Executive Deferred Compensation Plan, covered employees can direct a portion of their Annual Incentive Award and/or Long Term Incentive Award into an unfunded FirstEnergy Stock Account to receive vested stock units. An additional 20% premium is received in the form of stock units based on the amount allocated to the FirstEnergy Stock Account. Dividends are calculated quarterly on stock units outstanding and are paid in the form of additional stock units. Upon withdrawal, stock units are converted to FirstEnergy shares. Payout occurs three years from the date of deferral. The Company continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As required by SFAS 123, "Accounting for Stock-Based Compensation," the Company has determined pro forma earnings as though the Company had accounted for employee stock options under the fair value method. The weighted average assumptions used in valuing the options and their resulting fair values are as follows: 2001 2000 1999 - --------------------------------------------------------------------------- Valuation assumptions: Expected option term (years) 8.3 7.6 6.4 Expected volatility......... 23.45% 21.77% 20.03% Expected dividend yield..... 5.00% 6.68% 5.97% Risk-free interest rate..... 4.67% 5.28% 5.97% Fair value per option......... $4.97 $2.86 $3.42 -------------------------------------------------------------------------- The following table summarizes the pro forma effect of applying fair value accounting to the Company's stock options. 2001 2000 1999 - ---------------------------------------------------------------------------- Earnings on Common Stock (000) As Reported................. $339,510 $325,332 $286,142 Pro Forma................... $338,866 $324,761 $285,963 - ---------------------------------------------------------------------------- (D) PREFERRED AND PREFERENCE STOCK- Penn's 7.75% series of preferred stock has a restriction which prevents early redemption prior to July 2003. All other preferred stock may be redeemed by the Companies in whole, or in part, with 30-60 days' notice. The Company has eight million authorized and unissued shares of preference stock having no par value. (E) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Penn's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1, 2002. The Companies' preferred shares are retired at $100 per share plus accrued dividends. Annual sinking fund requirements are approximately $750,000 in each year 2002-2006. (F) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES- Ohio Edison Financing Trust, a wholly owned subsidiary of the Company, has issued $120 million of 9% Cumulative Trust Preferred Capital Securities. The Company purchased all of the Trust's Common Securities and simultaneously issued to the Trust $123.7 million principal amount of 9% Junior Subordinated Debentures due 2025 in exchange for the proceeds that the Trust received from its sale of Preferred and Common Securities. The sole assets of the Trust are the Subordinated Debentures whose interest and other payment dates coincide with the distribution and other payment dates on the Trust Securities. Under certain circumstances the Subordinated Debentures could be distributed to the holders of the outstanding Trust Securities in the event the Trust is liquidated. The Subordinated Debentures may be optionally redeemed by the Company at a redemption price of $25 per Subordinated Debenture plus accrued interest, in which event the Trust Securities will be redeemed on a pro rata basis at $25 per share plus accumulated distributions. The Company's obligations under the Subordinated Debentures along with the related Indenture, amended and restated Trust Agreement, Guarantee Agreement and the Agreement for expenses and liabilities, constitute a full and unconditional guarantee by the Company of payments due on the Preferred Securities. (G) LONG-TERM DEBT- The first mortgage indentures and their supplements, which secure all of the Companies' first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Companies. Based on the amount of bonds authenticated by the Trustees through December 31, 2001, the Companies' annual sinking and improvement fund requirements for all bonds issued under the mortgage amounts to $31 million. The Companies expect to deposit funds in 2002 that will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes against unfunded property additions or against previously retired bonds. This method can result in minor increases in the amount of the annual sinking fund requirement. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) for the next five years are: (In millions) ---------------------------------------------- 2002................................. $574.8 2003................................. 379.0 2004................................. 258.3 2005................................. 136.8 2006................................. 5.6 -------------------------------------------- The Companies' obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $171.5 million and noncancelable municipal bond insurance policies of $238.9 million to pay principal of, or interest on, the pollution control revenue bonds. To the extent that drawings are made under the letters of credit, the Companies are entitled to a credit against their obligation to repay those bonds. The Companies pay annual fees of 1.10% to 1.375% of the amounts of the letters of credit to the issuing banks and are obligated to reimburse the banks for any drawings thereunder. The Company has a $250 million long-term revolving credit facility agreement (with no outstanding borrowings as of December 31, 2001) which expires November 18, 2002. The Company must pay an annual fee of 0.20% on the total credit facility amount. In addition, the credit agreement provides that the Company maintain unused first mortgage bond capability for the full credit agreement amount under the Company's indenture as potential security for the unsecured borrowings. Nuclear fuel purchases are financed through the issuance of OES Fuel commercial paper and loans, both of which are supported by a $141.5 million long-term bank credit agreement which expires March 31, 2002. The Company does not anticipate extending the credit agreement. Accordingly, the commercial paper and loans are reflected as currently payable long-term debt on the December 31, 2001 Consolidated Balance Sheet. OES Fuel must pay an annual facility fee of 0.20% on the total line of credit and an annual commitment fee of 0.0625% on any unused amount. 4. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT: Short-term borrowings outstanding as of December 31, 2001, consisted of $60.0 million of bank borrowings and $159.8 million of OES Capital, Incorporated commercial paper. OES Capital is a wholly owned subsidiary of the Company whose borrowings are secured by customer accounts receivable. OES Capital can borrow up to $170 million under a receivables financing agreement at rates based on certain bank commercial paper and is required to pay an annual fee of 0.20% on the amount of the entire finance limit. The receivables financing agreement expires in 2002. As of December 31, 2001, the Company also had total short-term borrowings of $26.1 million from its affiliates. The weighted average interest rates on short-term borrowings outstanding as of December 31, 2001 and 2000, were 2.45% and 6.93%, respectively. The Company has lines of credit with domestic banks that provide for borrowings of up to $34 million under various interest rate options. Short-term borrowings may be made under these lines of credit on its unsecured notes. To assure the availability of these lines, the Company is required to pay annual commitment fees of 0.15% to 0.20%. These lines expire at various times during 2002. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Companies' current forecasts reflect expenditures of approximately $510 million for property additions and improvements from 2002-2006, of which approximately $128 million is applicable to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $240 million, of which approximately $23 million applies to 2002. During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $230 million and $47 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on their ownership and leasehold interests in the Beaver Valley Station and the Perry Plant, the Companies' maximum potential assessment under the industry retrospective rating plan (assuming the other affiliate co-owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $168.2 million per incident but not more than $19.1 million in any one year for each incident. The Companies are also insured as to their respective interests in Beaver Valley and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Companies have also obtained approximately $537 million of insurance coverage for replacement power costs for their respective interests in Beaver Valley and Perry. Under these policies, the Companies can be assessed a maximum of approximately $33.1 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Companies intend to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Companies' plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Companies' insurance policies, or to the extent such insurance becomes unavailable in the future, the Companies would remain at risk for such costs. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. In accordance with the Ohio transition plan discussed in "Regulatory Plans" in Note 1, generation operations and any related additional capital expenditures for environmental compliance are the responsibility of FirstEnergy's competitive services business unit. 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 nineteen states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. State Implementation Plans (SIP) must comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania submitted a SIP that requires compliance with the NOx budgets at the 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. FirstEnergy continues to evaluate its compliance plans and other compliance options. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals found constitutional and other defects in the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new NAAQS rules regulating ultra-fine particulates but found defects in the new NAAQS rules for ozone and decided that the EPA must revise those rules. The future cost of compliance with these regulations may be substantial and will depend if and how they are ultimately implemented by the states in which the 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 the Companies in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. Although unable to predict the outcome of these proceedings, the Companies believe the Sammis Plant is in full compliance with the Clean Air Act and the NOV and complaints are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while these proceedings are pending. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. LEGAL MATTERS- Various lawsuits, claims and proceedings related to the Companies' normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to the Companies are described above. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 2001 and 2000.
March 31, June 30, September 30, December 31, Three Months Ended 2001 2001 2001 2001 - ------------------------------------------------------------------------------------------------------------------- (In millions) Operating Revenues............................... $783.1 $744.7 $815.7 $712.9 Operating Expenses and Taxes..................... 694.3 606.8 693.2 595.3 - ------------------------------------------------------------------------------------------------------------------- Operating Income................................. 88.8 137.9 122.5 117.6 Other Income..................................... 12.4 17.8 18.7 19.8 Net Interest Charges............................. 47.0 50.5 45.0 42.8 - ------------------------------------------------------------------------------------------------------------------- Net Income....................................... $ 54.2 $105.2 $ 96.2 $ 94.6 =================================================================================================================== Earnings on Common Stock......................... $ 51.5 $102.5 $ 93.5 $ 92.0 ===================================================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 2000 2000 2000 2000 - ---------------------------------------------------------------------------------------------------------------- (In millions) Operating Revenues............................... $644.4 $667.2 $733.9 $681.2 Operating Expenses and Taxes..................... 524.9 533.1 604.6 581.8 - ---------------------------------------------------------------------------------------------------------------- Operating Income................................. 119.5 134.1 129.3 99.4 Other Income..................................... 12.3 11.5 16.4 15.8 Net Interest Charges............................. 51.0 51.8 51.4 47.6 - ---------------------------------------------------------------------------------------------------------------- Net Income....................................... $ 80.8 $ 93.8 $ 94.3 $ 67.6 ================================================================================================================ Earnings on Common Stock......................... $ 78.0 $ 91.0 $ 91.5 $ 64.8 ================================================================================================================
Report of Independent Public Accountants To the Stockholders and Board of Directors of Ohio Edison Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Ohio Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ohio Edison Company and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. EX-21 26 ex21-1oe.txt LIST OF SUBS - OE EXHIBIT 21.1 OHIO EDISON COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 2001 Pennsylvania Power Company - Incorporated in Pennsylvania OES Fuel, Incorporated - Incorporated in Ohio OES Ventures, Incorporated - Incorporated in Ohio OES Capital, Incorporated - Incorporated in Delaware OES Finance, Incorporated - Incorporated in Ohio OES Nuclear, Incorporated - Incorporated in Ohio Ohio Edison Financing Trust - Incorporated in Delaware Ohio Edison Financing Trust II - Incorporated in Delaware Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 2001, is not included in the printed document. EX-23 27 ex23-1oe.txt ARTHUR ANDERSEN CONSENT - OE EXHIBIT 23.1 OHIO EDISON COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into Ohio Edison Company's previously filed Registration Statements, File No. 33-49135, No. 33-49259, No. 33-49413, No. 33-51139, No. 333-01489 and No. 333-05277. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 29, 2002. EX-99 28 ex99oe.txt LETTER TO SEC RE: ARTHUR ANDERSEN - OE Exhibit 99 March 29, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Temporary Note 3T to Article 3 of Regulation S-X Ladies and Gentlemen: In connection with the audit of the consolidated financial statements of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and for the year then ended, Arthur Andersen LLP (Andersen) has issued its report dated March 18, 2002. Andersen's report is included in FirstEnergy's Annual Report on Form 10-K for the year ended December 31, 2001. FirstEnergy has received the following representations from Andersen with respect to their audit: o The FirstEnergy audit was subject to Andersen's quality control system for their U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards. o There was appropriate continuity of Andersen personnel working on the FirstEnergy audit. o There was appropriate availability of national office consultation for the FirstEnergy audit. o There was appropriate availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the FirstEnergy audit. Sincerely, /s/Harvey L. Wagner ---------------------------------- Harvey L. Wagner Vice President and Controller EX-3 29 ex3-2.txt AMENDED & RESTATED CODE OF REGS - CEI AMENDED AND RESTATED CODE OF REGULATIONS OF THE CLEVELAND ELECTRIC ILLUMINATING COMPANY (Effective March 15, 2002) MEETINGS OF SHAREHOLDERS Section 1. Annual Meetings. - ---------- ---------------- The annual meeting of shareholders shall be held on such date and at such time as the Board of Directors may determine each year. Such meetings may be held within or without the State of Ohio at such time and place as the directors may determine. Section 2. Special Meetings. - ---------- ----------------- Special meetings of the shareholders may be called at any time by (i) the Chairman of the Board, (ii) the President, (iii) the Directors, by action at a meeting or a majority of the Directors acting without a meeting, or (iv) the holders of 25% or more of the outstanding shares entitled to vote thereat. Such meetings may be held within or without the State of Ohio at such time and place as may be specified in the notice thereof. Section 3. Notice of Meetings. - ---------- ------------------- Written notice of every annual or special meeting of the shareholders stating the time, place and purposes thereof shall be given to each shareholder entitled to notice as provided by law, not less than seven (7) nor more than sixty (60) days before the date of the meeting. Such notice may be given by or at the direction of the Chairman of the Board, the President or the Corporate Secretary. Except to the full extent that notice is legally permitted (now or hereafter) to be given by any other form of media, including any form of electronic or other communications, notice shall be given by personal delivery or by mail addressed to the shareholder at his last address as it appears on the records of the Corporation. Any shareholder may waive in writing notice of any meeting, either before or after the holding of such meeting, and, by attending any meeting without protesting the lack of proper notice, shall be deemed to have waived notice thereof. Section 4. Business Transacted at Meetings. - ---------- -------------------------------- Business transacted at any meeting of shareholders shall be for the purposes stated in the notice. Section 5. Quorum and Adjournments. - ---------- ------------------------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 6. Required Vote; Inspectors. - ---------- -------------------------- (a) When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Articles of Incorporation a different vote is required in which case such express provision shall govern and control the decision of such question. (b) Inspectors of election may be appointed to act at any meeting of shareholders in accordance with Ohio law. Section 7. Voting Power of Shareholders. - ---------- ----------------------------- Every shareholder of record of the Corporation shall be entitled at each meeting of shareholders to one vote for each share of stock held by such shareholder according to the books of the Corporation as of the date of such vote or, if a record date is set by the Board of Directors, as of such record date. Section 8. Voting by Proxy. - ---------- ---------------- At any meeting of the shareholders, any shareholder may be represented and vote by a proxy or proxies appointed by an instrument in writing or by any other form of verifiable communication, including any form of electronic or other communications, to the full extent legally permitted (now or hereafter). In the event that any such instrument shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or, if only one shall be present, then that one shall have and may exercise all of the powers conferred by such instrument upon all of the persons so designated unless the instrument shall otherwise provide. No such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force. Subject to the above, any proxy duly executed is not revoked and continues in full force and effect until an instrument or verifiable communication revoking it or a duly executed proxy bearing a later date is filed with the Corporate Secretary of the Corporation. Section 9. Action by Shareholders Without a Meeting. - ---------- ----------------------------------------- Any action which may be taken by the vote of the shareholders at a meeting may be taken without a meeting if authorized by the written consent of the shareholders holding at least a majority of the voting power, unless the provisions of the statutes or of the Articles of Incorporation provide that a greater proportion of written consents shall be required. Such written consent shall be filed with or entered upon the records of the Corporation. DIRECTORS Section 10. Authority of Directors. - ----------- ----------------------- (a) The business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, the Articles of Incorporation, or these Regulations directed or required to be exercised or done by the shareholders. (b) Any action required or permitted to be taken at a meeting of the Board of Directors or any committee of the Board of Directors may be taken without a meeting if, prior or subsequent to such action, all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing and such written consents are filed with the Corporate Secretary of the Corporation. Section 11. Number; Qualifications. - ----------- ----------------------- The number of Directors shall be not less than three (3) and not more than five (5) (plus any Directors separately elected by the holders of any class of stock other than the Common Stock as provided in the Articles of Incorporation as amended from time to time). The number of Directors may be determined (a) by the vote of the holders of a majority of the shares entitled to vote thereon at any annual meeting or special meeting called for the purpose of electing Directors or (b) by action of the Board of Directors at a meeting by the vote of a majority of the Directors in office at the time or in a writing signed by all the Directors in office at the time. When so fixed, such number shall continue to be the authorized number of Directors until changed by the shareholders or Directors in the manner described above. Any increase in the number of Directors shall be deemed to create a vacancy or vacancies which may be filled as provided in Section 14. A reduction in the number of Directors shall not be applied to remove any Director from office prior to the expiration of his term. Directors need not be shareholders of the Corporation. Section 12. Election of Directors. - ----------- ---------------------- At each meeting of the shareholders for the election of Directors, the persons receiving the greatest number of votes shall be the Directors. Such elections shall be by ballot whenever requested by any person entitled to vote at such meeting; but unless so requested, such election may be conducted in any way approved at such meeting. Section 13. Term of Office; Removal; Resignations. - ----------- -------------------------------------- (a) Directors shall hold office until the annual meeting of the shareholders next following their election and until their respective successors are elected, or until their earlier resignation, death or removal from office. (b) Any Director or the entire Board of Directors may be removed upon the affirmative vote of the holders of a majority of the voting power of the Corporation. (c) Any Director may resign at any time by giving written notice of his resignation to the President or Corporate Secretary. Any resignation will be effective upon actual receipt by such person or, if later, as of the date and time specified in such written notice. Section 14. Vacancies. - ----------- ---------- Vacancies, including those caused by an increase in the number of Directors, may be filled by a majority of the remaining Directors though less than a quorum. When one or more Directors shall give notice of his or their resignation to the Board, effective at a future date, the Board shall have the power to fill such vacancy or vacancies to take effect when such resignation or resignations shall become effective, each Director so appointed to hold office during the remainder of the term of office of the resigning Director or Directors. Whenever any vacancy shall occur among the Directors, the remaining Directors shall constitute the Directors of the Corporation until such vacancy is filled or until the number of Directors is changed as in Section 11 hereof. MEETINGS OF THE BOARD OF DIRECTORS Section 15. Organizational Meeting. - ----------- ----------------------- Immediately after each annual meeting of the shareholders at which Directors are elected, or each special meeting held in lieu thereof, the newly elected Directors, if a quorum thereof is present, shall hold an organizational meeting at the same place or at such other time and place as may be fixed by the shareholders at such meeting, for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. If for any reason such organizational meeting is not held at such time, a special meeting of the Directors for such purpose shall be held as soon thereafter as practicable. Section 16. Regular Meetings. - ----------- ----------------- Regular meetings of the Directors may be held without notice at such times and places within or without the State of Ohio as shall be determined by the Directors from time to time. Section 17. Special Meetings. - ----------- ----------------- Special meetings of the Directors may be held at any time within or without the State of Ohio upon call by the Chairman of the Board, the President, or the Corporate Secretary upon the written request of two Directors. Notice of each such meeting shall be given to each Director by letter, facsimile, telegram, telephone, or in person not less than forty-eight (48) hours prior to such meeting. Notices sent by mail shall be sent postage prepaid and shall be addressed to each Director at his address as it appears upon the records of the Corporation. Notice by mail shall be deemed to be given at the time when the notice is deposited in the mail, and notice by facsimile or telegram shall be deemed to be given at the time when confirmation of successful transmission is received. Such notice may be waived in writing by Directors either before or after the meeting, and such written waivers shall be filed with or entered upon the records of the meeting. The attendance of any Director at any such meeting without protesting the lack of proper notice, prior to or at the commencement of the meeting, shall be deemed to be a waiver by the Director of notice of the meeting. Unless otherwise limited in the notice thereof, any business may be transacted at any organizational, regular or special meeting. Section 18. Quorum and Adjournments; Participation by Communications - ------------ -------------------------------------------------------- Equipment. ---------- (a) A majority of the Directors, at a meeting duly called and held, shall be necessary to constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation. Any action required or permitted to be taken at a meeting of the Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Directors entitled to vote with respect to the subject matter thereof. Any meeting duly called, whether or not a quorum is present, may, by vote of a majority of the Directors present, be adjourned from time to time and place to place within or without the State of Ohio, in which case no further notice of the adjourned meeting need be given. (b) Meetings of the Board of Directors or of any committee of the Board of Directors may be held through any means of communications equipment if all persons participating can hear each other, and such participation will constitute presence in person at such meeting. Section 19. Committees. - ----------- ----------- The Board of Directors may, by resolution passed by a majority of the Directors, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation, which, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the Board when required. Section 20. Compensation. - ----------- ------------- The Directors may be paid their expenses, if any, for attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors. The sums may be different for different Directors, and the sum shall be established by resolution of the Board of Directors and may be changed from time to time by resolution. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. EXECUTIVE COMMITTEE Section 21. Executive Committee - ----------- ------------------- The Board of Directors at any time may elect from its members an Executive Committee which shall consist of not less than three (3) members. Each member of such Committee shall hold office during the pleasure of the Board and may be removed by a majority vote of the whole Board at any time with or without cause. Vacancies occurring in the Committee may be filled by the Board. The Committee shall prescribe its own rules for calling and holding meetings, and for transacting business, subject, however, to any rules prescribed by the Board of Directors, and the Committee shall keep minutes of its actions. Action by the Committee may be taken at meetings thereof attended by not less than a majority thereof, or without a meeting by instrument in writing signed by not less than a majority of the members. Except as the Committee's powers and duties may be limited or otherwise prescribed by the Board of Directors, the Committee, during the intervals between the meetings of the Board, shall possess and may exercise all of the powers and authority of the Board of Directors, however conferred, provided, however, that the Committee shall not be empowered to elect the officers (other than Assistant Secretaries and Assistant Treasurers) or to fill vacancies in the Board of Directors or in the Executive Committee. Subject to such exceptions, persons dealing with the Corporation shall be entitled to rely upon any action of the Committee with the same force and effect as though such action had been taken by the Board of Directors. OFFICERS Section 22. Generally. - ----------- ---------- The Corporation may have a Chairman, elected by the directors from among their number, and shall have a President, a Corporate Secretary and a Treasurer. The Corporation may also have one or more Vice Chairmen, Vice Presidents, Senior Vice Presidents and such other officers and assistant officers as the Board of Directors may deem appropriate. If the Board of Directors so desires, it may elect a Chief Executive Officer to manage the affairs of the Corporation, subject to the direction and control of the Board of Directors. All of the officers shall be elected by the Board of Directors. Notwithstanding the foregoing, by specific action, the Board of Directors may authorize the Chairman or the President to appoint any person to any office other than Chairman, President, Corporate Secretary, or Treasurer. Any number of offices may be held by the same person, and no two offices must be held by the same person. Any of the offices may be left vacant from time to time as the Board of Directors may determine. In case of the absence or disability of any officer of the Corporation or for any other reason deemed sufficient by a majority of the Board of Directors, the Board of Directors may delegate the absent or disabled officer's powers or duties to any other officer or to any director. Section 23. Authority and Duties of Officers. - ----------- --------------------------------- The officers of the Corporation shall have such authority and shall perform such duties as are customarily incident to their respective offices, or as may be specified from time to time by the Board of Directors, the Chairman or the President regardless of whether such authority and duties are customarily incident to such office. Section 24. Compensation. - ----------- ------------ The compensation of all officers and agents of the Corporation who are also members of the Board of Directors of the Corporation will be fixed by the Board of Directors or by a committee of the Board of Directors. The Board of Directors may fix, or delegate the power to fix, the compensation of the other officers and agents of the Corporation to the Chief Executive Officer or any other officer of the Corporation. Section 25. Succession. - ---------- ---------- The officers of the Corporation will hold office until their successors are elected. Any officer may be removed at any time by the affirmative vote of a majority of the whole Board. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors or by the Chairman or President as provided in Regulation 22. Section 26. Delegation of Duties. - ----------- --------------------- The Directors are authorized to delegate the duties of any officers to any other officer and generally to control the action of the officers and to require the performance of duties in addition to those mentioned herein. Section 27. Signing Checks and Other Instruments. - ----------- ------------------------------------- The Directors are authorized to determine or provide the method of determining how checks, notes, bills or exchange and similar instruments shall be signed, countersigned or endorsed. CERTIFICATES OF STOCK Section 28. Contents of Certificates. - ----------- ------------------------- Every shareholder shall be entitled to one or more certificates, signed by the President or a Vice President and by the Treasurer, an Assistant Treasurer, the Corporate Secretary, or an Assistant Corporate Secretary of the Corporation, certifying the number and class of shares owned by him in the Corporation. If the Corporation is authorized to issue shares of more than one class or more than one series of any class, there shall be set forth upon the face or back of the certificate a full or summary statement of the designations, preferences and relative, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, or the certificate shall have a statement that the Corporation will furnish such information to any shareholders upon request and without charge. If the Corporation shall be authorized to issue only special stock, such certificate shall set forth in full or summarize the rights of the holders of such stock. Section 29. Countersignature of Authentication by Transfer Agents or - ------- --- -------------------------------------------------------- Registrars. ---------- Whenever any certificate is countersigned or otherwise authenticated by a transfer agent or registrar, then a facsimile of the signatures of such officers of the Corporation may be engraved, stamped, or printed upon such certificate in lieu of the actual signatures. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be an officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be an officer or officers of such Corporation. LOST CERTIFICATES Section 30. Replacement of Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. TRANSFER OF STOCK Section 31. Transfer of Stock. - ----------- ------------------ Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on its books. RECORD DATES AND CLOSING OF TRANSFER BOOKS Section 32. Record Dates and Closing of Transfer Books. - ----------- ------------------------------------------- The Board of Directors may fix a time not exceeding sixty (60) days preceding the date of any meeting of shareholders or the date fixed for the payment of any dividend or distribution or the date for the allotment of rights as the record date for the determination of the shareholders entitled to notice of or to vote at any such meeting or entitled to receive payment of any such dividend, distribution or allotment of rights, and in such case only shareholders of record on the date so fixed shall be entitled to notice of or to vote at such meeting or to receive payment of such dividend, distribution or allotment of rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of the period between such record date and the date of the event in respect for which such record date was fixed. REGISTERED SHAREHOLDERS Section 33. Recognition of Record Ownership. - ----------- -------------------------------- The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Ohio. GENERAL PROVISIONS DIVIDENDS Section 34. Payment of Dividends. - ----------- --------------------- The Board of Directors may declare dividends upon the capital stock of the Corporation, subject to the provisions of the Articles of Incorporation, if any, at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Articles of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Directors shall think conducive to the interest of the Corporation and the Directors may modify or abolish any such reserves in the manner in which it was created. FISCAL YEAR Section 35. Fiscal Year. - ----------- ------------ The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SEAL Section 36. Corporate Seal. - ----------- --------------- The corporate seal of the Corporation shall be of such design, and shall contain such words, as may be prescribed by the Directors. TRANSFER AGENT AND REGISTRAR Section 37. Transfer Agent; Registrar. - ----------- -------------------------- The Corporation may open transfer books in any state of the United States or in any foreign country for the purpose of transferring securities issued by it, and it may employ an agent or agents to keep the records of its securities to transfer or to register securities or both, in Ohio or in other states or in a foreign country, or both, and the acts of such agents shall be binding on the Corporation. The duties and liabilities of such agent or agents shall be such as may be agreed to by the Corporation. If no such transfer agent is appointed to act in Ohio in respect to its shares, the Corporation shall keep an office in Ohio at which shares shall be transferable, and at which it shall keep books in which shall be recorded the names and addresses of all shareholders and all transfers of shares. PROVISIONS IN ARTICLES OF INCORPORATION Section 38. Governance By Articles of Incorporation. - ----------- ---------------------------------------- These Regulations are at all times subject to the provisions of the Articles of Incorporation of the Corporation (including in such term whenever used in these Regulations, amendments thereto), and in case of any conflict between any provision herein and in the Articles of Incorporation, the provisions in the Articles of Incorporation shall be deemed to govern. AMENDMENTS Section 39. Procedure for Amendments. - ----------- ------------------------- These Regulations may be altered, changed or amended in any respect or superseded by new Regulations in whole or in part, by the affirmative vote of the holders of record of shares entitling them to exercise a majority of the voting power of the Corporation at an annual or special meeting called for such purpose or without a meeting by the written consent of the holders of record of shares entitling them to exercise a majority of the voting power of the Corporation. In case of adoption of any Regulation or amendment by such written consent, the Corporate Secretary shall enter the same in the corporate records and mail a copy thereof to each shareholder who would have been entitled to vote thereon and did not participate in the adoption thereof. INDEMNIFICATION AND INSURANCE Section 40. Indemnification. - ----------- ---------------- The Corporation shall indemnify, to the full extent then permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a member of the Board of Directors or an officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall indemnify such person against expenses, including attorney's fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him by reason of the fact that he is or was such person to the full extent to which the Corporation is empowered or authorized to indemnify any person under the Ohio General Corporation Law as now in effect or as amended from time to time. The Corporation shall pay, to the full extent then permitted by law, expenses, including attorney's fees, incurred by a member of the Board of Directors in defending any such action, suit or proceeding as they are incurred, in advance of the final disposition thereof, and may pay, in the same manner and to the full extent then permitted by law, such expenses incurred by any other person. The indemnification and payment of expenses provided hereby shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under any law, the Articles of Incorporation, any agreement, vote of shareholders or disinterested members of the Board of Directors, or otherwise, both as to action in official capacities and as to action in another capacity while he or she is a member of the Board of Directors, or an officer, employee or agent of the Corporation, and shall continue as to a person who has ceased to be a member of the Board of Directors, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 41. Insurance. - ----------- ---------- The Corporation may, to the full extent then permitted by law and authorized by the Board of Directors, purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit or self-insurance, on behalf of or for any persons described in Section 40 against any liability asserted against and incurred by any such person in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such liability. Insurance may be purchased from or maintained with a person in which the Corporation has a financial interest. EMERGENCY REGULATIONS Section 42. Emergency Regulations. - ----------- ---------------------- The Board of Directors may adopt, at any meeting, either before or during "an emergency" as that term is defined in Section 1701.01 of the Ohio Revised Code, emergency regulations to be operative during, but only during, an emergency. The emergency regulations may contain any provisions which may be made by emergency regulations as provided in Section 1701.111 of the Ohio Revised Code. I, the undersigned, being Corporate Secretary of The Cleveland Electric Illuminating Company, do hereby certify the foregoing to be the Regulations of said Corporation, as adopted in an action in writing of the shareholders dated the 15th day of March, 2002. ------------------------------------ Nancy C. Ashcom Corporate Secretary EX-12 30 ex12-3ce.txt FIXED CHARGE RATIO - CEI
EXHIBIT 12.3 Page 1 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ------------------------------------------------ Jan 1- Nov. 8- Nov. 7, Dec. 31, 1997 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) | EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $ 95,191 | $19,290 $164,891 $194,089 $202,950 $219,044 Interest and other charges, before reduction for | amounts capitalized.............................. 212,957 | 35,472 232,727 211,960 202,752 192,198 Provision for income taxes......................... 78,940 | 14,029 110,611 123,869 126,701 158,648 Interest element of rentals charged to income (a).. 59,078 | 10,008 68,314 66,680 65,616 59,497 -------- | -------- -------- -------- -------- -------- Earnings as defined.............................. $446,166 | $78,799 $576,543 $596,598 $598,019 $629,387 ======== | ======= ======== ======== ======== ======== | FIXED CHARGES AS DEFINED IN REGULATION S-K: | Interest expense................................... $212,957 | $35,472 $232,727 $211,960 $202,752 $192,198 Interest element of rentals charged to income (a).. 59,078 | 10,008 68,314 66,680 65,616 59,497 -------- | ------- -------- -------- -------- -------- Fixed charges as defined......................... $272,035 | $45,480 $301,041 $278,640 $268,368 $251,695 ======== | ======= ======== ======== ======== ======== | CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES....... 1.64 | 1.73 1.92 2.14 2.23 2.50 ==== | ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest component of Bruce Mansfield sale and leaseback rentals, leased nuclear fuel in the reactor, and other miscellaneous rentals.
EXHIBIT 12.3 Page 2 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) Year Ended December 31, ------------------------------------------------ Jan 1- Nov. 8- Nov. 7, Dec. 31, 1997 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) | EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $ 95,191 | $19,290 $164,891 $194,089 $202,950 $219,044 Interest and other charges, before reduction | for amounts capitalized.......................... 212,957 | 35,472 232,727 211,960 202,752 192,198 Provision for income taxes......................... 78,940 | 14,029 110,611 123,869 126,701 158,648 Interest element of rentals charged to income (a).. 59,078 | 10,008 68,314 66,680 65,616 59,497 -------- | ------- -------- -------- -------- -------- Earnings as defined.............................. $446,166 | $78,799 $576,543 $596,598 $598,019 $629,387 ======== | ======= ======== ======== ======== ======== | FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS | PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS): | Interest expense................................... $212,957 | $35,472 $232,727 $211,960 $202,752 $192,198 Preferred stock dividend requirements.............. 45,029 | -- 24,794 33,524 20,843 25,838 Adjustments to preferred stock dividends | to state on a pre-income tax basis............... 36,568 | -- 16,632 21,395 13,012 18,714 Interest element of rentals charged to income (a).. 59,078 | 10,008 68,314 66,680 65,616 59,497 -------- | ------- -------- -------- --------- -------- Fixed charges as defined plus preferred stock | dividend requirements (pre-income tax basis)... $353,632 | $45,480 $342,467 $333,559 $302,223 $296,247 ======== | ======= ======== ======== ========= ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES | PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS)............................. 1.26 | 1.73 1.68 1.79 1.98 2.12 ==== | ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest component of Bruce Mansfield sale and leaseback rentals, leased nuclear fuel in the reactor, and other miscellaneous rentals.
EX-13 31 ex13-2ce.txt ANNUAL REPORT - CEI THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 2001 ANNUAL REPORT TO STOCKHOLDERS The Cleveland Electric Illuminating Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. It engages in the generation, distribution and sale of electric energy in an area of approximately 1,700 square miles in northeastern Ohio. It also engages in the sale, purchase and interchange of electric energy with other electric companies. The area it serves has a population of approximately 1.9 million. Contents Page - -------- ---- Selected Financial Data........................................ 1 Management's Discussion and Analysis........................... 2-8 Consolidated Statements of Income.............................. 9 Consolidated Balance Sheets.................................... 10 Consolidated Statements of Capitalization...................... 11-12 Consolidated Statements of Common Stockholder's Equity......... 13 Consolidated Statements of Preferred Stock..................... 13 Consolidated Statements of Cash Flows.......................... 14 Consolidated Statements of Taxes............................... 15 Notes to Consolidated Financial Statements..................... 16-26 Report of Independent Public Accountants....................... 27
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY SELECTED FINANCIAL DATA Nov. 8- Jan. 1- 2001 2000 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - ----------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) GENERAL FINANCIAL INFORMATION: | | Operating Revenues.................... $2,076,222 $1,887,039 $1,864,954 $1,795,997 $ 254,892 | $1,537,459 ========== ========== ========== ========== ========== | ========== | Operating Income...................... $ 395,561 $ 390,094 $ 394,766 $ 382,523 $ 50,431 | $ 315,777 ========== ========== ========== ========== ========== | ========== | Income Before Extraordinary Item...... $ 219,044 $ 202,950 $ 194,089 $ 164,891 $ 19,290 | $ 95,191 ========== ========== ========== ========== ========== | ========== | Net Income (Loss)..................... $ 219,044 $ 202,950 $ 194,089 $ 164,891 $ 19,290 | $ (229,247) ========== ========== ========== ========== ========== | ========== | Earnings (Loss) on Common Stock....... $ 193,206 $ 182,107 $ 160,565 $ 140,097 $ 19,290 | $ (274,276) ========== ========== ========== ========== ========== | ========== | Total Assets.......................... $5,856,106 $5,964,631 $6,208,761 $6,318,183 $6,440,284 | ========== ========== ========== ========== ========== | | CAPITALIZATION AT DECEMBER 31: | Common Stockholder's Equity........... $1,082,145 $1,064,839 $ 966,616 $1,008,238 $ 950,904 | Preferred Stock- | Not Subject to Mandatory Redemption 141,475 238,325 238,325 238,325 238,325 | Subject to Mandatory Redemption.... 106,288 26,105 116,246 149,710 183,174 | Long-Term Debt........................ 2,156,322 2,634,692 2,682,795 2,888,202 3,189,590 | ---------- ----------- ---------- ---------- ---------- | Total Capitalization.................. $3,486,230 $3,963,961 $4,003,982 $4,284,475 $4,561,993 | ========== ========== ========== ========== ========== | CAPITALIZATION RATIOS: | Common Stockholder's Equity............ 31.0% 26.9% 24.1% 23.5% 20.9% | Preferred Stock- | Not Subject to Mandatory Redemption. 4.1 6.0 6.0 5.6 5.2 | Subject to Mandatory Redemption..... 3.0 0.6 2.9 3.5 4.0 | Long-Term Debt......................... 61.9 66.5 67.0 67.4 69.9 | ----- ----- ----- ----- ----- | Total Capitalization................... 100.0% 100.0% 100.0% 100.0% 100.0% | ===== ===== ===== ===== ===== | DISTRIBUTION KILOWATT-HOUR | DELIVERIES (Millions): | Residential............................ 5,061 5,061 5,278 4,949 790 | 4,062 Commercial............................. 4,907 6,656 6,509 6,353 893 | 4,990 Industrial............................. 9,593 8,320 8,069 8,024 1,285 | 6,710 Other.................................. 166 167 166 165 89 | 476 ------ ------ ------ ------ ----- | ------ Total ................................. 19,727 20,204 20,022 19,491 3,057 | 16,238 ====== ====== ====== ====== ===== | ====== CUSTOMERS SERVED: | Residential............................ 673,852 667,115 667,954 668,470 671,265 | Commercial............................. 70,636 69,103 69,954 68,896 74,751 | Industrial............................. 4,783 4,851 5,090 5,336 6,515 | Other.................................. 292 307 223 221 278 | ------- ------- ------- ------- ------- | Total.................................. 749,563 741,376 743,221 742,923 752,809 | ======= ======= ======= ======= ======= | | Number of Employees (a)................ 1,025 1,046 1,694 1,798 3,162 | (a) Reduction in 2000 reflects transfer of responsibility for generation operations to FirstEnergy Corp.'s competitive services unit.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), and the availability and cost of capital. Corporate Separation - -------------------- Beginning on January 1, 2001, Ohio customers were able to choose their electricity suppliers as a result of legislation which restructured the electric utility industry. That legislation 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 Public Utilities Commission of Ohio (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 regulated services unit and a corporate support services unit. We are included in the regulated services unit and continue to deliver power to homes and businesses through our existing distribution system and maintain the "provider of last resort" (PLR) obligation under our rate plan. As a result of the transition plan, FirstEnergy's electric utility operating companies (EUOC) entered into power supply agreements whereby FirstEnergy Solutions Corp. (FES) purchases all of the EUOC nuclear generation, as well as generation from leased fossil generating facilities. FirstEnergy Generation Corp. (FGCO), a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. We are a "full requirements" customer of FES to enable us to meet our PLR responsibilities. We continue to provide power directly to wholesale customers under previously negotiated contracts as well as to alternative energy suppliers as part of our market support generation of 400 megawatts (351 megawatts committed as of December 31, 2001). The effect on our reported results of operations during 2001 from FirstEnergy's corporate separation plan and our sale of transmission assets to American Transmission Systems, Inc. (ATSI) in September 2000, are summarized in the following tables: Corporate Restructuring - 2001 Income Statement Effects Increase (Decrease) Corporate Separation ATSI Total ---------- ---- ----- (In millions) Operating Revenues: Power supply agreement with FES...... $334.1 $ -- $334.1 Generating units rent................ 59.1 -- 59.1 Ground lease with ATSI............... -- 2.8 2.8 ----------------------------------------------------------------------------- Total Operating Revenues Effect...... $393.2 $ 2.8 $396.0 ============================================================================= Operating Expenses and Taxes: Fossil fuel costs.................... $(97.6)(a) $ -- $(97.6) Purchased power costs................ 597.4 (b) -- 597.4 Other operating costs................ (90.7)(a) 13.9 (d) (76.8) Provision for depreciation and amortization -- (5.9)(e) (5.9) General taxes........................ (3.2)(c) (9.3)(e) (12.5) Income taxes......................... (4.9) 3.4 (1.5) ----------------------------------------------------------------------------- Total Operating Expenses Effect...... $401.0 $ 2.1 $403.1 ============================================================================= Other Income........................... $ -- $ 4.8 (f) $ 4.8 ============================================================================= (a) Transfer of fossil operations to FGCO. (b) Purchased power from power supply agreement (PSA). (c) Payroll taxes related to employees transferred to FGCO. (d) Transmission services received from ATSI. (e) Depreciation and property taxes related to transmission assets sold to ATSI. (f) Interest on note receivable from ATSI. Results of Operations - --------------------- Earnings on common stock in 2001 increased 6.1% to $193.2 million in 2001 from $182.1 million in 2000. Excluding the effects shown in the table above, earnings on common stock increased by 7.4% in 2001 from 2000, being favorably affected by reduced operating expenses and taxes, and lower net interest charges, which were substantially offset by reduced operating revenues. In 2000, earnings on common stock increased 13.4% to $182.1 million from $160.6 million primarily due to higher operating revenues and reduced depreciation and amortization, net interest charges and preferred stock dividend requirements. Excluding the effects shown in the table above, operating revenues decreased by $206.8 million or 11.0% in 2001 from 2000 following a $22.1 million increase in 2000 from the prior year. Customer choice in Ohio and the influence of a declining national economy on our regional business activity combined to lower operating revenues. Electric generation services provided by other suppliers in our service area represented 12.9% of total energy delivered in 2001. Retail generation sales declined in all customer categories, resulting in an overall 14.9% reduction in kilowatt-hour sales from the prior year. As part of Ohio's electric utility restructuring law, the implementation of a 5% reduction in generation charges for residential customers reduced operating revenues by approximately $16.6 million in 2001, compared to 2000. Distribution deliveries declined 2.4% in 2001 from the prior year, reflecting the impact of a weaker economy that contributed to lower commercial and industrial kilowatt-hour sales. Operating revenues were also lower in 2001 from the prior year due to the absence of revenues associated with the low-income payment plan now administered by the Ohio Department of Development; there was also a corresponding reduction in other operating costs associated with that change. Revenues from kilowatt-hour sales to wholesale customers declined $86.7 million in 2001 from last year, with a corresponding 76.4% reduction in kilowatt-hour sales. Additional kilowatt-hour sales to the wholesale market were the largest source of the increase in operating revenues in 2000, compared to the prior year, due in part to additional available generating capacity. Operating revenues from increased kilowatt-hour sales to retail customers were more than offset by a reduction in average retail unit prices in 2000, compared to 1999. While sales to commercial and industrial customers both increased in 2000, sales to residential customers decreased in part due to the cooler summer weather, as compared to the above normal temperatures experienced during 1999. Other electric revenues were also lower in 2000 as a result of the elimination of steam sales and the absence of joint ownership billings to Duquesne Light Company in 2000 resulting from an asset swap with Duquesne in early December 1999. The decline in other revenues was partially offset by additional transmission-related revenues in 2000, compared to the prior year. Changes in KWH Sales 2001 2000 --------------------------------------------------------------------- Increase (Decrease) Electric Generation: Retail................................ (14.9)% 0.9% Wholesale............................. (76.4)%* 77.6% --------------------------------------------------------------------- Total Electric Generation Sales......... (26.4)% 9.8% ==================================================================== Distribution Deliveries: Residential........................... -- % (4.1)% Commercial and industrial............. (3.2)% 2.7% --------------------------------------------------------------------- Total Distribution Deliveries........... (2.4)% (0.9)% ===================================================================== * Excluding PSA kilowatt-hour sales related to restructuring. Operating Expenses and Taxes Total operating expenses and taxes increased by $183.7 million in 2001 and by $26.8 million in 2000 from the prior year. Excluding the effects of restructuring, total 2001 operating expenses and taxes were $219.4 million lower than the prior year. The following table presents changes from the prior year by expense category excluding the impact of restructuring. Operating Expenses and Taxes - Changes 2001 2000 --------------------------------------------------------------------- Increase (Decrease) (In millions) Fuel and purchased power...................... $(145.6) $ 4.8 Nuclear operating costs....................... (11.8) 12.9 Other operating costs......................... (7.1) 6.7 -------------------------------------------------------------------- Total operation and maintenance expenses.... (164.5) 24.4 Provision for depreciation and amortization... (20.3) (10.3) General taxes................................. (64.8) 10.7 Income taxes.................................. 30.2 2.0 -------------------------------------------------------------------- Total operating expenses and taxes.......... $(219.4) $ 26.8 ==================================================================== The following discussion excludes the effects shown in the preceding table related to the impact of restructuring. The decrease in fuel and purchased power costs in 2001, compared to 2000, reflects the transfer of fossil operations to FGCO, with our power requirements being provided under the PSA. In 2000, fuel and purchased power costs increased a moderate $4.8 million, compared to 1999. The slightly higher costs resulted from a $44.8 million increase in purchased power costs which was significantly offset by a $40.0 million decrease in fuel expense. Most of the increase in purchased power costs occurred in the second quarter as generating unit refueling and maintenance outages reduced internal generation during that period. The reduction in fuel expense in 2000 from the preceding year occurred despite a 3.4% increase in internal generation (due to additional lower-cost nuclear generation), the expiration of an above-market coal contract and continued improvement in coal blending strategies. There was one less nuclear refueling outage in 2001, compared to 2000, resulting in an $11.8 million decrease in nuclear operating costs from the prior year. In 2000, nuclear operating costs increased $12.9 million, compared to 1999, primarily due to additional refueling outage costs and increased ownership of the Perry Plant resulting from the Duquesne asset swap. Other operating costs decreased $7.1 million in 2001 from the prior year reflecting a reduction in low-income payment plan customer costs and the absence of voluntary early retirement costs in 2001, offset in part by additional planned maintenance work at the Bruce Mansfield Plant and the absence in 2001 of gains from the sale of emission allowances. In 2000, other operating costs rose $6.7 million, compared to 1999, with most of the increase resulting from additional leased portable diesel generators and voluntary early retirement costs. Partially offsetting these higher costs were increased gains of $7.8 million realized from the sale of emission allowances in 2000. Depreciation and amortization decreased by $20.3 million in 2001 from the prior year due to new deferrals for shopping incentives under our transition plan. In 2000, as part of the transition plan, generating plant assets were reviewed for possible impairment. Impaired nuclear plant investments were recognized as regulatory assets, for which recovery as transition costs began in January 2001. This reduction in plant investment resulted in a corresponding reduction to depreciation expense beginning in July 2000 and accounted for most of the $10.3 million reduction in depreciation and amortization in 2000 from the preceding year. General taxes decreased by $64.8 million in 2001 from 2000 due to reduced property taxes and other state tax changes in connection with the Ohio electric industry restructuring. The reduction in general taxes was partially offset by $20.1 million of new Ohio franchise taxes in 2001, which are classified as state income taxes on the Consolidated Statements of Income. Higher general taxes in 2000, compared to the prior year, resulted from favorable Ohio and Pennsylvania property tax settlements in 1999. Net Interest Charges Net interest charges continued to trend lower, decreasing by $9.9 million in 2001 and by $10.1 million in 2000, compared to the prior year. We continued to redeem and refinance our outstanding debt and preferred stock during 2001 -- net redemptions and refinancing activities in 2001, totaled $137.0 million and $100.0 million, respectively, and will result in annualized savings of $15.2 million. Preferred Stock Dividend Requirements Preferred stock dividend requirements were $12.7 million lower in 2000, compared to the prior year as a result of preferred stock redemptions and the amortization of fair value adjustments recognized under purchase accounting in 1997. Capital Resources and Liquidity Through net debt and preferred stock redemptions, we continued to reduce the cost of debt and preferred stock, and improve our financial position in 2001. During 2001, we reduced our total debt by approximately $152 million. Our common stockholder's equity as a percentage of total capitalization increased to 31% as of December 31, 2001 from 21% at the end of 1997. We have reduced the average cost of outstanding debt from 8.83% in 1996 to 7.88% in 2001. Following approval of the merger of FirstEnergy and GPU by the New Jersey Board of Public Utilities on September 26, 2001, Standard & Poor's upgraded our credit ratings. Following a period of review and after the Securities and Exchange Commission's approval of the merger on October 29, 2001, Moody's also upgraded our credit ratings. The improved credit ratings result from FirstEnergy's new consolidated credit profile following the merger. Our credit rating outlook from Standard & Poor's and Moody's are stable. The following table summarizes the changes: Credit Ratings Before and After Upgrade Before Upgrade After Upgrade - ------------------------------------------------------------------------------- Moody's Moody's Standard Investors Standard Investors & Poor's Service & Poor's Service - ------------------------------------------------------------------------------ Corporate/Issuer BB+ Ba1 BBB Baa3 Senior Secured Debt BB+ Baa3 BBB Baa2 Preferred Stock B+ Ba3 BB+ Ba2 ----------------------------------------------------------------------------- We had about $0.7 million of cash and temporary investments and $97.7 million of short-term indebtedness as of December 31, 2001. Under our first mortgage indenture, as of December 31, 2001, we had the capability to issue $476 million of additional first mortgage bonds on the basis of property additions and retired bonds. We have no restrictions on the issuance of preferred stock. Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table:
Contractual Obligations - --------------------------------------------------------------------------------------------------------- There- 2002 2003 2004 2005 2006 after Total - --------------------------------------------------------------------------------------------------------- (In millions) Long-term debt................ $228 $115 $280 $300 $-- $1,584 $2,507 Short-term borrowings......... 98 -- -- -- -- -- 98 Mandatory preferred stock..... 19 1 1 1 1 102 125 Capital leases ............... 1 1 1 1 1 6 11 Operating leases*............. 6 -- 27 19 16 149 217 Unconditional fuel purchases.. 65 36 52 21 -- -- 174 - --------------------------------------------------------------------------------------------------------- Total......................... $417 $153 $361 $342 $18 $1,841 $3,132 ========================================================================================================= * Operating lease payments are net of capital trust receipts of $712.8 million (see Note 2).
Our capital spending for the period 2002-2006 is expected to be about $392 million (excluding nuclear fuel) of which approximately $121 million applies to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $176 million, of which about $19 million relates to 2002. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $163 million and $32 million, respectively, as the nuclear fuel is consumed. Off balance sheet obligations primarily consist of a sale and leaseback arrangement involving the Bruce Mansfield Plant, which are reflected in the operating lease payments above (see Note 2 - Leases). The present value as of December 31, 2001, of these sale and leaseback operating lease commitments, net of trust investments, total $150 million. We sell substantially all of our retail customer receivables, which provided $97 million of off balance sheet financing as of December 31, 2001. On November 29, 2001, FirstEnergy reached an agreement to sell three of our coal-fired power plants (with an aggregate net book value of $393 million as of December 31, 2001) to NRG Energy Inc. The sale includes our 376 MW Ashtabula, 1,262 MW Eastlake and 249 MW Lakeshore plants. The net, after-tax gain from the sale, based on the difference between the sale price of the plants and their market price used in the Ohio restructuring transition plan, will be credited to customers by reducing the transition cost recovery period. Interest Rate Risk - ------------------ Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent risks related to refinancing maturing debt by issuing new debt securities. As discussed in Note 2, our investment in the Shippingport Capital Trust effectively reduces future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 - Utility Plant and Depreciation. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.
Comparison of Carrying Value to Fair Value - ------------------------------------------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value - ------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income................. $ 38 $ 48 $ 1 $ 32 $ 31 $ 503 $ 653 $ 674 Average interest rate..... 7.7% 7.6% 7.8% 7.9% 7.7% 7.2% 7.3% - ------------------------------------------------------------------------------------------------------------------- Liabilities - ------------------------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate................... $228 $115 $280 $300 $1,396 $2,319 $2,435 Average interest rate .... 7.7% 7.4% 7.7% 9.5% 7.4% 7.7% Variable rate................ $ 188 $ 188 $ 189 Average interest rate..... 2.5% 2.5% Short-term Borrowings........ $ 98 $ 98 $ 98 Average interest rate..... 3.5% 3.5% - ------------------------------------------------------------------------------------------------------------------- Preferred Stock.............. $ 19 $ 1 $ 1 $ 1 $ 1 $ 102 $ 125 $ 125 Average dividend rate .... 8.9% 7.4% 7.4% 7.4% 7.4% 9.0% 8.9% - -------------------------------------------------------------------------------------------------------------------
Outlook - ------- Our industry continues to transition to a more competitive environment. We continue to deliver power to homes and businesses through our existing distribution system, which remains regulated. Customer rates have been restructured into separate components to support customer choice. In Ohio, we have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier. Adopting new approaches to regulation and experiencing new forms of competition has created new uncertainties. Regulatory Matters Beginning on January 1, 2001 Ohio customers were able to choose their electricity suppliers. Ohio customer rates were restructured to establish separate charges for transmission, distribution, transition cost recovery and a generation-related component. When one of our customers elects to obtain power from an alternative supplier, we reduce the customer's bill with a "generation shopping credit," based on the regulated generation component plus an incentive, and the customer receives a generation charge from the alternative supplier. We have continuing responsibility to provide energy to our franchise customers as the PLR through December 31, 2005. The transition cost portion of rates provides for recovery of certain amounts not otherwise recoverable in a competitive generation market (such as regulatory assets). Transition costs are paid by all customers whether or not they choose an alternative supplier. Under the PUCO-approved transition plan, we assumed the risk of not recovering up to $170 million of transition revenue if the rate of customers (excluding contracts and full-service accounts) switching from our service to an alternative supplier does not reach 20% for any consecutive twelve-month period by December 31, 2005 - the end of the market development period. As of December 31, 2001, the customer-switching rate, on an annualized basis, implies that our risk of not recovering transition revenue has been reduced to approximately $52 million. We are also committed under the transition agreement to make available 400 MW of our generating capacity to marketers, brokers, and aggregators at set prices, to be used for sales only to retail customers in our service area. Through December 31, 2001, approximately 351 MW of the 400 MW supply commitment had been secured by alternative suppliers. We began accepting customer applications for switching to alternative suppliers on December 8, 2000; as of December 31, 2001 we had been notified that over 365,000 of our customers requested generation service from other authorized suppliers, including FES, an affiliated company. Environmental Matters We are in compliance with the current sulfur dioxide (SO2) and nitrogen oxide (NOx) reduction requirements under the Clean Air Act Amendments of 1990. In 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions in the future from our Ohio and Pennsylvania facilities. Various regulatory and judicial actions have since sought to further define NOx reduction requirements (see Note 5 - Environmental Matters). We continue to evaluate our compliance plans and other compliance options. Violations of federally approved SO2 regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day a unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. We cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. We have been named as a "potentially responsible party" (PRP) 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. We have accrued a liability of $2.9 million as of December 31, 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. We believe that waste disposal costs will not have a material adverse effect on our financial condition, cash flows, or results of operations. Legal Matters Various lawsuits, claims and proceedings related to our normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to us are described above. Significant Accounting Policies - ------------------------------- We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often requires a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting these specific factors. Our more significant accounting policies are described below. Regulatory Accounting We are subject to regulation that sets the prices (rates) we are permitted to charge our customers based on our costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in Ohio, significant amounts of regulatory assets have been recorded -- $874 million as of December 31, 2001. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future. As disclosed in Note 1 - Regulatory Plans, our full recovery of transition costs is dependent on achieving 20% customer shopping levels in any twelve-month period by December 31, 2005. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hours that have been delivered but not yet been billed through the end of the year. The determination of unbilled revenues requires management to make various estimates including: o Net energy generated or purchased for retail load o Losses of energy over distribution lines o Allocations to distribution companies within the FirstEnergy system o Mix of kilowatt-hour usage by residential, commercial and industrial customers o Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards - ------------------------------------ The Financial Accounting Standards Board (FASB) approved SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 2001. Under SFAS 142, amortization of existing goodwill will cease 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 a preliminary analysis. In 2001, we amortized about $38 million of goodwill. In July 2001, the FASB issued Statement of Financial Accounting Standards No. (SFAS) 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on our accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------- (In thousands) OPERATING REVENUES.......................................... $2,076,222 $1,887,039 $1,864,954 ---------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power................................. 768,306 414,127 409,282 Nuclear operating costs.................................. 139,787 151,571 138,686 Other operating costs.................................... 290,945 374,818 368,103 ---------- ---------- ---------- Total operation and maintenance expenses............... 1,199,038 940,516 916,071 Provision for depreciation and amortization.............. 194,717 220,915 231,225 General taxes............................................ 144,948 222,297 211,636 Income taxes............................................. 141,958 113,217 111,256 ---------- ---------- ---------- Total operating expenses and taxes..................... 1,680,661 1,496,945 1,470,188 ---------- ---------- ---------- OPERATING INCOME............................................ 395,561 390,094 394,766 OTHER INCOME................................................ 13,292 12,568 9,141 ---------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES.......................... 408,853 402,662 403,907 ---------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt............................... 191,695 199,444 211,842 Allowance for borrowed funds used during construction........................................... (2,293) (2,027) (1,755) Other interest expense (credit).......................... 32 2,295 (269) Subsidiary's preferred stock dividend requirements....... 375 -- -- ---------- ---------- ---------- Net interest charges..................................... 189,809 199,712 209,818 ---------- ---------- ---------- NET INCOME.................................................. 219,044 202,950 194,089 PREFERRED STOCK DIVIDEND REQUIREMENTS............................................. 25,838 20,843 33,524 ---------- ---------- ---------- EARNINGS ON COMMON STOCK.................................... $ 193,206 $ 182,107 $ 160,565 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service..................................................................... $4,071,134 $4,036,590 Less-Accumulated provision for depreciation.................................... 1,725,727 1,624,672 ---------- ---------- 2,345,407 2,411,918 ---------- ---------- Construction work in progress- Electric plant............................................................... 66,266 66,904 Nuclear fuel................................................................. 21,712 24,145 ---------- ---------- 87,978 91,049 ---------- ---------- 2,433,385 2,502,967 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust (Note 2)............................................ 475,543 491,830 Nuclear plant decommissioning trusts........................................... 211,605 189,804 Long-term notes receivable from associated companies........................... 103,425 92,722 Other.......................................................................... 24,611 36,084 ---------- ---------- 815,184 810,440 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents...................................................... 296 2,855 Receivables- Customers.................................................................... 17,706 14,748 Associated companies......................................................... 75,113 81,090 Other (less accumulated provisions of $1,015,000 and $1,000,000, respectively, for uncollectible accounts)...................... 99,716 127,639 Notes receivable from associated companies..................................... 415 384 Materials and supplies, at average cost- Owned........................................................................ 20,230 26,039 Under consignment............................................................ 28,533 38,673 Prepayments and other.......................................................... 31,634 59,377 ---------- ---------- 273,643 350,805 ---------- ---------- DEFERRED CHARGES: Regulatory assets.............................................................. 874,488 816,143 Goodwill....................................................................... 1,370,639 1,408,869 Property taxes................................................................. 80,470 64,230 Other.......................................................................... 8,297 11,177 ---------- ---------- 2,333,894 2,300,419 ---------- ---------- $5,856,106 $5,964,631 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholder's equity.................................................... $1,082,145 $1,064,839 Preferred stock- Not subject to mandatory redemption.......................................... 141,475 238,325 Subject to mandatory redemption.............................................. 6,288 26,105 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company subordinated debentures (Note 3)..... 100,000 -- Long-term debt................................................................. 2,156,322 2,634,692 ---------- ---------- 3,486,230 3,963,961 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock........................... 526,630 165,696 Accounts payable- Associated companies......................................................... 81,463 102,915 Other........................................................................ 30,332 54,422 Notes payable to associated companies.......................................... 97,704 28,586 Accrued taxes................................................................. 129,830 178,707 Accrued interest............................................................... 57,101 56,142 Other.......................................................................... 60,664 82,195 ---------- ---------- 983,724 668,663 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes.............................................. 637,339 591,748 Accumulated deferred investment tax credits.................................... 76,187 79,957 Nuclear plant decommissioning costs............................................ 220,798 198,997 Pensions and other postretirement benefits..................................... 231,365 227,528 Other.......................................................................... 220,463 233,777 ---------- ---------- 1,386,152 1,332,007 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 5)................................................................ ---------- ---------- $5,856,106 $5,964,631 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) 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 (Note 3A)........................................................... 150,183 132,877 ---------- ---------- Total common stockholder's equity................................................... 1,082,145 1,064,839 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ---------------- --------------------- 2001 2000 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3C): Cumulative, without par value- Authorized 4,000,000 shares Not Subject to Mandatory Redemption: $ 7.40 Series A...................... 500,000 500,000 $101.00 $ 50,500 50,000 50,000 $ 7.56 Series B...................... 450,000 450,000 102.26 46,017 45,071 45,071 Adjustable Series L................... 474,000 474,000 100.00 47,400 46,404 46,404 $42.40 Series T....................... 200,000 200,000 500.00 100,000 96,850 96,850 --------- --------- -------- ---------- ---------- 1,624,000 1,624,000 243,917 238,325 238,325 Redemption Within One Year.............. (96,850) -- --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption............................ 1,624,000 1,624,000 $243,917 141,475 238,325 ========= ========= ======== ---------- ---------- Subject to Mandatory Redemption:(Note 3D): $ 7.35 Series C...................... 70,000 80,000 101.00 $ 7,070 7,030 8,041 $91.50 Series Q....................... -- 10,716 -- -- -- 10,716 $88.00 Series R....................... -- 50,000 -- -- -- 51,128 $90.00 Series S....................... 17,750 36,500 -- -- 17,268 36,686 --------- --------- -------- ---------- ---------- 87,750 177,216 7,070 24,298 106,571 Redemption Within One Year.............. (18,010) (80,466) --------- --------- -------- ---------- ---------- Total Subject to Mandatory Redemption 87,750 177,216 $ 7,070 6,288 26,105 ========= ========= ======== ---------- ---------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (Note 3E): Cumulative, $25 stated value- Authorized 4,000,000 shares Subject to Mandatory Redemption: 9.00%................................. 4,000,000 -- $ -- 100,000 -- ========= ========= ======== ---------- ---------- LONG-TERM DEBT (Note 3F): First mortgage bonds: 7.625% due 2002................................................................... 195,000 195,000 7.375% due 2003................................................................... 100,000 100,000 9.500% due 2005................................................................... 300,000 300,000 6.860% due 2008................................................................... 125,000 125,000 9.000% due 2023................................................................... 150,000 150,000 ---------- ---------- Total first mortgage bonds...................................................... 870,000 870,000 ---------- ---------- Unsecured notes: * 5.580% due 2033................................................................... 27,700 27,700 ---------- ----------
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd) As of December 31, 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT (Cont'd): Secured notes: 7.000% due 2002-2009............................................................. 1,790 1,820 7.420% due 2001.................................................................. -- 10,000 8.540% due 2001.................................................................. -- 3,000 8.550% due 2001.................................................................. -- 5,000 8.560% due 2001.................................................................. -- 3,500 8.680% due 2001.................................................................. -- 15,000 9.050% due 2001.................................................................. -- 5,000 9.200% due 2001.................................................................. -- 15,000 7.850% due 2002.................................................................. 5,000 5,000 8.130% due 2002.................................................................. 28,000 28,000 7.750% due 2003.................................................................. 15,000 15,000 7.670% due 2004.................................................................. 280,000 280,000 7.130% due 2007.................................................................. 120,000 120,000 7.430% due 2009.................................................................. 150,000 150,000 8.000% due 2013.................................................................. 78,700 78,700 * 1.986% due 2015.................................................................. 39,835 39,835 7.880% due 2017.................................................................. 300,000 300,000 * 2.115% due 2018.................................................................. 72,795 72,795 * 1.650% due 2020.................................................................. 47,500 47,500 6.000% due 2020.................................................................. 62,560 62,560 6.100% due 2020.................................................................. 70,500 70,500 9.520% due 2021.................................................................. 7,500 7,500 6.850% due 2023.................................................................. 30,000 30,000 8.000% due 2023.................................................................. 46,100 46,100 7.625% due 2025.................................................................. 53,900 53,900 7.700% due 2025.................................................................. 43,800 43,800 7.750% due 2025.................................................................. 45,150 45,150 5.375% due 2028.................................................................. 5,993 5,993 5.350% due 2030.................................................................. 23,255 23,255 4.600% due 2030.................................................................. 81,640 81,640 ---------- ---------- Total secured notes............................................................ 1,609,018 1,665,548 ---------- ---------- Capital lease obligations (Note 2)................................................. 6,740 93,422 ---------- ---------- Net unamortized premium on debt.................................................... 54,634 63,252 ---------- ---------- Long-term debt due within one year................................................. (411,770) (85,230) ---------- ---------- Total long-term debt........................................................... 2,156,322 2,634,692 ---------- ---------- TOTAL CAPITALIZATION.................................................................. $3,486,230 $3,963,961 ========== ========== * Denotes variable rate issue with December 31, 2001 interest rate shown. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Comprehensive Number Carrying Retained Income of Shares Value Earnings ------------- --------- -------- -------- (Dollars in thousands) Balance, January 1, 1999....................... 79,590,689 $931,962 $ 76,276 Net income.................................. $ 194,089 194,089 ========= Cash dividends on preferred stock........... (36,737) Cash dividends on common stock.............. (198,974) - ------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999..................... 79,590,689 931,962 34,654 Net income.................................. $ 202,950 202,950 ========= Cash dividends on preferred stock........... (20,727) Cash dividends on common stock.............. (84,000) - ------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2000..................... 79,590,689 931,962 132,877 Net income.................................. $ 219,044 219,044 ========= Cash dividends on preferred stock........... (25,838) Cash dividends on common stock.............. (175,900) - ------------------------------------------------------------------------------------------------------------------ < Balance, December 31, 2001..................... 79,590,689 $931,962 $150,183 ==================================================================================================================
CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Carrying Number Carrying of Shares Value of Shares Value --------- -------- --------- -------- (Dollars in thousands) Balance, January 1, 1999............ 1,624,000 $238,325 262,144 $183,174 Redemptions- $ 7.35 Series C................. (10,000) (1,000) $88.00 Series E................. (3,000) (3,000) $91.50 Series Q................. (10,714) (10,714) $90.00 Series S................. (18,750) (18,750) ------------------------------------------------------------------------------------------ Balance, December 31, 1999.......... 1,624,000 238,325 219,680 149,710 Redemptions- $ 7.35 Series C................. (10,000) (1,000) $88.00 Series E................. (3,000) (3,000) $91.50 Series Q................. (10,714) (10,714) $90.00 Series S................. (18,750) (18,750) Amortization of fair market value adjustments- $ 7.35 Series C................. (69) $88.00 Series R................. (3,872) $90.00 Series S................. (5,734) ------------------------------------------------------------------------------------------ Balance, December 31, 2000.......... 1,624,000 238,325 177,216 106,571 Issues 9.00%........................... 4,000,000 100,000 Redemptions- $ 7.35 Series C................. (10,000) (1,000) $88.00 Series R................. (50,000) (50,000) $91.50 Series Q................. (10,716) (10,716) $90.00 Series S................. (18,750) (18,750) Amortization of fair market value adjustments- $ 7.35 Series C................. (11) $88.00 Series R................. (1,128) $90.00 Series S................. (668) ------------------------------------------------------------------------------------------ Balance, December 31, 2001.......... 1,624,000 $238,325 4,087,750 $124,298 ========================================================================================= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income....................................................... $ 219,044 $ 202,950 $194,089 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization..................... 194,717 220,915 231,225 Nuclear fuel and lease amortization............................. 30,539 37,217 33,912 Other amortization.............................................. (14,071) (11,635) (10,730) Deferred income taxes, net...................................... 46,976 22,373 33,060 Investment tax credits, net..................................... (3,770) (3,617) (3,947) Receivables..................................................... 30,942 (16,875) (31,544) Materials and supplies.......................................... 15,949 (1,697) 18,818 Accounts payable................................................ (45,542) 20,817 26,525 Other........................................................... (109,289) (44,188) (11,283) --------- --------- -------- Net cash provided from operating activities................... 365,495 426,260 480,125 --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt.................................................. -- -- 26,355 Preferred stock................................................. 96,739 -- -- Short-term borrowings, net...................................... 69,118 -- 22,853 Redemptions and Repayments- Preferred stock................................................. 80,466 33,464 33,464 Long-term debt.................................................. 74,230 212,771 214,405 Short-term borrowings, net...................................... -- 74,885 -- Dividend Payments- Common stock.................................................... 175,900 84,000 198,974 Preferred stock................................................. 27,645 30,518 33,524 --------- --------- -------- Net cash used for financing activities........................ 192,384 435,638 431,159 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions................................................... 154,927 96,236 122,194 Loans to associated companies........................................ 11,117 93,106 -- Loan payments from associated companies.............................. (383) -- (53,509) Capital trust investments............................................ (16,287) (25,426) (25,905) Sale of assets to associated companies............................... (11,117) (197,902) -- Other................................................................ 37,413 22,129 25,336 --------- --------- -------- Net cash used for (provided from) investing activities........ 175,670 (11,857) 68,116 --------- --------- -------- Net increase (decrease) in cash and cash equivalents................. (2,559) 2,479 (19,150) Cash and cash equivalents at beginning of year....................... 2,855 376 19,526 --------- --------- -------- Cash and cash equivalents at end of year............................. $ 296 $ 2,855 $ 376 ========= ========= ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year- Interest (net of amounts capitalized)........................... $ 196,001 $ 208,085 $221,360 ========= ========= ======== Income taxes.................................................... $ 131,801 $ 109,212 $ 92,555 ========= ========= ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF TAXES For the Years Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property......................................... $ 72,665 $131,331 $120,725 State gross receipts............................................... 27,169 79,709 78,197 Ohio kilowatt-hour excise.......................................... 42,608 -- -- Social security and unemployment................................... 2,752 11,464 10,941 Other.............................................................. (246) (207) 1,773 --------- -------- -------- Total general taxes......................................... $ 144,948 $222,297 $211,636 ========= ======== ======== PROVISION FOR INCOME TAXES: Currently payable- Federal......................................................... $ 97,675 $106,986 $ 92,627 State........................................................... 17,767 959 2,129 --------- -------- -------- 115,442 107,945 94,756 --------- -------- -------- Deferred, net- Federal......................................................... 42,566 23,265 33,369 State........................................................... 4,410 (892) (309) --------- -------- -------- 46,976 22,373 33,060 --------- -------- -------- Investment tax credit amortization................................. (3,770) (3,617) (3,947) --------- -------- -------- Total provision for income taxes............................ $ 158,648 $126,701 $123,869 ========= ======== ======== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating income................................................... $ 141,958 $113,217 $111,256 Other income....................................................... 16,690 13,484 12,613 --------- -------- -------- Total provision for income taxes............................ $ 158,648 $126,701 $123,869 ========= ======== ======== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes...................... $ 377,692 $329,651 $317,958 ========= ======== ======== Federal income tax expense at statutory rate....................... $ 132,192 $115,378 $111,285 Increases (reductions) in taxes resulting from- State income taxes, net of federal income tax benefit........... 14,415 44 1,183 Amortization of investment tax credits.......................... (3,770) (3,617) (3,947) Amortization of tax regulatory assets........................... 766 693 693 Amortization of goodwill........................................ 13,380 13,359 13,282 Other, net...................................................... 1,665 844 1,373 --------- -------- -------- Total provision for income taxes............................ $ 158,648 $126,701 $123,869 ========= ======== ======== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences......................................... $ 463,344 $495,588 $663,294 Competitive transition charge...................................... 279,198 133,248 21,397 Unamortized investment tax credits................................. (29,528) (35,341) (38,172) Unused alternative minimum tax credits............................. -- (27,115) (71,130) Deferred gain for asset sale to affiliated company................. 49,735 46,583 -- Other.............................................................. (125,410) (21,215) (7,911) --------- -------- -------- Net deferred income tax liability........................... $ 637,339 $591,748 $567,478 ========= ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include The Cleveland Electric Illuminating Company (Company) and its wholly owned subsidiaries, Centerior Funding Corporation (CFC) and Centerior Financing Trust (CFT). All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. FirstEnergy holds directly all of the issued and outstanding common shares of its principal electric utility operating subsidiaries, including, the Company, Ohio Edison Company (OE), The Toledo Edison Company (TE), American Transmission Systems, Inc. (ATSI), Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). JCP&L, Met-Ed and Penelec were formerly wholly owned subsidiaries of GPU, Inc. which merged with FirstEnergy on November 7, 2001. The Company follows the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. REVENUES- The Company's principal business is providing electric service to customers in northeastern Ohio. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 2001 or 2000, with respect to any particular segment of the Company's customers. The Company and TE sell substantially all of their retail customer receivables to CFC. CFC subsequently transfers the receivables to a trust under an asset-backed securitization agreement. The trust completed private sales of $50 million and $150 million of receivables-backed investor certificates in 2000 and 2001 respectively, in transactions that qualified for sale accounting treatment. CFC's creditors are entitled to be satisfied first out of the proceeds of CFC's assets. The 2001 private sale was used to repay a 1996 public sale of $150 million of receivables-backed investor certificates which was replaced under an amended securitization agreement. FirstEnergy's retained interest in the pool of receivables held by the trust (34% as of December 31, 2001) is stated at fair value reflecting adjustments for anticipated credit losses. Sensitivity analyses reflecting a 10% and 20% increase in the rate of anticipated credit losses did not significantly affect FirstEnergy's retained interest in the pool of receivables. Collections from receivables previously transferred to the trust were used for the purchase of new receivables from CFC during 2001 and totaled approximately $2.2 billion. As of December 31, 2001, receivables recorded on the Consolidated Balance Sheets were reduced by approximately $97 million due to the sale of $185 million of receivables to the trust less the Company's retained interest of $88 million. The Company and TE processed receivables for the trust and received servicing fees of approximately $4.5 million ($3.0 million applicable to the Company) in 2001. Expenses associated with the factoring discount related to the sale of receivables were $12 million in 2001. REGULATORY PLAN- Ohio's 1999 electric utility restructuring law allowed Ohio electric customers to select their generation suppliers beginning January 1, 2001, provided for a five percent reduction on the generation portion of residential customers' bills and the opportunity for utilities to recover transition costs, including regulatory assets. Under this law, the PUCO approved FirstEnergy's transition plan in 2000 as modified by a settlement agreement with major parties to the transition plan, which it filed on behalf of the Company, OE and TE. The settlement agreement included approval for recovery of the amounts of transition costs filed in the transition plan through no later than 2008 for the Company, except where a longer period of recovery is provided for in the settlement agreement. The settlement also granted preferred access over FirstEnergy's subsidiaries to nonaffiliated marketers, brokers and aggregators to 400 megawatts of generation capacity through 2005 at established prices for sales to the Company's retail customers. The Company's base electric rates for distribution service under its prior regulatory plan was extended from December 31, 2005 through December 31, 2007. The transition rate credits for customers under its prior regulatory plan was also extended through the Company's transition cost recovery period. 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 resulted in the 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 planned changes in 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 a 5% reduction in the price of generation for residential customers. The Company's 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 period. If the customer shopping goals established in the agreement are not achieved by the end of 2005, the transition cost recovery period could be shortened for the Company to reduce recovery by as much as $170 million, but any such adjustment would be computed on a class-by-class and pro-rata basis. Based on annualized shopping levels as of December 31, 2001, the Company believes that the maximum potential recovery reduction was approximately $52 million. The application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to the Company's nonnuclear generation business was discontinued with the issuance of the PUCO transition plan order. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement concluding that any supplemental regulated cash flows such as a competitive transition charge should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance $304 million of impaired plant investments were recognized by the Company as regulatory assets recoverable as transition costs through future regulatory cash flows. Net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $1.425 billion as of December 31, 2001. All of the Company's regulatory assets are expected to continue to be recovered under provisions of the Ohio transition plan. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for the Company's nuclear generating units which were adjusted to fair value), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annualized composite rate was approximately 3.2% in 2001 and 3.4% in 2000 and 1999. Annual depreciation expense includes approximately $29.0 million for future decommissioning costs applicable to the Company's ownership interests in three nuclear generating units. The 2001 amounts reflected an increase of approximately $17 million from implementing the Company's transition plan in 2001. The Company's share of the future obligation to decommission these units is approximately $656 million in current dollars and (using a 4.0% escalation rate) approximately $1.6 billion in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $163 million for decommissioning through its electric rates from customers through December 31, 2001. The Company has also recognized an estimated liability of approximately $7.6 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required as of January 1, 2003. SFAS 143 requires the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the costs to settle the retirement obligation differs from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trust will be recorded as investment income. The Company is currently assessing the new standard and has not yet quantified the impact on its financial statements. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company, together with TE and OE and its wholly owned subsidiary, Pennsylvania Power Company (Penn), own and/or lease, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 2001 include the following:
Utility Accumulated Construction Ownership/ Plant Provision for Work in Leasehold Generating Units in Service Depreciation Progress Interest --------------------------------------------------------------------------------------------------- (In millions) W. H. Sammis Unit 7........... $ 183.4 $123.9 $ -- 31.20% Bruce Mansfield Units 1, 2 and 3 84.7 35.0 22.0 20.42% Beaver Valley Unit 2.......... 2.3 0.5 7.1 24.47% Davis-Besse................... 209.8 33.4 12.9 51.38% Perry......................... 631.6 126.9 2.0 44.85% ---------------------------------------------------------------------------------------------------- Total....................... $1,111.8 $319.7 $44.0 ====================================================================================================
The Bruce Mansfield Plant is being leased through a sale and leaseback transaction (see Note 2) and the above-related amounts represent construction expenditures subsequent to the transaction. NUCLEAR FUEL- Nuclear fuel is recorded at original cost, which includes material, enrichment, fabrication and interest costs incurred prior to reactor load. The Company amortizes the cost of nuclear fuel based on the rate of consumption. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. The Company is included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Company's full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the GPU pension plans were merged with the FirstEnergy plan. The Company uses the projected unit credit method for funding purposes and was not required to make pension contributions during the three years ended December 31, 2001. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1...... $1,506.1 $1,394.1 $ 752.0 $ 608.4 Service cost............................ 34.9 27.4 18.3 11.3 Interest cost........................... 133.3 104.8 64.4 45.7 Plan amendments......................... 3.6 41.3 -- -- Actuarial loss.......................... 123.1 17.3 73.3 121.7 Voluntary early retirement program...... -- 23.4 2.3 -- GPU acquisition......................... 1,878.3 -- 716.9 -- Benefits paid........................... (131.4) (102.2) (45.6) (35.1) -------------------------------------------------------------------------------------------- Benefit obligation as of December 31.... 3,547.9 1,506.1 1,581.6 752.0 -------------------------------------------------------------------------------------------- Change in fair value of plan assets: Fair value of plan assets as of January 1 1,706.0 1,807.5 23.0 4.9 Actual return on plan assets............ 8.1 0.7 12.7 (0.2) Company contribution.................... -- -- 43.3 18.3 GPU acquisition......................... 1,901.0 -- 462.0 -- Benefits paid........................... (131.4) (102.2) (6.0) -- -------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 3,483.7 1,706.0 535.0 23.0 -------------------------------------------------------------------------------------------- Funded status of plan................... (64.2) 199.9 (1,046.6) (729.0) Unrecognized actuarial loss (gain)...... 222.8 (90.9) 212.8 147.3 Unrecognized prior service cost......... 87.9 93.1 17.7 20.9 Unrecognized net transition obligation (asset) -- (2.1) 101.6 110.9 -------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost.......... $ 246.5 $ 200.0 $ (714.5) $(449.9) ============================================================================================ Company's share of prepaid (accrued) benefit cost.......................... $ (32.7) $ (34.6) $ (195.9) $(188.8) ============================================================================================ Assumptions used as of December 31: Discount rate........................... 7.25% 7.75% 7.25% 7.75% Expected long-term return on plan assets 10.25% 10.25% 10.25% 10.25% Rate of compensation increase........... 4.00% 4.00% 4.00% 4.00%
FirstEnergy's net pension and other postretirement benefit costs for the three years ended December 31, 2001 were computed as follows:
Other Pension Benefits Postretirement Benefits ---------------- ------------------------ 2001 2000 1999 2001 2000 1999 ------------------------------------------------------------------------------------------------------- (In millions) Service cost............................ $ 34.9 $ 27.4 $ 28.3 $18.3 $11.3 $ 9.3 Interest cost........................... 133.3 104.8 102.0 64.4 45.7 40.7 Expected return on plan assets.......... (204.8) (181.0) (168.1) (9.9) (0.5) (0.4) Amortization of transition obligation (asset) (2.1) (7.9) (7.9) 9.2 9.2 9.2 Amortization of prior service cost...... 8.8 5.7 5.7 3.2 3.2 3.3 Recognized net actuarial loss (gain).... -- (9.1) -- 4.9 -- -- Voluntary early retirement program...... 6.1 17.2 -- 2.3 -- -- ------------------------------------------------------------------------------------------------------- Net benefit cost........................ $ (23.8) $ (42.9) $ (40.0) $92.4 $68.9 $62.1 ======================================================================================================= Company's share of net benefit cost..... $ (1.9) $ (5.3) $ (14.4) $12.5 $21.3 $22.0 -------------------------------------------------------------------------------------------------------
The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and other income include transactions with affiliated companies, primarily TE, OE, Penn, ATSI, FirstEnergy Solutions Corp. (FES) and FirstEnergy. The Ohio transition plan, as discussed in the "Regulatory Plan" section, resulted in the corporate separation of FirstEnergy's regulated and unregulated operations in 2001. Unregulated operations under FES now operate the generation businesses of the Company, TE, OE and Penn. As a result, the Company entered into power supply agreements (PSA) whereby FES purchases all of the Company's nuclear generation and the generation from leased fossil generating facilities and the Company purchases its power from FES to meet its "provider of last resort" obligations. CFC serves as the transferor in connection with the accounts receivable securitization for the Company and TE. The primary affiliated companies transactions, including the effects of the PSA beginning in 2001, the sale and leaseback of the Company's transmission assets to ATSI in September 2000 and FirstEnergy's providing support services at cost, are as follows: 2001 2000 1999 - -------------------------------------------------------------------------- (In millions) Operating Revenues: PSA revenues with FES............... $334.1 $ -- $ -- Generating units rent with FES...... 59.1 -- -- Ground lease with ATSI.............. 7.1 4.4 -- Operating Expenses: Purchased power under PSA........... 597.4 -- -- Purchased power from TE............. 97.0 106.8 106.1 ATSI rent expense................... 28.9 15.0 -- FirstEnergy support services........ 49.6 97.9 109.1 Other Income: Interest income from ATSI........... 7.2 2.4 -- Interest income from FES............ 0.9 -- -- - -------------------------------------------------------------------------- The Company is buying 150 megawatts of TE's Beaver Valley Unit 2 leased capacity entitlement. Purchased power expense for this transaction was $97.0 million, $104.0 million and $104.3 million in 2001, 2000 and 1999, respectively. This purchase is expected to continue through the end of the lease period (See Note 2). SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $2.1 million, $52.0 million and $26.2 million in 2001, 2000 and 1999, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31:
2001 2000 - ---------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ---------------------------------------------------------------------------------------------------------- (In millions) Long-term debt................................... $2,507 $2,624 $2,563 $2,655 Preferred stock.................................. $ 125 $ 125 $ 105 $ 105 Investments other than cash and cash equivalents: Debt securities - Maturity (5-10 years)....................... $ 11 $ 11 $ -- $ -- - Maturity (more than 10 years)............... 568 565 585 568 All other..................................... 214 218 202 210 - ---------------------------------------------------------------------------------------------------------- $ 793 $ 794 $ 787 $ 778 ==========================================================================================================
The fair values of long-term debt and preferred stock subject to mandatory redemption reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with corresponding changes to the decommissioning liability. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PUCO have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are expected to continue to be recovered from customers under the Company's transition plan. Based on that plan, the Company continues to bill and collect cost-based rates for its transmission and distribution services, which will remain regulated; accordingly, it is appropriate that the Company continues the application of SFAS 71 to those operations. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: 2001 2000 ------------------------------------------------------------------------ (In millions) Regulatory transition charge.................... $830.3 $767.9 Customer receivables for future income taxes.... 9.2 10.3 Loss on reacquired debt......................... 16.5 17.8 Other........................................... 18.5 20.1 ------------------------------------------------------------------------ Total...................................... $874.5 $816.1 ======================================================================== 2. LEASES: The Company leases certain generating facilities, office space and other property and equipment under cancelable and noncancelable leases. The Company and TE sold their ownership interests in Bruce Mansfield Units 1, 2 and 3 and TE sold a portion of its ownership interest in Beaver Valley Unit 2. In connection with these sales, which were completed in 1987, the Company and TE entered into operating leases for lease terms of approximately 30 years as co-lessees. During the terms of the leases, the Company and TE continue to be responsible, to the extent of their combined ownership and leasehold interest, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company and TE have the right, at the end of the respective basic lease terms, to renew the leases. The Company and TE also have the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. As co-lessee with TE, the Company is also obligated for TE's lease payments. If TE is unable to make its payments under the Beaver Valley Unit 2 and Bruce Mansfield Plant leases, the Company would be obligated to make such payments. No such payments have been made on behalf of TE. (TE's future minimum lease payments as of December 31, 2001 were approximately $1.1 billion, net of trust cash receipts.) Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 2001 are summarized as follows: 2001 2000 1999 --------------------------------------------------------------------- (In millions) Operating leases Interest element.... $35.3 $ 36.8 $ 38.6 Other............... 36.4 29.8 30.7 Capital leases Interest element.... 3.6 5.9 6.9 Other............... 19.4 37.4 41.3 --------------------------------------------------------------------- Total rentals....... $94.7 $109.9 $117.5 ===================================================================== The future minimum lease payments as of December 31, 2001 are: Operating Leases ----------------------------- Capital Lease Capital Leases Payments Trust Net ------------------------------------------------------------------------ (In millions) 2002........................... $ 1.0 $ 76.4 $ 70.6 $ 5.8 2003........................... 1.0 77.5 77.9 (0.4) 2004........................... 1.0 55.7 28.1 27.6 2005........................... 1.0 66.7 47.5 19.2 2006........................... 1.0 71.3 55.2 16.1 Years thereafter............... 5.7 582.5 433.5 149.0 ----------------------------------------------------------------------- Total minimum lease payments... 10.7 $930.1 $712.8 $217.3 ====== ====== ====== Interest portion............... 4.0 -------------------------------------- Present value of net minimum lease payments............... 6.7 Less current portion........... .3 -------------------------------------- Noncurrent portion............. $ 6.4 ====================================== The Company and TE refinanced high-cost fixed obligations related to their 1987 sale and leaseback transaction for the Bruce Mansfield Plant through a lower cost transaction in June and July 1997. In a June 1997 offering (Offering), the two companies pledged $720 million aggregate principal amount ($575 million for the Company and $145 million for TE) of first mortgage bonds due through 2007 to a trust as security for the issuance of a like principal amount of secured notes due through 2007. The obligations of the two companies under these secured notes are joint and several. Using available cash, short-term borrowings and the net proceeds from the Offering, the two companies invested $906.5 million ($569.4 million for the Company and $337.1 million for TE) in a business trust, in June 1997. The trust used these funds in July 1997 to purchase lease notes and redeem all $873.2 million aggregate principal amount of 10-1/4% and 11-1/8% secured lease obligation bonds (SLOBs) due 2003 and 2016. The SLOBs were issued by a special-purpose-funding corporation in 1988 on behalf of lessors in the two companies' 1987 sale and leaseback transaction. The Shippingport Capital Trust arrangement effectively reduces lease costs related to that transaction. 3. CAPITALIZATION: (A) RETAINED EARNINGS- There are no restrictions on retained earnings for payment of cash dividends on the Company's common stock. The 1997 FirstEnergy merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 8, 1997 merger date. (B) STOCK COMPENSATION PLANS- Employees of the Company participate in stock based plans administered by FirstEnergy which include the Centerior Equity Plan (CEI Plan) and FirstEnergy Executive and Director Incentive Compensation Plan (FE Plan). All options are fully vested under the CE Plan, and no further awards are permitted. Outstanding options will expire on or before February 25, 2007. Under the FE Plan, total awards cannot exceed 15 million shares of common stock or their equivalent. Only stock options and restricted stock have been granted, with vesting periods ranging from six months to seven years. Under the Executive Deferred Compensation Plan, covered employees can direct a portion of their Annual Incentive Award and/or Long Term Incentive Award into an unfunded FirstEnergy Stock Account to receive vested stock units. An additional 20% premium is received in the form of stock units based on the amount allocated to the FirstEnergy Stock Account. Dividends are calculated quarterly on stock units outstanding and are paid in the form of additional stock units. Upon withdrawal, stock units are converted to FirstEnergy shares. Payout occurs three years from the date of deferral. The Company continues to apply APB 25, "Accounting for Stock Issued to Employees." As required by SFAS 123, "Accounting for Stock-Based Compensation," the Company has determined pro forma earnings as though the Company had accounted for employee stock options under the fair value method. The weighted average assumptions used in valuing the options and their resulting fair values are as follows: 2001 2000 1999 - ---------------------------------------------------------------------------- Valuation assumptions: Expected option term (years) 8.3 7.6 6.4 Expected volatility......... 23.45% 21.77% 20.03% Expected dividend yield..... 5.00% 6.68% 5.97% Risk-free interest rate..... 4.67% 5.28% 5.97% Fair value per option......... $4.97 $2.86 $3.42 -------------------------------------------------------------------------- The following table summarizes the pro forma effect of applying fair value accounting to the Company's stock options. 2001 2000 1999 - ---------------------------------------------------------------------------- Earnings on Company Stock (000) As Reported................. $193,206 $182,107 $160,565 Pro Forma................... $192,784 $181,742 $160,403 - ---------------------------------------------------------------------------- (C) PREFERRED AND PREFERENCE STOCK- The Company's $90.00 Series S has no optional redemption provision. All other preferred stock may be redeemed by the Company in whole, or in part, with 30-90 days' notice. The preferred dividend rate on the Company's Series L fluctuates based on prevailing interest rates and market conditions. The dividend rate for this issue was 7% in 2001. The Company redeemed, pursuant to redemption provisions of its $42.40 Series T issue, all 200,000 shares outstanding on February 1, 2002 at a price of $500 per share. The Company has three million authorized and unissued shares of preference stock having no par value. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Annual sinking fund provisions currently in effect for preferred stock are as follows: Redemption Price Per Series Shares Share -------------------------------------------------------- $ 7.35 C 10,000 $ 100 90.00 S 17,750 1,000 -------------------------------------------------------- Annual sinking fund requirements for the next five years are $18.0 million in 2002 and $1.0 million in each year 2003-2006. (E) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES- CFT, a wholly owned subsidiary of the Company, issued $100 million of 9% Cumulative Trust Preferred Capital Securities in December 2001. The Company purchased all of the Trust's Common Securities and simultaneously issued to the Trust $103.1 million principal amount of 9% Junior Subordinated Debentures due 2031 in exchange for the proceeds that the Trust received from its sale of Preferred and Common Securities. The sole assets of the Trust are the Subordinated Debentures whose interest and other payment dates coincide with the distribution and other payment dates on the Trust Securities. Under certain circumstances, the Subordinated Debentures could be distributed to the holders of the outstanding Trust Securities in the event the Trust is liquidated. Beginning in December 2006, the Subordinated Debentures may be optionally redeemed by the Company at a redemption price of $25 per Subordinated Debenture plus accrued interest, in which event the Trust Securities will be redeemed on a pro rata basis at $25 per share plus accumulated distributions. The Company's obligations under the Subordinated Debentures along with the related Indenture, Trust Agreement, Guarantee Agreement and the Agreement for expenses and liabilities, constitute a full and unconditional guarantee by the Company of payments due on the Preferred Securities. (F) LONG-TERM DEBT- The first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) for the next five years are: (In millions) --------------------------------------------- 2002................................. $411.4 2003................................. 196.7 2004................................. 307.7 2005................................. 300.0 2006................................. -- --------------------------------------------- The Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. Certain pollution control revenue bonds are entitled to the benefit of an irrevocable bank letter of credit of $48.1 million and noncancelable municipal bond insurance policies of $112.6 million to pay principal of, or interest on, the pollution control revenue bonds. To the extent that drawings are made under the letter of credit, the Company is entitled to a credit against its obligation to repay that bond. The Company pays an annual fee of 1.00% of the amount of the letter of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. The Company and TE have letters of credit of approximately $222 million in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in May 2002. The letters of credit are secured by first mortgage bonds of the Company and TE in the proportion of 40% and 60%, respectively (see Note 2). 4. SHORT-TERM BORROWINGS: The Company may borrow from its affiliates on a short-term basis. As of December 31, 2001, the Company had total short-term borrowings of $97.7 million from its affiliates with a weighted average interest rate of approximately 3.5%. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $392 million for property additions and improvements from 2002-2006, of which approximately $121 million is applicable to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $176 million, of which approximately $19 million applies to 2002. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $163 million and $32 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its ownership and leasehold interests in Beaver Valley Unit 2, the Davis-Besse Station and the Perry Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other affiliate co-owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $106.3 million per incident but not more than $12.1 million in any one year for each incident. The Company is also insured as to its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $382 million of insurance coverage for replacement power costs for its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry. Under these policies, the Company can be assessed a maximum of approximately $22 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. In accordance with the Ohio transition plan discussed in "Regulatory Plans" in Note 1, generation operations and any related additional capital expenditures for environmental compliance are the responsibility of FirstEnergy's competitive services business unit. The Company is required to meet federally approved sulfur dioxide (SO2) regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The Environmental Protection Agency (EPA) has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. The Company is in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or using emission allowances. NOx reductions are being achieved through combustion controls and the generation of more electricity at lower-emitting plants. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Company's 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 nineteen states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. State Implementation Plans (SIP) must comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania submitted a SIP that requires compliance with the NOx budgets at the Company's Pennsylvania facilities by May 1, 2003 and Ohio submitted a "draft" SIP that requires compliance with the NOx budgets at the Company's Ohio facilities by May 31, 2004. FirstEnergy continues to evaluate its compliance plans and other compliance options. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals found constitutional and other defects in the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new NAAQS rules regulating ultra-fine particulates but found defects in the new NAAQS rules for ozone and decided that the EPA must revise those rules. The future cost of compliance with these regulations may be substantial and will depend if and how they are ultimately implemented by the states in which the Company operates affected facilities. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. The Company has been named as a "potentially responsible party" (PRP) 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. The Company has accrued a liability of $2.9 million as of December 31, 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. The Company believes that waste disposal costs will not have a material adverse effect on its financial condition, cash flows or results of operations. Legal Matters Various lawsuits, claims and proceedings related to the Company's normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to the Company are described above. 6. SALE OF GENERATING ASSETS: On November 29, 2001, FirstEnergy reached an agreement to sell four coal-fired power plants (with an aggregate net book value of $539 million as of December 31, 2001) totaling 2,535 MW to NRG Energy Inc. (NRG) for $1.5 billion ($1.355 billion in cash and $145 million in debt assumption). The sale includes the 376 MW Ashtabula, 1,262 MW Eastlake and 249 MW Lakeshore plants owned by the Company (with an aggregate net book value of $393 million as of December 31, 2001). The net, after-tax gain from the sale, based on the difference between the sale price of the plants and their market price used in the Ohio restructuring transition plan, will be credited to customers by reducing the transition cost recovery period. FirstEnergy also entered into a power purchase agreement (PPA) with NRG. Under the terms of the PPA, NRG is obligated to sell up to 10.5 billion kilowatt-hours of electricity annually, similar to the average annual output of the plants, through 2005. The sale is expected to close in mid-2002. 7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 2001 and 2000.
March 31, June 30, September 30, December 31, Three Months Ended 2001 2001 2001 2001 - ----------------------------------------------------------------------------------------------------- (In millions) Operating Revenues.................. $516.4 $498.8 $603.3 $457.7 Operating Expenses and Taxes........ 463.0 420.2 430.0 367.4 - ----------------------------------------------------------------------------------------------------- Operating Income.................... 53.4 78.6 173.3 90.3 Other Income........................ 4.4 1.1 4.0 3.7 Net Interest Charges................ 46.2 47.2 48.4 48.0 - ----------------------------------------------------------------------------------------------------- Net Income.......................... $ 11.6 $ 32.5 $128.9 $ 46.0 ===================================================================================================== Earnings on Common Stock............ $ 5.1 $ 25.4 $122.6 $ 40.1 =====================================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 2000 2000 2000 2000 - ------------------------------------------------------------------------------------------------------ (In millions) Operating Revenues................... $423.7 $470.6 $525.4 $467.3 Operating Expenses and Taxes......... 336.9 383.7 396.0 380.3 - ------------------------------------------------------------------------------------------------------ Operating Income..................... 86.8 86.9 129.4 87.0 Other Income......................... 3.4 2.9 3.8 2.5 Net Interest Charges................. 51.5 50.5 49.2 48.5 - ----------------------------------------------------------------------------------------------------- Net Income........................... $ 38.7 $ 39.3 $ 84.0 $ 41.0 ====================================================================================================== Earnings on Common Stock............. $ 30.9 $ 32.6 $ 80.3 $ 38.3 ======================================================================================================
Report of Independent Public Accountants To the Stockholders and Board of Directors of The Cleveland Electric Illuminating Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of The Cleveland Electric Illuminating Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Cleveland Electric Illuminating Company and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. EX-21 32 ex21-2ce.txt LIST OF SUBS - CEI EXHIBIT 21.2 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 2001 Centerior Funding Corporation - Incorporated in Delaware Cleveland Electric Financing Trust I - Incorporated in Delaware Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 2001, is not included in the printed document. EX-23 33 ex23-2ce.txt ARTHUR ANDERSEN CONSENT - CEI EXHIBIT 23.2 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into The Cleveland Electric Illuminating Company's previously filed Registration Statements, File No. 33-55513, No. 333-47651, No. 333-72891 and No. 333-64776. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 29, 2002. EX-99 34 ex99ce.txt LETTER TO SEC RE: ARTHUR ANDERSEN - CEI Exhibit 99 March 29, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Temporary Note 3T to Article 3 of Regulation S-X Ladies and Gentlemen: In connection with the audit of the consolidated financial statements of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and for the year then ended, Arthur Andersen LLP (Andersen) has issued its report dated March 18, 2002. Andersen's report is included in FirstEnergy's Annual Report on Form 10-K for the year ended December 31, 2001. FirstEnergy has received the following representations from Andersen with respect to their audit: o The FirstEnergy audit was subject to Andersen's quality control system for their U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards. o There was appropriate continuity of Andersen personnel working on the FirstEnergy audit. o There was appropriate availability of national office consultation for the FirstEnergy audit. o There was appropriate availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the FirstEnergy audit. Sincerely, /s/Harvey L. Wagner ---------------------------------- Harvey L. Wagner Vice President and Controller EX-3 35 ex3-3.txt AMENDED & RESTATED CODE OF REGS - TE AMENDED AND RESTATED CODE OF REGULATIONS OF THE TOLEDO EDISON COMPANY (Effective March 15, 2002) MEETINGS OF SHAREHOLDERS Section 1. Annual Meetings. - ---------- ---------------- The annual meeting of shareholders shall be held on such date and at such time as the Board of Directors may determine each year. Such meetings may be held within or without the State of Ohio at such time and place as the directors may determine. Section 2. Special Meetings. - ---------- ----------------- Special meetings of the shareholders may be called at any time by (i) the Chairman of the Board, (ii) the President, (iii) the Directors, by action at a meeting or a majority of the Directors acting without a meeting, or (iv) the holders of 25% or more of the outstanding shares entitled to vote thereat. Such meetings may be held within or without the State of Ohio at such time and place as may be specified in the notice thereof. Section 3. Notice of Meetings. - ---------- ------------------- Written notice of every annual or special meeting of the shareholders stating the time, place and purposes thereof shall be given to each shareholder entitled to notice as provided by law, not less than seven (7) nor more than sixty (60) days before the date of the meeting. Such notice may be given by or at the direction of the Chairman of the Board, the President or the Corporate Secretary. Except to the full extent that notice is legally permitted (now or hereafter) to be given by any other form of media, including any form of electronic or other communications, notice shall be given by personal delivery or by mail addressed to the shareholder at his last address as it appears on the records of the Corporation. Any shareholder may waive in writing notice of any meeting, either before or after the holding of such meeting, and, by attending any meeting without protesting the lack of proper notice, shall be deemed to have waived notice thereof. Section 4. Business Transacted at Meetings. - ---------- -------------------------------- Business transacted at any meeting of shareholders shall be for the purposes stated in the notice. Section 5. Quorum and Adjournments. - ---------- ------------------------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 6. Required Vote; Inspectors. - ---------- -------------------------- (a) When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Articles of Incorporation a different vote is required in which case such express provision shall govern and control the decision of such question. (b) Inspectors of election may be appointed to act at any meeting of shareholders in accordance with Ohio law. Section 7. Voting Power of Shareholders. - ---------- ----------------------------- Every shareholder of record of the Corporation shall be entitled at each meeting of shareholders to one vote for each share of stock held by such shareholder according to the books of the Corporation as of the date of such vote or, if a record date is set by the Board of Directors, as of such record date. Section 8. Voting by Proxy. - ---------- ---------------- At any meeting of the shareholders, any shareholder may be represented and vote by a proxy or proxies appointed by an instrument in writing or by any other form of verifiable communication, including any form of electronic or other communications, to the full extent legally permitted (now or hereafter). In the event that any such instrument shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or, if only one shall be present, then that one shall have and may exercise all of the powers conferred by such instrument upon all of the persons so designated unless the instrument shall otherwise provide. No such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force. Subject to the above, any proxy duly executed is not revoked and continues in full force and effect until an instrument or verifiable communication revoking it or a duly executed proxy bearing a later date is filed with the Corporate Secretary of the Corporation. Section 9. Action by Shareholders Without a Meeting. - ---------- ----------------------------------------- Any action which may be taken by the vote of the shareholders at a meeting may be taken without a meeting if authorized by the written consent of the shareholders holding at least a majority of the voting power, unless the provisions of the statutes or of the Articles of Incorporation provide that a greater proportion of written consents shall be required. Such written consent shall be filed with or entered upon the records of the Corporation. DIRECTORS Section 10. Authority of Directors. - ----------- ----------------------- (a) The business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, the Articles of Incorporation, or these Regulations directed or required to be exercised or done by the shareholders. (b) Any action required or permitted to be taken at a meeting of the Board of Directors or any committee of the Board of Directors may be taken without a meeting if, prior or subsequent to such action, all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing and such written consents are filed with the Corporate Secretary of the Corporation. Section 11. Number; Qualifications. - ----------- ----------------------- The number of Directors shall be not less than three (3) and not more than five (5) (plus any Directors separately elected by the holders of any class of stock other than the Common Stock as provided in the Articles of Incorporation as amended from time to time). The number of Directors may be determined (a) by the vote of the holders of a majority of the shares entitled to vote thereon at any annual meeting or special meeting called for the purpose of electing Directors or (b) by action of the Board of Directors at a meeting by the vote of a majority of the Directors in office at the time or in a writing signed by all the Directors in office at the time. When so fixed, such number shall continue to be the authorized number of Directors until changed by the shareholders or Directors in the manner described above. Any increase in the number of Directors shall be deemed to create a vacancy or vacancies which may be filled as provided in Section 14. A reduction in the number of Directors shall not be applied to remove any Director from office prior to the expiration of his term. Directors need not be shareholders of the Corporation. Section 12. Election of Directors. - ----------- ---------------------- At each meeting of the shareholders for the election of Directors, the persons receiving the greatest number of votes shall be the Directors. Such elections shall be by ballot whenever requested by any person entitled to vote at such meeting; but unless so requested, such election may be conducted in any way approved at such meeting. Section 13. Term of Office; Removal; Resignations. - ----------- -------------------------------------- (a) Directors shall hold office until the annual meeting of the shareholders next following their election and until their respective successors are elected, or until their earlier resignation, death or removal from office. (b) Any Director or the entire Board of Directors may be removed upon the affirmative vote of the holders of a majority of the voting power of the Corporation. (c) Any Director may resign at any time by giving written notice of his resignation to the President or Corporate Secretary. Any resignation will be effective upon actual receipt by such person or, if later, as of the date and time specified in such written notice. Section 14. Vacancies. - ----------- ---------- Vacancies, including those caused by an increase in the number of Directors, may be filled by a majority of the remaining Directors though less than a quorum. When one or more Directors shall give notice of his or their resignation to the Board, effective at a future date, the Board shall have the power to fill such vacancy or vacancies to take effect when such resignation or resignations shall become effective, each Director so appointed to hold office during the remainder of the term of office of the resigning Director or Directors. Whenever any vacancy shall occur among the Directors, the remaining Directors shall constitute the Directors of the Corporation until such vacancy is filled or until the number of Directors is changed as in Section 11 hereof. MEETINGS OF THE BOARD OF DIRECTORS Section 15. Organizational Meeting. - ----------- ----------------------- Immediately after each annual meeting of the shareholders at which Directors are elected, or each special meeting held in lieu thereof, the newly elected Directors, if a quorum thereof is present, shall hold an organizational meeting at the same place or at such other time and place as may be fixed by the shareholders at such meeting, for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. If for any reason such organizational meeting is not held at such time, a special meeting of the Directors for such purpose shall be held as soon thereafter as practicable. Section 16. Regular Meetings. - ----------- ----------------- Regular meetings of the Directors may be held without notice at such times and places within or without the State of Ohio as shall be determined by the Directors from time to time. Section 17. Special Meetings. - ----------- ----------------- Special meetings of the Directors may be held at any time within or without the State of Ohio upon call by the Chairman of the Board, the President, or the Corporate Secretary upon the written request of two Directors. Notice of each such meeting shall be given to each Director by letter, facsimile, telegram, telephone, or in person not less than forty-eight (48) hours prior to such meeting. Notices sent by mail shall be sent postage prepaid and shall be addressed to each Director at his address as it appears upon the records of the Corporation. Notice by mail shall be deemed to be given at the time when the notice is deposited in the mail, and notice by facsimile or telegram shall be deemed to be given at the time when confirmation of successful transmission is received. Such notice may be waived in writing by Directors either before or after the meeting, and such written waivers shall be filed with or entered upon the records of the meeting. The attendance of any Director at any such meeting without protesting the lack of proper notice, prior to or at the commencement of the meeting, shall be deemed to be a waiver by the Director of notice of the meeting. Unless otherwise limited in the notice thereof, any business may be transacted at any organizational, regular or special meeting. Section 18. Quorum and Adjournments; Participation by Communications Equipment. - ----------- ------------------------------------------------------------------- (a) A majority of the Directors, at a meeting duly called and held, shall be necessary to constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation. Any action required or permitted to be taken at a meeting of the Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Directors entitled to vote with respect to the subject matter thereof. Any meeting duly called, whether or not a quorum is present, may, by vote of a majority of the Directors present, be adjourned from time to time and place to place within or without the State of Ohio, in which case no further notice of the adjourned meeting need be given. (b) Meetings of the Board of Directors or of any committee of the Board of Directors may be held through any means of communications equipment if all persons participating can hear each other, and such participation will constitute presence in person at such meeting. Section 19. Committees. - ----------- ----------- The Board of Directors may, by resolution passed by a majority of the Directors, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation, which, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the Board when required. Section 20. Compensation. - ----------- ------------- The Directors may be paid their expenses, if any, for attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors. The sums may be different for different Directors, and the sum shall be established by resolution of the Board of Directors and may be changed from time to time by resolution. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. EXECUTIVE COMMITTEE Section 21. Executive Committee. - ----------- -------------------- The Board of Directors at any time may elect from its members an Executive Committee which shall consist of not less than three (3) members. Each member of such Committee shall hold office during the pleasure of the Board and may be removed by a majority vote of the whole Board at any time with or without cause. Vacancies occurring in the Committee may be filled by the Board. The Committee shall prescribe its own rules for calling and holding meetings, and for transacting business, subject, however, to any rules prescribed by the Board of Directors, and the Committee shall keep minutes of its actions. Action by the Committee may be taken at meetings thereof attended by not less than a majority thereof, or without a meeting by instrument in writing signed by not less than a majority of the members. Except as the Committee's powers and duties may be limited or otherwise prescribed by the Board of Directors, the Committee, during the intervals between the meetings of the Board, shall possess and may exercise all of the powers and authority of the Board of Directors, however conferred, provided, however, that the Committee shall not be empowered to elect the officers (other than Assistant Secretaries and Assistant Treasurers) or to fill vacancies in the Board of Directors or in the Executive Committee. Subject to such exceptions, persons dealing with the Corporation shall be entitled to rely upon any action of the Committee with the same force and effect as though such action had been taken by the Board of Directors. OFFICERS Section 22. Generally. - ----------- ---------- The Corporation may have a Chairman, elected by the directors from among their number, and shall have a President, a Corporate Secretary and a Treasurer. The Corporation may also have one or more Vice Chairmen, Vice Presidents, Senior Vice Presidents and such other officers and assistant officers as the Board of Directors may deem appropriate. If the Board of Directors so desires, it may elect a Chief Executive Officer to manage the affairs of the Corporation, subject to the direction and control of the Board of Directors. All of the officers shall be elected by the Board of Directors. Notwithstanding the foregoing, by specific action, the Board of Directors may authorize the Chairman or the President to appoint any person to any office other than Chairman, President, Corporate Secretary, or Treasurer. Any number of offices may be held by the same person, and no two offices must be held by the same person. Any of the offices may be left vacant from time to time as the Board of Directors may determine. In case of the absence or disability of any officer of the Corporation or for any other reason deemed sufficient by a majority of the Board of Directors, the Board of Directors may delegate the absent or disabled officer's powers or duties to any other officer or to any director. Section 23. Authority and Duties of Officers. - ----------- --------------------------------- The officers of the Corporation shall have such authority and shall perform such duties as are customarily incident to their respective offices, or as may be specified from time to time by the Board of Directors, the Chairman or the President regardless of whether such authority and duties are customarily incident to such office. Section 24. Compensation. - ----------- ------------ The compensation of all officers and agents of the Corporation who are also members of the Board of Directors of the Corporation will be fixed by the Board of Directors or by a committee of the Board of Directors. The Board of Directors may fix, or delegate the power to fix, the compensation of the other officers and agents of the Corporation to the Chief Executive Officer or any other officer of the Corporation. Section 25. Succession. - ---------- ---------- The officers of the Corporation will hold office until their successors are elected. Any officer may be removed at any time by the affirmative vote of a majority of the whole Board. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors or by the Chairman or President as provided in Regulation 22. Section 26. Delegation of Duties. - ----------- --------------------- The Directors are authorized to delegate the duties of any officers to any other officer and generally to control the action of the officers and to require the performance of duties in addition to those mentioned herein. Section 27. Signing Checks and Other Instruments. - ----------- ------------------------------------- The Directors are authorized to determine or provide the method of determining how checks, notes, bills or exchange and similar instruments shall be signed, countersigned or endorsed. CERTIFICATES OF STOCK Section 28. Contents of Certificates. - ----------- ------------------------- Every shareholder shall be entitled to one or more certificates, signed by the President or a Vice President and by the Treasurer, an Assistant Treasurer, the Corporate Secretary, or an Assistant Corporate Secretary of the Corporation, certifying the number and class of shares owned by him in the Corporation. If the Corporation is authorized to issue shares of more than one class or more than one series of any class, there shall be set forth upon the face or back of the certificate a full or summary statement of the designations, preferences and relative, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, or the certificate shall have a statement that the Corporation will furnish such information to any shareholders upon request and without charge. If the Corporation shall be authorized to issue only special stock, such certificate shall set forth in full or summarize the rights of the holders of such stock. Section 29. Countersignature of Authentication by Transfer Agents or Registrars. - ----------- ------------------------------------------------------------------- Whenever any certificate is countersigned or otherwise authenticated by a transfer agent or registrar, then a facsimile of the signatures of such officers of the Corporation may be engraved, stamped, or printed upon such certificate in lieu of the actual signatures. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be an officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be an officer or officers of such Corporation. LOST CERTIFICATES Section 30. Replacement of Lost Certificates. - ----------- --------------------------------- The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. TRANSFER OF STOCK Section 31. Transfer of Stock. - ----------- ------------------ Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on its books. RECORD DATES AND CLOSING OF TRANSFER BOOKS Section 32. Record Dates and Closing of Transfer Books. - ----------- ------------------------------------------- The Board of Directors may fix a time not exceeding sixty (60) days preceding the date of any meeting of shareholders or the date fixed for the payment of any dividend or distribution or the date for the allotment of rights as the record date for the determination of the shareholders entitled to notice of or to vote at any such meeting or entitled to receive payment of any such dividend, distribution or allotment of rights, and in such case only shareholders of record on the date so fixed shall be entitled to notice of or to vote at such meeting or to receive payment of such dividend, distribution or allotment of rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of the period between such record date and the date of the event in respect for which such record date was fixed. REGISTERED SHAREHOLDERS Section 33. Recognition of Record Ownership. - ----------- -------------------------------- The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Ohio. GENERAL PROVISIONS DIVIDENDS Section 34. Payment of Dividends. - ----------- --------------------- The Board of Directors may declare dividends upon the capital stock of the Corporation, subject to the provisions of the Articles of Incorporation, if any, at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Articles of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Directors shall think conducive to the interest of the Corporation and the Directors may modify or abolish any such reserves in the manner in which it was created. FISCAL YEAR Section 35. Fiscal Year. - ----------- ------------ The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SEAL Section 36. Corporate Seal. - ----------- --------------- The corporate seal of the Corporation shall be of such design, and shall contain such words, as may be prescribed by the Directors. TRANSFER AGENT AND REGISTRAR Section 37. Transfer Agent; Registrar. - ----------- -------------------------- The Corporation may open transfer books in any state of the United States or in any foreign country for the purpose of transferring securities issued by it, and it may employ an agent or agents to keep the records of its securities to transfer or to register securities or both, in Ohio or in other states or in a foreign country, or both, and the acts of such agents shall be binding on the Corporation. The duties and liabilities of such agent or agents shall be such as may be agreed to by the Corporation. If no such transfer agent is appointed to act in Ohio in respect to its shares, the Corporation shall keep an office in Ohio at which shares shall be transferable, and at which it shall keep books in which shall be recorded the names and addresses of all shareholders and all transfers of shares. PROVISIONS IN ARTICLES OF INCORPORATION Section 38. Governance By Articles of Incorporation. - ----------- ---------------------------------------- These Regulations are at all times subject to the provisions of the Articles of Incorporation of the Corporation (including in such term whenever used in these Regulations, amendments thereto), and in case of any conflict between any provision herein and in the Articles of Incorporation, the provisions in the Articles of Incorporation shall be deemed to govern. AMENDMENTS Section 39. Procedure for Amendments. - ----------- ------------------------- These Regulations may be altered, changed or amended in any respect or superseded by new Regulations in whole or in part, by the affirmative vote of the holders of record of shares entitling them to exercise a majority of the voting power of the Corporation at an annual or special meeting called for such purpose or without a meeting by the written consent of the holders of record of shares entitling them to exercise a majority of the voting power of the Corporation. In case of adoption of any Regulation or amendment by such written consent, the Corporate Secretary shall enter the same in the corporate records and mail a copy thereof to each shareholder who would have been entitled to vote thereon and did not participate in the adoption thereof. INDEMNIFICATION AND INSURANCE Section 40. Indemnification. - ----------- ---------------- The Corporation shall indemnify, to the full extent then permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a member of the Board of Directors or an officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall indemnify such person against expenses, including attorney's fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him by reason of the fact that he is or was such person to the full extent to which the Corporation is empowered or authorized to indemnify any person under the Ohio General Corporation Law as now in effect or as amended from time to time. The Corporation shall pay, to the full extent then permitted by law, expenses, including attorney's fees, incurred by a member of the Board of Directors in defending any such action, suit or proceeding as they are incurred, in advance of the final disposition thereof, and may pay, in the same manner and to the full extent then permitted by law, such expenses incurred by any other person. The indemnification and payment of expenses provided hereby shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under any law, the Articles of Incorporation, any agreement, vote of shareholders or disinterested members of the Board of Directors, or otherwise, both as to action in official capacities and as to action in another capacity while he or she is a member of the Board of Directors, or an officer, employee or agent of the Corporation, and shall continue as to a person who has ceased to be a member of the Board of Directors, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 41. Insurance. - ----------- ---------- The Corporation may, to the full extent then permitted by law and authorized by the Board of Directors, purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit or self-insurance, on behalf of or for any persons described in Section 40 against any liability asserted against and incurred by any such person in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such liability. Insurance may be purchased from or maintained with a person in which the Corporation has a financial interest. EMERGENCY REGULATIONS Section 42. Emergency Regulations. - ----------- ---------------------- The Board of Directors may adopt, at any meeting, either before or during "an emergency" as that term is defined in Section 1701.01 of the Ohio Revised Code, emergency regulations to be operative during, but only during, an emergency. The emergency regulations may contain any provisions which may be made by emergency regulations as provided in Section 1701.111 of the Ohio Revised Code. I, the undersigned, being Corporate Secretary of The Toledo Edison Company, do hereby certify the foregoing to be the Regulations of said Corporation, as adopted in an action in writing of the sole shareholder dated the 15th day of March, 2002. ------------------------------------ Nancy C. Ashcom Corporate Secretary EX-4 36 ex4-2.txt SUPPLEMENTAL INDENTURE - TE THE TOLEDO EDISON COMPANY TO THE CHASE MANHATTAN BANK Trustee. ----------------- Fifty-First Supplemental Indenture Dated as of September 1, 2000 ----------------- (Supplemental to Indenture dated as of April 1, 1947) ----------------- First Mortgage Bonds, Pledge Series C of 2000 due 2033 FIFTY-FIRST SUPPLEMENTAL INDENTURE, dated as of September 1, 2000, between THE TOLEDO EDISON COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company"), and THE CHASE MANHATTAN BANK, a corporation existing under the laws of the State of New York (hereinafter called the "Trustee"), as Trustee. RECITALS The Company has heretofore executed and delivered an Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 (hereinafter referred to as the "Original Indenture") to The Chase National Bank of the City of New York, predecessor Trustee, to secure an issue of First Mortgage Bonds of the Company, issuable in series, and created thereunder an initial series of bonds designated as First Mortgage Bonds, 2?% Series due 1977; and The Company has heretofore executed and delivered to The Chase National Bank of the City of New York, predecessor Trustee, four Supplemental Indentures supplementing the Original Indenture dated, respectively, September 1, 1948, April 1, 1949, December 1, 1950 and March 1, 1954 and has heretofore executed and delivered to The Chase Manhattan Bank, which on March 31, 1955, became the Trustee under the Original Indenture by virtue of the merger of The Chase National Bank of the City of New York into President and Directors of The Manhattan Company under the name of The Chase Manhattan Bank, the Fifth and the Sixth Supplemental Indentures dated, respectively, February 1, 1956, and May 1, 1958, supplementing the Original Indenture; and The Chase Manhattan Bank was converted into a national banking association under the name The Chase Manhattan Bank (National Association), effective September 23, 1965; and by virtue of said conversion the continuity of the business of The Chase Manhattan Bank, including its business of acting as corporate trustee, and its corporate existence, was not affected, so that The Chase Manhattan Bank (National Association) was vested with all the trusts, powers, discretion, immunities, privileges and all other matters as were vested in said The Chase Manhattan Bank under the Indenture (hereinafter defined), with like effect as if originally named as Trustee therein; and The Company has heretofore executed and delivered to The Chase Manhattan Bank (National Association) 41 Supplemental Indentures dated, respectively, as follows: Seventh, August 1, 1967, Eighth, November 1, 1970, Ninth, August 1, 1972, Tenth, November 1, 1973, Eleventh, July 1, 1974, Twelfth, October 1, 1975, Thirteenth, June 1, 1976, Fourteenth, October 1, 1978, Fifteenth, September 1, 1979, Sixteenth, September 1, 1980, Seventeenth, October 1, 1980, Eighteenth, April 1, 1981, Nineteenth, November 1, 1981, Twentieth, June 1, 1982, Twenty-first, September 1, 1982, Twenty-second, April 1, 1983, Twenty-third, December 1, 1983, Twenty-fourth, April 1, 1984, Twenty-fifth, October 15, 1984, Twenty-sixth, October 15, 1984, Twenty-seventh, August 1, 1985, Twenty-eighth, August 1, 1985, Twenty-ninth, December 1, 1985, Thirtieth, March 1, 1986, Thirty-first, October 15, 1987, Thirty-second, September 15, 1988, Thirty-third, June 15, 1989, Thirty-fourth, October 15, 1989, Thirty-fifth, May 15, 1990, Thirty-sixth, March 1, 1991, Thirty-seventh, May 1, 1992, Thirty-eighth, August 1, 1992, Thirty-ninth, October 1, 1992, Fortieth, January 1, 1993, Forty-first, September 15, 1994, Forty-second, May 1, 1995, Forty-third, June 1, 1995, Forty-fourth, July 14, 1995, Forty-fifth, July 15, 1995, Forty-sixth, June 15, 1997 and Forty-seventh, August 1, 1997 supplementing the Original Indenture; and The Chase Manhattan Bank (National Association), Successor Trustee, was merged on July 1, 1996, with and into Chemical Bank, a New York banking corporation, which changed its name to The Chase Manhattan Bank, and which became the Trustee under the Original Indenture by virtue of such merger; and The Company has heretofore executed and delivered to The Chase Manhattan Bank three Supplemental Indentures dated as follows: Forty-eighth, June 1, 1998, Forty-ninth, January 15, 2000 and Fiftieth, May 1, 2000 supplementary to the Original Indenture (the Original Indenture, all the aforementioned Supplemental Indentures, this Fifty-first Supplemental Indenture and any other indentures supplemental to the Original Indenture are herein collectively called the "Indenture" and this Fifty-first Supplemental Indenture is hereinafter called this "Supplemental Indenture"); and The Company covenanted in and by the Original Indenture to execute and deliver such further instruments and do such further acts as may be necessary or proper to carry out more effectually the purposes of the Original Indenture and to make subject to the lien thereof property acquired after the execution and delivery of the Original Indenture; and Under Article 3 of the Original Indenture, the Company is authorized to issue additional bonds upon the terms and conditions expressed in the Original Indenture; and The Company proposes to create a new series of First Mortgage Bonds to be designated as First Mortgage Bonds, Pledge Series C of 2000 due 2033 (hereinafter called the "Bonds of 2000 Pledge Series C") with the denominations, rates of interest, date of maturity, redemption provisions and other provisions and agreements in respect thereof as in this Supplemental Indenture set forth; and The Bonds of 2000 Pledge Series C are to be issued by the Company and delivered to Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance corporation (the "Insurer") pursuant to an Insurance Agreement (the "Insurance Agreement"), dated as of September 1, 2000, between the Company and the Insurer under which (i) the Insurer has agreed to issue a municipal bond insurance policy (the "Policy") in favor of the Ohio Water Development Authority (the "Authority") insuring the payment of the principal of and interest on $30,900,000 aggregate principal amount of the Authority's Pollution Control Revenue Refunding Bonds, Series 2000-B (The Toledo Edison Company Project) (the "Revenue Bonds") and (ii) the Company has agreed to deliver to the Insurer a series of its First Mortgage Bonds as security for the Company's obligation to reimburse the Insurer in respect of payments made by the Issuer under the Policy; and The Company, by appropriate corporate action, has duly resolved and determined to execute this Supplemental Indenture for the purpose of providing for the creation of the Bonds of 2000 Pledge Series C and of specifying the form, provisions and particulars thereof as in said Original Indenture, as amended, provided or permitted, including the issuance only of fully registered bonds, and of giving to the Bonds of 2000 Pledge Series C the protection and security of the Indenture; and The text of the Bonds of 2000 Pledge Series C is to be substantially in the following respective forms: [FORM OF FULLY REGISTERED BOND OF 2000 PLEDGE SERIES C] THIS BOND IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR TO AMBAC ASSURANCE CORPORATION (THE "INSURER") UNDER THE INSURANCE AGREEMENT, DATED AS OF SEPTEMBER 1, 2000, BETWEEN THE COMPANY AND AMBAC ASSURANCE CORPORATION, AS AMENDED OR SUPPLEMENTED (THE "INSURANCE AGREEMENT"), OR IN COMPLIANCE WITH A FINAL ORDER OF A COURT OF COMPETENT JURISDICTION IN CONNECTION WITH ANY BANKRUPTCY OR REORGANIZATION PROCEEDING OF THE COMPANY. THE TOLEDO EDISON COMPANY FIRST MORTGAGE BOND, PLEDGE SERIES C OF 2000 DUE 2033 No. $__________ THE TOLEDO EDISON COMPANY, an Ohio corporation (hereinafter called the Company), for value received, hereby promises to pay to _________________________________, or registered assigns, the principal sum of _______________________ dollars ($_________), on September 1, 2033, in any coin or currency of the United States of America which at the time of such payment shall be legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof in like coin or currency to the registered owner hereof at such rate per annum on each interest payment date (hereinafter defined) as shall cause the amount of interest payable on such interest payment date on the Bonds of this Series (hereinafter defined) to equal the amount of interest payable on such interest payment date on the Revenue Bonds (hereinafter defined). Such interest shall be payable on the same dates as interest is payable on said Revenue Bonds (each such date hereinafter called an "interest payment date"), until maturity or redemption of this Bond, or, if the Company shall default in the payment of the principal due on this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in the Indenture (hereinafter defined). The amount of interest payable on each interest payment date shall be computed on the same basis as the corresponding amount is computed on the Revenue Bonds, provided, however, that the aggregate amount of interest payable on any interest payment date shall not exceed an amount which results in an interest rate of more than 10% per annum on the aggregate principal amount of the Bonds of this Series outstanding from time to time. Except as hereinafter provided, this Bond shall bear interest (a) from the interest payment date next preceding the date of this Bond to which interest has been paid, or (b) if the date of this Bond is an interest payment date to which interest has been paid, then from such date, or (c) if no interest has been paid on this Bond, then from the date of initial issue. This Bond is one of the Bonds of the Company, known as its First Mortgage Bonds, issued and to be issued in one or more series under and equally and ratably secured (except as any sinking, amortization, improvement or other fund, established in accordance with the provisions of said Indenture, may afford additional security for the Bonds of any particular series) by a certain Indenture of Mortgage and Deed of Trust, dated as of April 1, 1947 (hereinafter called the "Original Indenture"), made by the Company to The Chase National Bank of the City of New York (The Chase Manhattan Bank, successor), as Trustee (hereinafter called the "Trustee"), and by certain indentures supplemental thereto, including the Fifty-first Supplemental Indenture dated as of September 1, 2000 (the Original Indenture and said indentures supplemental thereto herein collectively called the "Indenture" and said Fifty-first Supplemental Indenture hereinafter called the "Supplemental Indenture"), to which Indenture reference is hereby made for a description of the property mortgaged, the nature and extent of the security, the rights and limitations of rights of the Company, the Trustee and the holders of said Bonds and of the coupons appurtenant to coupon Bonds under the Indenture and the terms and conditions upon which said Bonds are and are to be issued and secured, to all of the provisions of which Indenture and of all such supplemental indentures in respect of such security, including the provisions of the Indenture permitting the issue of Bonds of any series for property which, under the restrictions and limitations therein specified, may be subject to liens prior to the lien of the Indenture, the holder, by accepting this Bond, assents. To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said Bonds and coupons (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company, by the holders of at least 75% in aggregate principal amount of the Bonds then outstanding, such percentage being determined as provided in the Indenture; provided, however, that in case such changes and modifications affect one or more but less than all series of Bonds then outstanding, they shall be required to be adopted only by the affirmative vote of the holders of at least 75% in aggregate principal amount of outstanding Bonds of such one or more series so affected; and further provided, that without the consent of the holder hereof no such change or modification shall be made which will extend the time of payment of the principal of, or of the interest or premium, if any, on this Bond or reduce the principal amount hereof or the rate of interest or the premium, if any, hereon, or affect any other modification of the terms of payment of such principal or interest or premium, if any, or will permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture on any of the mortgaged property, or will deprive the holder hereof of the benefit of a lien upon the mortgaged property for the security of this Bond, or will reduce the percentage of Bonds required for the adoption of changes or modifications as aforesaid. This Bond is one of a series of Bonds designated as the First Mortgage Bonds, Pledge Series C of 2000 due 2033, of the Company (herein called the "Bonds of this Series") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $30,900,000, and is issued under and secured by the Supplemental Indenture. The Bonds of this Series have been issued by the Company to the Insurer to (i) provide for the payment of the Company's obligations to make payments to the Insurer under the Insurance Agreement and (ii) provide to the Insurer the benefits of the security provided for the Bonds of this Series. The Insurance Agreement has been entered into by the Company in connection with the issuance by the Insurer of a municipal bond insurance policy (the "Policy") in favor of the Ohio Water Development Authority (the "Authority") insuring the payment of the principal of and interest on $30,900,000 aggregate amount of the Authority's Pollution Control Revenue Refunding Bonds, Series 2000-B (the Toledo Edison Company Project) (the "Revenue Bonds"). Payments made by the Company of principal and interest on the Bonds of this Series are intended to be sufficient to reimburse the Insurer for any payments of principal and interest made by the Insurer on the Revenue Bonds pursuant to the Policy. The Bonds of this Series are not transferable except (i) as required to effect an assignment to a successor of the Insurer under the Insurance Agreement or (ii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company. The Company's obligation to make payments with respect to the principal of and/or interest on the Bonds of this Series shall be fully or partially satisfied and discharged to the extent that, at the time any such payment shall be due, the corresponding amount then due of principal of and/or interest on the Revenue Bonds shall have been fully or partially paid (other than by the application of the proceeds of any payment by the Insurer under the Policy), as the case may be, or there shall have been deposited with the Trustee for the Revenue bonds trust funds sufficient to fully or partially pay, as the case may be, the corresponding amount then due of principal of and/or interest on the Revenue Bonds (other than by the application of the proceeds of any payment by the Insurer under the Policy). Notwithstanding anything contained herein or in the Indenture to the contrary, the Company shall be obligated to make payments with respect to the principal of and/or interest on the Bonds of this Series only to the extent that the Insurer has made a payment with respect to the Revenue Bonds under the Policy. Upon payment of the principal of and interest due on the Revenue Bonds, whether at maturity or prior to maturity by acceleration, redemption or otherwise, or upon provision for the payment thereof having been made in accordance with the indenture under which the Revenue Bonds are issued (other than by the application of the proceeds of any payment by the Insurer under the Policy), the Bonds of this Series in a principal amount equal to the principal amount of Revenue Bonds so paid or for which such provision for payment has been made shall be deemed fully paid, satisfied and discharged and the obligations of the Company thereunder shall be terminated and such Bonds of this Series shall be surrendered to and canceled by the Trustee. From and after the Release Date (as defined in the Insurance Agreement), the Bonds of this Series shall be deemed fully paid, satisfied and discharged and the obligation of the Company thereunder shall be terminated. On the Release Date, the Bonds of this Series shall be surrendered to and canceled by the Trustee. The Bonds of this Series are subject to mandatory redemption, in whole or in part, as the case may be, on each date that Revenue Bonds are to be redeemed. The principal amount of the Bonds of this Series to be redeemed on any such date shall be equal to the principal amount of Revenue Bonds called for redemption on that date. All redemptions of Bonds of this Series shall be at 100% of the principal amount thereof, plus accrued interest to the redemption date. The principal of this Bond may be declared or may become due before the maturity hereof, on the conditions, in the manner and at the times set forth in the Indenture, upon the happening of a default as therein defined. No recourse under or upon any covenant or obligation of the Indenture, or of any indenture supplemental thereto, or of this Bond, for the payment of the principal of or the interest on this Bond, or for any claim based thereon, or otherwise in any manner in respect thereof, shall be had against any incorporator, subscriber to the capital stock, stockholder, officer or director, as such, of the Company, whether former, present or future, either directly or indirectly through the Company or any predecessor or successor corporation or the Trustee, by the enforcement of any subscription to capital stock, assessment or otherwise, or by any legal or equitable proceeding by virtue of any constitution, statute, or otherwise (including, without limiting the generality of the foregoing, any proceeding to enforce any claimed liability of stockholders of the Company based upon any theory of disregarding the corporate entity of the Company or upon any theory that the Company was acting as the agent or instrumentality of the stockholders), any and all such liability of incorporators, stockholders, subscribers, officers and directors, as such, being released by the holder hereof, by the acceptance of this Bond, and being likewise waived and released by the terms of the Indenture. This Bond shall not be valid or become obligatory for any purpose until the certificate of authentication endorsed hereon shall have been signed by The Chase Manhattan Bank or its successor, as Trustee under the Indenture. IN WITNESS WHEREOF, THE TOLEDO EDISON COMPANY has caused this Bond to be signed in its name by its President or a Vice-President and its corporate seal to be impressed or imprinted hereon and attested by its Corporate Secretary or an Assistant Corporate Secretary. Dated THE TOLEDO EDISON COMPANY By --------------------------------------- Vice President Attest: - ------------------------------- Corporate Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Bond is one of the Bonds of the series designated herein, described in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, AS TRUSTEE By --------------------------------------- Authorized Officer [END OF FORM OF BOND OF 2000 PLEDGE SERIES C] All conditions and requirements necessary to make this Supplemental Indenture a valid, legal and binding instrument in accordance with its terms and to make the Bonds of 2000 Pledge Series C, when duly executed by the Company and authenticated and delivered by the Trustee, and duly issued, the valid, binding and legal obligations of the Company, have been done and performed, and the execution and delivery of this Supplemental Indenture have been in all respects duly authorized. NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That The Toledo Edison Company, the Company herein named, in consideration of the premises and of One Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, does hereby covenant and agree to and with the Trustee and its successors in the trust under the Indenture, for the benefit of those who shall hold the bonds to be issued hereunder and thereunder, as hereinafter provided, as follows: ARTICLE I CREATION AND DESCRIPTION OF BONDS OF 2000 PLEDGE SERIES C SECTION 1. A new series of bonds to be issued under and secured by the Indenture is hereby created, to be designated as "First Mortgage Bonds, Pledge Series C of 2000 due 2033" (such bonds herein referred to as the "Bonds of 2000 Pledge Series C"). The Bonds of 2000 Pledge Series C shall be limited to an aggregate principal amount of $30,900,000. The Bonds of 2000 Pledge Series C shall be substantially in the form hereinbefore recited. SECTION 2. The principal of all Bonds of 2000 Pledge Series C shall be payable on September 1, 2033, unless earlier redeemed, and shall bear interest from the time hereinafter provided at such rate per annum on each interest payment date (hereinafter defined) as shall cause the amount of interest payable on each interest payment date on the Bonds of 2000 Pledge Series C to equal the amount of interest payable on such interest payment date on the Revenue Bonds. Such interest shall be payable on the same dates as interest is payable on the Revenue Bonds (each such date herein called an "interest payment date"), until the maturity or redemption of the Bonds of 2000 Pledge Series C, or, in the case of any default by the Company in the payment of the principal due on any such Bonds, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in the Indenture. The amount of interest payable on each interest payment date shall be computed on the same basis as the corresponding amount is computed on the Revenue Bonds, provided, however, that the aggregate amount of interest payable on any interest payment date shall not exceed an amount which results in an interest rate of more than 10% per annum on the aggregate principal amount of the Bonds of 2000 Pledge Series C outstanding from time to time. Except as hereinafter provided, each Bond of 2000 Pledge Series C shall bear interest (a) from the interest payment date next preceding the date of such Bond to which interest has been paid, or (b) if the date of such Bond is an interest payment date to which interest has been paid, then from such date, or (c) if no interest has been paid thereon, then from the date of initial issue. The Trustee may rely upon the certification of the Insurer of the interest rate of, interest payment dates of and basis on which interest is computed for, the Revenue Bonds as necessary to enable the Trustee to determine for the Bonds of 2000 Pledge Series C their corresponding interest rate, interest payment dates and basis on which interest shall be computed and with respect to its payments under the Policy. SECTION 3. The Bonds of 2000 Pledge Series C shall be payable as to principal and interest at the office or agency of the Company in the City of Akron, State of Ohio; and principal and interest shall be payable in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. SECTION 4. The Bonds of 2000 Pledge Series C shall be issued only as fully registered Bonds in the denominations of $1,000 or any higher multiple of $1.00. SECTION 5. Except as may be necessary to comply with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company, the Bonds of 2000 Pledge Series C shall be transferable only to a successor to Ambac Assurance Corporation under the Insurance Agreement in the manner and upon the terms set forth in ss. 2.05 of the Original Indenture, but notwithstanding the provisions of ss. 2.08 of the Original Indenture, no charge shall be made upon any transfer or exchange of Bonds of 2000 Pledge Series C other than for any tax or taxes or other governmental charge required to be paid by the Company. SECTION 6. The Company's obligation to pay the principal of or interest on the Bonds of 2000 Pledge Series C, shall be fully or partially satisfied as stated in the form of the Bonds of the 2000 Pledge Series C hereinbefore recited. SECTION 7. The Bonds of 2000 Pledge Series C may be executed by the Company and delivered to the Trustee and, upon compliance with all applicable provisions and requirements of the Original Indenture in respect thereof, shall be authenticated by the Trustee and delivered (without awaiting the filing or recording of this Supplemental Indenture) in accordance with the written order or orders of the Company. SECTION 8. The Bonds of 2000 Pledge Series C shall be redeemed by the Company in whole or in part at any time prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus any accrued and unpaid interest to the redemption date as stated in the form of the Bonds of the 2000 Pledge Series C hereinbefore recited. ARTICLE II THE TRUSTEE The Trustee accepts the trusts created by this Supplemental Indenture upon the terms and conditions in the Original Indenture and in this Supplemental Indenture set forth. The recitals in this Supplemental Indenture are made by the Company only and not by the Trustee. Each and every term and condition contained in Article 13 of the Original Indenture shall apply to this Supplemental Indenture with the same force and effect as if the same were herein set forth in full, with such omissions, variations and modifications thereof as may be appropriate to make the same conform to this Supplemental Indenture. For purposes of this Supplemental Indenture (a) the Trustee may conclusively rely and shall be protected in acting upon a written certificate of, the Insurer as to the interest rate of, interest payment dates of and basis on which interest is computed for, the Revenue Bonds and with respect to its payments under the Policy, or any officer's certificate or opinion of counsel, as to the truth of the statements and the correctness of the opinions expressed therein, without independent investigation or verification thereof, subject to Article 13 of the Indenture and (b) a written certificate of, the Insurer shall mean a written certificate executed by the president, any vice president or any authorized officer of the Insurer. ARTICLE iII MISCELLANEOUS PROVISIONS SECTION 1. The Original Indenture, as heretofore supplemented, is in all respects ratified and confirmed, and the Original Indenture, this Supplemental Indenture and all other indentures supplemental to the Original Indenture shall be read, taken and construed as one and the same instrument. Neither the execution of this Supplemental Indenture nor anything herein contained shall be construed to impair the lien of the Indenture on any of the property subject thereto, and such lien shall remain in full force and effect as security for all bonds now outstanding or hereafter issued under the Indenture. All covenants and provisions of the Original Indenture, except as modified by this Supplemental Indenture and all other indentures supplemental to the Original Indenture, shall continue in full force and effect for the respective periods of time therein specified, and this Supplemental Indenture shall form part of the Indenture. All terms defined in Article 1 of the Original Indenture shall, for all purposes of this Supplemental Indenture, have the meanings in said Article 1 specified, except as modified by this Supplemental Indenture and all other indentures supplemental to the Original Indenture and unless the context otherwise requires. SECTION 2. This Supplemental Indenture may be simultaneously executed in any number of counterparts, and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. IN WITNESS WHEREOF, The Toledo Edison Company has caused its corporate name to be hereunto affixed and this instrument to be signed by its President or a Vice President and its corporate seal to be hereunto affixed and attested by its Corporate Secretary or an Assistant Corporate Secretary for and in its behalf and The Chase Manhattan Bank, as Trustee, in evidence of its acceptance of the trust hereby created, has caused its corporate name to be hereunto affixed, this instrument to be signed by its President or a Vice President and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary or any other authorized officer for and on its behalf, all as of the day and year first above written. THE TOLEDO EDISON COMPANY By ------------------------------------ Vice President [SEAL] Attest: ------------------------- Corporate Secretary Signed, sealed and acknowledged on behalf of THE TOLEDO EDISON COMPANY in the presence of - ---------------------------------- Edward J. Udovich - ---------------------------------- Julie A. Phillips As witnesses THE CHASE MANHATTAN BANK, AS TRUSTEE By --------------------------------------- Vice President Attest: ------------------------- Signed, sealed and acknowledged on behalf of THE CHASE MANHATTAN BANK in the presence of [SEAL] - --------------------------------------- - --------------------------------------- As witnesses STATE OF OHIO ) ) ss.: COUNTY OF SUMMIT ) On this 18th day of September, 2000, before me personally appeared Richard H. Marsh and Nancy C. Ashcom to me personally known, who being by me severally duly sworn, did say that they are a Vice President and the Corporate Secretary, respectively, of The Toledo Edison Company, that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors; and said officers severally acknowledged said instrument to be the free act and deed of said corporation. [SEAL] --------------------------------- Susie M. Hoisten, Notary Public Residence - Summit County State Wide Jurisdiction, Ohio My Commission Expires Nov. 19, 2001 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this ___ day of September, 2000 before me personally appeared ____________ and _____________ to me personally known, who being by me severally duly sworn, did say that they are a Vice President and an ______________, respectively, of The Chase Manhattan Bank, that the seal affixed to the foregoing instrument is the corporate seal of said Corporation and that said instrument was signed and sealed in behalf of said a Corporation by authority of its Board of Directors; and said officers severally acknowledged said instrument to be the free act and deed of said Corporation. [SEAL] --------------------------- Notary Public This instrument was prepared by: FirstEnergy Corp. 76 South Main Street Akron, Ohio 44308 EX-12 37 ex12-4te.txt FIXED CHARGE RATIO - TE
EXHIBIT 12.4 Page 1 THE TOLEDO EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ------------------------------------------------ Jan 1- Nov. 8- Nov. 7, Dec. 31, 1997 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $ 41,769 | $ 7,616 $106,582 $ 99,945 $137,233 $ 62,911 Interest and other charges, before reduction | for amounts capitalized.......................... 84,637 | 13,786 88,263 78,496 72,055 62,283 Provision for income taxes......................... 33,921 | 5,782 72,696 56,821 76,991 39,642 Interest element of rentals charged to income (a).. 87,850 | 14,945 100,245 98,445 96,358 92,108 -------- | ------- -------- -------- -------- -------- Earnings as defined.............................. $248,177 | $42,129 $367,786 $333,707 $382,637 $256,944 ======== | ======= ======== ======== ======== ======== | FIXED CHARGES AS DEFINED IN REGULATION S-K: | Interest expense................................... $ 84,637 | $13,786 $ 88,263 $ 78,496 $ 72,055 $ 62,283 Interest element of rentals charged to income (a).. 87,850 | 14,945 100,245 98,445 96,358 92,108 -------- | ------- -------- -------- -------- -------- Fixed charges as defined......................... $172,487 | $28,731 $188,508 $176,941 $168,413 $154,391 ======== | ======= ======== ======== ======== ======== | CONSOLIDATED RATIO OF EARNINGS TO FIXED | CHARGES............................................ 1.44 | 1.47 1.95 1.89 2.27 1.66 ==== | ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest component of Beaver Valley and Bruce Mansfield sale and leaseback rentals, leased nuclear fuel in the reactor, and other miscellaneous rentals.
EXHIBIT 12.4 Page 2 THE TOLEDO EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) Year Ended December 31, ------------------------------------------------ Jan 1- Nov. 8- Nov. 7, Dec. 31, 1997 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) | EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $ 41,769 | $ 7,616 $106,582 $ 99,945 $137,233 $ 62,911 Interest and other charges, before reduction for | amounts capitalized................................ 84,637 | 13,786 88,263 78,496 72,055 62,283 Provision for income taxes......................... 33,921 | 5,782 72,696 56,821 76,991 39,642 Interest element of rentals charged to income (a).. 87,850 | 14,945 100,245 98,445 96,358 92,108 -------- | ------- -------- -------- -------- -------- Earnings as defined.............................. $248,177 | $42,129 $367,786 $333,707 $382,637 $256,944 ======== | ======= ======== ======== ======== ======== | FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS | PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS): | Interest expense................................... $ 84,637 | $13,786 $ 88,263 $ 78,496 $ 72,055 $ 62,283 Preferred stock dividend requirements.............. 19,435 | -- 13,609 16,238 16,247 16,135 Adjustments to preferred stock dividends | to state on a pre-income tax basis............... 15,783 | -- 8,335 10,363 10,143 10,167 Interest element of rentals charged to income (a).. 87,850 | 14,945 100,245 98,445 96,358 92,108 -------- | ------- -------- -------- -------- -------- Fixed charges as defined plus preferred stock | dividend requirements (pre-income tax basis)... $207,705 | $28,731 $210,452 $203,542 $194,803 $180,693 ======== | ======= ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS | PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS)............................. 1.19 | 1.47 1.75 1.64 1.96 1.42 ==== | ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest component of Beaver Valley and Bruce Mansfield sale and leaseback rentals, leased nuclear fuel in the reactor, and other miscellaneous rentals.
EX-13 38 ex13-3te.txt ANNUAL REPORT - TE THE TOLEDO EDISON COMPANY 2001 ANNUAL REPORT TO STOCKHOLDERS The Toledo Edison Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. It engages in the generation, distribution and sale of electric energy in an area of approximately 2,500 square miles in northwestern Ohio. It also engages in the sale, purchase and interchange of electric energy with other electric companies. The area it serves has a population of approximately 0.8 million. Contents Page - -------- ---- Selected Financial Data.......................................... 1 Management's Discussion and Analysis............................. 2-7 Consolidated Statements of Income................................ 8 Consolidated Balance Sheets...................................... 9 Consolidated Statements of Capitalization........................ 10-11 Consolidated Statements of Common Stockholder's Equity........... 12 Consolidated Statements of Preferred Stock....................... 12 Consolidated Statements of Cash Flows............................ 13 Consolidated Statements of Taxes................................. 14 Notes to Consolidated Financial Statements....................... 15-24 Report of Independent Public Accountants......................... 25
THE TOLEDO EDISON COMPANY SELECTED FINANCIAL DATA Nov. 8- Jan. 1- 2001 2000 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) GENERAL FINANCIAL INFORMATION: Operating Revenues............. $1,094,903 $ 954,947 $ 921,159 $ 957,037 $ 122,669 | $ 772,707 ========== ========== ========== ========== ========== | ========= | Operating Income............... $ 105,484 $ 193,414 $ 163,772 $ 180,261 $ 19,055 | $ 123,282 ========== ========== ========== ========== ========== | ========= | Income Before Extraordinary | Item.......................... $ 62,911 $ 137,233 $ 99,945 $ 106,582 $ 7,616 | $ 41,769 ========== ========== ========== ========== ========== | ========= | Net Income (Loss).............. $ 62,911 $ 137,233 $ 99,945 $ 106,582 $ 7,616 | $(150,132) ========== ========== ========== ========== ========== | ========= | Earnings (Loss) on Common Stock $ 46,776 $ 120,986 $ 83,707 $ 92,972 $ 7,616 | $(169,567) ========== ========== ========== ========== ========== | ========= | Total Assets................... $2,572,118 $2,652,267 $2,666,928 $2,768,765 $2,758,152 | ========== ========== ========== ========== ========== | | CAPITALIZATION: | Common Stockholder's Equity.... $ 637,665 $ 605,587 $ 551,704 $ 575,692 $ 531,650 | Preferred Stock- | Not Subject to Mandatory | Redemption.................. 126,000 210,000 210,000 210,000 210,000 | Subject to Mandatory Redemption -- -- -- -- 1,690 | Long-Term Debt................. 646,174 944,193 981,029 1,083,666 1,210,190 | ---------- ---------- ---------- ---------- ---------- | Total Capitalization........... $1,409,839 $1,759,780 $1,742,733 $1,869,358 $1,953,530 | ========== ========== ========== ========== ========== | | CAPITALIZATION RATIOS: | Common Stockholder's Equity.... 45.2% 34.4% 31.7% 30.8% 27.2%| Preferred Stock- | Not Subject to Mandatory | Redemption.................. 9.0 11.9 12.0 11.2 10.8 | Subject to Mandatory Redemption -- -- -- -- 0.1 | Long-Term Debt................. 45.8 53.7 56.3 58.0 61.9 | ----- ----- ----- ----- ----- | Total Capitalization........... 100.0% 100.0% 100.0% 100.0% 100.0%| ===== ===== ===== ===== ===== | | DISTRIBUTION KILOWATT-HOUR | DELIVERIES (Millions): | Residential.................... 2,258 2,183 2,127 2,252 355 | 1,718 Commercial..................... 2,667 2,380 2,236 2,425 284 | 1,498 Industrial..................... 5,397 5,595 5,449 5,317 847 | 4,003 Other.......................... 61 49 54 63 79 | 413 ------ ------ ------ ------ ----- | ----- Total.......................... 10,383 10,207 9,866 10,057 1,565 | 7,632 ====== ====== ===== ====== ===== | ===== | CUSTOMERS SERVED: | Residential.................... 270,589 269,071 266,900 265,237 262,501 | Commercial..................... 31,680 31,413 32,481 31,982 29,367 | Industrial..................... 1,898 1,917 1,937 1,954 1,835 | Other.......................... 443 598 398 359 347 | ------- ------- ------- ------- ------- | Total.......................... 304,610 302,999 301,716 299,532 294,050 | ======= ======= ======= ======= ======= | | Number of Employees (a)........ 507 539 977 997 1,532 | | (a) Reduction in 2000 reflects transfer of responsibility for generation operations to FirstEnergy Corp.'s competitive services unit.
THE TOLEDO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), and the availability and cost of capital. Corporate Separation - -------------------- Beginning on January 1, 2001, Ohio customers were able to choose their electricity suppliers as a result of legislation which restructured the electric utility industry. That legislation 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 Public Utilities Commission of Ohio (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. We are included in the utility services unit and continue to deliver power to homes and businesses through our existing distribution system and maintain the "provider of last resort" (PLR) obligations under our rate plan. As a result of the transition plan, FirstEnergy's electric utility operating companies (EUOC) entered into power supply agreements whereby FirstEnergy Solutions Corp. (FES) purchases all of the EUOC nuclear generation, as well as generation from leased fossil generating facilities. FirstEnergy Generation Corp. (FGCO), a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. We are a "full requirements" customer of FES to enable us to meet our PLR responsibilities in our service area. We continue to provide power directly to wholesale customers under previously negotiated contracts as well as to alternative energy suppliers as part of our market support generation of 160 megawatts (129 megawatts committed as of December 31, 2001). The effect on our reported results of operations during 2001 from FirstEnergy's corporate separation plan and our sale of transmission assets to American Transmission Systems, Inc. (ATSI) in September 2000, are summarized in the following tables: Corporate Restructuring - 2001 Income Statement Effects - -------------------------------------------------------------------------------- Increase (Decrease) Corporate Separation ATSI Total ---------- ---- ----- (In millions) Operating Revenues: Power supply agreement with FES..... $180.9 $ -- $180.9 Generating units rent............... 14.0 -- 14.0 Ground lease with ATSI.............. -- (0.2) (0.2) - ------------------------------------------------------------------------- Total Operating Revenues Effect..... $194.9 $(0.2) $194.7 ========================================================================= Operating Expenses and Taxes: Fossil fuel costs................... $(39.8)(a) $ -- $(39.8) Purchased power costs............... 388.0 (b) -- 388.0 Other operating costs............... (21.6)(a) 7.6 (d) (14.0) Provision for depreciation and amortization -- (2.7)(e) (2.7) General taxes....................... (2.0)(c) (3.3)(e) (5.3) Income taxes........................ (50.4) 0.1 (50.3) - ------------------------------------------------------------------------- Total Operating Expenses Effect..... $274.2 $ 1.7 $275.9 ========================================================================= Other Income.......................... $ -- $ 2.0 (f) $ 2.0 ========================================================================= (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 - --------------------- Earnings on common stock in 2001 decreased 61% to $46.8 million from $121.0 million in 2000. Excluding the effects shown in the table above, earnings on common stock increased by 4.1% in 2001 from 2000, being favorably affected by reduced operating expenses and taxes, and lower net interest charges, which were substantially offset by reduced operating revenues. In 2000, earnings on common stock increased 45% to $121.0 million from $83.7 million in 1999. Results in 2000 were favorably affected by higher operating revenues and lower fuel and purchased power costs, other operating costs and net interest charges. Excluding the effects shown in the table above, operating revenues decreased by $54.7 million or 5.7% in 2001 from 2000 following a $33.8 million increase in 2000 from the prior year. Customer choice in Ohio and the influence of a declining national economy on our regional business activity combined to lower operating revenues. Sales of electric generation provided by other suppliers in our service area represented 5.6% of total energy delivered in 2001. Retail generation sales declined in all customer categories resulting in an overall 4.0% reduction in kilowatt-hour sales from the prior year. Distribution deliveries increased 1.7% in 2001 from the prior year despite the weaker national economic environment. As part of Ohio's electric utility restructuring law, the implementation of a 5% reduction in generation charges for residential customers reduced operating revenues by approximately $8.0 million in 2001, compared to 2000. Operating revenues were also lower in 2001 from the prior year due to the absence of revenues associated with the low-income payment plan now administered by the Ohio Department of Development; there was also a corresponding reduction in other operating costs associated with that change. Revenues from kilowatt-hour sales to wholesale customers declined $36.5 million in 2001 from last year, with a corresponding 37.2% reduction in kilowatt-hour sales. In 2000, additional kilowatt-hour sales to retail customers, which were partially offset by lower average retail unit prices, and sales to the wholesale market, were the primary contributors to higher operating revenues, compared to 1999. Sales to wholesale customers in 2000 benefited from additional available generating capacity. Kilowatt-hour sales to residential, commercial and industrial customers were all higher in 2000, compared to the preceding year. Transmission service revenues also contributed to the increase in operating revenues. Changes in KWH Sales 2001 2000 ------------------------------------------------------------------ Increase (Decrease) Electric Generation: Retail................................ (4.0)% 3.5% Wholesale............................. (37.2)%* 30.1% ------------------------------------------------------------------ Total Electric Generation Sales......... (11.8)% 8.7% ================================================================== Distribution Deliveries: Residential........................... 3.4% 2.6% Commercial and industrial............. 1.1% 3.8% ------------------------------------------------------------------ Total Distribution Deliveries........... 1.7% 3.5% ================================================================== * Excluding PSA kilowatt-hour sales related to restructuring. Operating Expenses and Taxes Total operating expenses and taxes increased by $227.9 million in 2001 and by $4.2 million in 2000 from the prior year. Excluding the effects of restructuring, total 2001 operating expenses and taxes were $48.0 million lower than the prior year. The following table presents changes from the prior year by expense category excluding the impact of restructuring. Operating Expenses and Taxes - Changes 2001 2000 -------------------------------------------------------------------- Increase (Decrease) (In millions) Fuel and purchased power...................... $(49.8) $(10.1) Nuclear operating costs....................... (16.5) 3.0 Other operating costs......................... 8.9 (15.1) --------------------------------------------------------------------- Total operation and maintenance expenses.... 57.4 (22.2) Provision for depreciation and amortization... 28.0 1.2 General taxes................................. (27.7) 3.0 Income taxes.................................. 9.1 22.2 -------------------------------------------------------------------- Total operating expenses and taxes.......... $(48.0) $ 4.2 ==================================================================== The following discussion excludes the effects shown in the preceding table related to the impact of restructuring. The decrease in fuel and purchased power costs in 2001, compared to 2000, reflects the transfer of fossil operations to FGCO with our power requirements being provided under the PSA. In 2000, fuel and purchased power costs decreased $10.1 million, compared to 1999. A $13.2 million reduction in fuel expense was partially offset by a $3.1 million increase in purchased power costs. The reduction in fuel expense in 2000 from the preceding year occurred despite a 1.4% increase in internal generation. Factors contributing to the lower fuel expense included the expiration of an above-market coal contract at the end of 1999 and continued improvement in coal blending strategies. There was one less nuclear refueling outage in 2001, compared to 2000, resulting in a $16.5 million decrease in nuclear operating costs from the prior year. In 2000, nuclear operating costs increased slightly by $3.0 million, compared to 1999. Higher outage-related costs at the Davis-Besse Plant and Beaver Valley Unit 2 were substantially offset by lower operating costs at the Perry Plant. Other operating costs increased by $8.9 million in 2001 from the prior year reflecting planned maintenance work at the Bruce Mansfield Plant and the absence in 2001 of gains from the sale of emission allowances, offset in part by a reduction in low-income payment plan customer costs and decreased storm damage costs. and the absence of costs incurred in 2000 related to the development of a distribution communications system. In 2000, other operating costs decreased $15.1 million, compared to 1999, principally due to increased gains of $18.9 million realized from the sale of emission allowances in 2000. Depreciation and amortization increased by $28.0 million in 2001 from the prior year due to incremental transition cost amortization under our transition plan, partially offset by new deferrals for shopping incentives. General taxes decreased by $27.7 million in 2001 from 2000 due to reduced property taxes and other state tax changes in connection with the Ohio electric industry restructuring. The reduction in general taxes was partially offset by $6.5 million of new Ohio franchise taxes in 2001, which are classified as state income taxes on the Consolidated Statements of Income. Net Interest Charges Net interest charges continued to trend lower decreasing by $6.6 million in 2001 and by $11.7 million in 2000, compared to the prior year. We continued to redeem our outstanding debt during 2001 -- net redemptions totaled $29.4 million and will result in annualized savings of $2.7 million. Capital Resources and Liquidity - ------------------------------- Through net debt and preferred stock redemptions, we continued to reduce the cost of debt and preferred stock, and improve our financial position in 2001. During 2001, we reduced our total debt by approximately $91 million. Our common stockholder's equity as a percentage of capitalization increased to 45% as of December 31, 2001 from 27% at the end of 1997. We have reduced the average cost of outstanding debt from 9.13% in 1996 to 7.41% in 2001. Following approval of the merger of FirstEnergy and GPU by the New Jersey Board of Public Utilities on September 26, 2001, Standard & Poor's upgraded our credit ratings. Following a period of review and after the Securities and Exchange Commission's approval of the merger on October 29, 2001, Moody's also upgraded our credit ratings. The following table summarizes the changes: Credit Ratings Before and After Upgrade Before Upgrade After Upgrade - ----------------------------------------------------------------------------- Moody's Moody's Standard Investors Standard Investors & Poor's Service & Poor's Service - ----------------------------------------------------------------------------- Corporate/Issuer BB+ Ba1 BBB Baa3 Senior Secured Debt BB+ Baa3 BBB Baa2 Preferred Stock B+ Ba3 BB+ Ba2 We had about $7.9 million of cash and temporary investments and $17.2 million of short-term indebtedness as of December 31, 2001. Under our first mortgage indenture, as of December 31, 2001, we had the capability to issue $415 million of additional first mortgage bonds on the basis of property additions and retired bonds. Based on our earnings in 2001 under the earnings coverage test contained in our charter, we could issue $102.4 million of preferred stock (assuming no additional debt was issued). Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table:
Contractual Obligations - --------------------------------------------------------------------------------------------------------- There- 2002 2003 2004 2005 2006 after Total - ---------------------------------------------------------------------------------------------------------- (In millions) Long-term debt................ $165 $ 96 $215 $ -- $ -- $ 413 $ 889 Short-term borrowings......... 17 -- -- -- -- -- 17 Operating leases*............. 73 76 74 80 82 761 1,146 Unconditional fuel purchases.. 43 23 34 14 -- -- 114 - --------------------------------------------------------------------------------------------------------- Total......................... $298 $195 $323 $ 94 $ 82 $1,174 $2,166 ========================================================================================================= * Operating lease payments are net of capital trust receipts of $395.3 million (see Note 2).
Our capital spending for the period 2002-2006 is expected to be about $228 million (excluding nuclear fuel) of which approximately $72 million applies to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $120 million, of which about $12 million relates to 2002. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $114 million and $22 million, respectively, as the nuclear fuel is consumed. Off balance sheet obligations primarily consist of sale and leaseback arrangements involving the Bruce Mansfield Plant and Beaver Valley Unit 2, which is reflected in the operating lease payments above (see Note 2 - Leases). The present value as of December 31, 2001, of these sale and leaseback operating lease commitments, net of trust investments, total $621 million. We sell substantially all of our retail customer receivables, which provided $103 million of off balance sheet financing as of December 31, 2001. On November 29, 2001, FirstEnergy reached an agreement to sell our 648 MW Bay Shore Plant (with an aggregate net book value of $80 million as of December 31, 2001). The net, after-tax gain from the sale, based on the difference between the sale price of the plant and its fair value as defined in our Ohio restructuring transition plan, will be credited to customers by reducing the transition cost recovery period. The sale is expected to close in mid-2002. Interest Rate Risk - ------------------ Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent risks related to refinancing maturing debt by issuing new debt securities. As discussed in Note 2, our investment in the Shippingport Capital Trust effectively reduces future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 - Utility Plant and Depreciation. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio and debt obligations.
Comparison of Carrying Value to Fair Value - ------------------------------------------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value - -------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income................. $ 20 $20 $ 9 $134 $12 $284 $479 $493 Average interest rate..... 7.6% 7.6% 7.6% 7.8% 7.6% 7.0% 7.3% - ------------------------------------------------------------------------------------------------------------------- Liabilities - ------------------------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate................... $165 $96 $215 $224 $700 $746 Average interest rate .... 8.6% 7.9% 7.8% 7.7% 8.0% Variable rate................ $189 $189 $191 Average interest rate..... 3.4% 3.4% Short-term Borrowings........ $ 17 $ 17 $ 17 Average interest rate..... 3.6% 3.6% - -------------------------------------------------------------------------------------------------------------------
Outlook - ------- Our industry continues to transition to a more competitive environment. We continue to deliver power to homes and businesses through our existing distribution system, which remains regulated. Customer rates have been restructured into separate components to support customer choice. In Ohio, we have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier. Adopting new approaches to regulation and experiencing new forms of competition has created new uncertainties. Regulatory Matters Beginning on January 1, 2001 Ohio customers were able to choose their electricity suppliers. Ohio customer rates were restructured to establish separate charges for transmission, distribution, transition cost recovery and a generation-related component. When one of our customers elects to obtain power from an alternative supplier, we reduce the customer's bill with a "generation shopping credit," based on the regulated generation component plus an incentive, and the customer receives a generation charge from the alternative supplier. We have continuing responsibility to provide energy to our franchise customers as the PLR through December 31, 2005. The transition cost portion of rates provides for recovery of certain amounts not otherwise recoverable in a competitive generation market (such as regulatory assets). Transition costs are paid by all customers whether or not they choose an alternative supplier. Under the PUCO-approved transition plan, we assumed the risk of not recovering up to $80 million of transition revenue if the rate of customers (excluding contracts and full-service accounts) switching from our service to an alternative supplier does not reach 20% for any consecutive twelve-month period by December 31, 2005 - the end of the market development period. As of December 31, 2001, the customer-switching rate, on an annualized basis, implies that our risk of not recovering transition revenue has been reduced to approximately $35 million. We are also committed under the transition agreement to make available 160 MW of our generating capacity to marketers, brokers, and aggregators at set prices, to be used for sales only to retail customers in our service area. Through December 31, 2001, approximately 129 MW of the 160 MW supply commitment had been secured by alternative suppliers. We began accepting customer applications for switching to alternative suppliers on December 8, 2000; as of December 31, 2001 we had been notified that almost 93,000 of our customers requested generation service from other authorized suppliers, including FES, an affiliated company. Environmental Matters We are in compliance with the current sulfur dioxide (SO2) and nitrogen oxide (NOx) reduction requirements under the Clean Air Act Amendments of 1990. In 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions in the future from our Ohio and Pennsylvania facilities. Various regulatory and judicial actions have since sought to further define NOx reduction requirements (see Note 5 - Environmental Matters). We continue to evaluate our compliance plans and other compliance options. Violations of federally approved SO2 regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day a unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. We cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. We have been named as a "potentially responsible party" (PRP) 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. We have accrued a liability of $0.2 million as of December 31, 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. We believe that waste disposal costs will not have a material adverse effect on our financial condition, cash flows, or results of operations. Legal Matters Various lawsuits, claims and proceedings related to our normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to us are described above. Significant Accounting Policies - ------------------------------- We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often requires a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting these specific factors. Our more significant accounting policies are described below. Regulatory Accounting We are subject to regulation that sets the prices (rates) we are permitted to charge our customers based on our costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in Ohio, significant amounts of regulatory assets have been recorded -- $389 million as of December 31, 2001. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future. As disclosed in Note 1 - Regulatory Plans, our full recovery of transition costs is dependent on achieving 20% customer shopping levels in any twelve-month period by December 31, 2005. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hour that have been delivered but not yet been billed through the end of the year. The determination of unbilled revenues requires management to make various estimates including: o Net energy generated or purchased for retail load o Losses of energy over distribution lines o Allocations to distribution companies within the FirstEnergy system o Mix of kilowatt-hour usage by residential, commercial and industrial customers o Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards - ------------------------------------ The Financial Accounting Standards Board (FASB) approved SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 2001. Under SFAS 142, amortization of existing goodwill will cease 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 a preliminary analysis. In 2001, we amortized about $12 million of goodwill. In July 2001, the FASB issued Statement of Financial Accounting Standards No. (SFAS) 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on our accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ (In thousands) OPERATING REVENUES (a)........................................... $1,094,903 $954,947 $921,159 ---------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power...................................... 457,444 159,039 169,153 Nuclear operating costs....................................... 161,532 178,063 175,015 Other operating costs......................................... 151,244 156,286 171,427 ---------- -------- -------- Total operation and maintenance expenses.................... 770,220 493,388 515,595 Provision for depreciation and amortization................... 130,196 104,914 103,725 General taxes................................................. 57,810 90,837 87,862 Income taxes.................................................. 31,193 72,394 50,205 ---------- -------- -------- Total operating expenses and taxes.......................... 989,419 761,533 757,387 ---------- -------- -------- OPERATING INCOME................................................. 105,484 193,414 163,772 OTHER INCOME..................................................... 15,652 8,669 12,744 ---------- -------- -------- INCOME BEFORE NET INTEREST CHARGES............................... 121,136 202,083 176,516 ---------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt.................................... 66,463 72,892 82,204 Allowance for borrowed funds used during construction................................................ (3,848) (6,523) (1,443) Other interest expense (credit)............................... (4,390) (1,519) (4,190) ---------- -------- -------- Net interest charges........................................ 58,225 64,850 76,571 ---------- -------- -------- NET INCOME....................................................... 62,911 137,233 99,945 PREFERRED STOCK DIVIDEND REQUIREMENTS.................................................. 16,135 16,247 16,238 ---------- -------- -------- EARNINGS ON COMMON STOCK......................................... $ 46,776 $120,986 $ 83,707 ========== ======== ======== (a) Includes electric sales to associated companies of $180.9 million, $142.3 million and $123.3 million in 2001, 2000 and 1999, respectively. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service.................................................................... $1,578,943 $1,637,616 Less-Accumulated provision for depreciation................................... 645,865 597,397 ---------- ---------- 933,078 1,040,219 ---------- ---------- Construction work in progress- Electric plant.............................................................. 40,220 73,565 Nuclear fuel................................................................ 19,854 10,720 ---------- ---------- 60,074 84,285 ---------- ---------- 993,152 1,124,504 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust (Note 2)........................................... 262,131 279,836 Nuclear plant decommissioning trusts.......................................... 156,084 132,442 Long-term notes receivable from associated companies.......................... 162,347 39,084 Other......................................................................... 4,248 4,601 ---------- ---------- 584,810 455,963 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents..................................................... 302 1,385 Receivables- Customers................................................................... 5,922 6,618 Associated companies........................................................ 64,667 62,271 Other....................................................................... 9,709 1,572 Notes receivable from associated companies.................................... 7,607 32,617 Materials and supplies, at average cost- Owned....................................................................... 13,996 17,388 Under consignment........................................................... 17,050 21,994 Prepayments and other......................................................... 14,580 27,151 ---------- ---------- 133,833 170,996 ---------- ---------- DEFERRED CHARGES: Regulatory assets............................................................. 388,846 412,682 Goodwill...................................................................... 445,732 458,164 Property taxes................................................................ 23,836 22,916 Other......................................................................... 1,909 7,042 ---------- ---------- 860,323 900,804 ---------- ---------- $2,572,118 $2,652,267 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholder's equity................................................... $ 637,665 $ 605,587 Preferred stock not subject to mandatory redemption........................... 126,000 210,000 Long-term debt................................................................ 646,174 944,193 ---------- ---------- 1,409,839 1,759,780 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock.......................... 347,593 56,230 Accounts payable- Associated companies........................................................ 53,960 36,564 Other....................................................................... 27,418 25,070 Notes payable to associated companies......................................... 17,208 41,936 Accrued taxes................................................................ 39,848 57,519 Accrued interest.............................................................. 19,918 19,946 Other......................................................................... 40,222 49,908 ---------- ---------- 546,167 287,173 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes............................................. 213,145 196,944 Accumulated deferred investment tax credits................................... 31,342 35,174 Nuclear plant decommissioning costs........................................... 162,426 138,784 Pensions and other postretirement benefits.................................... 120,561 119,327 Other......................................................................... 88,638 115,085 ---------- ---------- 616,112 605,314 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 5)............................................................... ---------- ---------- $2,572,118 $2,652,267 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) 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 (Note 3A)...................................................... 113,436 81,358 ---------- ---------- Total common stockholder's equity.............................................. 637,665 605,587 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ------------------ ----------------------- 2001 2000 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3C): Cumulative, $100 par value- Authorized 3,000,000 shares Not Subject to Mandatory Redemption: $ 4.25........................... 160,000 160,000 $104.63 $ 16,740 16,000 16,000 $ 4.56........................... 50,000 50,000 101.00 5,050 5,000 5,000 $ 4.25........................... 100,000 100,000 102.00 10,200 10,000 10,000 $ 8.32........................... 100,000 100,000 102.46 10,246 10,000 10,000 $ 7.76........................... 150,000 150,000 102.44 15,366 15,000 15,000 $ 7.80........................... 150,000 150,000 101.65 15,248 15,000 15,000 $10.00........................... 190,000 190,000 101.00 19,190 19,000 19,000 --------- --------- -------- ---------- ---------- 900,000 900,000 92,040 90,000 90,000 Redemption Within One Year (59,000) --------- --------- -------- ---------- ---------- 900,000 900,000 92,040 31,000 90,000 --------- --------- -------- ---------- ---------- Cumulative, $25 par value- Authorized 12,000,000 shares Not Subject to Mandatory Redemption: $2.21............................. 1,000,000 1,000,000 25.25 25,250 25,000 25,000 $2.365............................ 1,400,000 1,400,000 27.75 38,850 35,000 35,000 Adjustable Series A............... 1,200,000 1,200,000 25.00 30,000 30,000 30,000 Adjustable Series B............... 1,200,000 1,200,000 25.00 30,000 30,000 30,000 --------- --------- -------- ---------- ---------- 4,800,000 4,800,000 124,100 120,000 120,000 Redemption Within One Year.......... (25,000) -- --------- --------- -------- ---------- ---------- 4,800,000 4,800,000 124,100 95,000 120,000 --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption.................... 5,700,000 5,700,000 $216,140 126,000 210,000 ========= ========= ======== ---------- ---------- LONG-TERM DEBT (Note 3D): First mortgage bonds: 8.000% due 2002-2003............................................................... 34,125 34,525 7.875% due 2004.................................................................... 145,000 145,000 ---------- ---------- Total first mortgage bonds........................................................ 179,125 179,525 ---------- ---------- Unsecured notes and debentures: 10.000% due 2002-2010............................................................... 940 970 8.700% due 2002.................................................................... 135,000 135,000 * 4.850% due 2030.................................................................... 34,850 34,850 * 4.000% due 2033.................................................................... 5,700 5,700 * 5.250% due 2033.................................................................... 31,600 31,600 * 5.580% due 2033.................................................................... 18,800 18,800 ---------- ---------- Total unsecured notes and debentures.............................................. 226,890 226,920 ---------- ----------
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd) As of December 31 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT (Cont'd): Secured notes: 8.500% due 2001.................................................................. -- 8,000 9.500% due 2001.................................................................. -- 21,000 8.180% due 2002.................................................................. 17,000 17,000 8.620% due 2002.................................................................. 7,000 7,000 8.650% due 2002.................................................................. 5,000 5,000 7.760% due 2003.................................................................. 5,000 5,000 7.780% due 2003.................................................................. 1,000 1,000 7.820% due 2003.................................................................. 38,400 38,400 7.850% due 2003.................................................................. 15,000 15,000 7.910% due 2003.................................................................. 3,000 3,000 7.670% due 2004.................................................................. 70,000 70,000 7.130% due 2007.................................................................. 30,000 30,000 7.625% due 2020.................................................................. 45,000 45,000 7.750% due 2020.................................................................. 54,000 54,000 9.220% due 2021.................................................................. 15,000 15,000 10.000% due 2021.................................................................. 15,000 15,000 6.875% due 2023.................................................................. 20,200 20,200 8.000% due 2023.................................................................. 30,500 30,500 * 1.900% due 2024.................................................................. 67,300 67,300 6.100% due 2027.................................................................. 10,100 10,100 5.375% due 2028.................................................................. 3,751 3,751 * 1.600% due 2033.................................................................. 30,900 30,900 ---------- ---------- Total secured notes............................................................. 483,151 512,151 ---------- ---------- Capital lease obligations (Note 2)................................................... 263 56,859 ---------- ---------- Net unamortized premium on debt...................................................... 20,338 24,968 ---------- ---------- Long-term debt due within one year................................................... (263,593) (56,230) ---------- ---------- Total long-term debt............................................................ 646,174 944,193 ---------- ---------- TOTAL CAPITALIZATION................................................................. $1,409,839 $1,759,780 ========== ========== * Denotes variable rate issue with December 31, 2001 interest rate shown. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Other Comprehensive Number Par Paid-In Retained Income of Shares Value Capital Earnings ------------- --------- ----- ------- -------- (Dollars in thousands) Balance, January 1, 1999............... 39,133,887 $195,670 $328,559 $ 51,463 Net income.......................... $ 99,945 99,945 ======== Cash dividends on preferred stock... (17,582) Cash dividends on common stock...... (106,351) - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999............. 39,133,887 195,670 328,559 27,475 Net income.......................... $137,233 137,233 ======== Cash dividends on preferred stock... (16,250) Cash dividends on common stock...... (67,100) - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000............. 39,133,887 195,670 328,559 81,358 Net income.......................... $ 62,911 62,911 ======== Cash dividends on preferred stock... (16,133) Cash dividends on common stock...... (14,700) - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001............. 39,133,887 $195,670 $328,559 $113,436 =====================================================================================================================
CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Par Number Par of Shares Value of Shares Value --------- ----- --------- ----- (Dollars in thousands) Balance, January 1, 1999..... 5,700,000 $210,000 16,900 $ 1,690 Redemptions- $100 par $9.375.......... (16,900) (1,690) -------------------------------------------------------------------------------- Balance, December 31, 1999... 5,700,000 210,000 -- -- -------------------------------------------------------------------------------- Balance, December 31, 2000... 5,700,000 210,000 -- -- -------------------------------------------------------------------------------- Balance, December 31, 2001... 5,700,000 $210,000 -- $ -- ================================================================================ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income...................................................... $ 62,911 $137,233 $ 99,945 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization................... 130,196 104,914 103,725 Nuclear fuel and lease amortization........................... 22,222 23,881 25,166 Deferred income taxes, net.................................... 11,897 20,376 27,551 Investment tax credits, net................................... (3,832) (1,827) (1,922) Receivables................................................... (9,837) (6,671) 5,242 Materials and supplies........................................ 8,336 4,093 418 Accounts payable.............................................. 19,744 13,997 (20,898) Other......................................................... (51,781) (38,180) 1,427 --------- -------- -------- Net cash provided from operating activities................. 189,856 257,816 240,654 --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt................................................ -- 96,405 89,330 Short-term borrowings, net.................................... -- 8,060 33,876 Redemptions and Repayments- Preferred stock............................................... -- -- 1,690 Long-term debt................................................ 42,265 200,633 226,695 Short-term borrowings, net.................................... 24,728 -- -- Dividend Payments- Common stock.................................................. 14,700 67,100 106,351 Preferred stock............................................... 16,135 16,247 16,238 --------- -------- -------- Net cash used for financing activities...................... 97,828 179,515 227,768 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions................................................ 112,451 92,860 107,338 Loans to associated companies..................................... 123,438 63,838 -- Loan payments from associated companies........................... (25,185) -- (93,373) Capital trust investments......................................... (17,705) (15,618) (15,308) Sale of assets to associated companies............................ (123,438) (81,014) -- Other............................................................. 23,550 17,162 18,057 --------- -------- -------- Net cash used for investing activities...................... 93,111 77,228 16,714 --------- -------- -------- Net increase (decrease) in cash and cash equivalents.............. (1,083) 1,073 (3,828) Cash and cash equivalents at beginning of year.................... 1,385 312 4,140 --------- -------- -------- Cash and cash equivalents at end of year.......................... $ 302 $ 1,385 $ 312 ========= ======== ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year- Interest (net of amounts capitalized)........................... $ 63,159 $ 71,009 $ 84,538 ========= ======== ======== Income taxes.................................................... $ 33,210 $ 65,553 $ 40,461 ========= ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF TAXES For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ (In thousands) GENERAL TAXES: Real and personal property......................................... $ 23,624 $ 46,302 $ 44,280 Ohio kilowatt-hour excise.......................................... 19,576 -- -- State gross receipts............................................... 12,789 36,813 35,706 Social security and unemployment................................... 1,128 7,220 6,801 Other.............................................................. 693 502 1,075 -------- -------- -------- Total general taxes......................................... $ 57,810 $ 90,837 $ 87,862 ======== ======== ======== PROVISION FOR INCOME TAXES: Currently payable- Federal......................................................... $ 25,640 $ 56,631 $ 29,728 State........................................................... 5,937 1,811 1,489 -------- -------- -------- 31,577 58,442 31,217 -------- -------- -------- Deferred, net- Federal......................................................... 11,736 20,865 27,745 State........................................................... 161 (489) (194) -------- -------- -------- 11,897 20,376 27,551 -------- -------- -------- Investment tax credit amortization................................. (3,832) (1,827) (1,922) -------- -------- -------- Total provision for income taxes............................ $ 39,642 $ 76,991 $ 56,846 ======== ======== ======== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating income................................................... $ 31,193 $ 72,394 $ 50,205 Other income....................................................... 8,449 4,597 6,641 -------- -------- -------- Total provision for income taxes............................ $ 39,642 $ 76,991 $ 56,846 ======== ======== ======== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes...................... $102,553 $214,224 $156,791 ======== ======== ======== Federal income tax expense at statutory rate....................... $ 35,894 $ 74,978 $ 54,877 Increases (reductions) in taxes resulting from- State income taxes, net of federal income tax benefit........... 3,964 859 842 Amortization of investment tax credits.......................... (3,832) (1,827) (1,922) Amortization of tax regulatory assets........................... (2,367) (1,737) (1,735) Amortization of goodwill........................................ 4,351 4,334 4,280 Other, net...................................................... 1,632 384 504 -------- -------- -------- Total provision for income taxes............................ $ 39,642 $ 76,991 $ 56,846 ======== ======== ======== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences......................................... $171,976 $163,537 $195,326 Competitive transition charge...................................... 135,462 70,264 55,006 Unamortized investment tax credits................................. (12,184) (16,689) (18,324) Unused alternative minimum tax credits............................. -- (5,100) (30,055) Deferred gain for asset sale to affiliated company................. 16,305 15,330 -- Other.............................................................. (98,414) (30,398) (29,717) -------- -------- -------- Net deferred income tax liability............................... $213,145 $196,944 $172,236 ======== ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include The Toledo Edison Company (Company) and its 90% owned subsidiary, The Toledo Edison Capital Corporation (TECC). The subsidiary was formed in 1997 to make equity investments in a business trust in connection with the financing transactions related to the Bruce Mansfield Plant sale and leaseback (see Note 2). The Cleveland Electric Illuminating Company (CEI), an affiliate, has a 10% interest in TECC. All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. FirstEnergy holds directly all of the issued and outstanding common shares of its principal electric utility operating subsidiaries, including, the Company, CEI, Ohio Edison Company (OE), American Transmission Systems, Inc. (ATSI), Jersey Central Power & Light Company (JCP&L), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). JCP&L, Met-Ed and Penelec were formerly wholly owned subsidiaries of GPU, Inc. which merged with FirstEnergy on November 7, 2001. The Company follows the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. REVENUES- The Company's principal business is providing electric service to customers in northwestern Ohio. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 2001 or 2000, with respect to any particular segment of the Company's customers. The Company and CEI sell substantially all of their retail customer receivables to Centerior Funding Corp. (CFC), a wholly owned subsidiary of CEI. CFC subsequently transfers the receivables to a trust under an asset-backed securitization agreement. The trust completed private sales of $50 million and $150 million of receivables-backed investor certificates in 2000 and 2001 respectively, in transactions that qualified for sale accounting treatment. CFC's creditors are entitled to be satisfied first out of the proceeds of FirstEnergy's assets. The 2001 private sale was used to repay a 1996 public sale of $150 million of receivables-backed investor certificates which was replaced under an amended securitization agreement. FirstEnergy's retained interest in the pool of receivables held by the trust (34% as of December 31, 2001) is stated at fair value reflecting adjustments for anticipated credit losses. Sensitivity analyses reflecting a 10% and 20% increase in the rate of anticipated credit losses did not significantly affect FirstEnergy's retained interest in the pool of receivables. Collections from receivables previously transferred to the trust were used for the purchase of new receivables from CFC during 2001 and totaled approximately $2.2 billion. As of December 31, 2001, receivables recorded on the Consolidated Balance Sheet were reduced by approximately $103 million due to receivables sold to the trust. The Company and CEI processed receivables for the trust and received servicing fees of approximately $4.5 million ($1.5 million applicable to the Company) in 2001. Expenses associated with the factoring discount related to the sale of receivables were $12 million in 2001. REGULATORY PLAN- Ohio's 1999 electric utility restructuring law allowed Ohio electric customers to select their generation suppliers beginning January 1, 2001, provided for a five percent reduction on the generation portion of residential customers' bills and the opportunity for utilities to recover transition costs, including regulatory assets. Under this law, the PUCO approved FirstEnergy's transition plan in 2000 as modified by a settlement agreement with major parties to the transition plan, which it filed on behalf of the Company, OE and CEI. The settlement agreement included approval for recovery of the amounts of transition costs filed in the transition plan through no later than mid-2007 for the Company, except where a longer period of recovery is provided for in the settlement agreement. The settlement also granted preferred access over FirstEnergy's subsidiaries to nonaffiliated marketers, brokers and aggregators to 160 megawatts of generation capacity through 2005 at established prices for sales to the Company's retail customers. The Company's base electric rates for distribution service under its prior regulatory plan were extended from December 31, 2005 through December 31, 2007. The transition rate credits for customers under its prior regulatory plan were also extended through the Company's transition cost recovery period. 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 resulted in the 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 planned changes in 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 a 5% reduction in the price of generation for residential customers. The Company's 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 period. If the customer shopping goal established in the agreement are not achieved by the end of 2005, the transition cost recovery period could be shortened for the Company to reduce recovery by as much as $80 million, but any such adjustment would be computed on a class-by-class and pro-rata basis. Based on annualized shopping levels as of December 31, 2001, the Company believes that the maximum potential recovery reduction was approximately $35 million. The application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to the Company's generation business was discontinued with the issuance of the PUCO transition plan order. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement that concluded any supplemental regulated cash flows such as a competitive transition charge should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance $53 million of impaired plant investments were recognized by the Company as regulatory assets recoverable as transition costs through future regulatory cash flows. Net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued, were $601 million as of December 31, 2001. All of the Company's regulatory assets are expected to continue to be recovered under provisions of the Ohio transition plan. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for the Company's nuclear generating units which were adjusted to fair value), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annualized composite rate was approximately 3.5% in 2001 and 3.4% in 2000 and 1999. Annual depreciation expense includes approximately $28.5 million for future decommissioning costs applicable to the Company's ownership interests in three nuclear generating units. The 2001 amounts reflected an increase of approximately $18 million from implementing the Company's transition plan in 2001. The Company's share of the future obligation to decommission these units is approximately $456 million in current dollars and (using a 4.0% escalation rate) approximately $1.0 billion in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $139 million for decommissioning through its electric rates from customers through December 31, 2001. The Company has also recognized an estimated liability of approximately $5.9 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required as of January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trust will be recorded as investment income. The Company is currently assessing the new standard and has not yet quantified the impact on its financial statements. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company, together with CEI and OE and its wholly owned subsidiary, Pennsylvania Power Company (Penn), own and/or lease, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 2001 include the following: Utility Accumulated Construction Ownership/ Plant Provision for Work in Leasehold Generating Units in Service Depreciation Progress Interest - ------------------------------------------------------------------------------- (In millions) Bruce Mansfield Units 2 and 3....... $ 46.5 $15.1 $12.3 18.61% Beaver Valley Unit 2.. 0.8 0.3 5.7 19.91% Davis-Besse........... 215.8 36.8 9.2 48.62% Perry................. 338.7 48.6 2.1 19.91% ---------------------------------------------------------------------------- Total............... $601.8 $100.8 $29.3 ============================================================================= The Bruce Mansfield Plant and Beaver Valley Unit 2 are being leased through sale and leaseback transactions (see Note 2) and the above-related amounts represent construction expenditures subsequent to the transaction. NUCLEAR FUEL- Nuclear fuel is recorded at original cost, which includes material, enrichment, fabrication and interest costs incurred prior to reactor load. The Company amortizes the cost of nuclear fuel based on the rate of consumption. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. The Company is included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Company's full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the GPU pension plans were merged with the FirstEnergy plan. The Company uses the projected unit credit method for funding purposes and was not required to make pension contributions during the three years ended December 31, 2001. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1...... $1,506.1 $1,394.1 $ 752.0 $ 608.4 Service cost............................ 34.9 27.4 18.3 11.3 Interest cost........................... 133.3 104.8 64.4 45.7 Plan amendments......................... 3.6 41.3 -- -- Actuarial loss.......................... 123.1 17.3 73.3 121.7 Voluntary early retirement program...... -- 23.4 2.3 -- GPU acquisition......................... 1,878.3 -- 716.9 -- Benefits paid........................... (131.4) (102.2) (45.6) (35.1) ------------------------------------------------------------------------------------------- Benefit obligation as of December 31.... 3,547.9 1,506.1 1,581.6 752.0 ------------------------------------------------------------------------------------------- Change in fair value of plan assets: Fair value of plan assets as of January 1 1,706.0 1,807.5 23.0 4.9 Actual return on plan assets............ 8.1 0.7 12.7 (0.2) Company contribution.................... -- -- 43.3 18.3 GPU acquisition......................... 1,901.0 -- 462.0 -- Benefits paid........................... (131.4) (102.2) (6.0) -- ------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 3,483.7 1,706.0 535.0 23.0 ------------------------------------------------------------------------------------------- Funded status of plan................... (64.2) 199.9 (1,046.6) (729.0) Unrecognized actuarial loss (gain)...... 222.8 (90.9) 212.8 147.3 Unrecognized prior service cost......... 87.9 93.1 17.7 20.9 Unrecognized net transition obligation (asset) -- (2.1) 101.6 110.9 ------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost.......... $ 246.5 $ 200.0 $ (714.5) $(449.9) =========================================================================================== Company's share of prepaid (accrued) benefit cost.......................... $ 1.6 $ 0.9 $ (119.1) $(117.1) =========================================================================================== Assumptions used as of December 31: Discount rate........................... 7.25% 7.75% 7.25% 7.75% Expected long-term return on plan assets 10.25% 10.25% 10.25% 10.25% Rate of compensation increase........... 4.00% 4.00% 4.00% 4.00%
FirstEnergy's net pension and other postretirement benefit costs for the three years ended December 31, 2001 were computed as follows:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 2001 2000 1999 2001 2000 1999 ------------------------------------------------------------------------------------------------------- (In millions) Service cost............................ $ 34.9 $ 27.4 $ 28.3 $18.3 $11.3 $ 9.3 Interest cost........................... 133.3 104.8 102.0 64.4 45.7 40.7 Expected return on plan assets.......... (204.8) (181.0) (168.1) (9.9) (0.5) (0.4) Amortization of transition obligation (asset) (2.1) (7.9) (7.9) 9.2 9.2 9.2 Amortization of prior service cost...... 8.8 5.7 5.7 3.2 3.2 3.3 Recognized net actuarial loss (gain).... -- (9.1) -- 4.9 -- -- Voluntary early retirement program...... 6.1 17.2 -- 2.3 -- -- ------------------------------------------------------------------------------------------------------- Net benefit cost........................ $ (23.8) $ (42.9) $ (40.0) $92.4 $68.9 $62.1 ======================================================================================================= Company's share of net benefit cost..... $ (0.7) $ (12.7) $ (8.3) $ 3.5 $15.1 $12.6 -------------------------------------------------------------------------------------------------------
The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and other income include transactions with affiliated companies, primarily CEI, OE, Penn, ATSI, FirstEnergy Solutions Corp. (FES) and FirstEnergy. The Ohio transition plan, as discussed in the "Regulatory Plans" section, resulted in the corporate separation of FirstEnergy's regulated and unregulated operations in 2001. Unregulated operations under FES now operate the generation businesses of the Company, CEI, OE and Penn. As a result, the Company entered into power supply agreements (PSA) whereby FES purchases all of the Company's nuclear generation and the generation from leased fossil generating facilities and the Company purchases its power from FES to meet its "provider of last resort" obligations. CFC serves as the transferor in connection with the accounts receivable securitization for the Company and CEI. The primary affiliated companies transactions, including the effects of the PSA beginning in 2001, the sale and leaseback of the Company's transmission assets to ATSI in September 2000 and FirstEnergy's providing support services at cost, are as follows: 2001 2000 1999 - ---------------------------------------------------------------------------- (In millions) Operating Revenues: PSA revenues with FES............... $180.9 $ -- $ -- Generating units rent with FES...... 14.0 -- -- Electric sales to CEI............... 97.0 106.8 106.1 Ground lease with ATSI.............. 1.7 1.9 -- Operating Expenses: Purchased power under PSA........... 388.0 -- -- ATSI rent expense................... 17.0 9.4 -- FirstEnergy support services........ 23.8 36.0 59.4 Other Income: Interest income from ATSI........... 3.0 1.0 -- Interest income from FES............ 9.7 -- -- - ---------------------------------------------------------------------------- The Company is selling 150 megawatts of its Beaver Valley Unit 2 leased capacity entitlement to CEI. Operating revenues for this transaction were $97.0 million, $104.0 million and $104.3 million in 2001, 2000 and 1999, respectively. This sale is expected to continue through the end of the lease period. (See Note 2.) SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $1.0 million, $36.1 million and $8.5 million in 2001, 2000 and 1999, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt and investments other than cash and cash equivalents as of December 31:
2001 2000 - ---------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ---------------------------------------------------------------------------------------------------------- (In millions) Long-term debt....................................... $889 $937 $919 $952 Investments other than cash and cash equivalents: Debt securities - Maturity (5-10 years)........................... $123 $127 $ -- $ -- - Maturity (more than 10 years)................... 299 296 316 307 Equity securities................................. 2 2 3 3 All other......................................... 157 157 133 137 - ---------------------------------------------------------------------------------------------------------- $581 $582 $452 $447 ==========================================================================================================
The fair value of long-term debt reflects the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with corresponding changes to the decommissioning liability. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PUCO have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets will continue to be recovered from customers under the Company's transition plan. Based on that plan, the Company continues to bill and collect cost-based rates for its transmission and distribution services, which will remain regulated; accordingly, it is appropriate that the Company continues the application of SFAS 71 to those operations. The Company recognized incremental transition cost recovery aggregating $37 million in accordance with the current Ohio transition plan. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: 2001 2000 --------------------------------------------------------------------------- (In millions) Regulatory transition costs...................... $394.7 $420.5 Loss on reacquired debt.......................... 3.2 3.6 Other............................................ (9.1) (11.4) -------------------------------------------------------------------------- Total..................................... $388.8 $412.7 =========================================================================== 2. LEASES: The Company leases certain generating facilities, office space and other property and equipment under cancelable and noncancelable leases. The Company and CEI sold their ownership interests in Bruce Mansfield Units 1, 2 and 3 and the Company sold a portion of its ownership interest in Beaver Valley Unit 2. In connection with these sales, which were completed in 1987, the Company and CEI entered into operating leases for lease terms of approximately 30 years as co-lessees. During the terms of the leases, the Company and CEI continue to be responsible, to the extent of their combined ownership and leasehold interest, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company and CEI have the right, at the end of the respective basic lease terms, to renew the leases. The Company and CEI also have the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. As co-lessee with CEI, the Company is also obligated for CEI's lease payments. If CEI is unable to make its payments under the Bruce Mansfield Plant lease, the Company would be obligated to make such payments. No such payments have been made on behalf of CEI. (CEI's future minimum lease payments as of December 31, 2001 were approximately $0.2 billion, net of trust cash receipts.) Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 2001 are summarized as follows: 2001 2000 1999 - ----------------------------------------------------------------------------- (In millions) Operating leases Interest element............... $ 55.7 $ 58.7 $ 61.4 Other.......................... 52.4 46.2 45.3 Capital leases Interest element............... 2.5 3.9 5.3 Other.......................... 14.1 24.1 30.4 - --------------------------------------------------------------------------- Total rentals.................. $124.7 $132.9 $142.4 =========================================================================== The future minimum lease payments as of December 31, 2001 are: Operating Leases -------------------------------- Capital Lease Capital Leases Payments Trust Net - ------------------------------------------------------------------------------- (In millions) 2002.......................... $0.3 $ 111.0 $ 37.9 $ 73.1 2003.......................... -- 111.7 36.0 75.7 2004.......................... -- 97.9 24.3 73.6 2005.......................... -- 104.8 24.9 79.9 2006.......................... -- 107.8 25.6 82.2 Years thereafter.............. -- 1,007.9 246.6 761.3 ----------------------------------------------------------------------------- Total minimum lease payments.. 0.3 $1,541.1 $395.3 $1,145.8 ======== ====== ======== Interest portion.............. -- ---------------------------------------- Present value of net minimum lease payments.............. 0.3 Less current portion.......... 0.3 ---------------------------------------- Noncurrent portion............ $-- ======================================== The Company and CEI refinanced high-cost fixed obligations related to their 1987 sale and leaseback transaction for the Bruce Mansfield Plant through a lower cost transaction in June and July 1997. In a June 1997 offering (Offering), the two companies pledged $720 million aggregate principal amount ($145 million for the Company and $575 million for CEI) of first mortgage bonds due through 2007 to a trust as security for the issuance of a like principal amount of secured notes due through 2007. The obligations of the two companies under these secured notes are joint and several. Using available cash, short-term borrowings and the net proceeds from the Offering, the two companies invested $906.5 million ($337.1 million for the Company and $569.4 million for CEI) in a business trust, in June 1997. The trust used these funds in July 1997 to purchase lease notes and redeem all $873.2 million aggregate principal amount of 10-1/4% and 11-1/8% secured lease obligations bonds (SLOBs) due 2003 and 2016. The SLOBs were issued by a special-purpose funding corporation in 1988 on behalf of lessors in the two companies' 1987 sale and leaseback transaction. The Shippingport Capital Trust arrangement effectively reduces lease costs related to that transaction. 3. CAPITALIZATION: (A) RETAINED EARNINGS- The Company has a provision in its mortgage that requires common stock dividends to be paid out of its total balance of retained earnings. The 1997 FirstEnergy merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 8, 1997 merger date. (B) STOCK COMPENSATION PLANS- Employees of the Company participate in stock based plans administered by FirstEnergy which include the Centerior Equity Plan (CE Plan) and FirstEnergy Executive and Director Incentive Compensation Plan (FE Plan). All options are fully vested under the CE Plan, and no further awards are permitted. Outstanding options will expire on or before February 25, 2007. Under the FE Plan, total awards cannot exceed 15 million shares of common stock or their equivalent. Only stock options and restricted stock have been granted, with vesting periods ranging from six months to seven years. Under the Executive Deferred Compensation Plan, covered employees can direct a portion of their Annual Incentive Award and/or Long Term Incentive Award into an unfunded FirstEnergy Stock Account to receive vested stock units. An additional 20% premium is received in the form of stock units based on the amount allocated to the FirstEnergy Stock Account. Dividends are calculated quarterly on stock units outstanding and are paid in the form of additional stock units. Upon withdrawal, stock units are converted to FirstEnergy shares. Payout occurs three years from the date of deferral. The Company continues to apply APB 25, "Accounting for Stock Issued to Employees." As required by SFAS 123, "Accounting for Stock-Based Compensation," the Company has determined pro forma earnings as though the Company had accounted for employee stock options under the fair value method. The weighted average assumptions used in valuing the options and their resulting fair values are as follows: 2001 2000 1999 - -------------------------------------------------------------------------- Valuation assumptions: Expected option term (years) 8.3 7.6 6.4 Expected volatility......... 23.45% 21.77% 20.03% Expected dividend yield..... 5.00% 6.68% 5.97% Risk-free interest rate..... 4.67% 5.28% 5.97% Fair value per option......... $4.97 $2.86 $3.42 - -------------------------------------------------------------------------- The following table summarizes the pro forma effect of applying fair value accounting to the Company's stock options. 2001 2000 1999 - ----------------------------------------------------------------------------- Earnings on Common Stock (000) As Reported................. $46,776 $120,986 $83,707 Pro Forma................... $46,623 $120,778 $83,615 - ----------------------------------------------------------------------------- (C) PREFERRED AND PREFERENCE STOCK- Preferred stock may be redeemed by the Company in whole, or in part, with 30-90 days' notice. The preferred dividend rates on the Company's Series A and Series B shares fluctuate based on prevailing interest rates and market conditions. The dividend rates for these issues averaged 7.00% and 7.05%, respectively, in 2001. The Company exercised its option to redeem all outstanding shares of five series of preferred stock on February 1, 2002 as follows: Series Outstanding Shares Call Price ------------------------------------------------------- $ 7.76 150,000 $102.44 $ 7.80 150,000 $101.65 $ 8.32 100,000 $102.46 $10.00 190,000 $101.00 $ 2.21 1,000,000 $25.25 ------------------------------------------------------- The Company has five million authorized and unissued shares of $25 par value preference stock. (D) LONG-TERM DEBT- The first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company. Based on the amount of bonds authenticated by the Trustee through December 31, 2001, the Company's annual sinking and improvement fund requirements for all bonds issued under the mortgage amounts to $0.4 million. The Company expects to deposit funds in 2002 that will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes against unfunded property additions or against previously retired bonds. This method can result in minor increases in the amount of the annual sinking fund requirement. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) for the next five years are: (In millions) --------------------------------------------- 2002................................. $263.3 2003................................. 101.9 2004................................. 268.7 2005................................. -- 2006................................. -- --------------------------------------------- The Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $68.0 million and a noncancelable municipal bond insurance policy of $30.9 million to pay principal of, or interest on, the pollution control revenue bonds. To the extent that drawings are made under the letters of credit, the Company is entitled to a credit against its obligation to repay those bonds. The Company pays an annual fee of 1.00% of the amounts of the letters of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. The Company and CEI have letters of credit of approximately $222 million in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in May 2002. The letters of credit are secured by first mortgage bonds of the Company and CEI in the proportion of 60% and 40%, respectively (see Note 2). 4. SHORT-TERM BORROWINGS: The Company may borrow from its affiliates on a short-term basis. As of December 31, 2001, the Company had total short-term borrowings of $17.2 million from its affiliates with a weighted average interest rate of approximately 3.6%. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $228 million for property additions and improvements from 2002-2006, of which approximately $72 million is applicable to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $120 million, of which approximately $12 million applies to 2002. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $114 million and $22 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its ownership and leasehold interests in Beaver Valley Unit 2, the Davis Besse Station and the Perry Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other affiliate co-owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $77.9 million per incident but not more than $8.8 million in any one year for each incident. The Company is also insured as to its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $263.4 million of insurance coverage for replacement power costs for its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry. Under these policies, the Company can be assessed a maximum of approximately $15.1 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. In accordance with the Ohio transition plan discussed in "Regulatory Plans" in Note 1, generation operations and any related additional capital expenditures for environmental compliance are the responsibility of FirstEnergy's competitive services business unit. The Company is required to meet federally approved sulfur dioxide (SO2) regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The Environmental Protection Agency (EPA) has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. The Company is in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or using emission allowances. NOx reductions are being achieved through combustion controls and the generation of more electricity at lower-emitting plants. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Company's 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 nineteen states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. State Implementation Plans (SIP) must comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania submitted a SIP that requires compliance with the NOx budgets at the Company's Pennsylvania facilities by May 1, 2003 and Ohio submitted a "draft" SIP that requires compliance with the NOx budgets at the Company's Ohio facilities by May 31, 2004. FirstEnergy continues to evaluate its compliance plans and other compliance options. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals found constitutional and other defects in the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new NAAQS rules regulating ultra-fine particulates but found defects in the new NAAQS rules for ozone and decided that the EPA must revise those rules. The future cost of compliance with these regulations may be substantial and will depend if and how they are ultimately implemented by the states in which the Company operates affected facilities. In 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. The Company has been named as a "potentially responsible party" (PRP) 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. The Company has accrued a liability of $0.2 million as of December 31, 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. The Company believes that waste disposal costs will not have a material adverse effect on its financial condition, cash flows or results of operations. OTHER LEGAL PROCEEDINGS- Various lawsuits, claims and proceedings related to the Company's normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to the Company are described above. 6. SALE OF GENERATING ASSETS: On November 29, 2001, FirstEnergy reached an agreement to sell four coal-fired power plants (with an aggregate net book value of $539 million as of December 31, 2001) totaling 2,535 MW to NRG Energy Inc. (NRG) for $1.5 billion ($1.355 billion in cash and $145 million in debt assumption). The sale includes the 648 MW Bay Shore plant owned by the Company (with an aggregate net book value of $80 million as of December 31, 2001). The net, after-tax gain from the sale, based on the difference between the sale price of the plants and their market price used in our Ohio restructuring transition plan, will be credited to customers by reducing the transition cost recovery period. FirstEnergy also entered into a power purchase agreement (PPA) with NRG. Under the terms of the PPA, NRG is obligated to sell up to 10.5 billion kilowatt-hours of electricity annually, similar to the average annual output of the plants, through 2005. The sale is expected to close in mid-2002. 7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 2001 and 2000.
March 31, June 30, September 30, December 31, Three Months Ended 2001 2001 2001 2001 - ------------------------------------------------------------------------------------------------------------- (In millions) Operating Revenues.......................... $271.6 $263.0 $306.5 $253.8 Operating Expenses and Taxes................ 243.3 229.6 278.9 237.6 - ------------------------------------------------------------------------------------------------------------- Operating Income............................ 28.3 33.4 27.6 16.2 Other Income................................ 3.8 2.2 3.9 5.7 Net Interest Charges........................ 15.9 12.6 15.1 14.6 - ------------------------------------------------------------------------------------------------------------- Net Income.................................. $ 16.2 $ 23.0 $ 16.4 $ 7.3 ============================================================================================================= Earnings on Common Stock.................... $ 12.2 $ 18.9 $ 12.4 $ 3.3 =============================================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 2000 2000 2000 2000 - ------------------------------------------------------------------------------------------------------------- (In millions) Operating Revenues.......................... $217.4 $235.4 $260.8 $241.3 Operating Expenses and Taxes................ 173.5 201.8 188.6 197.6 - ------------------------------------------------------------------------------------------------------------- Operating Income............................ 43.9 33.6 72.2 43.7 Other Income................................ 2.7 2.2 2.0 1.8 Net Interest Charges........................ 17.1 15.2 16.6 16.0 - ------------------------------------------------------------------------------------------------------------- Net Income.................................. $ 29.5 $ 20.6 $ 57.6 $ 29.5 ============================================================================================================= Earnings on Common Stock.................... $ 25.5 $ 16.4 $ 53.6 $ 25.5 =============================================================================================================
Report of Independent Public Accountants To the Stockholders and Board of Directors of The Toledo Edison Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of The Toledo Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Toledo Edison Company and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. EX-21 39 ex21-3te.txt LIST OF SUBS - TE EXHIBIT 21.3 THE TOLEDO EDISON COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 2001 The Toledo Edison Capital Corporation - Incorporated in Delaware Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 2001, is not included in the printed document. EX-99 40 ex99te.txt LETTER TO SEC RE: ARTHUR ANDERSEN - TE Exhibit 99 March 29, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Temporary Note 3T to Article 3 of Regulation S-X Ladies and Gentlemen: In connection with the audit of the consolidated financial statements of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and for the year then ended, Arthur Andersen LLP (Andersen) has issued its report dated March 18, 2002. Andersen's report is included in FirstEnergy's Annual Report on Form 10-K for the year ended December 31, 2001. FirstEnergy has received the following representations from Andersen with respect to their audit: o The FirstEnergy audit was subject to Andersen's quality control system for their U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards. o There was appropriate continuity of Andersen personnel working on the FirstEnergy audit. o There was appropriate availability of national office consultation for the FirstEnergy audit. o There was appropriate availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the FirstEnergy audit. Sincerely, /s/Harvey L. Wagner ---------------------------------- Harvey L. Wagner Vice President and Controller EX-3.(I) 41 ex3-4.txt AMENDED & RESTATED ARTICLES OF INCORP-PENN AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PENNSYLVANIA POWER COMPANY (Effective March 15, 2002) FIRST: The name of the Corporation is PENNSYLVANIA POWER COMPANY (the ----- "Corporation"). SECOND: The purposes for which the Corporation is incorporated shall be to ------ engage in any or all lawful business for which corporations may be incorporated under the provisions of the act of the General Assembly of the Commonwealth of Pennsylvania entitled "An Act authorizing the merger and consolidation of certain corporations" enacted May 3, 1909, as amended, and under all amendments and supplements thereto, or any revision or restatement thereof or any statute enacted to take the place thereof, including, but not limited to, the following purposes: (1) To manufacture, acquire by purchase, lease or otherwise, transmit, distribute, sell and supply electricity to public and private consumers for light, heat and power and any or all other uses. (2) To manufacture, acquire by purchase, lease or otherwise, transmit, distribute, sell and supply steam and hot water for heat and power and any or all other uses. (3) To manufacture, acquire by purchase, lease or otherwise, transmit, distribute, sell and supply cold water and ice for cold storage and refrigerator purposes and any or all other uses. (4) To manufacture, acquire by purchase, lease or otherwise, transmit, distribute, sell and supply natural or artificial gas for light, heat and power and any or all other uses. (5) To acquire, own, maintain, operate and dispose of street and interurban railroads, with all necessary or convenient appurtenances and appliances incidental to the operation of street and interurban railroads, said railroads to be operated by electric or other motive power except steam or animal power, telegraph and telephone lines, and to acquire, own, maintain, operate and dispose of automobiles and busses with all necessary or convenient appurtenances and appliances incidental to the operation of automobiles and busses and to engage in the general business of a common carrier upon its railroad or lines of railway, and telegraph and telephone lines, or with its automobiles and busses. (6) To acquire and hold the securities of electric power and light and gas companies and other public utility companies and companies owning the stocks or securities of public utility companies. (7) To acquire and hold the securities of companies engaged in the business of operating or supervising the operation of public utility companies and of companies doing a general construction, engineering or contracting business with public utility or other companies. (8) To invest and deal with the monies of the Corporation in any manner, and to acquire by purchase, by the exchange of stock or other securities of the Corporation, by subscription or otherwise and to invest in, to hold for investment or for any other purpose and to deal in and to use, sell, pledge or otherwise dispose of any stocks, bonds, notes, debentures and other securities and obligations of any Government, State, municipality or corporation or association or partnership, domestic or foreign (including without prejudice to the generality of the foregoing the companies described in paragraphs 6 and 7 above), and while owner of any such stocks, bonds, notes, debentures or other securities or obligations, to exercise all the rights, powers and privileges of ownership, including among other things the right to vote thereon for any and all purposes. (9) Either directly, or through subsidiary companies, to engage in the business of operating or supervising the management or operation of public utility companies. (10) To aid in any lawful manner by loan, subsidy, guaranty or otherwise, any company whose stocks, bonds, notes, debentures or other securities or obligations are held or controlled directly or indirectly by the Corporation, and to do any and all lawful acts or things necessary or advisable to protect, preserve, improve or enhance the value of any such stocks, bonds, notes, debentures or other securities or obligations. (11) To guarantee and to assume the payment of any dividends on any shares of the capital stock of any company in which the Corporation may either directly or indirectly have an interest as stockholder or otherwise, and to assume and to guarantee by endorsement or otherwise the payment of the principal of and the interest on bonds, notes or other obligations created or to be created by any such company. (12) To acquire, to develop, to improve, to sell, to assign, to transfer, to convey, to lease, to sublease, to pledge and to otherwise alienate and dispose of and to mortgage or otherwise encumber real property situated in any part of the world and the fixtures and personal property incident thereto or connected therewith. (13) To develop and turn to account any land acquired by or in which the Corporation is interested and in particular by laying out and preparing the same for building purposes, constructing, altering and fully equipping buildings and by letting the same by building lease or building agreement and by advancing money to and entering into contracts and arrangements of all kinds with builders, contractors, tenants and others. (14) To construct, improve and fully equip electric power generating works, stations and substations, transmission lines, steam heating plants, water works, gas works, reservoirs, roads and additions to or extensions or betterments of any and all of the same, and other works and conveniences which the Corporation may deem directly or indirectly conducive to these objects, and to sell, assign, transfer, convey, lease and/or sublease any of said stations, substations, works or conveniences to any other corporation or corporations, association or associations, or individual or individuals authorized to purchase or otherwise acquire or lease the same. (15) To purchase, to sell, to manufacture and generally to deal in building materials and goods, wares and merchandise and to carry on any other lawful trade or business incidental to or proper or useful in connection with the purchase, sale, ownership, construction and equipment of its property. (16) To acquire, to hold, to own, to make, to dispose of and generally to deal in grants, concessions, franchises, rights of way and contracts of every kind from or with any person, firm, association, corporation, private, public or municipal, or body politic, and from or with the government or public authorities of the United States, or of any State, territory, possession or dependency thereof, or from or with the District of Columbia, or from or with any foreign government; to cause to be formed, to promote and to aid in any way in the formation of any corporation or association, domestic or foreign. (17) To make and enter into all manner and kinds of contracts, agreements and obligations for the purchasing, acquiring, holding, using, dealing in, selling or otherwise disposing of any and all kinds of property, real and personal. (18) To borrow money, to issue bonds, debentures, notes or other obligations secured or unsecured of the Corporation; to secure the same by mortgage or mortgages or deed or deeds of trust or pledge or other lien upon any or all of the property, rights, privileges and franchises of the Corporation wheresoever situated, acquired or to be acquired; to confer upon the holders of any debentures, bonds, notes or other obligations of the Corporation secured or unsecured the right to convert the same into any class of stock of any series of the Corporation now or hereafter to be issued upon such terms as shall be fixed by the Board of Directors subject to the provisions hereof; to sell, to pledge and to otherwise dispose of any or all bonds, debentures, notes or other obligations of the Corporation; to purchase and otherwise to acquire shares of its own capital stock and to hold, to sell, to assign, to transfer and to reissue any or all of such shares; provided that the Corporation shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of the stated capital of the Corporation, except as such purchase out of capital may be permitted by law, and provided further that shares of its own capital stock owned by the Corporation shall not be voted upon directly or indirectly. (19) To acquire, to hold, to use, to sell, to assign, to lease, to mortgage and otherwise to dispose of letters patent of the United States or of any other country, patents, patent rights, copyrights, licenses and privileges, inventions, improvements and processes, trade marks and trade names or pending applications therefore, relating to or useful in connection with any business of the Corporation or of any other company or association in which the Corporation may have an interest directly or indirectly as a stockholder or otherwise. (20) To deal in stocks and securities either as an agent or broker or underwriter, or otherwise; to make advances or loans upon the pledge of securities to be bought, sold or otherwise dealt in, or without security, so far as may be permitted by law. (21) To have and to exercise all the powers now or hereafter conferred by the laws of the Commonwealth of Pennsylvania upon corporations organized under the laws under which the Corporation is organized and any and all laws amendatory thereof and supplemental thereto. (22) To conduct business in the Commonwealth of Pennsylvania, other States, the District of Columbia, the territories and colonies of the United States and in foreign countries, and to have one or more offices out of the Commonwealth of Pennsylvania, as well as within said Commonwealth, and to hold, purchase, mortgage and convey real and personal property out of the Commonwealth of Pennsylvania as well as within said Commonwealth. (23) Generally to carry on and undertake any other lawful business of the same general nature, which may from time to time seem to the directors of the Corporation capable of being conveniently carried on in connection with the above objects, or calculated directly or indirectly to render valuable or enhance the value of any of the Corporation's properties, privileges or rights. (24) Generally to perform any and all acts connected with, arising from or incidental to the business to be carried on by the Corporation, and to do all acts necessary and proper for the purposes of its business. The foregoing clauses shall be construed both as objects and powers; and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the objects or powers of the Corporation, and that the Corporation shall possess such incidental powers as are reasonably necessary or convenient for the accomplishment of any of the objects or powers enumerated above, either alone or in association with other corporations, associations, firms or individuals, to the same extent and as fully as individuals might or could do as principals, agents, contractors or otherwise. THIRD: The registered office for the Corporation in this Commonwealth is: ----- Pennsylvania Power Company c/o C T Corporation 3 Gateway Center, Pittsburgh, PA 15222 FOURTH: The duration of the Corporation shall be perpetual. ------ FIFTH: The number of shares of the capital stock of the Corporation shall ----- be seven million, seven hundred thousand (7,700,000), of which one million, two hundred thousand (1,200,000) are to have a par value of One Hundred Dollars ($100) per share and six million, five hundred thousand (6,500,000) are to have a par value of Thirty Dollars ($30) per share, divided into one million, two hundred thousand (1,200,000) shares of Preferred Stock with a par value of One Hundred Dollars ($100) per share and six million, five hundred thousand (6,500,000) shares of Common Stock with a par value of Thirty Dollars ($30) per share. Unless four quarterly dividends payable on the Corporation's Preferred Stock of any series shall be in default, in whole or in part (and in such event, unless all defaults in the payment of dividends on the stock of the holders of the Corporation's Preferred Stock shall have been cured) the numbers of authorized shares of the Corporation's Preferred Stock of the par value of One Hundred Dollars ($100) per share may be increased from time to time solely by the affirmative vote in favor thereof of the holders of at least a majority of the shares of the Corporation's Common Stock at the time outstanding. SIXTH: The designations, terms, relative rights, privileges, limitation, ----- preferences and voting powers, or prohibitions, restrictions or qualifications of the voting and other rights and power of the shares of the Preferred Stock of the Corporation, and of the Common Stock of the Corporation shall be as follows: Preferred Stock Section 1. Division into and Issuance of Series of Preferred Stock ------------------------------------------------------------------ The shares of the Preferred Stock may be divided into and issued in series. Each series shall be designated so as to distinguish the shares thereof from the shares of all other series and all shares of the Preferred Stock, irrespective of series, shall be identical except as to the following relative rights and preferences in respect of any or all of which there may be variations between different series and, to the extent that series are not established in or by these resolutions and to the extent that variations in the relative rights and preferences as between series are not fixed and determined therein, series may be established and, prior to the issuance of any shares of such series, the following relative rights and preferences of the shares thereof may be determined, by the Board of Directors or by the stockholders, as may be permitted by the laws of the Commonwealth of Pennsylvania then applicable: (a) The rate of dividend and the dividend payment dates; (b) The price at which shares may be redeemed, such price to be not less than $100 nor more than $115 per share, plus accrued dividends to the date of redemption; (c) The amount payable upon shares in event of involuntary liquidation, which amount shall not be less than $100 per share or more than $115 per share, plus accrued dividends; (d) The amount payable upon shares in event of voluntary liquidation, which amount shall not be less than $100 per share or more than $115 per share, plus accrued dividends; (e) The terms and conditions, if any, on which shares of such series shall be by their terms convertible into or exchangeable for shares of any other class or kind of stock of the Corporation over which the Preferred Stock has preference as to payment of dividends and as to assets; (f) The sinking fund requirements, if any, for the purchase or redemption of shares of such series, which requirements shall not permit the purchase or redemption of shares of such series while the Corporation is subject to the Public Utility Holding Company Act of 1935 if the Corporation is in arrears with respect to dividends on any series of Preferred Stock, unless approval for such purchase or redemption has been obtained under that Act. The stockholders of the Corporation by resolution duly adopted by the holders of a majority of the shares entitled to vote at a meeting held for such purpose, or, if permitted by the laws of the Commonwealth of Pennsylvania then applicable, the Board of Directors, may authorize the issue and sale of any or all of the authorized and unissued shares of Preferred Stock as shares of any series of Preferred Stock already duly established or which shall be established in accordance herewith. Section 2. General Provisions for Preferred Stock -------------------------------------------------- The following provisions shall apply to all the Preferred Stock irrespective of series: (A) The holders of the Preferred Stock of each series shall be entitled to receive dividends, payable when and as declared by the Board of Directors, on such dates and at such rates as shall be determined for the respective series, from the first day of the current dividend period within which such stock shall have been originally issued, before any dividends shall be declared or paid upon or set apart for the Common Stock or any other kind of stock of the Corporation not having preference over the Preferred Stock as to payment of dividends. Such dividends shall be cumulative so that if for any dividend period or periods dividends shall not have been paid or declared and set apart for payment upon all outstanding Preferred Stock at the rates determined for the respective series, the deficiency shall be fully paid, or declared and set apart for payment, before any dividends shall be declared or paid upon the Common Stock or any other class or kind of stock of the Corporation not having preference over the Preferred Stock as to payment of dividends. Dividends shall not be declared and set apart for payment, or paid, on the Preferred Stock of any one series, for any dividend period, unless dividends have been or are contemporaneously declared and set apart for payment or paid on the Preferred Stock of all series for all dividend periods terminating on the same or an earlier date. (B) When full cumulative dividends as aforesaid upon the Preferred Stock of all series then outstanding for all past dividend periods and for the current dividend periods shall have been paid or declared and set apart for payment, the Board of Directors may declare dividends on the Common Stock or any other class or kind of stock over which such Preferred Stock has a preference as to payment of dividends, and no holders of any series of the Preferred Stock as such shall be entitled to share therein; provided, however, the declaration and payment of such dividends shall be subject to the restrictions set forth in the following provisions of this Paragraph (B): (1) No dividends (other than dividends paid in stock over which the Preferred Stock has preference as to payment of dividends and as to assets or dividends paid in cash or property, if presently thereafter there shall be paid to the Corporation in cash or property an amount equal to such dividends, for shares of, or as a capital contribution with respect to, such stock over which the Preferred Stock has such preference) shall be paid or any other distribution of assets made, by purchase of shares or otherwise, on Common Stock or on any other junior stock, as herein defined, except out of accumulated surplus available for distribution to stock over which the Preferred Stock has preference as to payment of dividends and as to assets, earned subsequent to November 30, 1945, or if, at the time of declaration thereof or the making of such distribution there shall not remain to the credit of earned surplus account (after deducting therefrom the amount of such dividends and distributions), an amount at least equal to two and one-half (2-1/2) times the annual dividend requirements on all then outstanding shares of the Preferred Stock and of all other classes or kinds of stock over which the Preferred Stock does not have preference as to the payment of dividends and as to assets; and (2) The Corporation shall not, unless authorized by the affirmative vote of the holders of at least 66-2/3% of the shares of the Preferred Stock at the time outstanding, pay any junior stock dividend, as herein defined (other than a dividend paid in shares of junior stock and other than dividends paid in cash if simultaneously therewith or immediately thereafter there shall be paid to the Corporation for shares of or as a capital contribution with respect to junior stock cash in an amount equal to such dividend), in contravention of the following provisions: (a) If and so long as the junior stock equity, as herein defined, at the end of the calendar month immediately preceding the date on which a dividend on junior stock is declared is, or as a result of such dividend would become, less than 20% of total capitalization, as herein defined, the Corporation shall not declare such dividends in an amount which, together with all other dividends on junior stock paid within the year ending with and including the date on which such dividend is payable, exceeds 50% of the net income of the Corporation available for dividends on junior stock for the twelve full calendar months immediately preceding the calendar month in which such dividends are declared, except in an amount not exceeding the aggregate of dividends on junior stock which under the restrictions set forth above in this subdivision (a) could have been, and have not been declared; and (b) If and so long as the junior stock equity at the end of the calendar month immediately preceding the date on which a dividend on junior stock is declared is, or as a result of such dividend would become, less than 25% but not less than 20% of total capitalization, the Corporation shall not declare dividends on junior stock in an amount which, together with all other dividends on junior stock paid within the year ending with and including the date on which such dividend is payable, exceeds 75% of the net income of the Corporation available for dividends on junior stock for the twelve full calendar months immediately preceding the calendar month in which such dividends are declared, except in an amount not exceeding the aggregate of dividends on junior stock which under the restrictions set forth above in subdivision (a) and in this subdivision (b) could have been, and have not been, declared. As used in this Paragraph (B) "junior stock dividend" means any dividend or distribution of assets in respect of shares of any stock (in this Paragraph (B) and in Paragraph (F)(3) called "junior stock") of the Corporation over which the Preferred Stock has preference as to dividends or as to assets and any purchase or other acquisition of shares of such junior stock. As used in this Paragraph (B) and in Paragraph (F)(3) "junior stock equity" shall mean the aggregate of the par value of, or stated capital represented by, the outstanding shares of junior stock, all earned surplus, capital or paid-in surplus, and any premiums on the junior stock then carried on the books of the Corporation, less (i) the excess, if any, of the aggregate amount payable on involuntary liquidation of the Corporation upon all outstanding shares of stock of the Corporation of all classes other than junior stock over the sum of (x) the aggregate par or stated value of such shares and (y) any premiums thereon; (ii) any amounts on the books of the Corporation known, or estimated if not known, to represent the excess, if any, or recorded value over original cost of used or useful utility plant; and (iii) any intangible items set forth on the asset side of the balance sheet of the Corporation as the result of accounting convention, such as unamortized debt discount and expense; provided, however, that no deductions shall be required to be made in respect of items referred to in subdivisions (ii) and (iii) above in cases in which such items are being amortized or are provided for, or are being provided for, by reserves. As used in this Paragraph (B) "total capitalization" shall mean the aggregate of (i) the principal amount of all outstanding indebtedness of the Corporation maturing more than twelve months after the date of issue thereof; and (ii) the par value or stated capital represented by, and any premiums carried on the books of the Corporation in respect of, the outstanding shares of all classes of the capital stock of the Corporation, earned surplus, and capital or paid-in surplus, less any amounts required to be deducted pursuant to subdivisions (ii) and (iii) of the immediately preceding paragraph in the determination of junior stock equity. (C) Upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Preferred Stock of each series, without any preference of the shares of any series of Preferred Stock over the shares of any other series of Preferred Stock, shall be entitled to receive out of the assets of the Corporation, whether capital, surplus or other, before any distribution of the assets to be distributed shall be made to the holders of Common Stock or of any other class or kind of stock not having preference as to assets over the Preferred Stock, the amount determined to be payable on the shares of such series in the event of voluntary or involuntary liquidation, as the case may be. In case the assets shall not be sufficient to pay in full the amounts determined to be payable on all the shares of Preferred Stock in the event of voluntary or involuntary liquidation, as the case may be, then the assets available for such payment shall be distributed to the extent available as follows: first, to the payment, pro rata, of $100 per share on each share of Preferred Stock outstanding irrespective of series; second, to the payment of the accrued dividends on such shares, such payment to be made pro rata in accordance with the amount of accrued dividends on each such share; and, third, to the payment of any amounts in excess of $100 per share plus accrued dividends which shall have been determined to be payable on the shares of any series in the event of voluntary or involuntary liquidation, as the case may be, such payment also to be made pro rata in accordance with the amounts, if any, so payable on each such share. After payment to the holders of the Preferred Stock of the full preferential amounts hereinbefore provided for, the holders of the Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation, either upon any distribution of such assets or upon dissolution, liquidation or winding up, and the remaining assets to be distributed, if any, upon a distribution of such assets or upon dissolution, liquidation or winding up, may be distributed among the holders of the Common Stock or of any other class or kind of stock over which the Preferred Stock has preference as to assets. Without limiting the right of the Corporation to distribute its assets or to dissolve, liquidate or wind up in connection with any sale, merger or consolidation, the sale of all the property of the Corporation to, or the merger or consolidation of the Corporation into or with, any other Corporation shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up for the purposes of this Paragraph (C). (D) At the option of the Board of Directors of the Corporation, the Corporation may redeem any series of Preferred Stock determined to be redeemable, and each said series may be redeemed as a whole or in part, at any time at the redemption price determined for such series; provided, however, that not less than thirty nor more than sixty days previous to the date fixed for redemption a notice of the time and place thereof shall be given to the holders of record of the Preferred Stock so to be redeemed by mail or publication, in such manner as may be prescribed by the By-Laws of the Corporation or by resolution of the Board of Directors, provided that such resolution shall in no way conflict with the By-Laws; and, provided, further, that, in every case of redemption of less than all of the outstanding shares of any one series of Preferred Stock, the shares of such series to be redeemed shall be chosen by lot in such manner as may be prescribed by resolution of the Board of Directors. At any time after notice of redemption has been given in the manner prescribed by the By-Laws of the Corporation or by resolution of the Board of Directors to the holders of stock so to be redeemed, the Corporation may deposit, or may cause its nominee to deposit, the aggregate redemption price with some bank or trust company in the Borough of Manhattan, The City of New York, named in such notice, payable on the date fixed for redemption as aforesaid and in the amounts aforesaid to the respective orders of the holders of the shares so to be redeemed, on endorsement to the Corporation or its nominee, or otherwise, as may be required, and upon surrender of the certificates for such shares. Upon the deposit of said money as aforesaid, or, if no such deposit is made, upon said redemption date (unless the Corporation defaults in making payment of the redemption price as set forth in such notice), such holders shall cease to be stockholders with respect to said shares, and from and after the making of said deposit, or, if no such deposit is made, after the redemption date (the Corporation not having defaulted in making payment of the redemption price as set forth in such notice), the said holders shall have no interest in or claim against the Corporation, or its nominee, with respect to said shares, but shall be entitled only to receive said moneys on the date fixed for redemption as aforesaid from said bank or trust company, or, if no such deposit is made, from the Corporation, without interest thereon, upon endorsement, if required, and surrender of the certificates as aforesaid. If such deposit shall be made by a nominee of the Corporation as aforesaid, the previous holders of the shares for the redemption of which such deposit shall have been made shall, upon such deposit, cease to have any rights or interest in said shares except as set forth in the foregoing paragraph, and such nominee shall, upon such deposit, become the owner of the shares with respect to which such deposit was made and certificates of stock may be issued to such nominee in evidence of such ownership. In case the holder of any such Preferred Stock shall not, within six years after said deposit, claim the amount deposited as above stated for the redemption thereof, the Depositary shall upon demand pay over to the Corporation such amounts so deposited and the Depositary shall thereupon be relieved from all responsibility to the holder thereof. No interest on such deposit shall be payable to any such holder. Nothing herein contained shall limit any legal right of the Corporation to purchase any shares of the Preferred Stock; provided, however, that if the Corporation be in default with respect to any quarterly dividend on any share of the Preferred Stock, it shall not acquire any shares of the Preferred Stock (except by redemption of all shares of the Preferred Stock) unless approval is obtained under the Public Utility Holding Company Act of 1935. (E) So long as any shares of the Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of Preferred Stock at the time outstanding, create or authorize any shares of any class of shares preferred as to dividends or as to assets over the Preferred Stock or issue any shares of any such prior ranking stock more than twelve months after the date of such a vote of the Preferred Stock, or change any of the rights and preferences of the then outstanding Preferred Stock so as to affect adversely the holders thereof; provided, however, that nothing in this Paragraph (E) contained shall authorize any such creation or change by the vote of the holders of a less number of shares of Preferred Stock, or of any other class of stock, or of all classes of stock, than is required for such creation or change by the laws of the Commonwealth of Pennsylvania at the time applicable thereto. (F) So long as any shares of the Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote in favor thereof of the holders of at least a majority of the shares of Preferred Stock at the time outstanding, (1) merge or consolidate with or into any other Corporation or Corporations or sell or otherwise dispose of all or substantially all of its assets unless such merger, consolidation, sale or other disposition, or the issuance or assumption of securities in the effectuation thereof, shall have been ordered, approved or permitted by a regulatory authority of the Commonwealth of Pennsylvania having jurisdiction in the premises and shall have been ordered or approved under the Public Utility Holding Company Act of 1935; provided, however, that nothing in this Paragraph (F) (1) contained shall authorize any such merger, consolidation, sale or other disposition by the vote of the holders of a less number of shares of the Preferred Stock, or of any other class of stock, or of all classes of stock, than is required for any such merger, consolidation, sale or other disposition by the laws of the Commonwealth of Pennsylvania at the time applicable thereto; and provided, further, that the provisions of this Paragraph (F) (1) shall not apply to a purchase or other acquisition by the Corporation of franchises or assets of another Corporation in any manner which does not involve a merger or consolidation; (2) issue any unsecured notes, debentures or other securities representing unsecured indebtedness, or assume any such unsecured securities, for purposes other than the refunding of outstanding securities theretofore issued or assumed by the Corporation or the redemption or other retirement of all outstanding shares of one or more series of the Preferred Stock or of any class or kind of stock over which the Preferred Stock does not have preference as to dividends and as to assets, if, immediately after such issue or assumption, the total principal amount of all unsecured notes, debentures or other securities representing unsecured indebtedness issued or assumed by the Corporation and then outstanding (including unsecured securities then to be issued or assumed) would exceed 10% of the aggregate of (i) the total principal amount of all bonds or other securities representing secured indebtedness issued or assumed by the Corporation and then to be outstanding and (ii) the aggregate, at the time of such issue or assumption, of the par value of, or stated capital represented by, the outstanding shares of all classes of stock and of the surplus of the Corporation (paid-in, earned and other, if any); or (3) issue, sell or otherwise dispose of any additional shares, or any reacquired shares, of Preferred Stock or of any other class of stock over which the outstanding shares of the Preferred Stock does not have preference as to dividends and as to assets, unless (i) the net income of the Corporation available for the payment of dividends for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the issuance, sale or disposition of such stock (including, in any case in which such stock is to be issued, sold or otherwise disposed of in connection with the acquisition of new property, the net income of the property to be so acquired, computed on the same basis as the net income of the Corporation available for the payment of dividends) is at least equal to two and one-half (2-1/2) times the annual dividend requirements of all outstanding shares of Preferred Stock and of all classes or kinds of stock over which the Preferred Stock does not have preference as to dividends and as to assets, including the shares proposed to be issued; (ii) in a case in which such issuance, sale or disposition is for any purpose other than to refinance an equal par amount or stated value of Preferred Stock or of any other class of stock over which the Preferred Stock does not have preference as to dividends and as to assets, the gross income of the Corporation (after all taxes including taxes based on income), for twelve consecutive calendar months within a period of fifteen calendar months immediately preceding the calendar month of such issuance (including, in any case in which such stock is to be issued in connection with the acquisition of new property, the gross income of the property to be so acquired, computed on the same basis as the gross income of the Corporation) is equal to at least 1-1/2 times the aggregate of the annual interest charges on indebtedness of the Corporation which will be outstanding immediately after the issuance of such shares and the annual dividend requirements on all Preferred Stock (including dividend requirements on any class of stock over which the shares to be issued do not have preference as to dividends and as to assets), which will be outstanding immediately after the issuance of such shares; (iii) in a case in which such issuance, sale or disposition is for any purpose other than to refinance an equal par amount or stated value of Preferred Stock or of any other class of stock over which the Preferred Stock does not have preference as to dividends and as to assets, the aggregate of the junior stock equity as defined in Paragraph (B) is at least equal to the aggregate amount payable in connection with an involuntary liquidation of the Corporation with respect to all shares of the Preferred Stock and all shares of any class of stock, if any, over which the Preferred Stock does not have preference as to dividends and as to assets, which will be outstanding immediately after the issuance of such shares; and (iv) in the case of Preferred Stock, if the total number of shares thereof thereafter issued and outstanding would exceed 50,000, or in the case of any other class of stock over which the outstanding shares of the Preferred Stock does not have preference as to dividends and as to assets, in any event, prior thereto or simultaneously therewith, the total par value of, or stated capital represented by, shares of stock over which the Preferred Stock has preference as to dividends and as to assets shall have been increased over $4,500,000 by an amount at least equal to $75 for each share so to be issued of Preferred Stock in excess of 50,000 shares or of any class or kind of stock over which the Preferred Stock does not have preference as to dividends and as to assets. If for the purposes of meeting the requirements of clause (iii) of this Paragraph (F) (3) above, it shall have been necessary to take into consideration any earned surplus of the Corporation, the Corporation shall not thereafter pay any dividends on or make any distributions in respect of, or purchase or otherwise acquire for value, junior stock as defined in Paragraph (B) which would result in reducing the junior stock equity to an amount less than the amount payable on involuntary liquidation of the Corporation with respect to all shares of Preferred Stock and all shares of any class of stock over which the Preferred Stock does not have preference as to dividends and as to assets, at the time outstanding. If, during the period as of which gross income is to be determined for the purposes of this Paragraph (F)(3), the amount, if any, required to be expended by the Corporation for property additions pursuant to a maintenance and replacement requirement or similar replacement and renewal requirement established under its mortgage indenture shall exceed the amount deducted in the determination of such gross income on account of depreciation and amortization of electric or gas plant acquisition adjustments, such excess shall also be deducted in determining such gross income. (G) The term "accrued dividends" shall be deemed to mean in respect of any share of the Preferred Stock of any series, as of any given date, the amount, if any, by which the product of the rate of dividend per annum, determined upon the shares of such series, multiplied by the number of years and any fractional part of a year which shall have elapsed from the date after which dividends on such stock became cumulative to such given date, exceeds the total dividends actually paid on such stock and the dividends declared and set apart for payment. Accumulations of dividends shall not bear interest. The term "outstanding", whenever used herein with respect to shares of Preferred Stock or of any other class or kind of stock which are by their terms redeemable, or with respect to bonds or other evidences of indebtedness, shall not include any such shares or bonds or evidences of indebtedness which have been called for redemption in accordance with the provisions applicable thereto, of which call for redemption notice shall have been given or appropriately provided for, as required by such provisions, and for the redemption of which a sum of money sufficient to pay the amount payable on such redemption shall have been deposited by the Corporation with a bank or trust company, irrevocably in trust for such purpose, or any bonds or other evidences of indebtedness for the payment of which at maturity provision has been made in a similar manner. The term "net income of the Corporation available for the payment of dividends" shall mean the balance remaining after deducting from the total gross earnings of the Corporation from all sources the following: (a) all operating expenses and taxes, including charges to income for general taxes and for federal income and excess profits taxes, for retirement or depreciation reserve and for amortization or other disposition of amounts, if any, classified as amounts in excess of original cost of utility plant, and (b) all interest charges and other income deductions, including charges to income for amortization of debt discount, premium and expense. For the purpose of computing such net income of the Corporation available for the payment of dividends, there shall not be deducted any provision made on the books of the Corporation or otherwise for the amortization of Preferred Stock premium, discount, commission and expense. Section 3. Established Series of Preferred Stock -------------------------------------------------- Without any limitation of the foregoing provisions for the establishment of shares of Preferred Stock as shares of various series of Preferred, there have been and hereby are established and confirmed the following series of Preferred Stock, namely: the 4.25% Preferred Stock, consisting of 41,049 shares; the 4.24% Preferred Stock, consisting of 40,000 shares; the 4.64% Preferred Stock, consisting of 60,000 shares, the 7.75% Preferred Stock, consisting of 250,000 shares and the 7.625% Preferred Stock, consisting of 150,000 shares. a. 4.25% Preferred Stock The relative rights and preferences of the shares of said 4.25% Preferred Stock in those respects in which the shares thereof may vary from the shares of other series of the Preferred Stock shall be as follows: Section (i) Dividend Rights The rate of dividends shall be 4.25% per annum and the dividend payment dates shall be the first days of February, May, August and November in each year. Section (ii) Redemption Rights The price at which shares may be redeemed shall be $107.50 per share if redeemed prior to January 1, 1954 and $105 per share if redeemed on or after said date, plus accrued dividends in either case to the date of redemption. Section (iii) Liquidation Rights (a) The amount payable in event of involuntary liquidation shall be $100 per share, plus accrued dividends;. (b) The amount payable in event of voluntary liquidation shall be $105 per share, plus accrued dividends. Section (iv) Conversion Rights The shares of such series shall not be, by their terms, convertible or exchangeable. b. 4.24% Preferred Stock The relative rights and preferences of the shares of said 4.24% Preferred Stock in those respects in which the shares thereof may vary from the shares of other series of Preferred Stock shall be as follows: Section (i) Dividend Rights The rate of dividends shall be 4.24% per annum and the dividend payment dates shall be the first days of March, June, September and December in each year. Section (ii) Redemption Rights The price at which shares may be redeemed shall be $105.125 per share if redeemed on or before March 1, 1956, $104.125 if redeemed after March 1, 1956 and on or before March 1, 1961, and $103.125 if redeemed after March 1, 1961, plus accrued dividends in any case to the date of redemption. Section (iii) Liquidation Rights (a) The amount payable in event of involuntary liquidation shall be $100 per share, plus accrued dividends; (b) The amount payable in event of voluntary liquidation shall be the redemption price in effect at the date of such liquidation. Section (iv) Conversion Rights The shares of such series shall not be, by their terms, convertible or exchangeable. c. 4.64% Preferred Stock The relative rights and preferences of the shares of said 4.64% Preferred Stock in those respects in which the shares thereof may vary from the shares of other series of Preferred Stock shall be as follows: Section (i) Dividend Rights The rate of dividends shall be 4.64% per annum and the dividend payment dates shall be the first days of March, June, September and December in each year. Section (ii) Redemption Rights The price at which shares may be redeemed shall be $106.62 per share if redeemed on or before June 1, 1963, $105.40 if redeemed after June 1, 1963 and on or before June 1, 1968, $104.19 if redeemed after June 1, 1968 and on or before June 1, 1973, and $102.98 if redeemed after June 1, 1973, plus accrued dividends in any case to the date of redemption. Section (iii) Liquidation Rights (a) The amount payable in event of involuntary liquidation shall be $100 per share, plus accrued dividends; (b) The amount payable in event of voluntary liquidation shall be the redemption price in effect at the date of such liquidation. Section (iv) Conversion Rights The shares of such series shall not be, by their terms, convertible or exchangeable. d. 7.75% Preferred Stock The relative rights and preferences of the shares of said 7.75% Preferred Stock in those respects in which the shares thereof may vary from the shares of other series of Preferred Stock shall be as follows: Section (i) Dividend Rights The rate of dividend shall be 7.75% per annum, when and as declared by the Board of Directors, and subject to the applicable provisions of the Business Corporation Law, and the dividend payment dates shall be the first days of January, April, July, and October in each year. Section (ii) Redemption Rights No shares of the 7.75% Preferred Stock shall be redeemable on or before July 1, 2003. After July 1, 2003, the price at which shares may be optionally redeemed shall be $100 per share plus an amount equal to the accumulated and unpaid dividends to the date set for redemption. Section (iii) Liquidation Rights (a) The amount payable in the event of involuntary liquidation shall be $100 per share, plus accrued dividends; (b) The amount payable in the event of voluntary liquidation shall be $100 per share, plus accrued dividends. Section (iv) Conversion Rights The shares shall not be, by their terms, convertible or exchangeable. Section (v) Sinking Fund Requirements There shall not be any sinking fund requirements for the purchase or redemption of the 7.75% Preferred Stock. e. 7.625% Preferred Stock The relative rights and preferences of the shares of said 7.625% Preferred Stock in those respects in which the shares thereof may vary from the shares of other series of Preferred Stock shall be as follows: Section (i) Dividend Rights The rate of dividend shall be 7.625% per annum, when and as declared by the Board of Directors, and subject to the applicable provisions of the Business Corporation Law, and the dividend payment dates shall be the first days of January, April, July, and October in each year; provided, however, that with respect to the dividend payable on January 1, 1993, the first day of the dividend period with respect to which such dividend is paid shall be the first day of the actual issuance of the 7.625% Preferred Stock. Section (ii) Redemption Rights The price at which shares may be optionally redeemed shall be as follows: If Redemption is Made During the 12-Month Period Beginning October 1 Redemption In the Year Price Per Share -------------------------- --------------- 1997............................. $107.63 1998............................. 106.86 1999............................. 106.10 2000............................. 105.34 2001............................. 104.58 2002............................. 103.81 2003............................. 103.05 2004............................. 102.29 2005............................. 101.52 2006............................. 100.76 2007 and thereafter.............. 100.00, plus accrued dividends in each case to the date of redemption; provided, however, that no share of the 7.625% Preferred Stock shall be redeemable prior to October 1, 1997. Any shares of 7.625% Preferred Stock so redeemed may be given the status of authorized but unissued shares of Preferred Stock and may be reissued as shares of Preferred Stock, but none of such shares shall be reissued as shares of 7.625% Preferred Stock, nor shall any of such shares be credited in satisfaction of the obligations of the Company set forth in subsection (v) hereof. No shares of Preferred Stock (in addition to the 150,000 shares thereof initially proposed to be issued) shall be issued as shares of 7.625% Preferred Stock. Section (iii) Liquidation Rights (a) The amount payable in the event of involuntary liquidation shall be $100 per share, plus accrued dividends; (b) The amount payable in the event of voluntary liquidation shall be the optional redemption price for the date on which such liquidation occurs. Section (iv) Conversion Rights The shares shall not be, by their terms, convertible or exchangeable. Section (v) Sinking Fund Requirements (a) On October 1, 2002 and on each October 1 thereafter through and including October 1, 2007 (a `Sinking Fund Payment Date'), the Corporation, subject to the applicable provisions of Pennsylvania law, shall redeem, at a redemption price per share equal to $100 plus accrued dividends to the date of redemption (the `Sinking Fund Redemption Price'), as and for a sinking fund for the 7.625% Preferred Stock, in each year prior to 2007, 7,500 shares of the 7.625% Preferred Stock and, in 2007, the remaining outstanding shares of the 7.625% Preferred Stock, provided that if, on any Sinking Fund Payment Date, the number of outstanding shares of the 7.625% Preferred Stock shall be less than 7,500, then the number of shares to be redeemed as and for the sinking fund created hereby shall be equal to such number of outstanding shares of the 7.625% Preferred Stock. The obligation of the Corporation to make such sinking fund redemptions shall be cumulative, so that all shares of the 7.625% Preferred Stock previously required to be redeemed pursuant to this subsection (v)(a) on a certain Sinking Fund Payment Date but not redeemed on such date shall be added to the number of shares of the 7.625% Preferred Stock otherwise required to be redeemed on the next succeeding Sinking Fund Payment Date and shall also be redeemed on such date, subject to the applicable provisions of Pennsylvania law. The Corporation shall redeem the full number of shares of 7.625% Preferred Stock required to be redeemed by it pursuant to this subsection (v)(a) in each calendar year and all prior calendar years before dividends (other than dividends payable in Common Stock) shall be paid or any other distribution of assets made (by purchase of shares or otherwise), in such calendar year, on Common Stock or any other stock of the Corporation over which the 7.625% Preferred Stock has preference as to the payment of dividends or as to assets. (b) No redemption, acquisition or purchase of any stock ranking equally with or junior to the 7.625% Preferred Stock shall occur during any period when the mandatory redemption of shares described in paragraph (a) of this subsection (a) is in arrears, except for payments of arrears through redemptions of shares of classes of Preferred Stock and of any kind of stock over which the Preferred Stock does not have preference as to the payment of dividends and as to assets which the Corporation is then obligated to redeem or purchase. (c) If on any Sinking Fund Payment Date funds legally available therefor are insufficient to permit the Corporation to redeem the full number of shares of 7.625% Preferred Stock so required to be redeemed on such date, the Corporation shall apply to such redemption the proportion of such funds which bears the same ratio to the amount required for the redemption of the full number of such shares required to be redeemed on such Sinking Fund Payment Date as the total amount of such funds bears to the total amount required for the purchase or redemption of all shares of all classes of Preferred Stock and of any kind of stock over which the Preferred Stock does not have preference as to the payment of dividends and as to assets which the Corporation is then obligated to redeem or purchase. Common Stock There shall be a class of stock of the Corporation designated Common Stock and each share of Common Stock shall be equal to every other share of said stock in every respect. Voting Powers At all elections of directors of the Corporation, and on all other matters, except on matters in respect of which the laws of the Commonwealth of Pennsylvania shall provide that all stockholders shall have the right to vote irrespective of whether such right has been relinquished by any of such stockholders and except as otherwise herein provided, the holders of the Common Stock shall have the exclusive right to vote; provided, however, that, whenever and as often as four quarterly dividends payable on the Preferred Stock of any series shall be in default, in whole or in part, the holders of the Preferred Stock shall have the exclusive right, voting separately and as a class, to vote for and to elect the smallest number of directors which shall constitute a majority of the then authorized number of directors of the Corporation, and, in all matters other than the election of directors, each holder of one or more shares of Preferred Stock shall be entitled to one vote for each such share or stock held by him. In the event of default entitling the Preferred Stock to vote as aforesaid, the holders of the Common Stock shall have the exclusive right, voting separately and as a class, to vote for and to elect the greatest number of directors which shall constitute a minority of the then authorized number of directors of the Corporation, and, in all matters other than the election of directors, each holder of Common Stock shall be entitled to one vote for each such share of stock held by him. The voting rights of the holders of the Preferred Stock, however, shall cease when all defaults in the payment of dividends on their stock shall have been cured, and such dividends shall be declared and paid out of any funds legally available therefor as soon as, in the judgment of the Board of Directors, is reasonably practicable. The terms of office of all persons who may be directors of the Corporation at the time when the right to elect a majority of the directors shall accrue to the holders of the Preferred Stock, as herein provided, shall terminate upon the election of their successors at a meeting of the stockholders of the Corporation then entitled to vote. Such meeting shall be held at any time after the accrual of such voting power upon notice similar to that provided in the By-Laws of the Corporation for a meeting of the stockholders at the request in writing of the holders of not less than 10% of the number of shares of the then outstanding Preferred Stock entitled to vote addressed to the Secretary of the Corporation at its principal business office. Any vacancy in the Board of Directors occurring during any period that the Preferred Stock shall have representatives on the Board shall be filled by a majority vote of the remaining directors representing the class of stock theretofore represented by the director causing the vacancy. Upon the termination of such exclusive right of the holders of the Preferred Stock to elect a majority of the directors of the Corporation, the terms of office of all the directors of the Corporation shall terminate upon the election of their successors at a meeting of the stockholders of the Corporation then entitled to vote. Such meeting shall be held at any time after the termination of such exclusive right of the holders of the Preferred Stock to elect a majority of the directors upon notice similar to that provided in the By-Laws of the Corporation for a meeting of the stockholders at the request in writing of the holders of not less than 10% of the number of shares of the then outstanding Common Stock addressed to the Secretary of the Corporation at its principal business office. At all meetings of the stockholders held for the purpose of electing directors during such times as the holders of the Preferred Stock shall have the exclusive right to elect a majority of the directors of the Corporation, the presence in person or by proxy of the holders of a majority of the outstanding shares of Common Stock shall be required to constitute a quorum of such class for the election of directors, and the presence in person or by proxy of the holders of a majority of the outstanding shares of Preferred Stock shall be required to constitute a quorum of such class for election of directors; provided, however, that the absence of a quorum of the holders of stock of either class shall not prevent the election at any such meeting, or adjournment thereof, of directors by the other class if the necessary quorum of the holders of stock of such class is present in person or by proxy at such meeting; and provided, further, that, in the absence of a quorum of the holders of stock of either class, a majority of those holders of such stock who are present in person or by proxy shall have the power to adjourn the election of those directors to be elected by that class from time to time without notice, other than announcement at the meeting, until the requisite amount of holders of stock of such class shall be present in person or by proxy. For the purposes of the foregoing provisions, the Preferred Stock of all series shall be deemed to be a single class. At all elections of directors of the Corporation, each stockholder may cast the whole number of his votes for one candidate for whom he may vote, or distribute them among two or more such candidates as he may prefer. Miscellaneous Provisions The holders of the Preferred Stock shall have no preemptive rights to subscribe to any additional shares of the capital stock of the Corporation of any kind, or any rights to exchange shares issued for shares to be issued; but, before issuing or disposing of any shares of Common Stock or any bonds, debentures, or other obligations or rights or options, which are convertible into or exchangeable for or which entitle the holder or owner to subscribe for or purchase any shares of Common Stock, the Board of Directors shall offer to the holders of the Common Stock at the time outstanding, and the holders thereof shall be entitled to purchase or subscribe for the shares of Common Stock or the bonds, debentures, or other obligations or rights or options, which are convertible into or exchangeable for such stock or which entitle the holder or owner thereof to subscribe for or purchase such stock, upon terms not less favorable to the purchaser (without deduction of such reasonable compensation, allowance or discount for the sale, underwriting or purchase thereof as may be fixed by the Board of Directors) than those on which the Board of Directors issue and dispose of such stock, bonds, debentures, obligations or rights to other than such holders of Common Stock. The Corporation may issue and dispose of any of its authorized shares for such consideration as may be fixed by the Board of Directors subject to the laws of the Commonwealth of Pennsylvania then applicable. Subject to any applicable limitations contained in the foregoing Paragraphs (B), (C), (D), and (F)(3) of Section 2 (General Provisions for Preferred Stock) of this ARTICLE SIXTH, , the Corporation may from time to time, out of its net profits or surplus earnings, purchase any of its stock outstanding at such prices as may be fixed by its Board of Directors and accepted by the holders of the stock purchased but such price shall not exceed the then applicable redemption price, if any, of the stock purchased. Seventh: Section 1. Directors and Officers as Fiduciaries. ------- ------------------------------------------------ A director or officer of the Corporation shall stand in a fiduciary relation to the Corporation and shall perform his or her duties as a director or officer, including his or her duties as a member of any committee of the board upon which he or she may serve, in good faith, in a manner he or she reasonably believes to be in the best interests of the Corporation, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his or her duties, a director or officer shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by one or more officers or employees of the Corporation whom the director or officer reasonably believes to be reliable and competent with respect to the matters presented, counsel, public accountants or other persons as to matters that the director or officer reasonably believes to be within the professional or expert competence of such person, or a committee of the Board of Directors upon which the director or officer does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director or officer reasonably believes to merit confidence. A director or officer shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted. Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or officer of the Corporation or any failure to take any action shall be presumed to be in the best interests of the Corporation. Section 2. Personal Liability of Directors. ------------------------------------------- A director of the Corporation shall not be personally liable, as such, for monetary damages (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys' fees and disbursements)) for any action taken, or any failure to take any action, unless the director has breached or failed to perform the duties of his or her office under these Articles of Incorporation, the By-Laws or applicable provisions of law and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Section 3. Personal Liability of Officers. ------------------------------------------ An officer of the Corporation shall not be personally liable, as such, to the Corporation or its shareholders for monetary damages (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys' fees and disbursements)) for any action taken, or any failure to take any action, unless the officer has breached or failed to perform the duties of his or her office under these Articles of Incorporation, the By-Laws or applicable provisions of law and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Section 4. Interpretation of Article. ------------------------------------- The provisions of Sections 2 and 3 of this Seventh Article shall not apply to the responsibility or liability of a director or officer, as such, pursuant to any criminal statute or for the payment of taxes pursuant to local, state or Federal law. The provisions of this Seventh Article have been adopted pursuant to the authority of section 204A(10) of the Pennsylvania Business Corporation Law, as amended, and under all amendments and supplements thereto, or any revision or restatement thereof or any statute enacted to take the place thereof, shall be deemed to be a contract with each director or officer of the Corporation who serves as such at any time while this article is in effect, and each person who serves as a director or officer of the Corporation while this article is in effect shall be deemed to be doing so in reliance on the provisions of this article and such provisions are cumulative of and shall be in addition to and independent of any and all other limitations on the liabilities of directors or officers of the Corporation, as such, or rights of indemnification by the Corporation to which a director or officer of the Corporation may be entitled, whether such limitations or rights arise under or are created by any statute, rule of law, by-law, agreement, vote of shareholders or disinterested directors or otherwise. No amendment to or repeal of this Seventh Article nor the adoption of any provision of these Articles of Corporation inconsistent with this article, shall apply to or have any effect on the liability or alleged liability of any director or officer of the Corporation for or with respect to any acts or omissions of such director or officer occurring prior to such amendment, repeal or adoption of an inconsistent provision. In any action, suit or proceeding involving the application of the provisions of this Seventh Article, the party or parties challenging the right of a director or officer to the benefits of this article shall have the burden of proof. EX-3.(II) 42 ex3-5.txt AMENDED & RESTATED BY-LAWS - PENN AMENDED AND RESTATED BY-LAWS OF PENNSYLVANIA POWER COMPANY (Effective March 15, 2002) MEETINGS OF STOCKHOLDERS Section 1. Annual Meetings. - ---------- ---------------- The annual meeting of stockholders shall be held on such date and at such time as the Board of Directors may determine each year. Such meetings may be held within or without the Commonwealth of Pennsylvania at such time and place as the directors may determine. Section 2. Special Meetings. - ---------- ----------------- Special meetings of the stockholders may be called at any time by (i) the Chairman of the Board, (ii) the President, (iii) the Directors, by action at a meeting or a majority of the Directors acting without a meeting, or (iv) the holders of 25% or more of the outstanding shares entitled to vote thereat. Such meetings may be held within or without the Commonwealth of Pennsylvania at such time and place as may be specified in the notice thereof. Section 3. Notice of Meetings. - ---------- ------------------- Written notice of every annual or special meeting of the stockholders stating the time, place and purposes thereof shall be given to each stockholder entitled to notice as provided by law, not less than seven (7) nor more than sixty (60) days before the date of the meeting. Such notice may be given by or at the direction of the Chairman of the Board, the President or the Corporate Secretary. Except to the full extent that notice is legally permitted (now or hereafter) to be given by any other form of media, including any form of electronic or other communications, notice shall be given by personal delivery or by mail addressed to the stockholder at his last address as it appears on the records of the Corporation. Any stockholder may waive in writing notice of any meeting, either before or after the holding of such meeting, and, by attending any meeting without protesting the lack of proper notice, shall be deemed to have waived notice thereof. Section 4. Business Transacted at Meetings. - ---------- -------------------------------- Business transacted at any special meeting of stockholders shall be for the purposes stated in the notice. Section 5. Quorum and Adjournments. - ---------- ------------------------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 6. Required Vote; Inspectors. - ---------- -------------------------- (a) When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Articles of Incorporation a different vote is required in which case such express provision shall govern and control the decision of such question. (b) Inspectors of election may be appointed to act at any meeting of stockholders in accordance with Pennsylvania law. Section 7. Voting Power of Stockholders. - ---------- ----------------------------- (a) Every stockholder of record of the Corporation shall be entitled at each meeting of stockholders to one vote for each share of stock held by such stockholder according to the books of the Corporation as of the date of such vote or, if a record date is set by the Board of Directors, as of such record date. (b) Whenever the right shall have accrued to the holders of the Preferred Stock to elect Directors, voting separately as a class, the terms of office, as Directors, of all persons who may be Directors of the Corporation at the time shall terminate upon the election of a majority of the Board of Directors by the holders of the Preferred Stock, except that if the holders of the Common Stock shall not have elected the remaining Directors of the Corporation, then, and only in that event, the Directors of the Corporation in office just prior to the election of a majority of the Board of Directors by the holders of the Preferred Stock shall elect the remaining Directors of the Corporation. Thereafter while the majority of the Board of Directors is being elected by the holders of the Preferred Stock, the remaining Directors, whether elected by Directors as provided above or whether originally or later elected by the holders of the Common Stock, shall continue in office until their successors are elected by the holders of the Common Stock. Whenever the right shall have accrued to the holders of the Preferred Stock to elect Directors, voting separately as a class, it shall be the duty of the President, a Vice President or the Corporate Secretary of the Corporation to call and cause notice to be given to the stockholders entitled to vote at a meeting to be held at such time as the Corporation's officers may fix, not less than forty-five nor more than sixty days after the accrual of such right, for the purpose of electing Directors. The notice so given shall be mailed to each holder of record of the Preferred Stock at his last known address appearing on the books of the Corporation and shall set forth, among other things: (i) that by reason of the fact that dividends payable on the Preferred Stock are in default in an amount equal to four full quarterly payments or more per share, the holders of the Preferred Stock, voting separately as a class, have the right to elect the smallest number of Directors necessary to constitute a majority of the full Board of Directors of the Corporation, (ii) that any holder of the Preferred Stock has the right, at any reasonable time, to inspect, and make copies of, the list or lists of holders of the Preferred Stock maintained at the principal office of the Corporation or at the office of any Transfer Agent of the Preferred Stock, and (iii) either the entirety of this paragraph or the substance thereof with respect to the number of shares of the Preferred Stock required to be represented at any meeting, or adjournment thereof, called for the election of Directors of the Corporation. At the first meeting of stockholders held for the purpose of electing Directors during such time as the holders of the Preferred Stock shall have the special right, voting separately as a class, to elect Directors, the presence in person or by proxy of the holders of a majority of the outstanding Common Stock shall be required to constitute a quorum of such class for the election of Directors, and the presence in person or by proxy of the holders of a majority of the outstanding Preferred Stock shall be required to constitute a quorum of such class for the election of Directors; provided, however, that in the absence of a quorum of the holders of the Preferred Stock, no election of Directors shall be held, but a majority of the holders of the Preferred Stock who are present in person or by proxy shall have power to adjourn the election of the Directors to a date not less than fifteen nor more than fifty days from the giving of the notice of such adjourned meeting provided below; and provided, further, that at such adjourned meeting, the presence in person or by proxy of the holders of 35% of the outstanding Preferred Stock shall be required to constitute a quorum of such class for the election of Directors. In the event such first meeting of stockholders shall be so adjourned, it shall be the duty of the President, a Vice President or the Corporate Secretary of the Corporation, within ten days from the date on which such first meeting shall have been adjourned, to cause notice of such adjourned meeting to be given to the stockholders entitled to vote thereat, such adjourned meeting to be held not less than fifteen days nor more than fifty days from the giving of such second notice. Such second notice shall be given in the form and manner provided above with respect to the notice required to be given of such first meeting of stockholders, and shall further set forth that a quorum was not present at such first meeting and that the holders of 35% of the outstanding Preferred Stock shall be required to constitute a quorum of such class for the election of Directors at such adjourned meeting. If the requisite quorum of holders of the Preferred Stock shall not be present at said adjourned meeting, then the Directors of the Corporation then in office shall remain in office until the next annual meeting of the Corporation, or special meeting in lieu thereof, and until their successors shall have been elected and shall qualify. Neither such first meeting nor such adjourned meeting shall be held on a date within sixty days of the date of the next annual meeting of the Corporation or special meeting in lieu thereof. At each annual meeting of the Corporation, or special meeting in lieu thereof, held during such time as the holders of the Preferred Stock, voting separately as a class, shall have the right to elect a majority of the Board of Directors, the foregoing provisions of this paragraph shall govern such annual meeting, or special meeting in lieu thereof, as if said annual meeting or special meeting were the first meeting of stockholders held for the purpose of electing Directors after the right of the holders of the Preferred Stock, voting separately as a class, to elect a majority of the Board of Directors, should have accrued, with the exception that if, at any adjourned annual meeting, or special meeting in lieu thereof, 35% of the outstanding Preferred Stock is not present in person or by proxy, all the Directors shall be elected by a vote of the holders of a majority of the Common Stock of the Corporation present or represented at the meeting. For the purposes of the foregoing provisions, the Preferred Stock of all classes shall be deemed to be a single class. Any vacancy in the Board of Directors occurring during any period that the Preferred Stock shall have representatives on the Board shall be filled by a majority vote of the remaining Directors representing the class of stock theretofore represented by the Director causing the vacancy or by the remaining Director representing such class if there be but one. In the event that any of the provisions hereof may conflict or be inconsistent with any other provisions of these By-Laws, then (this By-Law having been adopted by the vote of the holders of all of the outstanding shares of Common Stock of the Corporation) the provisions hereof shall govern in so far as permitted by law. Section 8. Voting by Proxy. - ---------- ---------------- At any meeting of the stockholders, any stockholder may be represented and vote by a proxy or proxies appointed by an instrument executed or authenticated by the stockholder or its duly authorized attorney-in-fact to the full extent permitted by law (now or hereafter) and filed with or transmitted to the Corporate Secretary or its designated agent. In the event that any such proxy shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or, if only one shall be present, then that one shall have and may exercise all of the powers conferred by such proxy upon all of the persons so designated unless the proxy shall otherwise provide. No such proxy shall be valid after the expiration of thirty-six (36) months from the date of its execution, authentication or transmission, unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force. Subject to the above, any proxy duly executed is not revoked and continues in full force and effect until an instrument revoking it or a duly executed proxy bearing a later date is filed or electronically transmitted to the Corporate Secretary of the Corporation or its designated agent. Section 9. Action by Stockholders Without a Meeting. - ---------- ----------------------------------------- Any action which may be taken by the vote of the stockholders at a meeting may be taken without a meeting if authorized by the consent of the stockholders holding at least a majority of the voting power, unless the provisions of the statutes or of the Articles of Incorporation provide that a greater proportion of consents shall be required. Such consents may take such form (written, electronic or otherwise) as permitted by law (now or hereafter). Such consents shall be filed with or entered upon the records of the Corporation. DIRECTORS Section 10. Authority of Directors. - ----------- ----------------------- (a) The business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, the Articles of Incorporation, or these By-Laws directed or required to be exercised or done by the stockholders. (b) Any action required or permitted to be taken at a meeting of the Board of Directors or any committee of the Board of Directors may be taken without a meeting if, prior or subsequent to such action, all members of the Board of Directors or of such committee, as the case may be, consent thereto. Such consents may take such form (written, electronic or otherwise) as permitted by law (now or hereafter). Such consents shall be filed with or entered upon the records of the Corporate Secretary of the Corporation. Section 11. Number; Qualifications. - ----------- ----------------------- The number of Directors shall be not less than three (3) and not more than five (5) (plus any Directors separately elected by the holders of any class of stock other than the Common Stock as provided in the Articles of Incorporation as amended from time to time). The number of Directors may be determined (a) by the vote of the holders of a majority of the shares entitled to vote thereon at any annual meeting or special meeting called for the purpose of electing Directors or (b) by action of the Board of Directors at a meeting or by consent by the vote of a majority of the Directors in office at the time. When so fixed, such number shall continue to be the authorized number of Directors until changed by the stockholders or Directors in the manner described above. Any increase in the number of Directors shall be deemed to create a vacancy or vacancies which may be filled as provided in Section 14. A reduction in the number of Directors shall not be applied to remove any Director from office prior to the expiration of his term. Directors need not be stockholders of the Corporation and need not be United States citizens or residents of Pennsylvania. Section 12. Election of Directors. - ----------- ---------------------- At each meeting of the stockholders for the election of Directors, the persons receiving the greatest number of votes shall be the Directors. Such elections shall be by ballot whenever requested by any person entitled to vote at such meeting; but unless so requested, such election may be conducted in any way approved at such meeting. Section 13. Term of Office; Removal; Resignations. - ----------- -------------------------------------- (a) Directors shall hold office until the annual meeting of the stockholders next following their election and until their respective successors are elected, or until their earlier resignation, death or removal from office. (b) Any Director or the entire Board of Directors may be removed upon the affirmative vote of the holders of a majority of the voting power of the Corporation. (c) Any Director may resign at any time by giving written notice of his resignation to the President or Corporate Secretary. Any resignation will be effective upon actual receipt by such person or, if later, as of the date and time specified in such written notice. Section 14. Vacancies. - ----------- ---------- Vacancies, including those caused by an increase in the number of Directors, may be filled by a majority of the remaining Directors though less than a quorum. When one or more Directors shall give notice of his or their resignation to the Board, effective at a future date, the Board shall have the power to fill such vacancy or vacancies to take effect when such resignation or resignations shall become effective, each Director so appointed to hold office during the remainder of the term of office of the resigning Director or Directors. Whenever any vacancy shall occur among the Directors, the remaining Directors shall constitute the Directors of the Corporation until such vacancy is filled or until the number of Directors is changed as in Section 11 hereof. MEETINGS OF THE BOARD OF DIRECTORS Section 15. Organizational Meeting. - ----------- ----------------------- Immediately after each annual meeting of the stockholders at which Directors are elected, or each special meeting held in lieu thereof, the newly elected Directors, if a quorum thereof is present, shall hold an organizational meeting at the same place or at such other time and place as may be fixed by the stockholders at such meeting, for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. If for any reason such organizational meeting is not held at such time, a special meeting of the Directors for such purpose shall be held as soon thereafter as practicable. Section 16. Regular Meetings. - ----------- ----------------- Regular meetings of the Directors may be held without notice at such times and places within or without the Commonwealth of Pennsylvania as shall be determined by the Directors from time to time. Section 17. Special Meetings. - ----------- ----------------- Special meetings of the Directors may be held at any time within or without the Commonwealth of Pennsylvania upon call by the Chairman of the Board, the President, or the Corporate Secretary upon the written request of two Directors. Notice of each such meeting shall be given to each Director by letter, facsimile, electronic mail, telegram, telephone, or in person not less than forty-eight (48) hours prior to such meeting. Notices sent by mail shall be sent postage prepaid and shall be addressed to each Director at his address as it appears upon the records of the Corporation. Notice by mail shall be deemed to be given at the time when the notice is deposited in the mail, and notice by facsimile, electronic mail or telegram shall be deemed to be given at the time when confirmation of successful transmission is received. Such notice may be waived by Directors either before or after the meeting, and such waivers shall be filed with or entered upon the records of the meeting. The attendance of any Director at any such meeting without protesting the lack of proper notice, prior to or at the commencement of the meeting, shall be deemed to be a waiver by the Director of notice of the meeting. Unless otherwise limited in the notice thereof, any business may be transacted at any organizational, regular or special meeting. Section 18. Quorum and Adjournments; Participation by Communications - ---------- -------------------------------------------------------- Equipment. ---------- (a) A majority of the Directors, at a meeting duly called and held, shall be necessary to constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation. Any action required or permitted to be taken at a meeting of the Directors may be taken without a meeting if a consent, setting forth the action so taken, shall be signed or authenticated by all of the Directors entitled to vote with respect to the subject matter thereof. Any meeting duly called, whether or not a quorum is present, may, by vote of a majority of the Directors present, be adjourned from time to time and place to place within or without the Commonwealth of Pennsylvania, in which case no further notice of the adjourned meeting need be given. (b) Meetings of the Board of Directors or of any committee of the Board of Directors may be held through any means of communications equipment if all persons participating can hear each other, and such participation will constitute presence in person at such meeting. Section 19. Committees. - ----------- ----------- The Board of Directors may, by resolution passed by a majority of the Directors, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation, which, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the Board when required. Section 20. Compensation. - ----------- ------------- The Directors may be paid their expenses, if any, for attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors. The sums may be different for different Directors, and the sum shall be established by resolution of the Board of Directors and may be changed from time to time by resolution. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. EXECUTIVE COMMITTEE Section 21. Executive Committee. - ----------- -------------------- The Board of Directors at any time may elect from its members an Executive Committee which shall consist of not less than three (3) members. Each member of such Committee shall hold office during the pleasure of the Board and may be removed by a majority vote of the whole Board at any time with or without cause. Vacancies occurring in the Committee may be filled by the Board. The Committee shall prescribe its own rules for calling and holding meetings, and for transacting business, subject, however, to any rules prescribed by the Board of Directors, and the Committee shall keep minutes of its actions. Action by the Committee may be taken at meetings thereof attended by not less than a majority thereof, or without a meeting by instrument in writing signed by not less than a majority of the members. Except as the Committee's powers and duties may be limited or otherwise prescribed by the Board of Directors, the Committee, during the intervals between the meetings of the Board, shall possess and may exercise all of the powers and authority of the Board of Directors, however conferred, provided, however, that the Committee shall not be empowered to elect the officers (other than Assistant Secretaries and Assistant Treasurers) or to fill vacancies in the Board of Directors or in the Executive Committee. Subject to such exceptions, persons dealing with the Corporation shall be entitled to rely upon any action of the Committee with the same force and effect as though such action had been taken by the Board of Directors. OFFICERS Section 22. Generally. - ----------- ---------- The Corporation may have a Chairman, elected by the directors from among their number, and shall have a President, a Corporate Secretary and a Treasurer. The Corporation may also have one or more Vice Chairmen, Vice Presidents, Senior Vice Presidents and such other officers and assistant officers as the Board of Directors may deem appropriate. If the Board of Directors so desires, it may elect a Chief Executive Officer to manage the affairs of the Corporation, subject to the direction and control of the Board of Directors. All of the officers shall be elected by the Board of Directors. Notwithstanding the foregoing, by specific action, the Board of Directors may authorize the Chairman or the President to appoint any person to any office other than Chairman, President, Corporate Secretary, or Treasurer. Any number of offices may be held by the same person, and no two offices must be held by the same person. Any of the offices may be left vacant from time to time as the Board of Directors may determine. In case of the absence or disability of any officer of the Corporation or for any other reason deemed sufficient by a majority of the Board of Directors, the Board of Directors may delegate the absent or disabled officer's powers or duties to any other officer or to any director. Section 23. Authority and Duties of Officers. - ----------- --------------------------------- The officers of the Corporation shall have such authority and shall perform such duties as are customarily incident to their respective offices, or as may be specified from time to time by the Board of Directors, the Chairman or the President regardless of whether such authority and duties are customarily incident to such office. Section 24. Compensation. - ----------- ------------ The compensation of all officers and agents of the Corporation who are also members of the Board of Directors of the Corporation will be fixed by the Board of Directors or by a committee of the Board of Directors. The Board of Directors may fix, or delegate the power to fix, the compensation of the other officers and agents of the Corporation to the Chief Executive Officer or any other officer of the Corporation. Section 25. Succession. - ---------- ---------- The officers of the Corporation will hold office until their successors are elected. Any officer may be removed at any time by the affirmative vote of a majority of the whole Board. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors or by the Chairman or President as provided in Regulation 22. Section 26. Delegation of Duties. - ----------- --------------------- The Directors are authorized to delegate the duties of any officers to any other officer and generally to control the action of the officers and to require the performance of duties in addition to those mentioned herein. Section 27. Signing Checks and Other Instruments. - ----------- ------------------------------------- The Directors are authorized to determine or provide the method of determining how checks, notes, bills or exchange and similar instruments shall be signed, countersigned or endorsed. CERTIFICATES OF STOCK Section 28. Contents of Certificates. - ----------- ------------------------- Every stockholder shall be entitled to one or more certificates, signed by the President or a Vice President and by the Treasurer, an Assistant Treasurer, the Corporate Secretary, or an Assistant Corporate Secretary of the Corporation, certifying the number and class of shares owned by him in the Corporation. If the Corporation is authorized to issue shares of more than one class or more than one series of any class, there shall be set forth upon the face or back of the certificate a full or summary statement of the designations, preferences and relative, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, or the certificate shall have a statement that the Corporation will furnish such information to any stockholders upon request and without charge. If the Corporation shall be authorized to issue only special stock, such certificate shall set forth in full or summarize the rights of the holders of such stock. Section 29. Countersignature of Authentication by Transfer Agents or - ------- --- ---------------- -- -------------- -- -------- ------ -- Registrars. ----------- Whenever any certificate is countersigned or otherwise authenticated by a transfer agent or registrar, then a facsimile of the signatures of such officers of the Corporation may be engraved, stamped, or printed upon such certificate in lieu of the actual signatures. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be an officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be an officer or officers of such Corporation. LOST CERTIFICATES Section 30. Replacement of Lost Certificates. - ----------- --------------------------------- The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. TRANSFER OF STOCK Section 31. Transfer of Stock. - ----------- ------------------ Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on its books. RECORD DATES AND CLOSING OF TRANSFER BOOKS Section 32. Record Dates and Closing of Transfer Books. - ----------- ------------------------------------------- The Board of Directors may fix a time not exceeding sixty (60) days preceding the date of any meeting of stockholders or the date fixed for the payment of any dividend or distribution or the date for the allotment of rights as the record date for the determination of the stockholders entitled to notice of or to vote at any such meeting or entitled to receive payment of any such dividend, distribution or allotment of rights, and in such case only stockholders of record on the date so fixed shall be entitled to notice of or to vote at such meeting or to receive payment of such dividend, distribution or allotment of rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of the period between such record date and the date of the event in respect for which such record date was fixed. REGISTERED STOCKHOLDERS Section 33. Recognition of Record Ownership. - ----------- -------------------------------- The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Pennsylvania. GENERAL PROVISIONS DIVIDENDS Section 34. Payment of Dividends. - ----------- --------------------- The Board of Directors may declare dividends upon the capital stock of the Corporation, subject to the provisions of the Articles of Incorporation, if any, at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Articles of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Directors shall think conducive to the interest of the Corporation and the Directors may modify or abolish any such reserves in the manner in which it was created. FISCAL YEAR Section 35. Fiscal Year. - ----------- ------------ The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SEAL Section 36. Corporate Seal. - ----------- --------------- The corporate seal of the Corporation shall be of such design, and shall contain such words, as may be prescribed by the Directors. TRANSFER AGENT AND REGISTRAR Section 37. Transfer Agent; Registrar. - ----------- -------------------------- The Corporation may open transfer books in any state of the United States or in any foreign country for the purpose of transferring securities issued by it, and it may employ an agent or agents to keep the records of its securities to transfer or to register securities or both, in Pennsylvania or in other states or in a foreign country, or both, and the acts of such agents shall be binding on the Corporation. The duties and liabilities of such agent or agents shall be such as may be agreed to by the Corporation. If no such transfer agent is appointed to act in Pennsylvania in respect to its shares, the Corporation shall keep an office in Pennsylvania at which shares shall be transferable, and at which it shall keep books in which shall be recorded the names and addresses of all stockholders and all transfers of shares. PROVISIONS IN ARTICLES OF INCORPORATION Section 38. Governance By Articles of Incorporation. - ----------- ---------------------------------------- These By-Laws are at all times subject to the provisions of the Amended and Restated Articles of Incorporation of the Corporation (including in such term whenever used in these By-Laws, amendments thereto), and in case of any conflict between any provision herein and in the Amended and Restated Articles of Incorporation, the provisions in the Amended and Restated Articles of Incorporation shall be deemed to govern. AMENDMENTS Section 39. Procedure for Amendments. - ----------- ------------------------- These By-Laws may be altered, changed or amended in any respect or superseded by new By-Laws in whole or in part, by the affirmative vote of the holders of record of shares entitling them to exercise a majority of the voting power of the Corporation at an annual or special meeting called for such purpose or without a meeting by the consent of the holders of record of shares entitling them to exercise a majority of the voting power of the Corporation. In case of adoption of any By-Law or amendment by such consent, the Corporate Secretary shall enter the same in the corporate records and mail a copy thereof to each stockholder who would have been entitled to vote thereon and did not participate in the adoption thereof. INDEMNIFICATION AND INSURANCE Section 40. Indemnification. - ----------- ---------------- The Corporation shall indemnify, to the full extent then permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a member of the Board of Directors or an officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall indemnify such person against expenses, including attorney's fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him by reason of the fact that he is or was such person to the full extent to which the Corporation is empowered or authorized to indemnify any person under the Pennsylvania Business Corporation Law as now in effect or as amended from time to time. The Corporation shall pay, to the full extent then permitted by law, expenses, including attorney's fees, incurred by a member of the Board of Directors in defending any such action, suit or proceeding as they are incurred, in advance of the final disposition thereof, and may pay, in the same manner and to the full extent then permitted by law, such expenses incurred by any other person. The indemnification and payment of expenses provided hereby shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under any law, the Articles of Incorporation, any agreement, vote of stockholders or disinterested members of the Board of Directors, or otherwise, both as to action in official capacities and as to action in another capacity while he or she is a member of the Board of Directors, or an officer, employee or agent of the Corporation, and shall continue as to a person who has ceased to be a member of the Board of Directors, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 41. Insurance. - ----------- ---------- The Corporation may, to the full extent then permitted by law and authorized by the Board of Directors, purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit or self-insurance, on behalf of or for any persons described in Section 40 against any liability asserted against and incurred by any such person in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such liability. Insurance may be purchased from or maintained with a person in which the Corporation has a financial interest. I, the undersigned, being Corporate Secretary of Pennsylvania Power Company, do hereby certify the foregoing to be the By-Laws of said Corporation, as adopted in an action in writing of the stockholders dated the 15th day of March, 2002. ------------------------------------ Nancy C. Ashcom Corporate Secretary EX-4 43 ex4-3.txt SUPPLEMENTAL INDENTURE - PENN PENNSYLVANIA POWER COMPANY To CITIBANK, N.A., As Trustee ----------- Forty-ninth Supplemental Indenture Providing among other things for First Mortgage Bond, Pledge Series A of 2001 due 2021 First Mortgage Bond, Pledge Series B of 2001 due 2017 Dated as of June 1, 2001 FORTY-NINTH SUPPLEMENTAL INDENTURE, dated as of June 1, 2001, made and entered into by and between PENNSYLVANIA POWER COMPANY, a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, with its principal place of business in Akron, Summit County, Ohio (hereinafter sometimes referred to as the "Company") and CITIBANK, N.A., a national banking association incorporated and existing under the laws of the United States of America, with its principal office in the Borough of Manhattan, The City, County and State of New York (hereinafter sometimes referred to as the "Trustee"), as trustee under the Indenture dated as of November 1, 1945 between the Company and CITIBANK, N.A. (successor to The First National Bank of The City of New York), as trustee, as supplemented and amended by Supplemental Indentures between the Company and the Trustee, dated as of May 1, 1948, as of March 1, 1950, as of February 1, 1952, as of October 1, 1957, as of September 1, 1962, as of June 1, 1963, as of June 1, 1969, as of May 1, 1970, as of April 1, 1971, as of October 1, 1971, as of May 1, 1972, as of December 1, 1974, as of October 1, 1975, as of September 1, 1976, as of April 15, 1978, as of June 28, 1979, as of January 1, 1980, as of June 1, 1981, as of January 14, 1982, as of August 1, 1982, as of December 15, 1982, as of December 1, 1983, as of September 6, 1984, as of December 1, 1984, as of May 30, 1985, as of October 29, 1985, as of August 1, 1987, as of May 1, 1988, as of November 1, 1989, as of December 1, 1990, as of September 1, 1991, as of May 1, 1992, as of July 15, 1992, as of August 1, 1992, as of May 1, 1993, as of July 1, 1993, as of August 31, 1993, as of September 1, 1993, as of September 15, 1993, as of October 1, 1993, as of November 1, 1993, as of August 1, 1994, as of September 1, 1995, as of June 1, 1997, as of June 1, 1998, as of September 29, 1999 and as of November 15, 1999 (said Indenture as so supplemented and amended, and as hereby supplemented and amended, being hereinafter sometimes referred to as the "Indenture"); WHEREAS, the Company and the Trustee have executed and delivered the Indenture for the purpose of securing an issue of bonds of the First Series described therein and such additional bonds as may from time to time be issued under and in accordance with the terms of the Indenture, the aggregate principal amount of bonds to be secured thereby being not limited, and the Indenture fully describes and sets forth the property conveyed thereby and is filed with the Secretary of the Commonwealth of Pennsylvania and the Secretary of State of the State of Ohio and will be of record in the office of the recorder of deeds of each county in the Commonwealth of Pennsylvania and the State of Ohio in which this Forty-ninth Supplemental Indenture is to be recorded and is on file at the corporate trust office of the Trustee, above referred to; and WHEREAS, the Indenture provides for the issuance of bonds thereunder in one or more series and the Company, by appropriate corporate action in conformity with the terms of the Indenture, has duly determined to create two such series of bonds under the Indenture, to be designated, respectively, as "First Mortgage Bonds, Pledge Series A of 2001 due 2021" (hereinafter sometimes referred to as the "bonds of the 2021 Series"), the bonds of which are to bear interest at the same rate as that of the Beaver County Industrial Authority Pollution Control Revenue Refunding Bonds, Series 2001-A (Pennsylvania Power Company Project) referred to herein, and are to mature on September 1, 2021, and First Mortgage Bonds, Pledge Series B of 2001 due 2017" (hereinafter sometimes referred to as the "bonds of the 2017 Series"), the bonds of which are to bear interest at the same rate as that of the Lawrence County Industrial Authority Pollution Control Revenue Refunding Bonds, Series 2001-A (Pennsylvania Power Company Project) referred to herein, and are to mature on March 1, 2017; AND WHEREAS each of the bonds of the 2021 Series and the bonds of the 2017 Series and in each case the Trustee's Authentication Certificate thereon are to be substantially in the following forms, respectively, to wit: [FORM OF BOND OF THE 2021 SERIES] [FACE] This Bond is not transferable except to a successor to Ambac Assurance Corporation under the Insurance Agreement, dated as of June 1, 2001, between the Company and Ambac Assurance Corporation, or in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company. PENNSYLVANIA POWER COMPANY FIRST MORTGAGE BOND, PLEDGE SERIES A OF 2001 DUE 2021 $__________ No.___________ PENNSYLVANIA POWER COMPANY, a Pennsylvania corporation (hereinafter called the "Company"), for value received, hereby promises to pay to_________________, registered assigns, the principal sum of _____________________________________ Dollars on September 1, 2021, and to pay the registered holder hereof interest on said sum from the Initial Interest Accrual Date (hereinbelow defined) at the rate from time to time borne by the Beaver County Industrial Development Authority Pollution Control Revenue Refunding Bonds, Series 2001-A (Pennsylvania Power Company Project) (the "Authority Bonds") issued on behalf of the Company by the Beaver County Industrial Development Authority (the "Authority ") under the Trust Indenture, dated as of June 1, 2001 ("Authority Bond Indenture"), between the Authority and The Bank of New York, as trustee (such trustee and any successor trustee being hereinafter referred to as the "Authority Bond Trustee"); provided, however, that in no event shall the rate of interest borne by the Bonds of this series exceed 10% per annum. The principal of and interest on this bond shall be payable at the office or agency of the Company in the Borough of Manhattan, The City, County and State of New York, or in the City of Akron, State of Ohio, designated for that purpose, in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. This bond shall not be valid or become obligatory for any purpose unless and until it shall have been authenticated by the execution by the Trustee or its successor in trust under the Indenture of the certificate hereon. IN WITNESS WHEREOF, PENNSYLVANIA POWER COMPANY has caused this bond to be executed in its name by its President or one of its Vice Presidents by his or her signature or a facsimile thereof, and its corporate seal or a facsimile thereof to be affixed hereto or imprinted hereon and attested by its Corporate Secretary or one of its Assistant Corporate Secretaries by his or her signature or a facsimile thereof. Dated: PENNSYLVANIA POWER COMPANY By ----------------------------- Vice President Attest: - ----------------------------- Corporate Secretary [FORM OF TRUSTEE'S AUTHENTICATION CERTIFICATE] TRUSTEE'S AUTHENTICATION CERTIFICATE This bond is one of the bonds, of the series designated therein, described in the within-mentioned Indenture. CITIBANK, N.A. as Trustee, By --------------------------- Authorized Officer [FORM OF BOND OF THE 2021 SERIES] [REVERSE] PENNSYLVANIA POWER COMPANY FIRST MORTGAGE BOND, PLEDGE SERIES A OF 2001 DUE 2021 This bond is one of the bonds issued and to be issued from time to time under and in accordance with and all secured by an indenture of mortgage or deed of trust dated as of November 1, 1945, and indentures supplemental thereto, given by the Company to Citibank, N.A. (successor to The First National Bank of The City of New York), as trustee (hereinafter referred to as the "Trustee"), to which indenture and indentures supplemental thereto (hereinafter referred to collectively as the "Indenture") reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security and the rights, duties and immunities thereunder of the Trustee and the rights of the holders of the bonds and coupons and of the Trustee and of the Company in respect of such security, and the limitations on such rights. By the terms of the Indenture, the bonds to be secured thereby are issuable in series which may vary as to date, amount, date of maturity, rate of interest, terms of redemption and in other respects as in the Indenture provided. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than seventy-five per centum in principal amount of the bonds (exclusive of bonds disqualified by reason of the Company's interest therein) at the time outstanding, including, if more than one series of bonds shall be at the time outstanding, not less than sixty per centum in principal amount of each series affected, to effect, by an indenture supplemental to the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and the rights of the holders of the bonds and coupons; provided, however, that no such modification or alteration shall be made without the written approval or consent of the holder hereof which will (a) extend the maturity of this bond or reduce the rate or extend the time of payment of interest hereon or reduce the amount of the principal hereof or reduce any premium payable on the redemption hereof, or (b) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of the Indenture, or (c) reduce the percentage of the principal amount of the bonds upon the approval or consent of the holders of which modifications or alterations may be made as aforesaid. The bonds of this series are issued and to be issued in order to provide security to Ambac Assurance Corporation, a Wisconsin domiciled stock insurance corporation ("the Insurer") in connection with its issuance of a financial guaranty insurance policy (the "Policy") in favor of the holders of the Authority Bonds pursuant to the Insurance Agreement (the "Insurance Agreement") dated as of June 27, 2001 between the Insurer and the Company. In order to provide monies to fund a loan made by the Authority to the Company pursuant to a Pollution Control Facilities Loan Agreement dated as of June 1, 2001 between the Authority and the Company (the "Loan Agreement"), the Authority has issued the Authority Bonds under and pursuant to the Authority Indenture. Payments made by the Company of principal and interest on the bonds of this series are intended to be sufficient to reimburse the Insurer for any payments of principal and interest made by the Insurer on the Authority Bonds pursuant to the Policy. The bonds of this series are not transferable except (i) as required to effect an assignment to a successor of the Insurer under the Insurance Agreement or (ii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company. The "Initial Interest Payment Date" on the bonds of this series shall be the date one (1) business day following the receipt by the Insurer of written notification of Nonpayment (as defined in the Policy) of interest on the Authority Bonds when such interest shall have come Due for Payment (as defined in the Policy), written notification of which the Insurer shall provide to the Company and the Trustee, and the "Initial Interest Accrual Date" shall be the date six months prior to such Initial Interest Payment Date. The next Interest Payment Date shall be the date six months after the Initial Interest Payment Date, and each successive Interest Payment Date shall be the date six months after the immediately preceding Interest Payment Date; provided, however, that the last Interest Payment Date shall be the date of maturity of the bonds of this series and the interest so payable on such maturity date shall accrue from the immediately preceding Interest Payment Date to but not including such maturity date. Notwithstanding anything herein to the contrary, the amount of interest payable on the bonds of the series on any Interest Payment Date (including the Initial Interest Payment Date) shall not exceed the amount actually paid to holders of Authority Bonds by the Insurer under the Policy in respect of the Nonpayment of interest Due for Payment on the Authority Bonds over the period from the immediately preceding Interest Payment Date to and including such Interest Payment Date (or if such Interest Payment Date is the Initial Interest Payment Date, then from the Initial Interest Accrual Date to such Interest Payment Date). The Company's obligation to make payments with respect to the principal of and/or interest on the bonds of this series shall be fully or partially satisfied and discharged to the extent that, at the time any such payment shall be due, the corresponding amount then due of principal of and/or interest on the Authority Bonds shall have been fully or partially paid (other than by the application of the proceeds of any payment by the Insurer under the Policy), as the case may be, or there shall have been deposited with the Authority Trustee pursuant to the Authority Indenture trust funds sufficient under such indenture to fully or partially pay, as the case may be, the corresponding amount then due of principal of and/or interest on the Authority Bonds (other than by the application of the proceeds of any payment by the Insurer under the Policy). Notwithstanding anything contained herein or in the Indenture to the contrary, the Company shall be obligated to make payments with respect to the principal of and/or interest on the bonds of this series only to the extent that the Insurer has made a payment with respect to the Authority Bonds under the Policy. Upon payment of the principal of and interest due on the Authority Bonds, whether at maturity or prior to maturity by acceleration, redemption or otherwise, or upon provision for the payment thereof having been made in accordance with the Authority Indenture (other than by the application of the proceeds of any payment by the Insurer under the Policy), the bonds of this series in a principal amount equal to the principal amount of Authority Bonds so paid or for which such provision for payment has been made shall be deemed fully paid, satisfied and discharged and the obligations of the Company thereunder shall be terminated and such bonds of this series shall be surrendered to and canceled by the Trustee. From and after the Release Date (as defined in the Insurance Agreement), the bonds of this series shall be deemed fully paid, satisfied and discharged and the obligation of the Company thereunder shall be terminated. On the Release Date, the bonds of this series shall be surrendered to and canceled by the Trustee. The bonds of this series are subject to mandatory redemption, in whole or in part, as the case may be, on each date that Authority Bonds are to be redeemed. The principal amount of the Bonds of this series to be redeemed on any such date shall be equal to the principal amount of Authority Bonds called for redemption on that date. All redemptions of bonds of this series shall be at 100% of the principal amount thereof, plus accrued interest to the redemption date. In case of certain defaults as specified in the Indenture, the principal of this bond may be declared or may become due and payable on the conditions, at the time, in the manner and with the effect provided in the Indenture. No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator, stockholder, director or officer, past, present or future, as such, of the Company, or of any predecessor or successor company, either directly or through the Company, or such predecessor or successor company, or otherwise, under any constitution or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, stockholders, directors and officers, as such, being waived and released by the holder and owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture. The bonds of this series are issuable only as registered bonds without coupons in denominations of $1,000 and, if higher, any authorized multiple of $1,000. Except as may be stated in any legend written on the face of this bond, this bond is transferable by the registered holder hereof, in person or by attorney duly authorized, at the corporate trust office of the Trustee, in the Borough of Manhattan, The City, County and State of New York, or at such other place or places as the Company may designate by resolution of the Board of Directors, but only in the manner and upon the conditions prescribed in the Indenture, upon the surrender and cancellation of this bond and the payment of charges for transfer, and upon any such transfer a new registered bond or bonds, without coupons, of the same series and maturity date and for the same aggregate principal amount, in authorized denominations, will be issued to the transferee in exchange herefor. The Company, the Trustee and any agent designated to make transfers or exchanges of bonds of this series may deem and treat the person in whose name this bond is registered as the absolute owner for all purposes including the purpose of the receipt of payment. Registered bonds of this series shall be exchangeable at said corporate trust office of the Trustee, or at such other place or places as the Company may designate by resolution of the Board of Directors, for registered bonds of other authorized denominations having the same aggregate principal amount, in the manner and upon the conditions prescribed in the Indenture. Neither the Company nor the Trustee nor any other agent designated for such purpose shall be required to make transfers or exchanges of bonds of this series during the period between any interest payment date for such series and the record date next preceding such interest payment date. Notwithstanding any provisions of the Indenture, no charge shall be made upon any transfer or exchange of bonds of this series other than for any tax or taxes or other governmental charge required to be paid by the Company. [END OF FORM OF BOND OF THE 2021 SERIES] [FORM OF BOND OF THE 2017 SERIES] [FACE] This Bond is not transferable except to a successor to Ambac Assurance Corporation under the Insurance Agreement, dated as of June 1, 2001, between the Company and Ambac Assurance Corporation, or in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company. PENNSYLVANIA POWER COMPANY FIRST MORTGAGE BOND, PLEDGE SERIES B OF 2001 DUE 2017 $______________ No.___________ PENNSYLVANIA POWER COMPANY, a Pennsylvania corporation (hereinafter called the "Company"), for value received, hereby promises to pay to , or registered assigns, the principal sum of Dollars on March 1, 2017, and to pay the registered holder hereof interest on said sum from the Initial Interest Accrual Date (hereinbelow defined) at the rate from time to time borne by the Lawrence County Industrial Development Authority Pollution Control Revenue Refunding Bonds, Series 2001-B (Pennsylvania Power Company Project) (the "Authority Bonds") issued on behalf of the Company by the Lawrence County Industrial Development Authority (the "Authority ") under the Trust Indenture, dated as of June 1, 2001 ("Authority Bond Indenture"), between the Authority and The Bank of New York, as trustee (such trustee and any successor trustee being hereinafter referred to as the "Authority Bond Trustee"); provided, however, that in no event shall the rate of interest borne by the Bonds of this series exceed 10% per annum. The principal of and interest on this bond shall be payable at the office or agency of the Company in the Borough of Manhattan, The City, County and State of New York, or in the City of Akron, State of Ohio, designated for that purpose, in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. This bond shall not be valid or become obligatory for any purpose unless and until it shall have been authenticated by the execution by the Trustee or its successor in trust under the Indenture of the certificate hereon. IN WITNESS WHEREOF, PENNSYLVANIA POWER COMPANY has caused this bond to be executed in its name by its President or one of its Vice Presidents by his or her signature or a facsimile thereof, and its corporate seal or a facsimile thereof to be affixed hereto or imprinted hereon and attested by its Corporate Secretary or one of its Assistant Corporate Secretaries by his or her signature or a facsimile thereof. Dated: PENNSYLVANIA POWER COMPANY By --------------------------- Vice President Attest: - ----------------------------- Corporate Secretary [FORM OF TRUSTEE'S AUTHENTICATION CERTIFICATE] TRUSTEE'S AUTHENTICATION CERTIFICATE This bond is one of the bonds, of the series designated therein, described in the within-mentioned Indenture. CITIBANK, N.A. as Trustee, By ---------------------------- Authorized Officer [FORM OF BOND OF THE 2017 SERIES] [REVERSE] PENNSYLVANIA POWER COMPANY FIRST MORTGAGE BOND, PLEDGE SERIES B OF 2001 DUE 2017 This bond is one of the bonds issued and to be issued from time to time under and in accordance with and all secured by an indenture of mortgage or deed of trust dated as of November 1, 1945, and indentures supplemental thereto, given by the Company to Citibank, N.A. (successor to The First National Bank of The City of New York), as trustee (hereinafter referred to as the "Trustee"), to which indenture and indentures supplemental thereto (hereinafter referred to collectively as the "Indenture") reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security and the rights, duties and immunities thereunder of the Trustee and the rights of the holders of the bonds and coupons and of the Trustee and of the Company in respect of such security, and the limitations on such rights. By the terms of the Indenture, the bonds to be secured thereby are issuable in series which may vary as to date, amount, date of maturity, rate of interest, terms of redemption and in other respects as in the Indenture provided. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than seventy-five per centum in principal amount of the bonds (exclusive of bonds disqualified by reason of the Company's interest therein) at the time outstanding, including, if more than one series of bonds shall be at the time outstanding, not less than sixty per centum in principal amount of each series affected, to effect, by an indenture supplemental to the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and the rights of the holders of the bonds and coupons; provided, however, that no such modification or alteration shall be made without the written approval or consent of the holder hereof which will (a) extend the maturity of this bond or reduce the rate or extend the time of payment of interest hereon or reduce the amount of the principal hereof or reduce any premium payable on the redemption hereof, or (b) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of the Indenture, or (c) reduce the percentage of the principal amount of the bonds upon the approval or consent of the holders of which modifications or alterations may be made as aforesaid. The bonds of this series are issued and to be issued in order to provide security to Ambac Assurance Corporation, a Wisconsin domiciled stock insurance corporation, (the "Insurer") in connection with its issuance of a financial guaranty insurance policy (the "Policy") in favor of the holders of the Authority Bonds pursuant to the Insurance Agreement (the "Insurance Agreement") dated as of June 27, 2001 between the Insurer and the Company. In order to provide monies to fund a loan made by the Authority to the Company pursuant to a Pollution Control Facilities Loan Agreement dated as of June 1, 2001 between the Authority and the Company (the "Loan Agreement"), the Authority has issued the Authority Bonds under and pursuant to the Authority Indenture. Payments made by the Company of principal and interest on the bonds of this series are intended to be sufficient to reimburse the Insurer for any payments of principal and interest made by the Insurer on the Authority Bonds pursuant to the Policy. The bonds of this series are not transferable except (i) as required to effect an assignment to a successor of the Insurer under the Insurance Agreement or (ii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company. The "Initial Interest Payment Date" on the bonds of this series shall be the date one (1) business day following the receipt by the Insurer of written notification of Nonpayment (as defined in the Policy) of interest on the Authority Bonds when such interest shall have come Due for Payment (as defined in the Policy), written notification of which the Insurer shall provide to the Company and the Trustee, and the "Initial Interest Accrual Date" shall be the date six months prior to such Initial Interest Payment Date. The next Interest Payment Date shall be the date six months after the Initial Interest Payment Date, and each successive Interest Payment Date shall be the date six months after the immediately preceding Interest Payment Date; provided, however, that the last Interest Payment Date shall be the date of maturity of the bonds of this series and the interest so payable on such maturity date shall accrue from the immediately preceding Interest Payment Date to but not including such maturity date. Notwithstanding anything herein to the contrary, the amount of interest payable on the bonds of the series on any Interest Payment Date (including the Initial Interest Payment Date) shall not exceed the amount actually paid to holders of Authority Bonds by the Insurer under the Policy in respect of the Nonpayment of interest Due for Payment on the Authority Bonds over the period from the immediately preceding Interest Payment Date to and including such Interest Payment Date (or if such Interest Payment Date is the Initial Interest Payment Date, then from the Initial Interest Accrual Date to such Interest Payment Date). The Company's obligation to make payments with respect to the principal of and/or interest on the bonds of this series shall be fully or partially satisfied and discharged to the extent that, at the time any such payment shall be due, the corresponding amount then due of principal of and/or interest on the Authority Bonds shall have been fully or partially paid (other than by the application of the proceeds of any payment by the Insurer under the Policy), as the case may be, or there shall have been deposited with the Authority Trustee pursuant to the Authority Indenture trust funds sufficient under such indenture to fully or partially pay, as the case may be, the corresponding amount then due of principal of and/or interest on the Authority Bonds (other than by the application of the proceeds of any payment by the Insurer under the Policy). Notwithstanding anything contained herein or in the Indenture to the contrary, the Company shall be obligated to make payments with respect to the principal of and/or interest on the bonds of this series only to the extent that the Insurer has made a payment with respect to the Authority Bonds under the Policy. Upon payment of the principal of and interest due on the Authority Bonds, whether at maturity or prior to maturity by acceleration, redemption or otherwise, or upon provision for the payment thereof having been made in accordance with the Authority Indenture (other than by the application of the proceeds of any payment by the Insurer under the Policy), the bonds of this series in a principal amount equal to the principal amount of Authority Bonds so paid or for which such provision for payment has been made shall be deemed fully paid, satisfied and discharged and the obligations of the Company thereunder shall be terminated and such bonds of this series shall be surrendered to and canceled by the Trustee. From and after the Release Date (as defined in the Insurance Agreement), the bonds of this series shall be deemed fully paid, satisfied and discharged and the obligation of the Company thereunder shall be terminated. On the Release Date, the bonds of this series shall be surrendered to and canceled by the Trustee. The bonds of this series are subject to mandatory redemption, in whole or in part, as the case may be, on each date that Authority Bonds are to be redeemed. The principal amount of the Bonds of this series to be redeemed on any such date shall be equal to the principal amount of Authority Bonds called for redemption on that date. All redemptions of bonds of this series shall be at 100% of the principal amount thereof, plus accrued interest to the redemption date. In case of certain defaults as specified in the Indenture, the principal of this bond may be declared or may become due and payable on the conditions, at the time, in the manner and with the effect provided in the Indenture. No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator, stockholder, director or officer, past, present or future, as such, of the Company, or of any predecessor or successor company, either directly or through the Company, or such predecessor or successor company, or otherwise, under any constitution or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, stockholders, directors and officers, as such, being waived and released by the holder and owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture. The bonds of this series are issuable only as registered bonds without coupons in denominations of $1,000 and, if higher, any authorized multiple of $1,000. Except as may be stated in any legend written on the face of this bond, this bond is transferable by the registered holder hereof, in person or by attorney duly authorized, at the corporate trust office of the Trustee, in the Borough of Manhattan, The City, County and State of New York, or at such other place or places as the Company may designate by resolution of the Board of Directors, but only in the manner and upon the conditions prescribed in the Indenture, upon the surrender and cancellation of this bond and the payment of charges for transfer, and upon any such transfer a new registered bond or bonds, without coupons, of the same series and maturity date and for the same aggregate principal amount, in authorized denominations, will be issued to the transferee in exchange herefor. The Company, the Trustee and any agent designated to make transfers or exchanges of bonds of this series may deem and treat the person in whose name this bond is registered as the absolute owner for all purposes including the purpose of the receipt of payment. Registered bonds of this series shall be exchangeable at said corporate trust office of the Trustee, or at such other place or places as the Company may designate by resolution of the Board of Directors, for registered bonds of other authorized denominations having the same aggregate principal amount, in the manner and upon the conditions prescribed in the Indenture. Neither the Company nor the Trustee nor any other agent designated for such purpose shall be required to make transfers or exchanges of bonds of this series during the period between any interest payment date for such series and the record date next preceding such interest payment date. Notwithstanding any provisions of the Indenture, no charge shall be made upon any transfer or exchange of bonds of this series other than for any tax or taxes or other governmental charge required to be paid by the Company. [END OF FORM OF BOND OF THE 2017 SERIES] AND WHEREAS all acts and things necessary to make the bonds, when authenticated by the Trustee and issued as in the Indenture provided, the valid, binding and legal obligations of the Company, and to constitute the Indenture a valid, binding and legal instrument for the security thereof, have been done and performed, and the creation, execution and delivery of the Indenture and the creation, execution and issue of the bonds subject to the terms hereof and of the Indenture, have in all respects been duly authorized; NOW THEREFORE, in consideration of the premises, and of the acceptance and purchase by holders thereof of the bonds issued and to be issued under the Indenture, and the sum of One Dollar duly paid by the Trustee to the Company, and of other good and valuable consideration, the receipt of which is hereby acknowledged, and for the purpose of securing the due and punctual payment of the principal of and premium, if any, and interest on all bonds now outstanding under the Indenture and the $14,925,000 principal amount of bonds of the 2021 Series and the $17,925,000 principal amount of bonds of the 2017 Series proposed presently to be issued and all other bonds which shall be issued under the Indenture, and for the purpose of securing the faithful performance and observance of all covenants and conditions therein and in any supplemental indenture set forth, the Company has given, granted, bargained, sold, released, transferred, assigned, hypothecated, pledged, mortgaged, confirmed, created a security interest in, set over, warranted, aliened and conveyed and by these presents does give, grant, bargain, sell, release, transfer, assign, hypothecate, pledge, mortgage, confirm, create a security interest in, set over, warrant, alien and convey unto Citibank, N.A., as Trustee as provided in the Indenture, and its successor or successors in the trust thereby and hereby created and to its or their assigns forever, all the right, title and interest of the Company in and to the property described in the Indenture (and not therein expressly excepted), together (subject to the provisions of Article X of the Indenture) with the tolls, rents, revenues, issues, earnings, income, products and profits thereof, and does hereby confirm that the Company will not cause or consent to a partition, whether voluntary or through legal proceedings, of property, whether herein described or heretofore or hereafter acquired, in which its ownership shall be as a tenant in common except as permitted by and in conformity with the provisions of the Indenture and particularly of said Article X thereof. TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the premises, property, franchises and rights, or any thereof, referred to in the Indenture (and not therein expressly excepted) with the reversion and reversions, remainder and remainders and (subject to the provisions of Article X of the Indenture) the tolls, rents, revenues, issues, earnings, income, products and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to such premises, property, franchises and rights and every part and parcel thereof, subject to "excepted encumbrances" of the original Indenture. TO HAVE AND TO HOLD all said premises, property, franchises and rights hereby conveyed, assigned, pledged, or mortgaged, or intended so to be, unto the Trustee, its successor or successors in trust, and their assigns forever. BUT IN TRUST, NEVERTHELESS, with power of sale, for the equal and proportionate benefit and security of the holders of all bonds now or hereafter authenticated and delivered under the Indenture, and interest coupons appurtenant thereto, pursuant to the provisions thereof, and for the enforcement of the payment of said bonds and coupons when payable and the performance of and compliance with the covenants and conditions of the Indenture, without any preference, distinction or priority as to lien or otherwise of any bond or bonds over others by reason of the difference in time of the actual authentication, delivery, issue, sale or negotiation thereof or for any other reason whatsoever, except as otherwise expressly provided in the Indenture; and so that each and every bond now or hereafter authenticated and delivered thereunder shall have the same lien, and so that the principal of and premium, if any, and interest on every such bond shall, subject to the terms of the Indenture, be equally and proportionately secured thereby and hereby, as if it had been made, executed, authenticated, delivered, sold and negotiated simultaneously with the execution and delivery of the Indenture. AND IT IS EXPRESSLY DECLARED that all bonds authenticated and delivered and secured thereunder and hereunder are to be issued, authenticated and delivered, and all said premises, property, franchises and rights hereby and by the Indenture conveyed, assigned, pledged or mortgaged, or intended so to be (including all the right, title and interest of the Company in and to any and all premises, property, franchises and rights of every kind and description, real, personal and mixed, tangible and intangible, thereafter acquired by the Company and whether or not specifically described in the Indenture, except any therein expressly excepted), are to be dealt with and disposed of, under, upon and subject to the terms, conditions, stipulations, covenants, agreements, trusts, uses and purposes in the Indenture expressed, and it is hereby agreed as follows: SECTION 1. There is hereby created a series of bonds designated Pledge Series A of 2001 due 2021, which shall also bear the descriptive title "First Mortgage Bond" and the form of such series shall be substantially as hereinbefore set forth. Bonds of the 2021 Series shall mature on September 1, 2021. The bonds of the 2021 Series may be issued only as registered bonds without coupons in denominations of $1,000 or, if higher, in such multiples of $1,000 as the Board of Directors shall approve, and delivery to the Trustee for authentication shall be conclusive evidence of such approval. The serial numbers of bonds of the 2021 Series shall be such as may be approved by any officer of the Company, the execution thereof by any such officer, by facsimile signature or otherwise, to be conclusive evidence of such approval. Bonds of the 2021 Series shall bear interest from the Initial Interest Accrual Date (as defined in the form of the bonds of the 2021 Series hereinabove set forth) at the rate set forth in the form thereof hereinbefore set forth. Principal or redemption price of and interest on said bonds shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts at the office or agency of the Company in the Borough of Manhattan, The City, County and State of New York, designated for that purpose. Bonds of the 2021 Series shall be exchangeable and transferable as and to the extent set forth in the form thereof hereinbefore set forth. The bonds of the 2021 Series shall be redeemable as set forth in the form thereof hereinbefore set forth in whole or in part, prior to maturity, upon notice given by mailing the same, postage pre-paid, at least thirty days and not more than forty-five days prior to the date fixed for redemption to each registered holder of a bond to be redeemed at the last address of such holder appearing on the registry books. Redemption of the bonds of the 2021 Series shall be at the principal amount thereof, plus accrued interest thereon to the date fixed for redemption and such amount shall become due and payable on the date fixed for such redemption. SECTION 2. There is hereby created a series of bonds designated Pledge Series B of 2001 due 2017, which shall also bear the descriptive title "First Mortgage Bond" and the form of such series shall be substantially as hereinbefore set forth. Bonds of the 2017 Series shall mature on March 1, 2017. The bonds of the 2017 Series may be issued only as registered bonds without coupons in denominations of $1,000 or, if higher, in such multiples of $1,000 as the Board of Directors shall approve, and delivery to the Trustee for authentication shall be conclusive evidence of such approval. The serial numbers of bonds of the 2017 Series shall be such as may be approved by any officer of the Company, the execution thereof by any such officer, by facsimile signature or otherwise, to be conclusive evidence of such approval. Bonds of the 2017 Series shall bear interest from the Initial Interest Accrual Date (as defined in the form of the bonds of the 2017 Series hereinabove set forth) at the rate set forth in the form thereof hereinbefore set forth. Principal or redemption price of and interest on said bonds shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts at the office or agency of the Company in the Borough of Manhattan, The City, County and State of New York, designated for that purpose. Bonds of the 2017 Series shall be exchangeable and transferable as and to the extent set forth in the form thereof hereinbefore set forth. The bonds of the 2017 Series shall be redeemable as set forth in the form thereof hereinbefore set forth in whole or in part, prior to maturity, upon notice given by mailing the same, postage pre-paid, at least thirty days and not more than forty-five days prior to the date fixed for redemption to each registered holder of a bond to be redeemed at the last address of such holder appearing on the registry books. Redemption of the bonds of the 2017 Series shall be at the principal amount thereof, plus accrued interest thereon to the date fixed for redemption and such amount shall become due and payable on the date fixed for such redemption. SECTION 3. Bonds of the 2021 Series shall be deemed to be paid and no longer outstanding under the Indenture to the extent that Authority Bonds (as defined in the form of bonds of the 2021 Series hereinbefore set forth) which are outstanding from time to time under the Authority Bond Indenture (as defined in the form of bonds of the 2021 Series hereinbefore set forth) are paid or deemed to be paid and are no longer outstanding and the Trustee has been notified to such effect by the Company. Bonds of the 2017 Series shall be deemed to be paid and no longer outstanding under the Indenture to the extent that Authority Bonds (as defined in the form of bonds of the 2017 Series hereinbefore set forth) which are outstanding from time to time under the Authority Bond Indenture (as defined in the form of bonds of the 2017 Series hereinbefore set forth) are paid or deemed to be paid and are no longer outstanding and the Trustee has been notified to such effect by the Company. SECTION 4. The Company covenants and agrees that the provisions of Section 3 of the Fifth Supplemental Indenture dated as of September 1, 1962, which are to remain in effect so long as any bonds of the Sixth Series shall be outstanding under the Indenture, shall remain in full force and effect so long as any bonds of the 2021 Series or bonds of the 2017 Series shall be outstanding under the Indenture. SECTION 5. As supplemented and amended by this Supplemental Indenture, the Indenture is in all respects ratified and confirmed, and the Indenture and this Supplemental Indenture shall be read, taken and construed as one and the same instrument. SECTION 6. Nothing in this Supplemental Indenture contained shall, or shall be construed to, confer upon any person other than a holder of bonds issued under the Indenture, the Company and the Trustee any right or interest to avail himself of any benefit under any provision of the Indenture or of this Supplemental Indenture. SECTION 7. The Trustee assumes no responsibility for or in respect of the validity or sufficiency of this Supplemental Indenture or the due execution hereof by the Company or for or in respect of the recitals and statements contained herein, all of which recitals and statements are made solely by the Company. SECTION 8. This Supplemental Indenture may be executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. PENNSYLVANIA POWER COMPANY hereby constitutes and appoints Arthur R. Garfield to be its attorney for it and in its name as and for its corporate act and deed to acknowledge this Supplemental Indenture before any person having authority to take such acknowledgement, to the intent that the same may be duly recorded. CITIBANK, N.A. hereby constitutes and appoints P. De Felice to be its attorney for it and in its name as and for its corporate act and deed to acknowledge this Supplemental Indenture before any person having authority to take such acknowledgement, to the intent that the same may be duly recorded. IN WITNESS WHEREOF, PENNSYLVANIA POWER COMPANY has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by its President or a Vice President, and its corporate seal to be attested by its Corporate Secretary or an Assistant Corporate Secretary for and in its behalf, in the City of Akron, County of Summit and State of Ohio and CITIBANK, N.A., in token of its acceptance of the trust, has caused its corporate name to be hereunto affixed, and this instrument to be signed by a Vice President and its corporate seal to be affixed and attested by its Assistant Vice President in The City of New York, County of New York and State of New York, all as of the day and year first above written. PENNSYLVANIA POWER COMPANY, By: ------------------------------ Arthur R. Garfield Vice President ATTEST: By: ------------------------------ Nancy C. Ashcom Corporate Secretary [Seal] Signed, sealed and delivered by PENNSYLVANIA POWER COMPANY in the presence of: - -------------------------------- Michele Rankin - -------------------------------- Nadine Stith CITIBANK, N.A. as Trustee as aforesaid By: -------------------------------- P. DeFelice Vice President ATTEST: - ---------------------------- Assistant Vice President [Seal] Signed, sealed and delivered by CITIBANK, N.A. in the presence of: - ---------------------------- - ---------------------------- STATE OF OHIO ) ) ss.: COUNTY OF SUMMIT ) BE IT REMEMBERED that, on the 27th day of June, 2001 before me, the undersigned, a Notary Public in said County of Summit, State of Ohio, personally appeared Arthur R. Garfield, who being duly sworn according to law, doth depose and say that he was personally present and did see the common or corporate seal of the above named PENNSYLVANIA POWER COMPANY affixed to the foregoing Supplemental Indenture; that the seal so affixed is the common or corporate seal of the said Pennsylvania Power Company and was so affixed by the authority of the said corporation as the act and deed thereof; that the above named Arthur R. Garfield is a Vice President of said corporation and did sign the said Supplemental Indenture as such in the presence of this deponent; that this deponent is the Corporate Secretary of Pennsylvania Power Company, and that the name of this deponent above signed is attestation of the due execution of the said Supplemental Indenture is in this deponent's own proper handwriting. Sworn to and subscribed before me this 27th day of June, 2001. [SEAL] ---------------------------------- Susie M. Hoisten Notary Public Residence Summit County Statewide Jurisdiction Ohio My commission expires November 19, 2001 State of Ohio ) ) ss.: County of Summit ) I HEREBY CERTIFY THAT on this 27th day of June, 2001, before me, the subscriber, a Notary Public in and for the State and County aforesaid, personally appeared Arthur R. Garfield, the attorney for PENNSYLVANIA POWER COMPANY, and the attorney named in the foregoing Supplemental Indenture and, by virtue and in pursuance of the authority therein conferred upon him, acknowledged the said Supplemental Indenture to be the act and deed of said Pennsylvania Power Company. WITNESS my hand and notarial seal the day and year aforesaid. [SEAL] ---------------------------------- Susie M. Hoisten Notary Public Residence Summit County Statewide Jurisdiction Ohio My commission expires November 19, 2001 STATE OF OHIO ) )ss.: COUNTY OF SUMMIT ) On the 27th day of June, 2001, before me, personally came Arthur R. Garfield to me known, who, being by me duly sworn, did depose and say that he resides at 3846 Wisewood Street, Uniontown, Ohio 44685; that he is a Vice President of PENNSYLVANIA POWER COMPANY, one of the corporations described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like authority. WITNESS my hand and notarial seal the day and year aforesaid. [SEAL] ---------------------------------- Susie M. Hoisten Notary Public Residence Summit County Statewide Jurisdiction Ohio My commission expires November 19, 2001 STATE OF OHIO ) )ss.: COUNTY OF SUMMIT ) BE IT REMEMBERED that, on the 27th day of June, 2001 before me, the undersigned, a Notary Public in said County of New York, State of New York, personally appeared Nancy Forte, who being duly sworn according to law, doth depose and say that she was personally present and did see the common or corporate seal of the above named CITIBANK, N.A. affixed to the foregoing Supplemental Indenture; that the seal so affixed is the common or corporate seal of the said CITIBANK, N.A. and was so affixed by the authority of the said corporation as the act and deed thereof; that the above named, P. DeFelice is one of the Vice Presidents of said association and did sign the said Supplemental Indenture as such in the presence of this deponent; that this deponent is a Assistant Vice President of said CITIBANK, N.A., and that the name of this deponent above signed is attestation of the due execution of the said Supplemental Indenture is in this deponent's own proper handwriting. Sworn to and subscribed before me this 27th day of June, 2001. [SEAL] ------------------------------- STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK ) I HEREBY CERTIFY that on this 27th day of June, 2001, before me, the subscriber, a Notary Public in and for the State and County aforesaid, personally appeared P. DeFelice, the attorney for CITIBANK, N.A., and the attorney named in the foregoing Supplemental Indenture and, by virtue and in pursuance of the authority therein conferred upon him, acknowledged the execution of said Supplemental Indenture to be the act and deed of said CITIBANK, N.A. WITNESS my hand and notarial seal the day and year aforesaid. [SEAL] ------------------------------- STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 27th day of June, 2001 before me, personally came P. DeFelice, to me known, who being by me duly sworn, did depose and say that he resides at 47-09 169th Street, Flushing, New York 11358; that he is a Vice President of CITIBANK, N.A., one of the parties described in and which executed the above instrument; that he knows the seal of said association; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said association, and that he signed his name thereto by like authority. WITNESS my hand and notarial seal the day and year aforesaid. [SEAL] ------------------------------- Citibank, N.A. hereby certifies that its precise name and address as Trustee hereunder are: CITIBANK, N.A. 111 Wall Street - 14th Floor Borough of Manhattan City, County and State of New York 10005 CITIBANK, N.A. By: -------------------------------- P. DeFelice Vice President EX-12 44 ex12-5pp.txt FIXED CHARGE RATIO - PENN
EXHIBIT 12.5 Page 1 PENNSYLVANIA POWER COMPANY RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, -------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items.................... $31,472 $39,748 $12,648 $22,847 $ 41,041 Interest before reduction for amounts capitalized.... 22,438 21,073 21,317 20,437 18,172 Provision for income taxes........................... 26,658 32,504 18,834 26,121 39,921 Interest element of rentals charged to income (a).... 1,750 1,920 1,887 2,791 1,316 ------- ------- ------- ------- -------- Earnings as defined................................ $82,318 $95,245 $54,686 $72,196 $100,450 ======= ======= ======= ======= ======== FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest on long-term debt........................... $20,458 $19,255 $19,268 $18,651 $ 16,971 Interest on nuclear fuel obligations................. 276 28 90 364 141 Other interest expense............................... 1,704 1,789 1,959 1,422 1,060 Interest element of rentals charged to income (a).... 1,750 1,920 1,887 2,791 1,316 ------- ------- ------- ------- -------- Fixed charges as defined........................... $24,188 $22,992 $23,204 $23,228 $ 19,488 ======= ======= ======= ======= ======== RATIO OF EARNINGS TO FIXED CHARGES (b).................. 3.40 4.14 2.36 3.11 5.15 ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $483,000 and $273,000 for each of the two years ended December 31, 1998, respectively. The guarantee and related coal supply contract debt expired December 31, 1999.
EXHIBIT 12.5 Page 2 PENNSYLVANIA POWER COMPANY RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) Year Ended December 31, ---------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items........................... $31,472 $39,748 $12,648 $22,847 $ 41,041 Interest before reduction for amounts capitalized........... 22,438 21,073 21,317 20,437 18,172 Provision for income taxes.................................. 26,658 32,504 18,834 26,121 39,921 Interest element of rentals charged to income (a)........... 1,750 1,920 1,887 2,791 1,316 ------- ------- ------- ------- -------- Earnings as defined....................................... $82,318 $95,245 $54,686 $72,196 $100,450 ======= ======= ======= ======= ======== FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS): Interest on long-term debt.................................. $20,458 $19,255 $19,268 $18,651 $ 16,971 Interest on nuclear fuel obligations........................ 276 28 90 364 141 Other interest expense...................................... 1,704 1,789 1,959 1,422 1,060 Preferred stock dividend requirements....................... 4,626 4,626 4,370 3,704 3,703 Adjustment to preferred stock dividends to state on a pre-income tax basis 3,859 3,726 6,403 4,018 3,534 Interest element of rentals charged to income (a)........... 1,750 1,920 1,887 2,791 1,316 ------- ------- ------- ------- -------- Fixed charges as defined plus preferred stock dividend requirements (pre-income tax basis)............ $32,673 $31,344 $33,977 $30,950 $ 26,725 ======= ======= ======= ======= ======== RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) (b)...... 2.52 3.04 1.61 2.33 3.76 ==== ==== ==== ==== ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $483,000 and $273,000 for each of the two years ended December 31, 1998, respectively. The guarantee and related coal supply contract debt expired December 31, 1999.
EX-13 45 ex13-4pp.txt ANNUAL REPORT - PENN PENNSYLVANIA POWER COMPANY 2001 ANNUAL REPORT TO STOCKHOLDERS Pennsylvania Power Company, an electric utility operating company of FirstEnergy Corp. and a wholly owned subsidiary of Ohio Edison Company, provides electric service to approximately 153,000 customers in western Pennsylvania. Contents Page Selected Financial Data...................................... 1 Management's Discussion and Analysis......................... 2-6 Statements of Income......................................... 7 Balance Sheets............................................... 8 Statements of Capitalization................................. 9 Statements of Common Stockholder's Equity.................... 10 Statements of Preferred Stock................................ 10 Statements of Cash Flows..................................... 11 Statements of Taxes.......................................... 12 Notes to Financial Statements................................ 13-21 Report of Independent Public Accountants..................... 22
PENNSYLVANIA POWER COMPANY SELECTED FINANCIAL DATA 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Dollars in thousands) Operating Revenues.................... $498,401 $383,112 $ 329,234 $323,756 $ 323,381 ======== ======== ========== ======== ========== Operating Income...................... $ 55,178 $ 39,979 $ 32,063 $ 58,041 $ 50,736 ======== ======== ========== ======== ========== Income Before Extraordinary Item...... $ 41,041 $ 22,847 $ 12,648 $ 39,748 $ 31,472 ======== ======== ========== ======== ========== Net Income............................ $ 41,041 $ 22,847 $ 12,648 $ 9,226 $ 31,472 ======== ======== ========== ======== ========== Earnings on Common Stock.............. $ 37,338 $ 19,143 $ 8,278 $ 4,600 $ 26,846 ======== ======== ========== ======== ========== Total Assets.......................... $960,097 $988,909 $1,015,616 $977,772 $1,034,457 ======== ======== ========== ======== ========== CAPITALIZATION AT DECEMBER 31: Common Stockholder's Equity........... $223,788 $213,851 $ 199,608 $275,281 $ 291,977 Preferred Stock- Not Subject to Mandatory Redemption. 39,105 39,105 39,105 50,905 50,905 Subject to Mandatory Redemption..... 14,250 15,000 15,000 15,000 15,000 Long-Term Debt........................ 262,047 270,368 274,821 287,689 289,305 -------- -------- ---------- -------- ---------- Total Capitalization.................. $539,190 $538,324 $ 528,534 $628,875 $ 647,187 ======== ======== ========== ======== ========== CAPITALIZATION RATIOS: Common Stockholder's Equity........... 41.5% 39.7% 37.8% 43.8% 45.1% Preferred Stock- Not Subject to Mandatory Redemption. 7.3 7.3 7.4 8.1 7.9 Subject to Mandatory Redemption..... 2.6 2.8 2.8 2.4 2.3 Long-Term Debt........................ 48.6 50.2 52.0 45.7 44.7 ----- ----- ----- ----- ----- Total Capitalization.................. 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== DISTRIBUTION KILOWATT-HOUR DELIVERIES (Millions): Residential........................... 1,353 1,387 1,325 1,278 1,238 Commercial............................ 1,121 1,198 1,105 1,069 1,013 Industrial............................ 1,506 1,665 1,495 1,439 1,659 Other................................. 6 6 6 6 6 ----- ----- ----- ----- ----- Total................................. 3,986 4,256 3,931 3,792 3,916 ===== ===== ===== ===== ===== CUSTOMERS SERVED: Residential........................... 134,956 121,066 117,440 124,304 129,316 Commercial............................ 18,153 16,634 16,307 16,924 16,738 Industrial............................ 224 177 175 206 241 Other................................. 87 87 87 86 97 ------- ------- ------- ------- ------- Total................................. 153,420 137,964 134,009 141,520 146,392 ======= ======= ======= ======= ======= NUMBER OF EMPLOYEES (a)............... 256 275 895 888 997 === === === === === (a) Reduction in 2000 reflects transfer of responsibility for generation operations to FirstEnergy Corp.'s competitive services unit.
PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), and the availability and cost of capital. Corporate Separation - -------------------- In connection with FirstEnergy's Ohio transition plan, FirstEnergy separated its businesses into three distinct units - a competitive services unit, a regulated services unit and a corporate support services unit. Penn is included in the regulated services unit which continues to deliver power to homes and businesses through its existing distribution system and maintains the "provider of last resort" (PLR) obligation under its rate plan. FirstEnergy's electric utility operating companies (EUOC) have entered into power supply agreements whereby FirstEnergy Solutions Corp. (FES) purchases all of the EUOC nuclear generation, as well as generation from leased fossil generation facilities. FirstEnergy Generation Corp. (FGCO), a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. We are a "full requirements" customer of FES to enable us to meet our PLR responsibilities in our service area. The effect on our reported results of operations in 2001 from FirstEnergy's corporate separation plan and our sale of transmission assets to American Transmission Systems, Inc. (ATSI) in September 2000, are summarized in the following table: Corporate Restructuring - 2001 Income Statement Effects - -------------------------------------------------------------------------------- Increase (Decrease) Corporate Separation ATSI Total ---------- ---- ----- (In millions) Operating Revenues: Power supply agreement with FES. $151.5 $ -- $151.5 Generating units rent........... 20.2 -- 20.2 Ground lease with ATSI.......... -- 0.6 0.6 ----------------------------------------------------------------------------- Total Operating Revenues Effect. $171.7 $ 0.6 $172.3 ============================================================================= Operating Expenses and Taxes: Fossil fuel costs............... $(32.6)(a) $ -- $ (32.6) Purchased power costs........... 152.7 (b) -- 152.7 Other operating costs........... (21.1)(a) 4.9 (d) (16.2) Provision for depreciation and amortization -- (2.2)(e) (2.2) General taxes................... (2.4)(c) (0.3)(e) (2.7) Income Taxes.................... 31.1 -- 31.1 ----------------------------------------------------------------------------- Total Operating Expenses Effect. $127.7 $ 2.4 $ 130.1 ============================================================================= Other Income...................... $ -- $ 1.7 (f) $ 1.7 ============================================================================= (a) Transfer of fossil operations to FGCO. (b) Purchased power from power supply agreement (PSA). (c) Payroll taxes related to employees transferred to FGCO. (d) Transmission services received from ATSI. (e) Depreciation and property taxes related to transmission assets sold to ATSI. (f) Interest on note receivable from ATSI. Results of Operations - --------------------- Earnings on common stock in 2001 increased to $37.3 million from $19.1 million in 2000. Excluding the effects shown in the table above, earnings on common stock decreased to $6.6 million in 2001 from 2000, being adversely affected by reduced operating revenues, which were partially offset by reduced operating expenses and taxes and lower net interest charges. In 2000, earnings on common stock increased to $19.1 million from $8.3 million in 1999. Results for 2000 were favorably affected by higher operating revenues which were partially offset by increased nuclear operating expenses and taxes. Excluding the effects shown in the table above, operating revenues decreased by $57.0 million or 14.9% in 2001 from 2000 following a $53.9 million increase in 2000 from the prior year. The decrease primarily resulted from a $56.7 million reduction in wholesale revenues (a 93.3% decrease in wholesale kilowatt-hour sales) from the prior year due to the substitution of PSA sales for kilowatt-hour sales to other wholesale customers. Distribution deliveries declined 2.3% in 2001 from the prior year reflecting the influence of a declining national economy on our regional business activity that contributed to lower distribution deliveries to commercial and industrial customers. Partially offsetting the impact of a weaker economy was an increase in electric generation revenues reflecting a return of customers previously served by alternative generation suppliers. Retail generation sales increased in all customer categories resulting in an overall 4.8% increase in kilowatt-hour sales from the prior year. Electric generation services provided by other suppliers in our service area decreased to 4.1% from 10.6% in 2000. In 2000, service area growth combined with the return of customers previously served by alternative generation suppliers to increase retail sales revenues. Sales to all retail customer groups were substantially higher in 2000, compared to the preceding year, reflecting a stronger economy in our service area. The transfer of ownership in Penn Power Energy, Inc. (PPE) to FES in December 1999, offset a portion of the increased operating revenues in 2000. Substantial growth in wholesale kilowatt-hour sales, primarily to affiliated utilities, contributed significantly to the higher operating revenues in 2000. These sales were possible due to additional available internal generation resulting from increased nuclear capacity received in a December 1999 exchange of generating assets with Duquesne Light Company. Changes in KWH Sales 2001 2000 ------------------------------------------------------------------- Increase (Decrease) Electric Generation: Retail................................ 4.8% 15.1% Wholesale............................. (93.3)%* 266.0% ------------------------------------------------------------------ Total Electric Generation Sales......... (62.6)% 78.5% ================================================================== Distribution Deliveries: Residential........................... 0.3% 4.7% Commercial and industrial............. (3.6)% 10.1% ------------------------------------------------------------------ Total Distribution Deliveries........... (2.3)% 8.3% ================================================================== * Excluding PSA kilowatt-hour sales related to restructuring. Operating Expenses and Taxes Total operating expenses and taxes increased $100.1 million in 2001 and by $46.0 million in 2000 from the respective prior year. Excluding the effects of restructuring, total 2001 operating expenses and taxes were $30.0 million lower than the prior year. The following table presents changes from the prior year by expense category excluding the impact of restructuring. Operating Expenses and Taxes - Changes 2001 2000 --------------------------------------------------------------------- Increase (Decrease) (In millions) Fuel and purchased power...................... $ (12.9) $(19.0) Nuclear operating costs....................... 1.9 75.8 Other operating costs......................... 1.9 (5.7) --------------------------------------------------------------------- Total operation and maintenance expenses.... (9.1) 51.1 Provision for depreciation and amortization... 3.3 (6.2) General taxes................................. (5.2) (6.0) Income taxes.................................. (19.0) 7.1 -------------------------------------------------------------------- Total operating expenses and taxes.......... $ (30.0) $ 46.0 ===================================================================== The following discussion excludes the effects shown in the preceding table related to the impact of restructuring. The decrease in fuel and purchased power costs in 2001, compared to 2000, primarily reflects the transfer of fossil operations to FGCO with our power requirements being provided under the PSA. In 2000, fuel and purchased power costs decreased $19.0 million, compared to 1999, primarily due to an $18.6 million reduction in purchased power costs and a slight reduction in fuel expense. The decrease in purchased power costs in 2000 resulted from a substantial increase in available internal generation, which reduced the need for external sources of power, as well as the transfer of ownership in PPE to FES. Although internal generation increased 76% compared to 1999, fuel expense was slightly lower due to the absence of a $6.8 million nonrecurring charge related to the Duquesne asset exchange in 1999, additional nuclear generation, the expiration of an above-market coal contract and continued improvement in coal blending strategies. Nuclear operating costs increased slightly in 2001 from the previous year. In 2000, nuclear operating costs increased $75.8 million from 1999. The increase was due to additional costs associated with refueling outages at both Beaver Valley Plant units and increased ownership of the Beaver Valley Plant for the entire year following the 1999 asset exchange with Duquesne, compared to approximately one month of increased ownership in the prior year. Other operating costs increased slightly in 2001 from the prior year. In 2000, other operating costs decreased $5.7 million from the prior year primarily due to increased gains realized from the sale of emission allowances, compared to 1999. Depreciation and amortization increased $3.3 million in 2001 from the prior year. The increase resulted in part from the absence in 2001 of an adjustment made in the prior year to decommissioning costs. In 2000, depreciation and amortization decreased $6.2 million from 1999 primarily reflecting lower accrued decommissioning costs. General taxes decreased by $5.2 million in 2001 from 2000 primarily due to a one-time benefit of $3 million resulting from successfully resolving certain pending tax issues and the effect of a reduction to the gross receipts tax rate. In 2000, general taxes decreased by $6.0 million from 1999 primarily due to favorable property tax law changes and the phase-out of Pennsylvania's Capital Stock and Franchise Tax. Net Interest Charges Net interest charges continued to trend lower, decreasing by $2.1 million in 2001 and by $1.4 million in 2000, compared to the prior year. We continue to redeem and refinance our outstanding debt during 2001 -- net redemptions and refinancing activities totaled $1.0 million and $32.9 million, respectively, and will result in annualized savings of $872,000. Capital Resources and Liquidity We had about $54.5 million of cash and temporary investments and no short-term indebtedness as of December 31, 2001. We also had a $2 million bank facility that provides for borrowings on a short-term basis at the bank's discretion. At the end of 2001, we had the capability to issue $293 million of additional first mortgage bonds on the basis of property additions and retired bonds. Based upon applicable earnings in 2001 under the earnings coverage test contained in our charter, we could issue $195 million of preferred stock (assuming no additional debt was issued). Following approval of the merger of FirstEnergy and GPU by the New Jersey Board of Public Utilities on September 26, 2001, Standard & Poor's upgraded our corporate credit rating and senior secured debt rating from BB+ to BBB. Ratings of junior securities were also upgraded to conform to typical rating relationships. Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table:
Contractual Obligations - ---------------------------------------------------------------------------------------------------------- There- 2002 2003 2004 2005 2006 after Total - ---------------------------------------------------------------------------------------------------------- (In millions) Long-term debt................ $1 $41 $35 $1 $1 $173 $252 Mandatory preferred stock..... 1 1 1 1 1 10 15 Unconditional fuel purchases.. 5 18 16 3 -- -- 42 - ---------------------------------------------------------------------------------------------------------- Total......................... $7 $60 $52 $5 $2 $183 $309 ==========================================================================================================
Our capital spending for the period 2002-2006 is expected to be about $177 million (excluding nuclear fuel) of which approximately $36 million applies to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $94 million, of which about $8 million relates to 2002. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $95 million and $20 million, respectively, as the nuclear fuel is consumed. We had no material off balance sheet obligations as of December 31, 2001. Interest Rate Risk - ------------------ Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent risks related to refinancing maturing debt by issuing new debt securities. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 - Utility Plant and Depreciation. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.
Comparison of Carrying Value to Fair Value - -------------------------------------------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value - -------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income................. $ 1 $6 $1 $104 $112 $115 Average interest rate..... 7.8% 7.8% 7.8% 5.9% 6.0% - -------------------------------------------------------------------------------------------------------------------- Liabilities - -------------------------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate................... $1 $41 $35 $1 $1 $125 $204 $214 Average interest rate .... 9.7% 7.6% 6.6% 9.7% 9.7% 7.0% 7.1% Variable rate................ $ 48 $ 48 $ 48 Average interest rate..... 2.1% 2.1% Preferred Stock.............. $1 $ 1 $ 1 $1 $1 $ 10 $ 15 $ 15 Average dividend rate..... 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% - -------------------------------------------------------------------------------------------------------------------
Outlook - ------- In 2001, a number of our customers previously electing to be served by alternative energy providers returned to our system for their energy needs. We have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier subject to certain limits. Adopting new approaches to regulation and experiencing new forms of competition have created new uncertainties. We continue to deliver power to homes and businesses through our existing distribution system, which remains regulated. Environmental Matters We are in compliance with the current sulfur dioxide (SO2) and nitrogen oxide (NOx) reduction requirements under the Clean Air Act Amendments of 1990. In 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions in the future from our Ohio and Pennsylvania facilities. Various regulatory and judicial actions have since sought to further define NOx reduction requirements (see Note 5 - Environmental Matters). We continue to evaluate our compliance plans and other compliance options. Violations of federally approved SO2 regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day a unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. We cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to nine utilities covering 44 power plants, including the W.H. Sammis Plant. In addition, the U.S. Department of Justice filed eight civil complaints against various investor-owned utilities, which included a complaint against us in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act (CAA) based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint against us requests the installation of "best available control technology" as well as civil penalties of up to $27,500 per day. Although unable to predict the outcome of these proceedings, we believe the Sammis Plant is in full compliance with the CAA and that the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while these proceedings are pending. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. Legal Matters- Various lawsuits, claims and proceedings related to our normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to us are described above. Significant Accounting Policies - ------------------------------- We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often require a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting these specific factors. Our more significant accounting policies are described below. Regulatory Accounting We are subject to regulation that sets the prices (rates) we are permitted to charge our customers based on our costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in Pennsylvania, significant amounts of regulatory assets have been recorded -- $209 million as of December 31, 2001. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hours that have been delivered but have not yet been billed through the end of the year. The determination of unbilled revenues requires management to make various estimates including: o Net energy generated or purchased for retail load o Losses of energy over distribution lines o Allocations to distribution companies within the FirstEnergy system o Mix of kilowatt-hour usage by residential, commercial and industrial customers o Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards - ------------------------------------ In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (SFAS) 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on our accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30.
PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------- (In thousands) OPERATING REVENUES........................................... $498,401 $383,112 $329,234 -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power................................... 175,257 68,099 87,128 Nuclear operating costs.................................... 114,623 112,731 36,915 Other operating costs...................................... 45,133 59,389 65,079 -------- -------- -------- Total operation and maintenance expenses................. 335,013 240,219 189,122 Provision for depreciation and amortization................ 57,087 55,964 62,182 General taxes.............................................. 14,214 22,076 28,110 Income taxes............................................... 36,909 24,874 17,757 -------- -------- -------- Total operating expenses and taxes....................... 443,223 343,133 297,171 -------- -------- -------- OPERATING INCOME............................................. 55,178 39,979 32,063 OTHER INCOME................................................. 3,185 2,300 1,438 -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES........................... 58,363 42,279 33,501 -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt................................. 16,971 18,651 19,268 Interest on nuclear fuel obligations....................... 141 364 90 Allowance for borrowed funds used during construction...... (850) (1,005) (464) Other interest expense..................................... 1,060 1,422 1,959 -------- -------- -------- Net interest charges..................................... 17,322 19,432 20,853 -------- -------- -------- NET INCOME................................................... 41,041 22,847 12,648 PREFERRED STOCK DIVIDEND REQUIREMENTS........................ 3,703 3,704 4,370 -------- -------- -------- EARNINGS ON COMMON STOCK..................................... $ 37,338 $ 19,143 $ 8,278 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY BALANCE SHEETS As of December 31, 2001 2000 - --------------------------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service......................................................... $664,432 $636,418 Less-Accumulated provision for depreciation........................ 290,216 275,699 -------- -------- 374,216 360,719 -------- -------- Construction work in progress- Electric plant................................................... 24,141 20,800 Nuclear fuel..................................................... 2,921 2,810 -------- -------- 27,062 23,610 -------- -------- 401,278 384,329 -------- -------- OTHER PROPERTY AND INVESTMENTS: Nuclear plant decommissioning trusts (Note 1)...................... 116,634 117,453 Long-term notes receivable from associated companies............... 39,290 33,581 Other.............................................................. 21,597 21,279 -------- -------- 177,521 172,313 -------- -------- CURRENT ASSETS: Cash and cash equivalents.......................................... 67 3,475 Notes receivable from associated companies (Note 4)................ 54,411 41,264 Receivables- Customers (less accumulated provisions of $619,000 and $628,000, respectively, for uncollectible accounts)...................... 40,890 40,980 Associated companies............................................. 36,491 40,685 Other............................................................ 4,787 8,848 Materials and supplies, at average cost............................ 25,598 29,595 Prepayments........................................................ 5,682 2,044 -------- -------- 167,926 166,891 -------- -------- DEFERRED CHARGES: Regulatory assets.................................................. 208,838 260,221 Other.............................................................. 4,534 5,155 -------- -------- 213,372 265,376 -------- -------- $960,097 $988,909 ======== ======== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Statements of Capitalization): Common stockholder's equity........................................ $223,788 $213,851 Preferred stock- Not subject to mandatory redemption.............................. 39,105 39,105 Subject to mandatory redemption.................................. 14,250 15,000 Long-term debt- Associated companies............................................. 21,064 18,135 Other............................................................ 240,983 252,233 -------- -------- 539,190 538,324 -------- -------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock- Associated companies............................................. 18,090 16,620 Other............................................................ 12,075 1,036 Accounts payable- Associated companies............................................. 50,604 42,293 Other............................................................ 1,441 21,165 Accrued taxes...................................................... 18,853 19,250 Accrued interest................................................... 5,264 5,972 Other.............................................................. 9,675 16,228 -------- -------- 116,002 122,564 -------- -------- DEFERRED CREDITS: Accumulated deferred income taxes.................................. 136,808 160,632 Accumulated deferred investment tax credits........................ 4,108 4,407 Nuclear plant decommissioning costs................................ 117,096 117,915 Other.............................................................. 46,893 45,067 -------- -------- 304,905 328,021 -------- -------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 5)...................... -------- -------- $960,097 $988,909 ======== ======== The accompanying Notes to Financial Statements are an integral part of these balance sheets.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CAPITALIZATION As of December 31, 2001 2000 - ----------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, $30 par value, 6,500,000 shares authorized, 6,290,000 shares outstanding .................................................................. $188,700 $188,700 Other paid-in capital................................................................. (310) (310) Retained earnings (Note 3A)........................................................... 35,398 25,461 -------- -------- Total common stockholder's equity................................................. 223,788 213,851 -------- -------- Number of Shares Optional Outstanding Redemption Price ------------------ -------------------- 2001 2000 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3C): Cumulative, $100 par value- Authorized 1,200,000 shares Not Subject to Mandatory Redemption: 4.24%................................... 40,000 40,000 $103.13 $ 4,125 4,000 4,000 4.25%................................... 41,049 41,049 105.00 4,310 4,105 4,105 4.64%................................... 60,000 60,000 102.98 6,179 6,000 6,000 7.75%................................... 250,000 250,000 -- -- 25,000 25,000 ------- ------- ------- -------- -------- Total not subject to mandatory redemption.......................... 391,049 391,049 $14,614 39,105 39,105 ======= ======= ======= -------- -------- Subject to Mandatory Redemption (Note 3D): 7.625%.................................. 150,000 150,000 104.58 $15,687 15,000 15,000 Redemption Within One Year................ (750) -- ------- ------- ------- -------- -------- Total subject to mandatory redemption. 150,000 150,000 $15,687 14,250 15,000 ======= ======= ======= -------- -------- LONG-TERM DEBT (Note 3E): First mortgage bonds- 9.740% due 2002-2019................................................................ 17,565 18,539 7.500% due 2003..................................................................... 40,000 40,000 6.375% due 2004..................................................................... 20,500 20,500 6.625% due 2004..................................................................... 14,000 14,000 8.500% due 2022..................................................................... 27,250 27,250 7.625% due 2023..................................................................... 6,500 6,500 -------- -------- Total first mortgage bonds........................................................ 125,815 126,789 -------- -------- Secured notes- 5.400% due 2013..................................................................... 1,000 1,000 5.400% due 2017..................................................................... 10,600 10,600 * 1.550% due 2017..................................................................... 17,925 -- 7.150% due 2017..................................................................... -- 17,925 5.900% due 2018..................................................................... 16,800 16,800 * 1.550% due 2021..................................................................... 14,482 -- 7.150% due 2021..................................................................... -- 14,482 6.150% due 2023..................................................................... 12,700 12,700 * 1.750% due 2027..................................................................... 10,300 10,300 6.450% due 2027..................................................................... 14,500 14,500 5.375% due 2028..................................................................... 1,734 1,734 5.450% due 2028..................................................................... 6,950 6,950 6.000% due 2028..................................................................... 14,250 14,250 5.950% due 2029..................................................................... 238 238 -------- -------- Total secured notes............................................................... 121,479 121,479 -------- -------- Unsecured notes- * 5.900% due 2033..................................................................... 5,200 5,200 -------- -------- Other obligations- Nuclear fuel........................................................................ 39,154 34,756 Capital leases (Note 2)............................................................. 95 170 -------- -------- Total other obligations........................................................... 39,249 34,926 -------- -------- Net unamortized discount on debt...................................................... (281) (370) -------- -------- Long-term debt due within one year.................................................... (29,415) (17,656) -------- -------- Total long-term debt.............................................................. 262,047 270,368 -------- -------- TOTAL CAPITALIZATION.................................................................... $539,190 $538,324 ======== ======== * Denotes variable rate issue with December 31, 2001 interest rate shown. The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Other Comprehensive Number Par Paid-In Retained Income of Shares Value Capital Earnings ------------- --------- ----- -------- -------- (Dollars in thousands) Balance, January 1, 1999............... 6,290,000 $188,700 $(310) $ 86,891 Net income........................... $12,648 12,648 ======= Transfer of Penn Power Energy to a FirstEnergy affiliate......... 3,302 Cash dividends on common stock....... (87,362) Cash dividends on preferred stock.... (4,056) Premium on redemption of preferred stock.............................. (205) - ----------------------------------------------------------------------------------------------------- Balance, December 31, 1999............. 6,290,000 188,700 (310) 11,218 Net income........................... $22,847 22,847 ======= Cash dividends on common stock....... (4,900) Cash dividends on preferred stock.... (3,704) - ----------------------------------------------------------------------------------------------------- Balance, December 31, 2000............. 6,290,000 188,700 (310) 25,461 Net income........................... $41,041 41,041 ======= Cash dividends on common stock....... (27,400) Cash dividends on preferred stock.... (3,704) - ----------------------------------------------------------------------------------------------------- Balance, December 31, 2001............. 6,290,000 $188,700 $(310) $ 35,398 =====================================================================================================
STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Par Number Par of Shares Value of Shares Value --------- ----- --------- ----- (Dollars in thousands) Balance, January 1, 1999.... 509,049 $50,905 150,000 $15,000 ----------------------------------------------------------------------------- Redemptions- 7.64% Series............. (60,000) (6,000) 8.00% Series............. (58,000) (5,800) ----------------------------------------------------------------------------- Balance, December 31, 1999.. 391,049 39,105 150,000 15,000 ----------------------------------------------------------------------------- Balance, December 31, 2000.. 391,049 39,105 150,000 15,000 ----------------------------------------------------------------------------- Balance, December 31, 2001.. 391,049 $39,105 150,000 $15,000 ============================================================================= The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 41,041 $ 22,847 $ 12,648 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization............ 57,087 55,964 62,182 Nuclear fuel and lease amortization.................... 17,323 18,248 8,423 Deferred income taxes, net............................. (11,055) (8,620) (16,207) Investment tax credits, net............................ (2,775) (3,051) (3,111) Receivables............................................ 8,345 (8,484) (390) Materials and supplies................................. 3,997 2,888 389 Accounts payable....................................... (11,413) 8,335 22,291 Other.................................................. (9,265) (9,651) 15,899 -------- -------- -------- Net cash provided from operating activities.......... 93,285 78,476 102,124 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt......................................... 31,626 -- 5,200 Redemptions and Repayments- Preferred stock........................................ -- -- 12,005 Long-term debt......................................... 51,351 47,796 8,675 Dividend Payments- Common stock........................................... 27,400 4,900 87,362 Preferred stock........................................ 3,704 3,704 4,055 -------- -------- -------- Net cash used for financing activities............... 50,829 56,400 106,897 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions....................................... 40,529 29,856 21,964 Loans to associated companies............................ 19,175 59,421 -- Loan payment from parent................................. -- -- (34,577) Sale of assets to associated companies................... (6,053) (67,472) -- Other.................................................... (7,787) 2,466 9,655 -------- -------- -------- Net cash used for (provided from) investing activities........................................... 45,864 24,271 (2,958) -------- -------- -------- Net decrease in cash and cash equivalents................ 3,408 2,195 1,815 Cash and cash equivalents at beginning of year........... 3,475 5,670 7,485 -------- -------- -------- Cash and cash equivalents at end of year................. $ 67 $ 3,475 $ 5,670 ======== ======== ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid during the year- Interest (net of amounts capitalized).................. $ 19,286 $ 18,804 $ 19,436 ======== ======== ======== Income taxes........................................... $ 53,527 $ 39,704 $ 33,786 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF TAXES For the Years Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: State gross receipts.................................... $ 12,776 $ 14,264 $ 13,466 Real and personal property.............................. 59 4,012 8,626 State capital stock..................................... 1,081 1,598 3,067 Social security and unemployment........................ 201 2,137 2,875 Other................................................... 97 65 76 -------- -------- -------- Total general taxes................................. $ 14,214 $ 22,076 $ 28,110 ======== ======== ======== PROVISION FOR INCOME TAXES: Currently payable- Federal............................................... $ 40,948 $ 26,712 $ 29,522 State................................................. 12,803 11,080 8,630 -------- -------- -------- 53,751 37,792 38,152 -------- -------- -------- Deferred, net- Federal............................................... (8,304) (4,273) (12,714) State................................................. (2,751) (4,347) (3,493) -------- -------- -------- (11,055) (8,620) (16,207) -------- -------- -------- Investment tax credit amortization...................... (2,775) (3,051) (3,111) -------- -------- -------- Total provision for income taxes.................... $ 39,921 $ 26,121 $ 18,834 ======== ======== ======== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating expenses...................................... $ 36,909 $ 24,874 $ 17,757 Other income............................................ 3,012 1,247 1,077 -------- -------- -------- Total provision for income taxes.................... $ 39,921 $ 26,121 $ 18,834 ======== ======== ======== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes........... $ 80,962 $ 48,968 $ 31,482 ======== ======== ======== Federal income tax expense at statutory rate............ $ 28,337 $ 17,139 $ 11,019 Increases (reductions) in taxes resulting from: State income taxes, net of federal income tax benefit. 6,534 4,376 3,339 Amortization of investment tax credits................ (2,775) (3,051) (3,111) Amortization of tax regulatory assets................. 6,315 6,899 7,059 Other, net............................................ 1,510 758 528 -------- -------- -------- Total provision for income taxes.................... $ 39,921 $ 26,121 $ 18,834 ======== ======== ======== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Competitive transition charge........................... $ 75,686 $ 95,497 $115,277 Property basis differences.............................. 65,534 64,348 73,694 Allowance for equity funds used during construction..... 2,608 4,163 5,688 Customer receivables for future income taxes............ 5,640 7,016 8,354 Unamortized investment tax credits...................... (1,702) (1,823) (2,987) Deferred gain for asset sale to affiliated company...... 9,943 8,925 -- Other................................................... (20,901) (17,494) (17,324) -------- -------- -------- Net deferred income tax liability................... $136,808 $160,632 $182,702 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Pennsylvania Power Company (Company), a wholly owned subsidiary of Ohio Edison Company (OE), follows the accounting policies and practices prescribed by the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Results of operations for 1999 include the Company and its former wholly owned subsidiary, Penn Power Energy, Inc. (PPE). The subsidiary was formed to market energy products and services coincident with the commencement of electricity generation customer choice and competition in Pennsylvania in January 1999. All significant intercompany transactions have been eliminated. The Company transferred its 100% ownership in PPE to a subsidiary of FirstEnergy Corp., OE's parent company, effective December 31, 1999. REVENUES- The Company's principal business is providing electric service to customers in western Pennsylvania. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 2001 or 2000, with respect to any particular segment of the Company's customers. REGULATORY PLAN- Pennsylvania enacted "The Electricity Generation Customer Choice and Competition Act" in 1996, which permitted customers, including the Company's customers, to choose their electric generation supplier, while transmission and distribution services would continue to be supplied by their current providers. The phase in of customer choice was completed on January 1, 2001. The Company continues to deliver power to homes and businesses through its distribution system, which remains regulated by the PPUC. The Company's rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of the Company's rates is excluded from their bill and the customers receive a generation charge from the alternative supplier. The stranded cost recovery portion of rates provides for recovery of certain amounts not otherwise considered recoverable in a competitive generation market, including regulatory assets. In 1998, the PPUC authorized the Company's rate restructuring plan, which essentially resulted in the deregulation of the Company's generation business. The Company was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business and assess all other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded that any supplemental regulated cash flows such as a competitive transition charge (CTC) should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, the Company reduced its nuclear generating unit investments by approximately $305 million, of which approximately $227 million was recognized as a regulatory asset to be recovered through the CTC over a seven-year transition period; the remaining net amount of $78 million was written off. The Company is entitled to recover $236 million of stranded costs through the CTC that began in 1999 and ends in 2006. The Company's net assets included in utility plant relating to the operations for which the application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71) was discontinued were $88 million as of December 31, 2001. All of the Company's regulatory assets are expected to continue to be recovered under provisions of the rate restructuring plan. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for nuclear generating units which were adjusted to fair value as discussed above), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annual composite rate for electric plant was approximately 2.9% in 2001, 2.6% in 2000 and 2.5% in 1999. Annual depreciation expense includes approximately $1.6 million for future decommissioning costs applicable to the Company's ownership interest in three nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $340 million in current dollars and (using a 4.0% escalation rate) approximately $695 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $16 million for decommissioning through its electric rates from customers through December 31, 2001. The Company has also recognized an estimated liability of approximately $7.0 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required as of January 1, 2003. SFAS 143 requires the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the costs to settle the retirement obligation differs from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trust will be recorded as investment income. The Company is currently assessing the new standard and has not yet quantified the impact on its financial statements. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company, together with OE and other affiliated companies, The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE), own, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Statements of Income. The amounts reflected on the Balance Sheet under utility plant at December 31, 2001 include the following: Utility Accumulated Construction Company's Plant in Provision for Work in Ownership Generating Units Service Depreciation Progress Interest - ------------------------------------------------------------------------------- (In millions) W. H. Sammis #7............ $ 67.7 $ 25.7 $ -- 20.80% Bruce Mansfield #1, #2 and #3............ 186.0 112.8 2.5 16.38% Beaver Valley #1 and #2.... 44.6 11.5 -- 39.37% Perry #1................... 3.6 0.9 0.5 5.24% ------------------------------------------------------------------------------ Total.................. $301.9 $150.9 $ 3.0 =============================================================================== NUCLEAR FUEL- OES Fuel, Incorporated, a wholly owned subsidiary of OE, is the sole lessor for the Company's nuclear fuel requirements. OE anticipates replacing that lease arrangement with direct ownership and nuclear fuel financing by the Company and OE. The Company amortizes the cost of nuclear fuel based on the rate of consumption. INCOME TAXES- Details of the total provision for income taxes are shown on the Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. The Company is included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Company's full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the FirstEnergy pension plan was merged with the pension plans of GPU, Inc., which merged with FirstEnergy on November 7, 2001. The Company uses the projected unit credit method for funding purposes and was not required to make pension contributions during the three years ended December 31, 2001. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ----------------- ----------------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1...... $1,506.1 $1,394.1 $ 752.0 $ 608.4 Service cost............................ 34.9 27.4 18.3 11.3 Interest cost........................... 133.3 104.8 64.4 45.7 Plan amendments......................... 3.6 41.3 -- -- Actuarial loss.......................... 123.1 17.3 73.3 121.7 Voluntary early retirement program...... -- 23.4 2.3 -- GPU acquisition......................... 1,878.3 -- 716.9 -- Benefits paid........................... (131.4) (102.2) (45.6) (35.1) --------------------------------------------------------------------------------------------- Benefit obligation as of December 31.... 3,547.9 1,506.1 1,581.6 752.0 --------------------------------------------------------------------------------------------- Change in fair value of plan assets: Fair value of plan assets as of January 1 1,706.0 1,807.5 23.0 4.9 Actual return on plan assets............ 8.1 0.7 12.7 (0.2) Company contribution.................... -- -- 43.3 18.3 GPU acquisition......................... 1,901.0 -- 462.0 -- Benefits paid........................... (131.4) (102.2) (6.0) -- --------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 3,483.7 1,706.0 535.0 23.0 --------------------------------------------------------------------------------------------- Funded status of plan................... (64.2) 199.9 (1,046.6) (729.0) Unrecognized actuarial loss (gain)...... 222.8 (90.9) 212.8 147.3 Unrecognized prior service cost......... 87.9 93.1 17.7 20.9 Unrecognized net transition obligation (asset) -- (2.1) 101.6 110.9 --------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost.......... $ 246.5 $ 200.0 $ (714.5) $(449.9) ============================================================================================= Company's share of prepaid (accrued) benefit cost.......................... $ 18.1 $ 17.4 $ (37.4) $ (35.1) ============================================================================================== Assumptions used as of December 31: Discount rate........................... 7.25% 7.75% 7.25% 7.75% Expected long-term return on plan assets 10.25% 10.25% 10.25% 10.25% Rate of compensation increase........... 4.00% 4.00% 4.00% 4.00%
FirstEnergy's net pension and other postretirement benefit costs for the three years ended December 31, 2001 were computed as follows:
Other Pension Benefits Postretirement Benefits ------------------------ ------------------------- 2001 2000 1999 2001 2000 1999 ---------------------------------------------------------------------------------------------------- (In millions) Service cost............................ $ 34.9 $ 27.4 $ 28.3 $18.3 $11.3 $ 9.3 Interest cost........................... 133.3 104.8 102.0 64.4 45.7 40.7 Expected return on plan assets.......... (204.8) (181.0) (168.1) (9.9) (0.5) (0.4) Amortization of transition obligation (asset) (2.1) (7.9) (7.9) 9.2 9.2 9.2 Amortization of prior service cost...... 8.8 5.7 5.7 3.2 3.2 3.3 Recognized net actuarial loss (gain).... -- (9.1) -- 4.9 -- -- Voluntary early retirement program...... 6.1 17.2 -- 2.3 -- -- ------------------------------------------------------------------------------------------------------ Net benefit cost........................ $(23.8) $ (42.9) $ (40.0) $92.4 $68.9 $62.1 ====================================================================================================== Company's share of net benefit cost..... $ (0.7) $ (3.6) $ (4.8) $ 4.0 $ 7.5 $ 7.5 ------------------------------------------------------------------------------------------------------
The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and other income include transactions with affiliated companies, primarily OE, CEI, TE, American Transmission Systems, Inc. (ATSI), FirstEnergy Solutions Corp. (FES) and FirstEnergy. The Ohio transition plan resulted in the corporate separation of FirstEnergy's regulated and unregulated operations in 2001. Unregulated operations under FES now operate the generation businesses of the Company, OE, CEI and TE. As a result, the Company entered into power supply agreements (PSA) whereby FES purchases all of the Company's nuclear generation and the Company purchases its power from FES to meet its "provider of last resort" obligations. The 2001 reduction in revenues for Bruce Mansfield administrative and general charges and costs for FirstEnergy support services reflects the transfer of fossil generation operations to FES. The primary affiliated companies transactions, including the effects of the PSA beginning in 2001, the sale and leaseback of the Company's transmission assets to ATSI in September 2000 and FirstEnergy's providing support services at cost, are as follows: 2001 2000 1999 - ----------------------------------------------------------------------------- (In millions) Operating Revenues: PSA revenues with FES............... $151.5 $ -- $ -- Generating units rent with FES...... 20.2 -- -- Electric sales to affiliated utilities -- 57.6 12.6 Bruce Mansfield administrative and general charges.................. -- 2.9 5.3 Ground lease with ATSI.............. 1.3 0.7 -- Operating Expenses: Nuclear fuel leased from OES Fuel... 18.7 20.3 8.8 Purchased power from affiliated utilities -- 7.1 12.9 Purchased power under PSA........... 152.7 -- -- Transmission facilities rentals (including ATSI rents)........... 9.9 5.7 1.3 Nuclear operations administrative and generation charges............. 18.6 15.0 2.1 FirstEnergy support services........ 10.1 27.4 28.3 Other Income: Interest income from ATSI........... 2.6 0.9 -- Interest income from FES............ 0.5 -- -- - ----------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Balance Sheets at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $21.6 million, $21.2 million and $27.1 million for the years 2001, 2000 and 1999, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 2001 2000 - ------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ------------------------------------------------------------------------------- (In millions) Long-term debt................... $252 $262 $253 $263 Preferred stock.................. 15 15 15 15 Investments other than cash and cash equivalents................ 160 162 155 153 - ------------------------------------------------------------------------------ The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents consist primarily of decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Company's rate restructuring plan. Based on the rate restructuring plan, the Company continues to bill and collect cost-based rates relating to the Company's nongeneration operations and continues the application of SFAS 71 to these operations. Net regulatory assets on the Balance Sheets are comprised of the following: 2001 2000 - ------------------------------------------------------------------------------ (In millions) Competitive transition charge.................. $182.7 $230.9 Customer receivables for future income taxes... 13.6 17.0 Loss on reacquired debt........................ 6.9 6.4 Employee postretirement benefit costs.......... 3.6 4.5 Other.......................................... 2.0 1.4 ----------------------------------------------------------------------------- Total..................................... $208.8 $260.2 ============================================================================== 2. LEASES The Company leases office space and other property and equipment under cancelable and noncancelable leases. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Statements of Income. Such costs for the three years ended December 31, 2001, are summarized as follows: 2001 2000 1999 - ----------------------------------------------------------------------------- (In millions) Operating leases Interest element................... $ -- $0.3 $0.6 Other.............................. 0.1 0.8 1.6 Capital leases Interest element................... -- 0.4 0.6 Other.............................. 0.1 0.3 0.5 - ----------------------------------------------------------------------------- Total rentals......................... $ 0.2 $1.8 $3.3 ============================================================================ The future minimum lease payments as of December 31, 2001, are: Capital Operating Leases Leases - -------------------------------------------------------------------------------- (In millions) 2002............................... $0.1 $0.1 2003............................... 0.1 0.1 2004............................... -- 0.1 2005............................... -- 0.1 2006............................... -- 0.1 Years thereafter................... -- 0.8 ---------------------------------------------------------------- Total minimum lease payments....... 0.2 $1.3 ==== Executory costs.................... 0.1 ------------------------------------------- Net minimum lease payments......... 0.1 Interest portion................... -- ------------------------------------------- Present value of net minimum lease payments................... 0.1 Less current portion............... 0.1 ------------------------------------------- Noncurrent portion................. $-- ========================================== 3. CAPITALIZATION (A) RETAINED EARNINGS- Under the Company's Charter, the Company's retained earnings unrestricted for payment of cash dividends on the Company's common stock were $26.1 million as of December 31, 2001. (B) STOCK COMPENSATION PLANS- Employees of the Company participate in the FirstEnergy Executive and Director Incentive Compensation Plan (FE Plan) administered by FirstEnergy. Under the FE Plan, total awards cannot exceed 15 million shares of common stock or their equivalent. Only stock options and restricted stock have been granted, with vesting periods ranging from six months to seven years. Under the Executive Deferred Compensation Plan, covered employees can direct a portion of their Annual Incentive Award and/or Long Term Incentive Award into an unfunded FirstEnergy Stock Account to receive vested stock units. An additional 20% premium is received in the form of stock units based on the amount allocated to the FirstEnergy Stock Account. Dividends are calculated quarterly on stock units outstanding and are paid in the form of additional stock units. Upon withdrawal, stock units are converted to FirstEnergy shares. Payout occurs three years from the date of deferral. The Company continues to apply APB 25, "Accounting for Stock Issued to Employees." As required by SFAS 123, "Accounting for Stock-Based Compensation," the Company has determined pro forma earnings as though the Company had accounted for employee stock options under the fair value method. The weighted average assumptions used in valuing the options and their resulting fair values are as follows: 2001 2000 1999 - --------------------------------------------------------------------------- Valuation assumptions: Expected option term (years) 8.3 7.6 6.4 Expected volatility......... 23.45% 21.77% 20.03% Expected dividend yield..... 5.00% 6.68% 5.97% Risk-free interest rate..... 4.67% 5.28% 5.97% Fair value per option......... $4.97 $2.86 $3.42 -------------------------------------------------------------------------- The following table summarizes the pro forma effect of applying fair value accounting to the Company's stock options. 2001 2000 1999 - --------------------------------------------------------------------------- Earnings on Common Stock (000) As Reported................. $37,338 $19,143 $8,278 Pro Forma................... $37,191 $18,970 $8,228 - --------------------------------------------------------------------------- (C) PREFERRED STOCK- The Company's 7.75% series of preferred stock has a restriction which prevents early redemption prior to July 2003. All other preferred stock may be redeemed by the Company in whole, or in part, with 30-60 days' notice. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- The Company's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1, 2002. (E) LONG-TERM DEBT- The first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as a direct first mortgage lien on substantially all property and franchises, other than specifically excepted property, owned by the Company. Based on the amount of bonds authenticated by the Trustee through December 31, 2001, the Company's annual sinking and improvement fund requirements for all bonds issued under the mortgage amounts to $1.0 million. The Company expects to deposit funds in 2002 that will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes against unfunded property additions or against previously retired bonds. This method can result in minor increases in the amount of the annual sinking fund requirement. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) during the next five years are $11.3 million in 2002, $41.0 million in 2003, $40.7 million in 2004 and $1.0 million in each year 2005 and 2006. The Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $10.4 million and noncancelable municipal bond insurance policies of $32.9 million to pay principal of, or interest on, the pollution control revenue bonds. To the extent that drawings are made under the letters of credit, the Company is entitled to a credit against its obligation to repay the related bond. The Company pays an annual fee of 1.25% of the amount of the letters of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. 4. SHORT-TERM BORROWINGS: The Company has a credit agreement with OE whereby either company can borrow funds from the other by issuing unsecured notes at the prevailing prime or similar interest rate. Under the terms of this agreement, the maximum borrowing is limited only by the availability of funds; however, the Company's borrowings under this agreement are currently limited by the PPUC to a total of $50 million. Either company can terminate the agreement with six months' notice. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $177 million for property additions and improvements from 2002-2006, of which approximately $36 million is applicable to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $94 million, of which approximately $8 million applies to 2002. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $95 million and $20 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its ownership interests in the Beaver Valley Station and the Perry Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other affiliate co-owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $74.0 million per incident but not more than $8.4 million in any one year for each incident. The Company is also insured as to its interest in Beaver Valley and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $222.1 million of insurance coverage for replacement power costs for its interests in Beaver Valley and Perry. Under these policies, the Company can be assessed a maximum of approximately $13.9 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. Generation operations and any related additional capital expenditures for environmental compliance are the responsibility of FirstEnergy's competitive services business unit. The Company is required to meet federally approved sulfur dioxide (SO2) regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The Environmental Protection Agency (EPA) has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. The Company is in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or using emission allowances. NOx reductions are being achieved through combustion controls and the generation of more electricity at lower-emitting plants. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Company's Pennsylvania facilities. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions (an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions) across a region of nineteen states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. State Implementation Plans (SIP) must comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania submitted a SIP that requires compliance with the NOx budgets at the Company's Pennsylvania facilities by May 1, 2003. FirstEnergy continues to evaluate its compliance plans and other compliance options. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals found constitutional and other defects in the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new NAAQS rules regulating ultra-fine particulates but found defects in the new NAAQS rules for ozone and decided that the EPA must revise those rules. The future cost of compliance with these regulations may be substantial and will depend if and how they are ultimately implemented by the states in which the Company operates affected facilities. In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to nine utilities covering 44 power plants, including the W. H. Sammis Plant. In addition, the U.S. Department of Justice filed eight civil complaints against various investor-owned utilities, which included a complaint against the Company and OE in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. Although unable to predict the outcome of these proceedings, the Company and OE believe the Sammis Plant is in full compliance with the Clean Air Act and the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while these proceedings are pending. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. LEGAL MATTERS- Various lawsuits, claims and proceedings related to the Company's normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to the Company are described above.
6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain operating results by quarter for 2001 and 2000. March 31, June 30, September 30, December 31, Three Months Ended 2001 2001 2001 2001 - --------------------------------------------------------------------------------------------------------------- (In millions) Operating Revenues........................ $128.4 $124.7 $121.3 $124.0 Operating Expenses and Taxes.............. 112.4 101.8 118.7 110.3 - --------------------------------------------------------------------------------------------------------------- Operating Income.......................... 16.0 22.9 2.6 13.7 Other Income.............................. 0.9 0.7 1.0 0.6 Net Interest Charges...................... 4.5 4.6 4.3 4.0 - --------------------------------------------------------------------------------------------------------------- Net Income (Loss)......................... $ 12.4 $ 19.0 $ (0.7) $ 10.3 =============================================================================================================== Earnings (Loss) on Common Stock........... $ 11.5 $ 18.1 $ (1.7) $ 9.4 ===============================================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 2000 2000 2000 2000 - --------------------------------------------------------------------------------------------------------------- (In millions) Operating Revenues........................ $ 83.9 $93.6 $102.8 $102.8 Operating Expenses and Taxes.............. 90.3 81.0 83.0 88.9 - --------------------------------------------------------------------------------------------------------------- Operating Income (Loss)................... (6.4) 12.6 19.8 13.9 Other Income.............................. 0.4 0.4 0.4 1.1 Net Interest Charges...................... 4.4 5.4 5.0 4.6 - --------------------------------------------------------------------------------------------------------------- Net Income (Loss)......................... $(10.4) $ 7.6 $ 15.2 $ 10.4 =============================================================================================================== Earnings (Loss) on Common Stock........... $(11.3) $ 6.7 $ 14.3 $ 9.5 ===============================================================================================================
Report of Independent Public Accountants To the Stockholders and Board of Directors of Pennsylvania Power Company: We have audited the accompanying balance sheets and statements of capitalization of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) as of December 31, 2001 and 2000, and the related statements of income, common stockholder's equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Power Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002. EX-23 46 ex23-3.txt ARTHUR ANDERSEN CONSENT - PENN EXHIBIT 23.3 PENNSYLVANIA POWER COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into Pennsylvania Power Company's previously filed Registration Statements, File No. 33-62450 and No. 33-65156. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 29, 2002. EX-99 47 ex99pp.txt LETTER TO SEC RE: ARTHUR ANDERSEN - PENN Exhibit 99 March 29, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Temporary Note 3T to Article 3 of Regulation S-X Ladies and Gentlemen: In connection with the audit of the consolidated financial statements of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and for the year then ended, Arthur Andersen LLP (Andersen) has issued its report dated March 18, 2002. Andersen's report is included in FirstEnergy's Annual Report on Form 10-K for the year ended December 31, 2001. FirstEnergy has received the following representations from Andersen with respect to their audit: o The FirstEnergy audit was subject to Andersen's quality control system for their U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards. o There was appropriate continuity of Andersen personnel working on the FirstEnergy audit. o There was appropriate availability of national office consultation for the FirstEnergy audit. o There was appropriate availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the FirstEnergy audit. Sincerely, /s/Harvey L. Wagner ---------------------------------- Harvey L. Wagner Vice President and Controller EX-4 48 ex4-4.txt SUPPLEMENTAL INDENTURE - JCP&L Executed in 50 Counterparts of which this is Counterpart No. ______ ------------------------------------------------------------------------- MORTGAGE ------------------------------------------------------------------------- JERSEY CENTRAL POWER & LIGHT COMPANY to UNITED STATES TRUST COMPANY OF NEW YORK, Successor Trustee --------------------- FIFTY-FOURTH SUPPLEMENTAL INDENTURE FIRST MORTGAGE BONDS, DESIGNATED SENIOR NOTE BANK SERIES DUE 2002 ------------------------------------------------------------------------- Dated as of May 1, 2001 ------------------------------------------------------------------------- This instrument prepared by: Marc B. Lasky, Esq. TABLE OF CONTENTS PARTIES ................................................................... 1 RECITALS .................................................................. 1 GRANT ..................................................................... 5 EXPECTED PROPERTY.......................................................... 5 GENERAL SUBJECT CLAUSES.................................................... 5 ARTICLE I CONCERNING THE TRUSTEE........................................... 6 Section 1.01.Acceptance by Trustee of Property in Trust................. 6 Section 1.02.Recitals by Company........................................ 6 ARTICLE II CREATION, DESCRIPTION AND FORM OF THE SENIOR NOTE BANK BONDS ............................................................ 6 Section 2.01 Creation of Senior Note Bank Bonds......................... 6 Section 2.02 Dating of Senior Note Bank Bonds........................... 7 Section 2.03 Payment of Principal and Interest.......................... 7 Section 2.04 Credits with Respect to Senior Note Bank Bonds ............ 7 Section 2.05 Registration of Senior Note Bank Bonds..................... 7 Section 2.06.Transferability and Assignability of Senior Note Bank Bonds 7 Section 2.07 Redemption of Senior Note Bank Bonds....................... 8 Section 2.08 Mandatory Redemption of Senior Note Bank Bonds............. 8 Section 2.09 Related Series of Senior Note First Mortgage Bonds......... 8 Section 2.10 Satisfaction and Discharge................................. 8 Section 2.11 Form of Senior Note Bank Bonds..... ....................... 8 ARTICLE III MISCELLANEOUS.................................................. 14 Section 3.01 Meaning of Certain Terms................................... 14 Section 3.02 Original Indenture and Supplemental Indentures Ratified and Confirmed................................................ 14 Section 3.03 Execution in Counterparts.................................. 14 TESTIMONIUM................................................................ 15 SIGNATURES AND SEALS....................................................... 16 ACKNOWLEDGMENTS ......................................................... 17 CERTIFICATE OF RESIDENCE................................................... 21 MORTGAGE -------- FIFTY-FOURTH SUPPLEMENTAL INDENTURE, dated as of the 1st day of May, 2001, made and entered into by and between JERSEY CENTRAL POWER & LIGHT COMPANY, a corporation organized and existing under the laws of the State of New Jersey (hereinafter called the "Company"), party of the first part, and UNITED STATES TRUST COMPANY OF NEW YORK, a bank and trust company organized under the State of New York bank law, with its principal corporate trust office at 114 West 47th Street, New York, New York, 10036-1532, as Successor Trustee under the Original Indenture hereinafter mentioned (the Successor Trustee being hereinafter sometimes called "Trustee"), party of the second part. WHEREAS, the Company has heretofore executed and delivered to City Bank Farmers Trust Company an Indenture dated as of March 1, 1946 (hereinafter called the "Original Indenture"), to secure the principal of and the interest and premium (if any) on all bonds at any time issued and outstanding thereunder, to declare the terms and conditions upon which bonds are to be issued thereunder and to subject to the lien thereof certain property therein described; and WHEREAS, United States Trust Company of New York is now acting as Successor Trustee under the Original Indenture and the indentures supplemental thereto hereinafter enumerated; and WHEREAS, the Original Indenture has heretofore been supplemented by a First Supplemental Indenture dated as of December 1, 1948, a Second Supplemental Indenture dated as of April 1, 1953, a Third Supplemental Indenture dated as of June 1, 1954, a Fourth Supplemental Indenture dated as of May 1, 1955, a Fifth Supplemental Indenture dated as of August 1, 1956, a Sixth Supplemental Indenture dated as of July 1, 1957, a Seventh Supplemental Indenture dated as of July 1, 1959, an Eighth Supplemental Indenture dated as of June 1, 1960, a Ninth Supplemental Indenture dated as of November 1, 1962, a Tenth Supplemental Indenture dated as of October 1, 1963, an Eleventh Supplemental Indenture dated as of October 1, 1964, a Twelfth Supplemental Indenture dated as of November 1, 1965, a Thirteenth Supplemental Indenture dated as of August 1, 1966, a Fourteenth Supplemental Indenture dated as of September 1, 1967, a Fifteenth Supplemental Indenture dated as of October 1, 1968, a Sixteenth Supplemental Indenture dated as of October 1, 1969, a Seventeenth Supplemental Indenture dated as of June 1, 1970, an Eighteenth Supplemental Indenture dated as of December 1, 1970, a Nineteenth Supplemental Indenture dated as of February 1, 1971, a Twentieth Supplemental Indenture dated as of November 1, 1971, a Twenty-first Supplemental Indenture dated as of August 1, 1972, a Twenty-second Supplemental Indenture dated as of August 1, 1973, a Twenty-third Supplemental Indenture dated as of October 1, 1973, a Twenty-fourth Supplemental Indenture dated as of December 1, 1973, a Twenty-fifth Supplemental Indenture dated as of November 1, 1974, a Twenty-sixth Supplemental Indenture dated as of March 1, 1975, a Twenty-seventh Supplemental Indenture dated as of July 1, 1975, a Twenty-eighth Supplemental Indenture dated as of October 1, 1975, a Twenty-ninth Supplemental Indenture dated as of February 1, 1976, a Supplemental Indenture No. 29A dated as of May 31, 1976, a Thirtieth Supplemental Indenture dated as of June 1, 1976, a Thirty-first Supplemental Indenture dated as of May 1, 1977, a Thirty-second Supplemental Indenture dated as of January 20, 1978, a Thirty-third Supplemental Indenture dated as of January 1, 1979, a Thirty-fourth Supplemental Indenture dated as of June 1, 1979, a Thirty-fifth Supplemental Indenture dated as of June 15, 1979, a Thirty-sixth Supplemental Indenture dated as of October 1, 1979, a Thirty-seventh Supplemental Indenture dated as of September 1, 1984, a Thirty-eighth Supplemental Indenture dated as of July 1, 1985, a Thirty-ninth Supplemental Indenture dated as of April 1, 1988, a Fortieth Supplemental Indenture dated as of June 14, 1988, a Forty-first Supplemental Indenture dated as of April 1, 1989, a Forty-second Supplemental Indenture dated as of July 1, 1989, a Forty-third Supplemental Indenture dated as of March 1, 1991, a Forty-fourth Supplemental Indenture dated as of March 1, 1992, a Forty-fifth Supplemental Indenture dated as of October 1, 1992, a Forty-sixth Supplemental Indenture dated as of April 1, 1993, a Forty-seventh Supplemental Indenture dated as of April 10, 1993, a Forty-eighth Supplemental Indenture dated as of April 15, 1993, a Forty-ninth Supplemental Indenture dated as of October 1, 1993, a Fiftieth Supplemental Indenture dated as of August 1, 1994, a Fifty-first Supplemental Indenture dated as of August 15, 1996, a Fifty-second Supplemental Indenture dated as of July 1, 1999 and a Fifty-third Supplemental Indenture dated as of November 1, 1999 (hereinafter respectively called "First Supplemental Indenture," "Second Supplemental Indenture," "Third Supplemental Indenture," "Fourth Supplemental Indenture," "Fifth Supplemental Indenture," "Sixth Supplemental Indenture," "Seventh Supplemental Indenture," "Eighth Supplemental Indenture," "Ninth Supplemental Indenture," "Tenth Supplemental Indenture," "Eleventh Supplemental Indenture," "Twelfth Supplemental Indenture," "Thirteenth Supplemental Indenture," "Fourteenth Supplemental Indenture," "Fifteenth Supplemental Indenture," "Sixteenth Supplemental Indenture," "Seventeenth Supplemental Indenture," "Eighteenth Supplemental Indenture," "Nineteenth Supplemental Indenture," "Twentieth Supplemental Indenture," "Twenty-first Supplemental Indenture," "Twenty-second Supplemental Indenture," "Twenty-third Supplemental Indenture," "Twenty-fourth Supplemental Indenture," "Twenty-fifth Supplemental Indenture," "Twenty-sixth Supplemental Indenture," "Twenty-seventh Supplemental Indenture," "Twenty-eighth Supplemental Indenture," "Twenty-ninth Supplemental Indenture," "Supplemental Indenture No. 29A," "Thirtieth Supplemental Indenture," "Thirty-first Supplemental Indenture," "Thirty-second Supplemental Indenture," "Thirty-third Supplemental Indenture," "Thirty-fourth Supplemental Indenture," "Thirty-fifth Supplemental Indenture," "Thirty-sixth Supplemental Indenture," "Thirty-seventh Supplemental Indenture," "Thirty-eighth Supplemental Indenture," "Thirty-ninth Supplemental Indenture," "Fortieth Supplemental Indenture," "Forty-first Supplemental Indenture," "Forty-second Supplemental Indenture," "Forty-third Supplemental Indenture," "Forty-fourth Supplemental Indenture," "Forty-fifth Supplemental Indenture," "Forty-sixth Supplemental Indenture," "Forty-seventh Supplemental Indenture," "Forty-eighth Supplemental Indenture," "Forty-ninth Supplemental Indenture," "Fiftieth Supplemental Indenture," "Fifty-first Supplemental Indenture," "Fifty-second Supplemental Indenture," and "Fifty-third Supplemental Indenture," collectively called "the Supplemental Indentures"), for the purposes therein expressed; and WHEREAS, the Original Indenture has been recorded in the proper recording offices of the following counties in the State of New Jersey and the Commonwealth of Pennsylvania in Books of Mortgages at the pages respectively stated as follows: 2 NEW JERSEY Mortgage County Book Page ------ ---- ---- Burlington 360 1 &c Camden 2423 37 &c Essex I-103 155 &c Hunterdon 439 284 &c Mercer 732 280 &c Middlesex 871 101 &c Monmouth 1365 1 &c Morris Z-16 1 &c Ocean 385 33 &c Passaic B-24 1 &c Somerset 386 1 &c Sussex 394 148 &c Union 1474 1 &c Warren 279 191 &c PENNSYLVANIA Armstrong 213 421 &c Bucks 2133 151 &c Dauphin N52 1 &c Indiana 200 371 &c Montgomery 7537 1287 &c Northampton 1159 1 &c ; and WHEREAS, the Supplemental Indentures have been recorded in the proper recording offices of the appropriate counties in the State of New Jersey and the Commonwealth of Pennsylvania; and WHEREAS, the Original Indenture, as the same may be amended or supplemented from time to time by indentures supplemental thereto, is hereinafter referred to as "the Indenture"; and WHEREAS, the Company has entered into an Indenture dated as of July 1, 1999 (the "Senior Note Indenture") with United States Trust Company of New York, as trustee (the "Senior Note Trustee"), providing for the issuance of notes thereunder (the "Senior Notes") from time to time, and pursuant to the Senior Note Indenture the Company has agreed to issue to the Senior Note Trustee, as security for the Senior Notes, a new series of bonds under the Indenture at the time of authentication of each series of Senior Notes issued prior to the Release Date (as defined in the Senior Note Indenture); and 3 WHEREAS, for such purposes the Company desires to issue a new series of bonds and by appropriate corporate action in conformity with the terms of the Indenture has duly determined to create a separate series of bonds, which shall be designated as "First Mortgage Bonds, Senior Note Bank Series due 2002" (hereinafter sometimes referred to as the "Senior Note Bank Bonds"), which said Senior Note Bank Bonds are to be substantially in the form set forth in Article II hereof; and WHEREAS, the Senior Note Bank Bonds shall be issued to the Senior Note Trustee in connection with the issuance by the Company of its Senior Notes, Bank Series (the "Bank Senior Notes"); and WHEREAS, all acts and things prescribed by law and by the certificate of incorporation and by-laws of the Company necessary to make the Senior Note Bank Bonds, when executed by the Company and authenticated by the Trustee, as in the Indenture provided, valid, binding and legal obligations of the Company, entitled in all respects to the security of the Indenture, have been performed or will have been performed prior to execution of such Senior Note Bank Bonds by the Company and authentication thereof by the Trustee; and WHEREAS, the Original Indenture authorizes the Company and the Trustee to enter into supplemental indentures for the purpose, among others, of conveying, transferring and assigning to the Trustee, and subjecting to the lien thereof, additional properties thereafter acquired by the Company; and WHEREAS, the Company desires to subject specifically to the lien of the Indenture certain property acquired by the Company since November 1, 1999; and WHEREAS, by the provisions of Article XVII of the Original Indenture, indentures supplemental to the Original Indenture may be executed and delivered for the purpose of setting forth the terms, provisions and form of the Senior Note Bank Bonds and supplementing the Original Indenture in a manner which is not inconsistent with the provisions thereof and does not adversely affect the interests nor modify the rights of outstanding bonds and for the other purposes therein more fully set forth; and WHEREAS, the Company, in the exercise of the powers and authority conferred upon and reserved to it under the provisions of the Original Indenture and pursuant to appropriate action of its Board of Directors, has fully resolved and determined to make, execute and deliver to the Trustee a Fifty-fourth Supplemental Indenture in the form hereof for the purposes herein provided; and WHEREAS, the Company represents that all conditions and requirements necessary to make this Fifty-fourth Supplemental Indenture, in the form and upon the terms hereof, a valid, binding and legal instrument, in accordance with its terms, and for the purposes herein expressed, have been done, performed and fulfilled, and the execution and delivery hereof, in the form and upon the terms hereof, have been in all respects duly authorized. 4 NOW THEREFORE, THIS FIFTY-FOURTH SUPPLEMENTAL INDENTURE WITNESSETH: That Jersey Central Power & Light Company, in consideration of the premises, and the execution and delivery by the Trustee of this Fifty-fourth Supplemental Indenture and for other good and valuable considerations, receipt of which is hereby acknowledged, has granted, bargained, sold, aliened, enfeoffed, released, conveyed, mortgaged, assigned, transferred, pledged, set over and confirmed, and by these presents does grant, bargain, sell, alien, enfeoff, release, convey, mortgage, assign, transfer, pledge, set over and confirm unto United States Trust Company of New York, as Successor Trustee as aforesaid, and to its successors in the trust created by the Original Indenture and to its and their successors and assigns forever, all the following properties of the Company, that is to say: FIRST All property additions, as defined in and by Section 1.03 of the Original Indenture, acquired by the Company on or after November 1, 1999, and prior to May 1, 2001, and now owned by the Company. SECOND Also all property of the character and nature specified in the "Second," "Third," "Fourth," "Fifth," and "Sixth" subdivisions of the granting clauses of the Original Indenture. EXPRESSLY EXCEPTING AND EXCLUDING, HOWEVER, from this Fifty-fourth Supplemental Indenture and from the lien and operation of the Indenture, all property which, prior to the date of this Fifty-fourth Supplemental Indenture, shall have been released from the lien of, or disposed of by the Company in accordance with the provisions of the Indenture; and all the tracts or parcels of land and premises and all property of every kind and type excepted and excluded from, and not heretofore or hereby expressly subjected to, the lien of the Original Indenture by the terms thereof whether such property was owned by the Company at the date thereof or has been acquired since that date. SUBJECT, HOWEVER, except as otherwise expressly provided in this Fifty-fourth Supplemental Indenture, to the exceptions, reservations and matters recited in the Indenture, to the reservations, exceptions, limitations and restrictions contained in the several deeds, grants, franchises and contracts or other instruments through which the Company acquired or claims title to the aforesaid property; and subject also to existing leases, to liens on easements or rights-of-way for transmission or distribution line purposes, to taxes and assessments not in default, to easements for alleys, streets, highways, rights-of-way and railroads that may run across or encroach upon said lands, to joint pole and similar agreements, to undetermined liens and charges, if any, incidental to the construction and other permissible encumbrances, as defined in the Original Indenture, and subject also to the provisions of Section 13.03 of the original Indenture. In trust, nevertheless, upon the terms and trusts set forth in the Indenture. 5 AND THIS FIFTY-FOURTH SUPPLEMENTAL INDENTURE FURTHER WITNESSETH: That the Company, for the considerations aforesaid, hereby covenants and agrees to and with the Trustee and its successors in the trust under the Indenture, as follows: ARTICLE I CONCERNING THE TRUSTEE Section 1.01 Acceptance by Trustee of Property in Trust. The Trustee ------------------------------------------ hereby accepts the properties hereby mortgaged and conveyed to it upon the trusts hereinbefore referred to and agrees to perform the same upon the terms and conditions set forth in the Indenture. Section 1.02 Recitals by Company. The Trustee shall not be --------------------- responsible in any manner for or with respect to the validity or sufficiency of this Fifty-fourth Supplemental Indenture, or the due execution hereof by the Company, or for or with respect to the recitals and statements contained herein, all of which recitals and statements are made solely by the Company. ARTICLE II CREATION, DESCRIPTION AND FORM OF THE SENIOR NOTE BANK BONDS Section 2.01 Creation of Senior Note Bank Bonds. The Company hereby ---------------------------------- creates a series of bonds to be issued under and secured by the Mortgage, to be designated and distinguished from bonds of all other series by the title "First Mortgage Bonds, Senior Note Bank Series due 2002." The aggregate principal amount of the Senior Note Bank Bonds which may be initially authenticated and delivered shall be limited to Two Hundred Sixty-Six Million Dollars ($266,000,000), shall mature on February 1, 2002, and shall be issued in denominations of $1,000 and any amount in excess thereof. The serial numbers of bonds of the Senior Note Bank Bonds shall be such as may be approved by any officer of the Company, the execution thereof by any such officer either manually or by facsimile signature to be conclusive evidence of such approval. The Senior Note Bank Bonds shall bear interest at the rate of ten per centum (10%) per annum; interest shall accrue from and including the date of the first authentication and delivery of the Senior Note Bank Bonds, except as otherwise provided in the form of bond set forth in this Article I hereof and shall be payable on each Interest Payment Date (as defined in the Bank Senior Notes) and at maturity or upon redemption. Interest on the Senior Note Bank Bonds during any period for which payment is made shall be computed in accordance with the Bank Senior Notes until the principal thereof shall have become due and payable. The regular record date for the interest payable on each Interest Payment Date shall be the day next preceding such Interest Payment Date. Interest payable at maturity shall be paid to the person to whom principal shall be paid. Interest on overdue interest shall be payable at the rate per annum specified in this Section 2.01. Except as provided in Sections 2.03, 2.04, 2.05, 8.03 and 17.04 of the Original Indenture, no Senior Note Bank Bonds shall be authenticated and delivered after such initial issue. 6 Section 2.02 Dating of Senior Note Bank Bonds. Each Senior Note Bank -------------------------------- Bond shall be dated the date of its authentication. Section 2.03 Payment of Principal and Interest. The principal of, ----------------------------------- and interest on any Senior Note Bank Bond shall be payable, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and shall be payable at the "office" or agency of the Company in the Borough of Manhattan, The City of New York. Section 2.04 Credits with Respect to Senior Note Bank Bonds. Upon ----------------------------------------------- any payment (or any deemed payment) of the principal of, and interest on, all or any portion of the Bank Senior Notes, whether at maturity or prior to maturity by redemption or otherwise or upon provision for the payment thereof having been made in accordance with Section 5.01(a) of the Senior Note Indenture, Senior Note Bank Bonds in a principal amount equal to the principal amount of such Bank Senior Notes shall, to the extent of such payment of principal, and interest, be deemed paid and the obligation of the Company thereunder to make such payment shall be discharged to such extent and, in the case of the payment of principal, the Senior Note Bank Bonds in an equal principal amount of the related Bank Senior Notes shall be surrendered to the Company for cancellation as provided in Section 4.08 of the Senior Note Indenture. The Trustee may at anytime and all times conclusively assume that the obligation of the Company to make payments with respect to the principal of, and interest on the Senior Note Bank Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged pursuant to the foregoing sentence unless and until the Trustee shall have received a written notice from the Senior Note Trustee signed by one of its officers stating (i) that timely payment of principal of or interest on, the Bank Senior Notes has not been so made, (ii) that the Company is in arrears as to the payments required to be made by it to the Senior Note Trustee pursuant to the Senior Note Indenture, and (iii) the amount of the arrearage. Section 2.05 Registration of Senior Note Bank Bonds. Senior Note --------------------------------------- Bank Bonds are to be issued to and registered in the name of United States Trust Company of New York, as the Senior Note Trustee, or a successor trustee thereto, under the Senior Note Indenture to secure any and all obligations of the Company under the Bank Senior Notes and any other series of Senior Notes from time to time outstanding under the Senior Note Indenture. Section 2.06 Transferability and Assignability of Senior Note Bank ------------------------------------------------------ Bonds. Except (i) as required to effect an assignment to a successor Trustee - ----- under the Senior Note Indenture, (ii) pursuant to Section 4.05 or Section 4.08 of the Senior Note Indenture, or (iii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company, the Senior Note Bank Bonds are not transferable. The Senior Note Bank Bonds shall be exchangeable for other registered bonds of the same series and for the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage, upon the surrender of such bonds at the office or agency of the Company in the Borough of Manhattan, The City of New York. The Company covenants and agrees that, notwithstanding Section 2.03 of the Original Indenture, it will not charge any 7 sum for or in connection with any exchange or transfer of any Senior Note Bank Bond, but may require the payment of a sum sufficient to cover any tax or taxes or other governmental charges incident to any exchange, transfer or registration thereof. Section 2.07 Redemption of Senior Note Bank Bonds. Senior Note Bank ------------------------------------ Bonds shall not be redeemable, in whole or in part, at the option of the Company. Senior Note Bank Bonds shall not be redeemable by the operation of the improvement fund pursuant to Section 5.22 and Section 9.06 of the Indenture or otherwise or by operation of the maintenance and replacement provisions of Section 5.07 and Section 9.06 of the Indenture or otherwise or with the proceeds of released property pursuant to Section 9.06 of the Indenture or otherwise. Section 2.08 Mandatory Redemption of Senior Note Bank Bonds. The ------------------------------------------------ Senior Note Bank Bonds shall be immediately redeemable at a redemption price of 100% of the principal amount thereof, plus interest accrued to the redemption date, in whole, upon a written demand for redemption by the Senior Note Trustee stating that (i) the Bank Senior Notes have been called for redemption or (ii) the principal of all Senior Notes then outstanding under the Senior Note Indenture have been declared to be immediately due and payable pursuant to the provisions of the first sentence of Section 8.01(a) thereof. Section 2.09 Related Series of Senior Note First Mortgage Bonds. For -------------------------------------------------- purposes of Section 4.07 of the Senior Note Indenture, this bond shall be deemed to be the "Related Series of Senior Note First Mortgage Bonds" in respect of the Bank Senior Notes. Section 2.10 Satisfaction and Discharge. At any time a Bank Senior -------------------------- Note shall cease to be entitled to any lien, benefit or security under the Senior Note Indenture pursuant to Section 5.01(b) thereof and the Company shall have provided the Senior Note Trustee with notice thereof, the Senior Note Trustee shall surrender an equal principal amount of the Related Series of Senior Note First Mortgage Bonds, subject to the limitations of Section 4.08 of the Senior Note Indenture, to the Company for cancellation. Section 2.11 Form of Senior Note Bank Bonds. Unless otherwise --------------------------------- specified in the written order of the Company delivered pursuant to Section 4.07(a) of the Original Indenture with respect to any Senior Note Bank Bonds, the form of the Senior Note Bank Bonds and the Trustee's authentication certificate to be endorsed thereon shall be substantially as follows, with other terms thereof to be appropriately inserted as provided in Section 2.01 of the Original Indenture. 8 [FORM OF SENIOR NOTE BANK BONDS] JERSEY CENTRAL POWER & LIGHT COMPANY FIRST MORTGAGE BOND, SENIOR NOTE BANK SERIES DUE 2002 $______________ No. _______ JERSEY CENTRAL POWER & LIGHT COMPANY, a corporation organized and existing under the laws of the State of New Jersey (hereinafter called the "Company"), for value received, hereby promises to pay to United States Trust Company of New York, as Trustee under the Company's Indenture dated as of July 1, 1999, or registered assigns, _______________ Dollars on February 1, 2002 specified above, unless this Bond shall have been duly called for previous redemption in whole or in part and payment of the redemption price shall have been duly made or provided for, at the office or agency of the Company in the Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay to the registered holder hereof interest thereon, at said office or agency, in like coin or currency, from the date hereof, until said principal sum has been paid or provided for, at the rate or rates per annum provided for in Section 2.01 of the Fifty-fourth Supplemental Indenture dated as of May 1, 2001, supplementing the Mortgage hereinafter mentioned, on the interest payment dates provided in said Section 2.01, and, to the extent permitted by law, to pay interest on overdue interest at the rate per annum above specified. This bond is one of an issue of bonds of the Company (hereinafter referred to as the "bonds"), not limited in principal amount except as provided in the Mortgage hereinafter mentioned, which may mature at different times, may bear interest at different rates, and may otherwise vary as in the Mortgage hereinafter mentioned provided, and is one of a series known as its First Mortgage Bonds, Senior Note Bank Series due 2002 (herein called the "Senior Note Bank Bonds"), all bonds issued and to be issued under and equally and ratably secured (except insofar as any sinking fund or analogous fund, established in accordance with the provisions of the Mortgage hereinafter mentioned, may afford additional security for the bonds of any particular series) by an Indenture, dated as of March 1, 1946, executed by the Company to City Bank Farmers Trust Company, Trustee (herein, together with any indentures supplemental thereto, including, but not by way of limitation, the Fifty-fourth Supplemental Indenture, dated as of May 1, 2001, called the "Mortgage"), under which United States Trust Company of New York is Successor Trustee (herein called the "Trustee"), to which Mortgage reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights and limitations of rights of the holders of the bonds and of the Company in respect thereof, the rights, duties and immunities of the Trustee, and the terms and conditions upon which the bonds are, and are to be, issued and secured. The Senior Note Bank Bonds are described in the Fifty-fourth Supplemental Indenture dated as of May 1, 2001 between the Company and the Trustee (the "Fifty-fourth Supplemental Indenture"). 9 Under an Indenture dated as of July 1, 1999 (hereinafter sometimes referred to as the "Senior Note Indenture"), between the Company and United Trust Company of New York, as trustee (hereinafter sometimes called the "Senior Note Trustee"), the Company will issue, concurrently with the issuance of this bond, an issue of notes under the Senior Note Indenture entitled Senior Notes, Bank Series(the "Bank Senior Notes"). Pursuant to Article IV of the Senior Note Indenture, this bond is issued to the Senior Note Trustee to secure any and all obligations of the Company under the Bank Senior Notes and any other series of senior notes from time to time outstanding under the Senior Note Indenture. Payment of principal of, or interest on, the Bank Senior Notes shall constitute payments on this bond as further provided herein and in the Fifty-fourth Supplemental Indenture. Interest on this bond shall be computed in accordance with the Bank Senior Notes. Upon any payment of the principal of, and interest on, all or any portion of the Bank Senior Notes, whether at maturity or prior to maturity by redemption or otherwise or upon provision for the payment thereof having been made in accordance with Section 5.01(a) of the Senior Note Indenture, Senior Note Bank Bonds in a principal amount equal to the principal amount of such Bank Senior Notes shall, to the extent of such payment of principal and interest, be deemed paid and the obligation of the Company thereunder to make such payment shall be discharged to such extent and, in the case of the payment of principal such bonds of said series shall be surrendered to the Company for cancellation as provided in Section 4.06 of the Senior Note Indenture. The Trustee may at anytime and all times conclusively assume that the obligation of the Company to make payments with respect to the principal of, and interest on the Senior Note Bank Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged pursuant to the foregoing sentence unless and until the Trustee shall have received a written notice from the Senior Note Trustee signed by one of its officers stating (i) that timely payment of principal of, or interest on, the Bank Senior Notes has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the Senior Note Trustee pursuant to the Senior Note Indenture, and (iii) the amount of the arrearage. For purposes of Section 4.07 of the Senior Note Indenture, this bond shall be deemed to be the "Related Senior Note First Mortgage Bonds" in respect of the Bank Senior Notes. The Mortgage contains provisions permitting the holders of not less than seventy-five per centum (75%) in principal amount of all the bonds at the time outstanding, determined and evidenced as provided in the Mortgage, or in case the rights under the Mortgage of the holders of bonds of one or more, but less than all, of the series of bonds outstanding shall be affected, the holders of not less than seventy-five per centum (75%) in principal amount of the outstanding bonds of such one or more series affected, except that if any such action would affect the bonds of two or more series, the holders of not less than seventy-five per centum (75%) in principal amount of outstanding bonds of such two or more series, which need not include seventy-five per centum (75%) in principal amount of outstanding bonds of each of such series, determined and evidenced as provided in the Mortgage, on behalf of the holders of all the bonds, to waive any past default under the Mortgage and its consequences except a completed default, as defined in the Mortgage, in respect of the payment of the principal of or interest on any bond or except a default arising from the 10 creation of any lien ranking prior to or equal with the lien of the Mortgage on any of the mortgaged property, subject to the condition that, in case the rights of the holders of less than all of the series of bonds outstanding shall be affected, no waiver of any past default or its consequences shall be effective unless approved by the holders of not less than a majority of all the bonds at the time outstanding. The Mortgage also contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than seventy-five per centum (75%) in principal amount of all the bonds at the time outstanding, determined and evidenced as provided in the Mortgage, or in case the rights under the Mortgage of the holders of bonds of one or more, but less than all, of the series of bonds outstanding shall be affected, then with the consent of the holders of not less than seventy-five per centum (75%) in principal amount of the outstanding bonds of such one or more series affected, except that if any such action would affect the bonds of two or more series, the holders of not less than seventy-five per centum (75%) in principal amount of outstanding bonds of such two or more series, which need not include seventy-five per centum (75%) in principal amount of outstanding bonds of each of such series, determined and evidenced as provided in the Mortgage, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Mortgage or modifying in any manner the rights of the holders of the bonds and coupons thereunto appertaining; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any bonds, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof, or, subject to the provisions of the Mortgage, limit the right of a bondholder to institute suit for the enforcement of payment of principal or interest in accordance with the terms of the bonds, without the consent of the holder of each bond so affected, or (ii) reduce the aforesaid percentage of bonds, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all bonds then outstanding, or (iii) permit the creation of any lien ranking prior to or equal with the lien of the Mortgage on any of the mortgaged property without the consent of the holders of all bonds then outstanding, or (iv) deprive the holder of any outstanding bond of the lien of the Mortgage on any of the mortgaged property. Any such waiver or consent by the holder of this bond (unless effectively revoked as provided in the Mortgage) shall be conclusive and binding upon such holder and upon all future holders of this bond, irrespective of whether or not any notation of such waiver or consent is made upon this bond. No reference herein to the Mortgage and no provision of this bond or of the Mortgage shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this bond at the time and place and at the rate and in the coin or currency herein prescribed. The Senior Note Bank Bonds are issuable only in fully registered form and in denominations of $1,000 and any amount in excess thereof. The Mortgage provides that if the Company shall deposit with the Trustee in trust for the purpose funds sufficient to pay the principal of all of the bonds of any series, or such of the bonds of any series as have been or are to be called for redemption, and premium, if any, thereon, and all interest payable on such bonds to the date on which they become due and payable, at maturity or upon redemption or otherwise, and complies with the other provisions of the Mortgage in respect thereof, then from the date of such deposit such bonds shall no longer be secured by the lien of the Mortgage. 11 The Senior Note Bank Bonds shall be redeemable as provided in the Fifty-fourth Supplemental Indenture. The principal hereof may be declared or may become due prior to the express date of the maturity hereof on the conditions, in the manner and at the time set forth in the Mortgage, upon the occurrence of a completed default as in the Mortgage provided. This bond is not transferable except (i) as required to effect an assignment to a successor Trustee under the Senior Note Indenture, (ii) pursuant to Section 4.03 or Section 4.06 of the Senior Note Indenture, or (iii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company. This bond shall be exchangeable for other registered bonds of the same series and for the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage, upon the surrender of such bonds at the office or agency of the Company in the Borough of Manhattan, The City of New York. However, notwithstanding the provisions of Section 2.03 of the Mortgage, no charge shall be made upon any registration of transfer or exchange of bonds of said series. The Company and the Trustee, any paying agent and any bond registrar may deem and treat the person in whose name this bond is registered as the absolute owner hereof, whether or not this bond shall be overdue, for the purpose of receiving payment and for all other purposes and neither the Company nor the Trustee nor any paying agent nor any bond registrar shall be affected by any notice to the contrary. No recourse under or upon any obligation, covenant or agreement contained in the Mortgage, or in any bond or coupon thereby secured, or because of any indebtedness thereby secured, shall be had against any incorporator, or against any past, present or future stockholder, officer or director, as such, of the Company or of any successor corporation, either directly or through the Company or any successor corporation under any rule of law, statute or constitution, or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise; it being expressly agreed and understood that the Mortgage, and the obligations thereby secured, are solely corporate obligations, and that no personal liability whatever shall attach to, or be incurred by, such incorporators, stockholders, officers or directors, as such, of the Company or of any successor corporation, or any of them because of the incurring of the indebtedness thereby authorized or under or by reason of any of the obligations, covenants or agreements contained in the Mortgage or in any of the bonds or coupons thereby secured, or implied therefrom. This bond shall not become valid or obligatory for any purpose until UNITED STATES TRUST COMPANY OF NEW YORK, the Trustee under the Mortgage, or its successor thereunder, shall have signed the certificate of authentication endorsed hereon. 12 IN WITNESS WHEREOF, JERSEY CENTRAL POWER & LIGHT COMPANY has caused this bond to be signed in its name by the manual or facsimile signature of its President or one of its Vice Presidents and its corporate seal, or a facsimile thereof, to be affixed hereto and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Dated: JERSEY CENTRAL POWER & LIGHT COMPANY By: ------------------------------------- (Vice) President Attest: - ----------------------------- (Assistant) Secretary 13 [FORM OF TRUSTEE'S CERTIFICATE] TRUSTEE'S AUTHENTICATION CERTIFICATE This bond is one of the bonds of the series herein designated, provided for in the within-mentioned Mortgage. UNITED STATES TRUST COMPANY OF NEW YORK By: ------------------------------------- Authorized Officer [END OF FORM OF SENIOR NOTE BANK BOND] ARTICLE III MISCELLANEOUS Section 3.01 Meaning of certain Terms. For all purposes hereof, ------------------------- except as the context may otherwise require, (a) all terms contained herein shall have the meanings given such terms in, and (b) all references herein to sections of the Original Indenture shall be deemed to be to such sections of, the Original Indenture as the same heretofore has been or hereafter may be amended by an indenture or indentures supplemental thereto. Section 3.02 Original Indenture and Supplemental Indentures Ratified ------------------------------------------------------- and Confirmed. As amended and supplemented by the aforesaid indentures - -------------- supplemental thereto and by this Fifty-fourth Supplemental Indenture, the Original Indenture is in all respects ratified and confirmed and the Original Indenture and the aforesaid indentures supplemental thereto and this Fifty-fourth Supplemental Indenture shall be read, taken and construed as one and the same instrument. Section 3.03 Execution in Counterparts. This Fifty-fourth ----------------------------- Supplemental Indenture shall be simultaneously executed in several counterparts, and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. 14 IN WITNESS WHEREOF, JERSEY CENTRAL POWER & LIGHT COMPANY, party of the first part, has caused this instrument to be signed in its name and behalf by its President or a Vice President, and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary and United States Trust Company of New York, as Successor Trustee as aforesaid, the party of the second part, in token of its acceptance of the trust hereby created, has caused this instrument to be signed in its name and behalf by a Vice President or an Assistant Vice President and its corporate seal to be hereunto affixed and attested by an Assistant Vice President or an Assistant Secretary, all as of the day and year first above written. JERSEY CENTRAL POWER & LIGHT COMPANY By: --------------------------------------- T.G Howson Vice President ATTEST: - ------------------------ M.E. Gramlich Assistant Secretary Signed, sealed and delivered by Jersey Central Power & Light Company in the presence of: - -------------------------------------- - -------------------------------------- 15 UNITED STATES TRUST COMPANY OF NEW YORK As Successor Trustee as aforesaid By: ------------------------------- Louis P. Young Vice President ATTEST: - ------------------------- Kevin Fox Assistant Secretary Signed, sealed and delivered by United States Trust Company of New York in the presence of: - ----------------------------------- - ----------------------------------- 16 STATE OF NEW JERSEY ) ss.: COUNTY OF MORRIS ) BE IT REMEMBERED that on this 26th day of April, 2001 before me, the subscriber, a notary public in and for said County and State, personally appeared M.E. Gramlich, an Assistant Secretary of JERSEY CENTRAL POWER & LIGHT COMPANY, the corporation named in and which executed the foregoing instrument, who, being by me duly sworn according to law, does depose and say and make proof to my satisfaction that she resides at Sparta, New Jersey; that she is an Assistant Secretary of JERSEY CENTRAL POWER & LIGHT COMPANY; that the seal affixed to said instrument is the corporate seal of said corporation, the same being well known to her; that it was so affixed by the order of the Board of Directors of said corporation; that T.G. Howson is a Vice President of said corporation; that she saw said T.G. Howson as such Vice President sign such instrument, and affix said seal thereto and deliver said instrument and heard him declare that he signed, sealed and delivered said instrument as the voluntary act and deed of said corporation by its order and by order of its Board of Directors, for the uses and purposes therein expressed; and that the said M.E. Gramlich signed her name thereto at the same time as subscribing witness, and that Jersey Central Power & Light Company, the mortgagor, has received a true copy of said instrument. ------------------------------------------- M.E. Gramlich Assistant Secretary Subscribed and sworn to before me the day and year aforesaid ------------------------------------------ Barbara E. Jost Notary Public of New Jersey My Commission Expires August 12, 2001 [NOTARIAL SEAL] 17 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) BE IT REMEMBERED that on this 26th day of April, 2001 before me, the subscriber, a notary public in and for said County and State, personally appeared Kevin Fox, an Assistant Secretary of UNITED STATES TRUST COMPANY OF NEW YORK, the corporation named in and which executed the foregoing instrument, who, being by me duly sworn according to law, does depose and say and make proof to my satisfaction that he resides at New York, New York; that he is an Assistant Secretary of UNITED STATES TRUST COMPANY OF NEW YORK; that the seal affixed to said instrument is the corporate seal of said corporation, the same being well known to him; that it was so affixed by him pursuant to authority granted by the Board of Directors of said corporation; that Louis P. Young is a Vice President of said corporation; that he saw said Louis P. Young as such Vice President sign and deliver said instrument and heard him declare that he signed and delivered said instrument as the voluntary act and deed of said corporation pursuant to authority granted by its Board of Directors, for the uses and purposes therein expressed; and that the said Kevin Fox signed his name thereto at the same time as subscribing witness. -------------------------------------- Kevin Fox Assistant Secretary Subscribed and sworn to before me the day and year aforesaid -------------------------------------- Christine C. Collins Notary Public, State of New York No. 03-4624735 Qualified in Bronx County Certificate filed in New York County Commission Expires March 30, 2002 [NOTARIAL SEAL] 18 STATE OF NEW JERSEY ) ss.: COUNTY OF MORRIS ) On this 26th day of April, 2001, before me came T.G. Howson, to me known, who, being by me duly sworn, did say that he resides at Madison, New Jersey; that he is a Vice President of JERSEY CENTRAL POWER & LIGHT COMPANY, one of the corporations described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that said seal was so affixed by order of the Board of Directors of said corporation; and that he signed his name to said instrument by like order. -------------------------------------- Barbara E.Jost Notary Public of New Jersey My Commission Expires August 12, 2001 Subscribed and sworn to before me the day and year aforesaid [NOTARIAL SEAL] 19 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On this 26th day of April, 2001, before me came Louis P. Young, to me known, who, being by me duly sworn, did say that he resides at Plainview, New York; that he is a Vice President of UNITED STATES TRUST COMPANY OF NEW YORK, one of the corporations described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that said seal was so affixed by authority of the Board of Directors of said corporation; and that he signed his name to said instrument by like authority. ------------------------------------ Christine C. Collins Notary Public, State of New York No. 03-4624735 Qualified in Bronx County Certificate filed in New York County Commission Expires March 30, 2002 Subscribed and sworn to before me the day and year aforesaid [NOTARIAL SEAL] 20 CERTIFICATE OF RESIDENCE United States Trust Company of New York, Successor Trustee within named, hereby certifies that its precise residence is 114 West 47th Street, in the Borough of Manhattan, in the City of New York, in the State of New York. UNITED STATES TRUST COMPANY OF NEW YORK By: --------------------------------------- Vice President 21 EX-12 49 ex12-6jc.txt FIXED CHARGE RATIO - JCP&L
EXHIBIT 12.6 Page 1 JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ---------------------------------------------- Jan 1- Nov. 7- Nov. 6, Dec. 31, 1997 1998 1999 2000 2001 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $212,014 $222,442 $172,380 $210,812 $ 34,467 | $30,041 Interest and other charges, before reduction | for amounts capitalized.......................... 115,698 110,190 106,675 105,799 95,727 | 16,919 Provision for income taxes......................... 112,116 145,078 100,970 119,875 52 | 20,101 Interest element of rentals charged to income (a).. 10,614 11,838 14,920 6,229 3,913 | 124 -------- -------- -------- -------- -------- | ------- Earnings as defined............................. . $450,442 $489,548 $394,945 $442,715 $134,159 | $67,185 ======== ======== ======== ======== ======== | ======= | FIXED CHARGES AS DEFINED IN REGULATION S-K: | Interest on long-term debt......................... $ 89,869 $ 87,261 $ 87,196 $ 85,220 $ 77,205 | $14,234 Other interest expense............................. 15,129 12,229 8,779 9,879 9,427 | 1,080 Subsidiary's preferred stock dividend requirements. 10,700 10,700 10,700 10,700 9,095 | 1,605 Interest element of rentals charged to income (a).. 10,614 11,838 14,920 6,229 3,913 | 124 -------- -------- -------- -------- -------- | ------- Fixed charges as defined......................... $126,312 $122,028 $121,595 $112,028 $ 99,640 | $17,043 ======== ======== ======== ======== ======== | ======= | CONSOLIDATED RATIO OF EARNINGS TO FIXED | CHARGES............................................ 3.57 4.01 3.25 3.95 1.35 | 3.94 ==== ==== ==== ==== ==== | ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined.
EXHIBIT 12.6 Page 2 JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) Year Ended December 31, ---------------------------------------------- Jan 1- Nov. 7- Nov. 6, Dec. 31, 1997 1998 1999 2000 2001 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $212,014 $222,442 $172,380 $210,812 $ 34,467 | $30,041 Interest and other charges, before reduction for | amounts capitalized.............................. 115,698 110,190 106,675 105,799 95,727 | 16,919 Provision for income taxes......................... 112,116 145,078 100,970 119,875 52 | 20,101 Interest element of rentals charged to income (a).. 10,614 11,838 14,920 6,229 3,913 | 124 -------- ---------- -------- -------- -------- | ------- Earnings as defined.............................. $450,442 $489,548 $394,945 $442,715 $134,159 | $67,185 ======== ======== ======== ======== ======== | ======= | FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS | PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS): | Interest on long-term debt......................... $ 89,869 $ 87,261 $ 87,196 $ 85,220 $ 77,205 | $14,234 Other interest expense............................. 15,129 12,229 8,779 9,879 9,427 | 1,080 Preferred stock dividend requirements.............. 22,076 20,765 19,370 17,604 13,642 | 2,303 Adjustments to preferred stock dividends to | state on a pre-income tax basis.................. 6,018 6,562 5,081 3,928 7 | 467 Interest element of rentals charged to income (a).. 10,614 11,838 14,920 6,229 3,913 | 124 -------- -------- -------- -------- -------- | ------- Fixed charges as defined plus preferred stock | dividend requirements (pre-income tax basis)... $143,706 $138,655 $135,346 $122,860 $104,194 | $18,208 ======== ======== ======== ======== ======== | ======= CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES | PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS.............................. 3.13 3.53 2.92 3.60 1.29 | 3.69 ==== ==== ==== ==== ==== | ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined.
EX-13 50 ex13-5_jc.txt ANNUAL REPORT - JCP&L EXHIBIT 13.5 JERSEY CENTRAL POWER & LIGHT COMPANY 2001 ANNUAL REPORT TO STOCKHOLDERS Jersey Central Power & Light Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. It engages in the distribution and sale of electric energy in an area of approximately 3,300 square miles in New Jersey. It also engages in the sale, purchase and interchange of electric energy with other electric companies. The area it serves has a population of approximately 2.7 million. In August 2000, FirstEnergy entered into an agreement to merge with GPU, Inc., under which FirstEnergy would acquire all of the outstanding shares of GPU, Inc.'s common stock for approximately $4.5 billion in cash and FirstEnergy common stock. The merger became effective on November 7, 2001 and is being accounted for by the purchase method. Prior to that time, Jersey Central Power & Light Company was a wholly owned subsidiary of GPU, Inc. Contents Page - -------- ---- Selected Financial Data........................................... 1 Management's Discussion and Analysis.............................. 2-8 Consolidated Statements of Income................................. 9 Consolidated Balance Sheets....................................... 10 Consolidated Statements of Capitalization......................... 11 Consolidated Statements of Common Stockholder's Equity............ 12 Consolidated Statements of Preferred Stock........................ 12 Consolidated Statements of Cash Flows............................. 13 Consolidated Statements of Taxes.................................. 14 Notes to Consolidated Financial Statements........................ 15-23 Reports of Independent Public Accountants......................... 24-25 JERSEY CENTRAL POWER & LIGHT COMPANY SELECTED FINANCIAL DATA
Years Ended December 31, Nov. 7 - Jan. 1 - ----------------------------------------------- Dec. 31, 2001 Nov. 6, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Operating Revenues..................... $ 282,902 | $ 1,838,638 $1,979,297 $2,018,209 $2,069,648 $2,093,972 ========== | =========== ========== ========== ========== ========== | Operating Income....................... $ 43,666 | $ 292,847 $ 283,227 $ 277,420 $ 297,614 $ 324,850 ========== | =========== ========== ========== ========== ========== | Income Before Extraordinary Item....... $ 30,041 | $ 34,467 $ 210,812 $ 172,380 $ 222,442 $ 212,014 ========== | =========== ========== ========== ========== ========== | Net Income ............................ $ 30,041 | $ 34,467 $ 210,812 $ 172,380 $ 222,442 $ 212,014 ========== | =========== ========== ========== ========== ========== | Earnings on Common Stock............... $ 29,343 | $ 29,920 $ 203,908 $ 162,862 $ 212,377 $ 200,638 ========== | =========== ========== ========== ========== ========== | Total Assets........................... $8,039,998 | $6,009,054 $5,587,677 $4,382,073 $4,459,306 ========== | ========== ========== ========== ========== | Capitalization: | Common Stockholder's Equity............ $3,163,701 | $1,459,260 $1,385,367 $1,557,073 $1,540,121 Preferred Stock- | Not Subject to Mandatory Redemption. 12,649 | 12,649 12,649 37,741 37,741 Subject to Mandatory Redemption..... 44,868 | 51,500 73,167 86,500 91,500 Company-Obligated Mandatorily | Redeemable Preferred Securities..... 125,250 | 125,000 125,000 125,000 125,000 Long-Term Debt......................... 1,224,001 | 1,093,987 1,133,760 1,173,532 1,173,304 ---------- | ---------- ---------- ---------- ---------- Total Capitalization................... $4,570,469 | $2,742,396 $2,729,943 $2,979,846 $2,967,666 ========== | ========== ========== ========== ========== | Capitalization Ratios: | Common Stockholder's Equity............ 69.2%| 53.2% 50.7% 52.2% 51.9% Preferred Stock- | Not Subject to Mandatory Redemption. 0.3 | 0.5 0.5 1.3 1.3 Subject to Mandatory Redemption..... 1.0 | 1.9 2.7 2.9 3.1 Company-Obligated Mandatorily | Redeemable Preferred Securities..... 2.7 | 4.5 4.6 4.2 4.2 Long-Term Debt......................... 26.8 | 39.9 41.5 39.4 39.5 ----- | ----- ----- ----- ----- Total Capitalization................... 100.0%| 100.0% 100.0% 100.0% 100.0% ===== | ===== ===== ===== ===== | Transmission and Distribution | Kilowatt-Hour Deliveries (Millions): | Residential............................ 1,428 | 7,042 8,087 7,978 7,551 7,256 Commercial............................. 1,330 | 6,787 7,706 7,624 7,259 6,974 Industrial............................. 474 | 2,670 3,307 3,289 3,474 3,536 Other.................................. 17 | 66 82 81 81 79 ----- | ------ ------ ------- ------ ------ Total Retail........................... 3,249 | 16,565 19,182 18,972 18,365 17,845 Total Wholesale........................ 295 | 1,780 2,161 1,622 1,690 1,063 ----- | ------ ------ ------- ------ ------ Total.................................. 3,544 | 18,345 21,343 20,594 20,055 18,908 ===== | ====== ====== ====== ====== ====== | Transmission and Distribution Deliveries | Customers Served: | Residential............................ 909,494 | 896,629 883,930 872,134 859,747 Commercial............................. 109,985 | 107,479 107,210 105,611 104,183 Industrial............................. 2,785 | 2,835 2,965 3,014 3,054 Other.................................. 1,484 | 1,551 1,648 1,635 1,618 --------- | --------- --------- ------- ------- Total.................................. 1,023,748 | 1,008,494 995,753 982,394 968,602 ========= | ========= ======= ======= ======= 1
JERSEY CENTRAL POWER & LIGHT COMPANY Management's Discussion and Analysis of Results of Operations and Financial Condition This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), the availability and cost of capital, ability to accomplish or realize anticipated benefits from strategic initiatives and other similar factors. Results of Operations - --------------------- Earnings on common stock decreased 70.9% to $59.3 million in 2001 from $203.9 million in 2000. Results in 2001 were affected by an after-tax charge of $177.5 million to reduce deferred costs in accordance with the Stipulation of Settlement related to the merger of FirstEnergy and GPU, Inc. Also contributing to lower earnings were higher purchased power costs. Partially offsetting these were lower nuclear and other operating costs and greater revenues. In 2000, earnings on common stock increased 25.2% to $203.9 million from $162.9 million in 1999, primarily due to a gain for the reversal of certain deferred taxes and realization of an investment tax credit related to the sale of the Oyster Creek Nuclear Generating Station and the absence of a charge resulting from the Summary Order issued by the New Jersey Board of Public Utilities (NJBPU) in 1999. Lower nuclear and other operating costs also positively affected results for 2000. Operating revenues increased by $142.2 million in 2001 following a $38.9 million decrease in 2000. The sources of the changes in operating revenues during 2001 and 2000, as compared to the prior year, are summarized in the following table. Sources of Revenue Changes 2001 2000 ------------------------------------------------------------- Increase (Decrease) (In millions) Change in kilowatt-hour sales due to level of retail customers shopping for generation service..........$ 67.3 $(108.7) Change in other retail kilowatt-hour sales.. 38.4 (74.0) Increase in wholesale sales................. 44.1 24.0 Provision for rate refunds.................. -- 112.2 All other changes........................... (7.6) 7.6 ------------------------------------------------------------ Net Increase (Decrease) in Operating Revenues................................. $142.2 $ (38.9) ============================================================== Electric Sales In 2001, a major source of the increase in operating revenues was the increase in retail generation kilowatt-hour sales due to a large number of customers returning to us in 2001 as full service customers, after receiving their power from alternate suppliers in 2000. Residential and commercial sales increased while industrial sales decreased. The majority of the increase in residential sales was weather-related, whereas a greater number of commercial customers and higher usage contributed almost evenly to the increase in commercial sales. Industrial sales were lower than the previous year due to both a decrease in the number of customers and lower usage. A large decrease in operating revenues occurred in 2000, as compared to 1999, as customers took advantage of the first full year of customer choice in New Jersey. In 2000, sales of electric generation provided by other suppliers accounted for 11.7% of total energy delivered as compared to only 0.2% in 1999. Partially offsetting the overall decrease in operating revenues was an increase due to our obligation to refund revenues to customers in 1999 as a result of the NJBPU's Restructuring Summary Order. The Order required us to refund customers 5% from rates in effect as of April 30, 1997. Changes in kilowatt-hour sales by customer class in 2001 and 2000 are summarized in the following table: 2 Changes in Kilowatt-hour Sales 2001 2000 ------------------------------------------------- Increase (Decrease) Residential.................. 4.7% 1.4% Commercial................... 5.3% 1.1% Industrial................... (4.9)% 0.5% ------------------------------------------------- Total Retail................. 3.3% 1.1% Wholesale.................... (4.0)% 33.2% ------------------------------------------------- Total Sales.................. 2.6% 3.6% ------------------------------------------------- Operating Expenses and Taxes Total operating expenses and taxes increased $89.0 million in 2001 after decreasing $44.7 million in 2000, compared to the preceding year. In both 2000 and 2001, greater purchased power costs accounted for the largest increases, offset by lower nuclear and other operating costs. Depreciation and amortization expenses also decreased in 2000 from 1999. Fuel and purchased power costs increased $177.6 million in 2001, compared to 2000. The increase was primarily attributed to greater amounts of power purchased through both two-party agreements and through the PJM Power Pool as a result of the sale of Oyster Creek and higher customer demand. Also contributing to the increase was a higher average cost of two-party power purchases in 2001 than in 2000. These increases were partially offset by lower fuel costs due to the sale of Oyster Creek. In 2000, fuel and purchased power costs increased $39.9 million from the preceding year due to the need to purchase more power through two-party agreements and the PJM Power Pool after the sale of our fossil fuel generating facilities and Unit 1 of the Three Mile Island Nuclear Plant in 1999. The average cost of these two-party purchases was also higher in 2000 than in 1999. Additionally, the amortization of non-utility generation (NUG) buyout costs was greater in 2000 than in 1999. Partially offsetting these increases were lower fuel costs since Oyster Creek was owned for only part of 2000. With the sale of Oyster Creek in August 2000, we no longer have any nuclear operating costs, which were $78.5 million in 2000. The sale of Oyster Creek was also responsible for the $71.3 million decrease in nuclear operating costs in 2000, compared to 1999. In 2001, other operating expenses decreased $25.2 million from the previous year due to lower bad debt expense and pension costs. The sale of our generating stations in 1999 was primarily responsible for the $29.8 million decrease in 2000 other operating costs from the preceding year. Also contributing to the reduction in costs was the receipt of additional cash distributions in 2000, compared to 1999, related to Oyster Creek property insurance. Other Income Other income decreased $199.8 million in 2001 from the prior year primarily due to a charge of $300 million ($177.5 million net of tax) to reduce deferred costs in accordance with the Stipulation of Settlement related to the merger between FirstEnergy and GPU. In 2000, other income increased $26.1 million from 1999. The increase was primarily due to higher interest income and the reversal of an estimated 1999 tax penalty. Net Interest Charges Net interest charges decreased by $0.2 million in 2001 following a decrease of $6.5 million in 2000 as compared to the prior year. In 2001, the slight decrease was attributed to greater deferred interest income offset by interest expense on $150 million of senior notes issued in May, and higher average short-term debt levels. The decrease in 2000 was primarily due to greater deferred interest income and lower interest expense as a result of the redemption of $40 million of first mortgage bonds (FMB). Preferred Stock Dividend Requirements Preferred stock dividend requirements decreased $1.7 million and $1.8 million in 2001 and 2000, respectively, due to the redemption of cumulative preferred stock pursuant to mandatory and optional sinking fund provisions. Capital Resources and Liquidity - ------------------------------- We had approximately $31.4 million of cash and temporary investments and $18.1 million of short-term indebtedness on December 31, 2001. We may borrow from our affiliates on a short-term basis. We will not issue FMBs 3 other than as collateral for senior notes, since our senior note indentures prohibit (subject to certain exceptions) us from issuing any debt which is senior to the senior notes. As of December 31, 2001, we had the capability to issue $257 million of additional senior notes based upon FMB collateral. At year end 2001, based upon applicable earnings coverage tests and our charter, we could issue $4.6 billion of preferred stock (assuming no additional debt was issued). At the end of 2001, our common equity as a percentage of capitalization stood at 69%, as compared to 53% at the end of 2000. This increase resulted from the allocation of the purchase price in the merger between FirstEnergy and GPU. Following approval of the merger of FirstEnergy and GPU by the NJBPU on September 26, 2001, Standard and Poor's adjusted our corporate credit rating from A/A1 to BBB/A-2, our senior secured debt rating from A+ to BBB+ and our preferred stock rating from BBB+ to BB+. The lower credit ratings reflect Standard & Poor's consolidated rating methodology, which resulted in essentially the same corporate credit rating for all of FirstEnergy's electric utility operating companies. The credit rating outlook of both Standard & Poor's and Moody's is stable. Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table: Contractual Obligations 2002 2003 2004 2005 2006 Thereafter Total - --------------------------------------------------------------------------- (In millions) Long-term debt..........$ 50 $150 $160 $ 50 $240 $ 596 $1,246 Mandatory preferred stock................. 11 11 11 2 2 139 176 Operating leases ....... 2 4 2 2 2 74 86 Unconditional fuel and power purchases....... 861 535 468 458 455 2,202 4,979 - --------------------------------------------------------------------------- $924 $700 $641 $512 $699 $3,011 $6,487 =========================================================================== Our capital spending for the period 2002-2006 is expected to be about $572 million, of which approximately $144 million applies to 2002. Market Risk Information - ----------------------- We use various market risk sensitive instruments, including derivative contracts, primarily to manage the risk of price fluctuations. Our Risk Policy Committee, comprised of FirstEnergy executive officers, exercises an independent risk oversight function to ensure compliance with corporate risk management policies and prudent risk management practices. Commodity Price Risk We are exposed to market risk primarily due to fluctuations in electricity and natural gas prices. To manage the volatility relating to these exposures, we use a variety of derivative instruments, including forward contracts, options and futures contracts. These derivatives are used principally for hedging purposes. The change in the fair value of commodity derivative contracts related to energy production during 2001 is summarized in the table below: Increase (Decrease)in the Fair Value of Commodity Derivative Contracts ---------------------------------------------------------------------- Nov. 7-Dec. 31 Jan. 1-Nov. 6 2001 2001 ---------------------------------------------------------------------- (In millions) Outstanding as of beginning of period with SFAS 133 cumulative adjustment............ $4.7 $23.4 Contract value when entered......... 0.1 4.9 Decrease in value of existing contracts........................ (3.2) (12.9) Change in techniques/assumptions.... -- (10.6) Settled contracts................... (0.1) (0.1) --------------------------------------------------------------------- Outstanding as of end of period..... $1.5 $4.7 ===================================================================== While the valuation of derivative contracts is always based on active market prices when they are available, longer-term contracts can require the use of model-based estimates of prices in later years due to the absence of published market prices. Currently, substantially all of our derivatives are valued based on active market prices. 4 We perform sensitivity analyses to estimate our exposure to the market risk of our commodity position. A hypothetical 10% adverse shift in quoted market prices in the near term on our derivative instruments would not have had a material effect on our consolidated financial position or cash flows as of December 31, 2001. Interest Rate Risk Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 to the consolidated financial statements. Comparison of Carrying Value to Fair Value - -------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value - -------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income.......... -- -- -- -- -- $187 $ 187 $ 185 Average interest rate.............. 5.4% 5.4% - -------------------------------------------------------------------------------- ________________________________________________________________________________ Liabilities - -------------------------------------------------------------------------------- Long-term Debt: Fixed rate............ $ 50 $150 $160 $ 50 $240 $596 $1,246 $1,250 Average interest rate.............. 9.0% 6.4% 7.1% 6.8% 6.9% 7.8% 7.4% Variable rate......... Average interest rate.............. Short-term Borrowings.......... $ 18 -- -- -- -- -- $ 18 $ 18 Average interest rate.............. 4.9% 4.9% - -------------------------------------------------------------------------------- Preferred Stock..... $ 11 $ 11 $ 11 $ 2 $ 2 $139 $ 176 $ 180 Average dividend rate.............. 8.4% 8.4% 8.4% 7.5% 7.5% 8.5% 8.4% - -------------------------------------------------------------------------------- Outlook - ------- Our industry continues to transition to a more competitive environment. Beginning in late 1999, all of our customers could select alternative energy suppliers. We continue to deliver power to homes and businesses through our existing distribution system, which remains regulated. To support customer choice, rates were restructured into unbundled service charges and additional non-bypassable charges to recover stranded costs (confirmed by a NJBPU Final Decision and Order issued in March 2001). We have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier, subject to certain limits, referred to as Basic Generation Service (BGS), until July 31, 2002. Regulatory Matters For the period from August 1, 2002 to July 31, 2003, the NJBPU has authorized the auctioning of BGS to meet the electric demands of customers who have not selected an alternative supplier. The auction was successfully concluded on February 13, 2002, thereby eliminating our obligation to provide for the energy requirements of BGS during that period. Beginning August 1, 2003, the approach to be taken in procuring the energy needs for BGS has not been determined. The NJBPU recently initiated a formal proceeding to decide how BGS will be handled after the transition period. We are permitted to defer for future recovery the amount by which our reasonable and prudently incurred costs for providing BGS to non-shopping customers and costs incurred under NUG agreements exceed amounts currently reflected in our BGS rate and market transition charge rate (for the recovery of stranded costs). On September 26, 2001, the NJBPU approved the merger of FirstEnergy and GPU subject to the terms and conditions set forth in a settlement agreement with major intervenors. As part of the settlement, we agreed to reduce our costs deferred for future recovery by $300 million, in order to ensure that customers receive the benefit of future merger savings. We wrote off $300 million of deferred costs in October 2001 upon receipt of the final regulatory approval for the merger, which occurred on October 29, 2001. On February 6, 2002, we received a Financing Order from the NJBPU with authorization to issue $320 million of transition bonds to securitize the recovery of bondable stranded costs associated with the previously divested Oyster Creek. The Order grants us the right to charge a usage-based, non-bypassable transition bond charge (TBC) and provided for the transfer of the bondable transition property relating to the TBC to JCP&L Transition Funding LLC (Transition Funding), a 5 wholly owned limited liability corporation. Transition Funding is expected to issue and sell up to $320 million of transition bonds that will be recognized on our Consolidated Balance Sheet in the second quarter of 2002, with the TBC providing recovery of principal, interest and related fees on the transition bonds. Supply Plan As part of our Restructuring Orders, we are obligated, through July 31, 2002, to supply electricity to customers who do not choose an alternate supplier. The total forecasted peak of this obligation is 5,400 megawatts (MW). The successful BGS auction in New Jersey removed our BGS obligation for 5,100 MW for the period from August 1, 2002 to July 31, 2003. In that auction FirstEnergy Solutions Corp., an affiliated company, was a successful bidder to provide 1,700 MW during the same period to us and two other electric utilities in New Jersey. Our current supply portfolio contains approximately 900 MW of long-term purchases from NUGs and 266 MW of owned generation. Our remaining obligation is expected to be met through a mix of short-term forward (less than one year) purchases and spot market purchases. Environmental Matters Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, our proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. We have been named as a "potentially responsible party" (PRP) 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. In addition, we have accrued liabilities for environmental remediation of former manufactured gas plants in New Jersey; these costs are being recovered through a non-bypassable societal benefits charge. We have total accrued liabilities aggregating approximately $52 million as of December 31, 2001. We do not believe environmental remediation costs will have a material adverse effect on our financial condition, cash flows or results of operations. Legal Matters Various lawsuits, claims and proceedings related to our normal business operations are pending against us, the most significant of which are described below. We have a 25% ownership interest in Unit 2 of the Three Mile Island Nuclear Plant (TMI-2), which was damaged during a 1979 accident. As a result of the accident, claims for alleged personal injury were filed against us, Metropolitan Edison Company, Pennsylvania Electric Company and GPU in the U.S. District Court for the Middle District of Pennsylvania. In 1996, the District Court granted a motion for summary judgment filed by the defendants and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. In November 1999, the U.S. Court of Appeals for the Third Circuit affirmed the District Court's dismissal of the ten test cases, but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. Following the resolution of judicial proceedings dealing with admissible evidence, we have again requested summary judgment of the remaining 2,100 claims in the District Court. On January 15, 2002, the District Court granted our motion. On February 14, 2002, the plaintiffs filed a notice of appeal of this decision (see Note 6 - Other Legal Proceedings). Although unable to predict the outcome of this litigation, we believe that any liability to which we might be subject by reason of the TMI-2 accident will not exceed our financial protection under the Price-Anderson Act. In July 1999, the Mid-Atlantic states experienced a severe heat storm which resulted in power outages throughout the service areas of many electric utilities, including ours. In an investigation into the causes of the outages and the reliability of the transmission and distribution systems of all four New Jersey electric utilities, the NJBPU concluded that there was not a prima facie case demonstrating that, overall, we provided unsafe, inadequate or improper service to our customers. In July 1999, two class action lawsuits (subsequently consolidated into a single proceeding) were filed against us and other GPU companies in New Jersey Superior Court, seeking compensatory and punitive damages arising from the July 1999 service interruptions in our service territory. In May 2001, the court denied without prejudice our motion seeking decertification of the class. Discovery continues in the class action, but no trial date has been set. The judge has set a schedule under which factual legal discovery would conclude in March 2002, and expert reports would be exchanged by June 2002. In October 2001, the court held argument on the plaintiffs' motion for partial summary judgment, which contends that we are bound to several findings of the NJBPU investigation. The plaintiffs' motion was denied by the Court in November 2001 and plaintiffs' motion seeking permission to file an appeal on this denial of their motion was rejected by the New Jersey Appellate Division. We have also filed a motion for partial summary judgment that is currently pending before the Superior Court. We are unable to predict the outcome of these matters. 6 Significant Accounting Policies - ------------------------------- We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often requires a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting these specific factors. Our more significant accounting policies are described below: Purchase Accounting On November 7, 2001, the merger between FirstEnergy and GPU became effective, and we became a wholly owned subsidiary of FirstEnergy. The merger was accounted for by the purchase method of accounting, which requires judgment regarding the allocation of the purchase price based on the fair values of the assets acquired (including intangible assets) and the liabilities assumed. The fair values of the acquired assets and assumed liabilities were based primarily on estimates. The adjustments reflected in our records, which are subject to adjustment in 2002 when finalized, primarily consist of: (1) revaluation of certain property, plant and equipment; (2) adjusting preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (3) recognizing additional obligations related to retirement benefits; and (4) recognizing estimated severance and other compensation liabilities. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which will be reviewed for impairment at least annually. As of December 31, 2001, we had recorded goodwill of approximately $1.9 billion related to the merger. Regulatory Accounting We are subject to regulation that sets the prices (rates) we are permitted to charge our customers based on costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in New Jersey, a significant amount of regulatory assets have been recorded. As of December 31, 2001, we had regulatory assets of $3.3 billion. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislation, judicial or regulatory actions in the future. Derivative Accounting Determination of appropriate accounting for derivative transactions requires the involvement of management representing operations, finance and risk assessment. In order to determine the appropriate accounting for derivative transactions, the provisions of the contract need to be carefully assessed in accordance with the authoritative accounting literature and management's intended use of the derivative. New authoritative guidance continues to shape the application of derivative accounting. Management's expectations and intentions are key factors in determining the appropriate accounting for a derivative transaction and, as a result, such expectations and intentions must be documented. Derivative contracts that are determined to fall within the scope of Statement of Financial Accounting Standards (SFAS) No. 133, as amended, must be recorded at their fair value. Active market prices are not always available to determine the fair value of the later years of a contract, requiring that various assumptions and estimates be used in their valuation. We continually monitor our derivative contracts to determine if our activities, expectations, intentions, assumptions and estimates remain valid. As part of our normal operations we enter into commodities contracts, which increase the impact of derivative accounting judgments. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hours that have been delivered but not yet billed through the end of the year. The determination of unbilled revenues requires management to make various estimates including: - Net energy purchased or generated for retail load - Losses of energy over distribution lines - Mix of kilowatt-hour usage by residential, commercial and industrial customers - Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards - ------------------------------------ The Financial Accounting Standards Board (FASB) approved SFAS 141, "Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 2001. SFAS 141 requires that all business combinations 7 initiated after June 30, 2001 be accounted for using purchase accounting. The provisions of the new standard relating to the determination of goodwill and other intangible assets have been applied to our 2001 merger, which was accounted for as a purchase transaction. Under SFAS 142, amortization of existing goodwill will cease 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 a preliminary analysis. We did not have any goodwill prior to our 2001 merger, and we did not amortize goodwill associated with the merger under the provisions of the new standard. In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of APB 30. Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30. 8 JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED STATEMENTS OF INCOME
Nov 7 - Jan. 1 - For the Years Ended Dec. 31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- (In thousands) OPERATING REVENUES........................................ $ 282,902 | $1,838,638 $1,979,297 $2,018,209 ---------- | ---------- ---------- ---------- | OPERATING EXPENSES AND TAXES: | Fuel and purchased power............................... 136,123 | 932,300 890,812 850,880 Nuclear operating costs................................ - | - 78,487 149,739 Other operating costs.................................. 40,670 | 237,513 303,353 333,134 ---------- | ---------- ---------- ---------- Total operation and maintenance expenses............. 176,793 | 1,169,813 1,272,652 1,333,753 Provision for depreciation and amortization............ 35,124 | 205,918 235,001 241,842 General taxes.......................................... 8,919 | 56,582 64,398 76,824 Income taxes........................................... 18,400 | 113,478 124,019 88,370 ---------- | ---------- ---------- ---------- Total operating expenses and taxes................... 239,236 | 1,545,791 1,696,070 1,740,789 ---------- | ---------- ---------- ---------- | OPERATING INCOME.......................................... 43,666 | 292,847 283,227 277,420 | OTHER INCOME (EXPENSE).................................... 1,186 | (176,875) 24,146 (1,957) ---------- | ---------- ---------- ---------- | INCOME BEFORE NET INTEREST CHARGES........................ 44,852 | 115,972 307,373 275,463 ---------- | ---------- ---------- ---------- | NET INTEREST CHARGES: | Subsidiaries' preferred stock dividend requirements.... 1,605 | 9,095 10,700 10,700 Interest on long-term debt............................. 14,234 | 77,205 85,220 87,196 Allowance for borrowed funds used during | construction......................................... 135 | (1,665) (1,287) (1,775) Deferred interest income............................... (2,243) | (12,557) (7,951) (1,817) Other interest expense................................. 1,080 | 9,427 9,879 8,779 ----------- | ---------- ----------- ----------- Net interest charges................................. 14,811 | 81,505 96,561 103,083 ---------- | ---------- ---------- ---------- | NET INCOME................................................ 30,041 | 34,467 210,812 172,380 | PREFERRED STOCK DIVIDEND | REQUIREMENTS........................................... 698 | 4,547 6,904 8,670 | LOSS ON PREFERRED STOCK | REACQUISITION.......................................... - | - - 848 ---------- | ---------- ---------- --------- | EARNINGS ON COMMON STOCK.................................. $ 29,343 | $ 29,920 $ 203,908 $ 162,862 =========== | =========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
9 JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service................................................................... $3,431,823 | $3,282,987 Less-Accumulated provision for depreciation.................................. 1,313,259 | 1,212,784 ---------- | ---------- 2,118,564 | 2,070,203 ---------- | ---------- Construction work in progress- | Electric plant............................................................. 60,482 | 75,201 ---------- | ---------- 2,179,046 | 2,145,404 ---------- | ---------- OTHER PROPERTY AND INVESTMENTS: | Nuclear plant decommissioning trusts......................................... 114,899 | 115,311 Nuclear fuel disposal trust.................................................. 137,098 | 126,336 Long-term notes receivable from associated companies......................... 20,333 | 20,333 Other........................................................................ 6,643 | 6,343 ---------- | ---------- 278,973 | 268,323 ---------- | ---------- CURRENT ASSETS: | Cash and cash equivalents.................................................... 31,424 | 2,021 Receivables- | Customers (less accumulated provisions of $12,923,000 and $21,479,000 | respectively, for uncollectible accounts)................................ 226,392 | 237,222 Associated companies....................................................... 6,412 | 8,520 Other...................................................................... 20,729 | 38,107 Materials and supplies, at average cost...................................... 1,348 | 508 Prepayments and other........................................................ 16,569 | 96,914 ---------- | ---------- 302,874 | 383,292 ---------- | ---------- DEFERRED CHARGES: | Regulatory assets............................................................ 3,324,804 | 3,185,072 Goodwill..................................................................... 1,926,526 | - Other........................................................................ 27,775 | 26,963 ---------- | ---------- 5,279,105 | 3,212,035 ---------- | ---------- $8,039,998 | $6,009,054 ========== | ========== CAPITALIZATION AND LIABILITIES | | CAPITALIZATION (See Consolidated Statements of Capitalization): | Common stockholder's equity.................................................. $3,163,701 | $1,459,260 Preferred stock- | Not subject to mandatory redemption........................................ 12,649 | 12,649 Subject to mandatory redemption............................................ 44,868 | 51,500 Company-obligated mandatorily redeemable preferred securities................ 125,250 | 125,000 Long-term debt............................................................... 1,224,001 | 1,093,987 ---------- | ---------- 4,570,469 | 2,742,396 ---------- | ---------- CURRENT LIABILITIES: | Currently payable long-term debt and preferred stock......................... 60,848 | 50,847 Short-term borrowings (Note 5)- | Associated companies....................................................... 18,149 | - Other...................................................................... - | 29,200 Accounts payable- | Associated companies....................................................... 171,168 | 98,526 Other...................................................................... 89,739 | 87,261 Accrued taxes............................................................... 35,783 | 8,836 Accrued interest............................................................. 25,536 | 23,625 Other........................................................................ 79,589 | 38,168 ---------- | ---------- 480,812 | 336,463 ---------- | ---------- DEFERRED CREDITS: | Accumulated deferred income taxes............................................ 514,216 | 666,047 Accumulated deferred investment tax credits.................................. 13,490 | 17,087 Power purchase contract loss liability ...................................... 1,968,823 | 1,699,473 Nuclear fuel disposal costs.................................................. 163,377 | 156,959 Nuclear plant decommissioning costs.......................................... 137,424 | 135,835 Other........................................................................ 191,387 | 254,794 ---------- | ---------- 2,988,717 | 2,930,195 ---------- | ---------- COMMITMENTS AND CONTINGENCIES | (Notes 3 and 6).............................................................. ---------- | ---------- $8,039,998 | $6,009,054 ========== | ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
10 JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION As of December 31, 2001 2000 - -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, par value $10 per share, authorized 16,000,000 shares | 15,371,270 shares outstanding.............................................. $ 153,713 | $ 153,713 Other paid-in capital........................................................ 2,981,117 | 510,769 Accumulated other comprehensive loss (Note 4F)............................. (472)| (8) Retained earnings (Note 4A).................................................. 29,343 | 794,786 ----------- | ----------- Total common stockholder's equity.......................................... 3,163,701 | 1,459,260 ----------- | ----------- Number of Shares Optional Outstanding Redemption Price ---------------- -------------------- 2001 2000 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 4B): Cumulative, without par value- Authorized 125,000 shares Not Subject to Mandatory Redemption: 4% Series..................... 125,000 125,000 $ 106.50 $ 13,313 12,649 | 12,649 | Subject to Mandatory Redemption (Note 4C): | 8.65% Series J..................... 250,001 333,334 101.30 $ 25,325 26,750 | 33,333 7.52% Series K..................... 265,000 290,000 103.76 27,496 28,951 | 29,000 Redemption Within One Year......... (10,833)| (10,833) -------- -------- --------- ----------- | ----------- Total Subject to Mandatory | Redemption..................... 515,001 623,334 $ 52,821 44,868 | 51,500 ======== ======== ========= ----------- | ----------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY LIMITED PARTNERSHIP HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (NOTE 4D): Cumulative, $25 par value - Authorized 5,000,000 shares Subject to Mandatory Redemption: 8.56% due 2044........................................................... 125,250 | 125,000 | LONG-TERM DEBT (Note 4E): | First mortgage bonds: | 6.450% due 2001............................................................ - | 40,000 9.000% due 2002............................................................ 50,000 | 50,000 6.375% due 2003............................................................ 150,000 | 150,000 7.125% due 2004............................................................ 160,000 | 160,000 6.780% due 2005............................................................ 50,000 | 50,000 6.850% due 2006............................................................ 40,000 | 40,000 8.250% due 2006............................................................ 50,000 | 50,000 7.900% due 2007............................................................ 40,000 | 40,000 7.125% due 2009............................................................ 6,300 | 6,300 7.100% due 2015............................................................ 12,200 | 12,200 9.200% due 2021............................................................ 50,000 | 50,000 8.320% due 2022............................................................ 40,000 | 40,000 8.550% due 2022............................................................ 30,000 | 30,000 8.820% due 2022............................................................ 12,000 | 12,000 8.850% due 2022............................................................ 38,000 | 38,000 7.980% due 2023............................................................ 40,000 | 40,000 7.500% due 2023............................................................ 125,000 | 125,000 8.450% due 2025............................................................ 50,000 | 50,000 6.750% due 2025............................................................ 150,000 | 150,000 ----------- | ----------- Total first mortgage bonds............................................... 1,093,500 | 1,133,500 ----------- | ----------- | Secured notes: | 6.450% due 2006............................................................ 150,000 | - ----------- | ----------- Unsecured notes: | 7.69% due 2039............................................................. 2,998 | 3,012 ----------- | ----------- Net unamortized premium / (discount) on debt..................................... 27,518 | (2,511) ----------- | ----------- Long-term debt due within one year............................................... (50,015)| (40,014) ----------- | ----------- Total long-term debt......................................................... 1,224,001 | 1,093,987 ----------- | ----------- | TOTAL CAPITALIZATION................................................................ $ 4,570,469 | $ 2,742,396 =========== | =========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
11 JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Common Stock Accumulated ------------------- Other Other Comprehensive Number Par Paid-In Comprehensive Retained Income of Shares Value Capital Income (Loss) Earnings ------------- ---------- ------- ------- ------------- -------- (Dollars in thousands) Balance, January 1, 1999....................... 15,371,270 $153,713 $ 510,769 $ (425) $ 893,016 Net income.................................. $172,380 172,380 Net unrealized gains on investments......... 7 7 Minimum pension liability................... 425 425 -------- Comprehensive income........................ 172,812 -------- Loss on preferred stock reacquisition...... (848) Cash dividends on preferred stock........... (8,670) Cash dividends on common stock.............. (335,000) - -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999..................... 15,371,270 153,713 510,769 7 720,878 Net income.................................. 210,812 210,812 Minimum pension liability................... (15) (15) -------- Comprehensive income........................ 210,797 -------- Cash dividends on preferred stock........... (6,904) Cash dividends on common stock.............. (130,000) - -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000..................... 15,371,270 153,713 510,769 (8) 794,786 Net income.................................. 34,467 34,467 Net unrealized gains on investments......... 2 2 Net unrealized gain on derivative instruments 768 768 -------- Comprehensive income........................ 35,237 -------- Cash dividends on preferred stock........... (4,547) Cash dividends on common stock ............ (175,000) - -------------------------------------------------------------------------------------------------------------------- Balance, November 6, 2001...................... 15,371,270 153,713 510,769 762 649,706 Purchase accounting fair value adjustment... 2,470,348 (762) (649,706) ____________________________________________________________________________________________________________________ Balance, November 7, 2001...................... 15,371,270 153,713 2,981,117 - - Net income.................................. 30,041 30,041 Net unrealized gain (loss) on derivative instruments................. (472) (472) -------- Comprehensive income........................ $ 29,569 -------- Cash dividends on preferred stock........... (698) - -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001..................... 15,371,270 $153,713 $2,981,117 $ (472) $ 29,343 ==================================================================================================================== CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- --------------------- Number Carrying Number Carrying of Shares Value of Shares Value --------- -------- --------- -------- (Dollars in thousands) Balance, January 1, 1999............ 375,000 $ 37,741 5,890,000 $214,000 Redemptions- 7.88% Series .................. (250,000) (25,092) 7.52% Series .................. (50,000) (5,000) --------------------------------------------------------------------------------------- Balance, December 31, 1999.......... 125,000 12,649 5,840,000 209,000 Redemptions- 7.52% Series .................. (50,000) (5,000) 8.65% Series .................. (166,666) (16,667) --------------------------------------------------------------------------------------- Balance, December 31, 2000.......... 125,000 12,649 5,623,334 187,333 Redemptions- 7.52% Series .................. (25,000) (2,500) 8.65% Series .................. (83,333) (8,333) Purchase accounting fair value adjustment............. 4,451 --------------------------------------------------------------------------------------- Balance, December 31, 2001.......... 125,000 $ 12,649 5,515,001 $180,951 ======================================================================================= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
12 JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
Nov. 7 - Jan. 1 - For the Years Ended Dec. 31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income...........................................................$ 30,041 | $ 34,467 $ 210,812 $ 172,380 Adjustments to reconcile net income to net | cash from operating activities: | Provision for depreciation and amortization..................... 35,124 | 205,918 235,001 241,842 Nuclear fuel and lease amortization............................. - | - 11,472 29,507 Other amortization.............................................. 1,360 | 23,025 34,563 30,441 NJBPU restructuring rate order.................................. - | - - 115,000 Deferred costs, net............................................. (25,471)| (29,312) (229,321) (37,841) Deferred income taxes, net...................................... 5,609 | (58,132) 270,479 (78,072) Investment tax credits, net..................................... (540)| (3,057) (15,027) (18,111) Receivables..................................................... 7,050 | 27,177 11,766 (84,364) Materials and supplies.......................................... 2 | (842) (268) 46,023 Accounts payable................................................ (5,060)| (44,498) 51,633 21,788 Other........................................................... 20,563 | 66,328 (230,100) (65,161) -------- | --------- --------- --------- Net cash provided from operating activities................... 68,678 | 221,074 351,010 373,432 -------- | --------- --------- --------- | CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing- | Long-term debt.................................................. - | 148,796 - - Short-term borrowings, net...................................... - | - 29,200 - Redemptions and Repayments- | Preferred stock................................................. - | 10,833 21,667 30,940 Long-term debt.................................................. 40,000 | - 40,000 12 Short-term borrowings, net...................................... 1,851 | 9,200 - 122,344 Capital lease payments.......................................... - | - 48,516 27,347 Dividend Payments- | Common stock.................................................... - | 175,000 130,000 335,000 Preferred stock................................................. 698 | 4,547 7,065 7,468 -------- | --------- --------- --------- Net cash used for financing activities........................ 42,549 | 50,784 218,048 523,111 -------- | --------- --------- --------- | CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions................................................... 21,487 | 141,030 144,389 140,915 Contributions to decommissioning trusts.............................. 202 | 1,004 130,444 59,175 Sale of investments.................................................. - | - (74,797) (413,753) Other................................................................ 1,078 | 2,215 624 2,162 -------- | --------- --------- --------- Net cash used for (provided from) investing activities........ 22,767 | 144,249 200,660 (211,501) -------- | --------- --------- --------- Net increase (decrease) in cash and cash equivalents................. 3,362 | 26,041 (67,698) 61,822 Cash and cash equivalents at beginning of period..................... 28,062 | 2,021 69,719 7,897 -------- | --------- --------- --------- Cash and cash equivalents at end of period...........................$ 31,424 | $ 28,062 $ 2,021 $ 69,719 ======== | ========= ========= ========= | SUPPLEMENTAL CASH FLOWS INFORMATION: | Cash Paid During the Year- | Interest (net of amounts capitalized)...........................$ 4,787 | $ 95,509 $ 99,961 $ 104,924 ======== | ========= ========= ========= Income taxes (refund)...........................................$ 20,586 | $ 19,365 $ (50,105) $ 189,304 ======== | ========= ========= ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
13 JERSEY CENTRAL POWER & LIGHT COMPANY CONSOLIDATED STATEMENTS OF TAXES
Nov. 7 - Jan. 1 - For the Years Ended Dec.31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property......................................... $ 283 | $ 3,589 $ 4,093 $ 4,668 State gross receipts............................................... 1,269 | - - - Social security and unemployment................................... (1) | 7 - 95 NJ TEFA............................................................ 6,765 | 42,418 47,521 58,831 Other.............................................................. 603 | 10,568 12,784 13,230 ---------- | ---------- ---------- ---------- Total general taxes......................................... $ 8,919 | $ 56,582 $ 64,398 $ 76,824 ========= | ========== ========== ========== | PROVISION FOR INCOME TAXES: | Currently payable- | Federal......................................................... $ 11,827 | $ 41,826 $ (109,572) $ 147,586 State........................................................... 3,205 | 19,415 (26,005) 49,567 --------- | --------- ---------- ---------- 15,032 | 61,241 (135,577) 197,153 --------- | --------- ----------- ---------- Deferred, net- | Federal......................................................... 4,268 | (36,210) 209,127 (54,760) State........................................................... 1,341 | (21,922) 61,352 (23,312) --------- | --------- ---------- ---------- 5,609 | (58,132) 270,479 (78,072) --------- | ---------- ---------- ----------- Investment tax credit amortization................................. (540) | (3,057) (15,027) (18,111) --------- | ---------- ---------- ---------- Total provision for income taxes............................ $ 20,101 | $ 52 $ 119,875 $ 100,970 ========= | ========== ========== ========== | INCOME STATEMENT CLASSIFICATION | OF PROVISION FOR INCOME TAXES: | Operating income................................................... $ 18,400 | $ 113,478 $ 124,019 $ 88,370 Other income....................................................... 1,701 | (113,426) (4,144) 12,600 --------- | ---------- ---------- ---------- Total provision for income taxes............................ $ 20,101 | $ 52 $ 119,875 $ 100,970 ========= | ========== ========== ========== | RECONCILIATION OF FEDERAL INCOME TAX | EXPENSE AT STATUTORY RATE TO TOTAL | PROVISION FOR INCOME TAXES: | Book income before provision for income taxes...................... $ 50,142 | $ 34,519 $ 330,688 $ 273,349 ========= | ========== ========== --======== Federal income tax expense at statutory rate....................... $ 17,550 | $ 12,082 $ 115,741 $ 95,672 Increases (reductions) in taxes resulting from- | Amortization of investment tax credits.......................... (540) | (3,057) (15,027) (12,481) Depreciation.................................................... 226 | 3,563 3,230 2,684 State income tax, net of federal tax............................ 3,077 | 4,355 21,987 16,232 Allocated share of consolidated tax savings..................... -- | (8,509) -- (2,421) Sale of generation assets....................................... -- | -- (6,239) -- Other, net...................................................... (212) | (8,382) 183 1,284 ---------- | ---------- ---------- ----------- Total provision for income taxes............................ $ 20,101 | $ 52 $ 119,875 $ 100,970 ========= | ========== ========== ========== | ACCUMULATED DEFERRED INCOME TAXES AT | DECEMBER 31: | Property basis differences......................................... $ 288,255 | $ 302,476 $ 403,250 Nuclear decommissioning............................................ 59,716 | 97,817 2,264 Deferred sale and leaseback costs.................................. (16,240) | (15,605) (15,429) Purchase accounting basis difference............................... (71,900) | -- -- Sale of generation assets.......................................... 202,485 | 235,923 -- Regulatory transition charge....................................... 123,042 | 99,930 -- Provision for rate refund.......................................... (46,942) | (46,942) (46,942) Customer receivables for future income taxes....................... 16,749 | 33,234 29,073 Other.............................................................. (40,949) | (40,786) (17,232) --------- | ---------- ---------- Net deferred income tax liability........................... $ 514,216 | $ 666,047 $ 354,984 ========= | ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include Jersey Central Power & Light Company (Company) and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. FirstEnergy also holds directly all of the issued and outstanding common shares of Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE), American Transmission Systems, Inc. (ATSI), Metropolitan Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The Company, Met-Ed and Penelec were formerly wholly owned subsidiaries of GPU, Inc., which merged with FirstEnergy on November 7, 2001. Pre-merger period and post-merger period financial results are separated by a heavy black line. The Company follows the accounting policies and practices prescribed by the New Jersey Board of Public Utilities (NJBPU) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES- The Company's principal business is providing electric service to customers in New Jersey. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers and sales to wholesale customers. There was no material concentration of receivables as of December 31, 2001 or 2000, with respect to any particular segment of the Company's customers. REGULATORY PLAN- New Jersey is evolving to a competitive electric utility marketplace. In March 2001, the NJBPU issued a Final Decision and Order (Final Order) with respect to the Company's rate unbundling, stranded cost and restructuring filings, which superseded its 1999 Summary Order. The Final Order confirms rate reductions set forth in the Summary Order, which remain in effect at increasing levels through July 2003 with rates after July 31, 2003 to be determined in a rate case commencing in 2002. The Final Order also confirms the right of customers to select their generation suppliers effective August 1, 1999, and includes the deregulation of electric generation service costs. The Final Order confirms the establishment of a non-bypassable societal benefits charge to recover costs which include nuclear plant decommissioning and manufactured gas plant remediation, as well as a non-bypassable market transition charge (MTC) primarily to recover stranded costs; however, the NJBPU deferred making a final determination of the net proceeds and stranded costs related to prior generating asset divestitures until the Company's request for an Internal Revenue Service (IRS) ruling regarding the treatment of associated federal income tax benefits is acted upon. Should the IRS ruling support the return of the tax benefits to ratepayers, the Company would need to record a corresponding charge to income of approximately $25 million, plus interest. The Company has an obligation to provide basic generation service (BGS), that is, it must act as provider of last resort to non-shopping customers as a result of the NJBPU's restructuring plans. The Company obtains its supply of electricity to meet its BGS obligation to non-shopping customers almost entirely from contracted and open market purchases. The Company is permitted to defer for future collection from customers the amounts by which its costs of supplying BGS to non-shopping customers and costs incurred under non-utility generation agreements exceed amounts collected through BGS and MTC rates. As of December 31, 2001, the accumulated deferred cost balance totaled approximately $300 million, after giving effect to the reduction discussed below. The Final Order provided for the ability to securitize stranded costs associated with the divested Oyster Creek Nuclear Generation Station. In February 2002, the Company received NJBPU authorization to issue $320 million of transition bonds to securitize the recovery of these costs. The NJBPU order also provides for a usage-based non-bypassable transition bond charge and for the transfer of the bondable transition property to another entity. The Company plans to sell transition bonds in the second quarter of 2002, which will be recognized on the Consolidated Balance Sheet. The Final Order also allows for additional securitization of the Company's deferred balance to the extent permitted by law upon application by the Company and a determination by the NJBPU that the conditions of the New Jersey restructuring legislation are met. There can be no assurance as to the extent, if any, that the NJBPU will permit such securitization. In June 2001, the four incumbent New Jersey electric distribution companies, including the Company, filed a joint proposal seeking NJBPU approval of a competitive bidding process to procure supply for the provision of BGS for the period August 1, 2002 through July 31, 2003. In December 2001, the NJBPU authorized the auctioning of BGS to meet 15 the electric demands of all customers who have not selected an alternative supplier. BGS for all four companies, for the period August 1, 2002 to July 31, 2003, was simultaneously put out for bid. The auction, which ended on February 13, 2002 and was approved by the NJBPU on February 15, 2002, removed the Company's BGS obligation of 5,100 megawatts for the period from August 1, 2002 to July 31, 2003. The auction represents a transitional mechanism and a different model for the procurement of BGS commencing August 1, 2003 may be adopted. On September 26, 2001, the NJBPU approved the merger between FirstEnergy and GPU, (see Note 2 - Merger) subject to the terms and conditions set forth in a Stipulation of Settlement which had been signed by the major parties in the merger discussions. Under this Stipulation of Settlement, FirstEnergy agreed to reduce the Company's regulatory assets by $300 million, in order to ensure that customers receive the benefit of future merger savings. The Company wrote off $300 million of its deferred costs upon receipt of the final regulatory approval for the merger, which occurred on October 29, 2001. The application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," was discontinued in 1999 with respect to the Company's generation operations. The Company subsequently divested substantially all of its generating assets. The Securities and Exchange Commission issued interpretive guidance regarding asset impairment measurement, concluding that any supplemental regulated cash flows such as a Competitive Transition Charge should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $46 million as of December 31, 2001. All of the Company's regulatory assets are expected to continue to be recovered under provisions of the Company's regulatory orders. PROPERTY, PLANT AND EQUIPMENT- As a result of the merger, certain of the Company's property, plant and equipment have been adjusted to reflect fair value. The majority of the Company's property, plant and equipment is reflected at original cost since such assets remain subject to rate regulation on a historical cost basis. In addition to its wholly owned facilities, the Company holds a 50% ownership interest in Yards Creek Pumped Storage Facility, and its net book value was approximately $21.5 million as of December 31, 2001. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annualized composite rate was approximately 3.4% in 2001, 3.3% in 2000 and 2.9% in 1999. Annual depreciation expense in 2001 included approximately $27.1 million for future decommissioning costs applicable to the Company's ownership in Unit 2 of the Three Mile Island Nuclear Plant (TMI-2), a demonstration nuclear reactor owned by a wholly owned subsidiary of the Company (in conjunction with Met-Ed and Penelec) and decommissioning liabilities for its previously divested nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $130.1 million in current dollars and (using a 4.0% escalation rate) approximately $214.1 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Decommissioning of the demonstration nuclear reactor is expected to be completed in 2003; payments for decommissioning of TMI-2 are expected to begin in 2014, when actual decommissioning work is expected to begin. The Company has recovered approximately $33 million for decommissioning through its electric rates from customers through December 31, 2001. The Company has also recognized an estimated liability of approximately $12.1 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required as of January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the costs to settle the retirement obligation differs from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trusts will be recorded as investment income. The Company is currently assessing the new standard and has not yet quantified the impact on its financial statements. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related 16 to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Results for the period January 1, 2001 through November 6, 2001 are included in the final consolidated federal income tax return of GPU, and results for the period November 7, 2001 through December 31, 2001 are included in FirstEnergy's 2001 consolidated federal income tax return. In both cases, the consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing the tax benefit for any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- Effective December 31, 2001, the Company's defined benefit pension plan was merged into FirstEnergy's defined benefit pension plan. FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Company's full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the GPU pension plans were merged with the FirstEnergy plan. FirstEnergy uses the projected unit credit method for funding purposes. The assets of the pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. Costs for the year 2001 include the former GPU companies' pension and other postretirement benefit costs for the period November 7, 2001 through December 31, 2001. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheet as of December 31, 2001: Other Pension Benefits Postretirement Benefits ---------------- ----------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1................. $1,506.1 $752.0 Service cost................... 34.9 18.3 Interest cost.................. 133.3 64.4 Plan amendments................ 3.6 -- Actuarial loss................. 123.1 73.3 Voluntary early retirement program...................... -- 2.3 GPU acquisition................ 1,878.3 716.9 Benefits paid.................. (131.4) (45.6) ----------------------------------------------------------------------- Benefit obligation as of December 31.................. 3,547.9 1,581.6 ----------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1.............. 1,706.0 23.0 Actual return on plan assets... 8.1 12.7 Company contribution........... -- 43.3 GPU acquisition................ 1,901.0 462.0 Benefits paid.................. (131.4) (6.0) ----------------------------------------------------------------------- Fair value of plan assets as of December 31............ 3,483.7 535.0 ----------------------------------------------------------------------- Funded status of plan.......... (64.2) (1,046.6) Unrecognized actuarial loss (gain).................. 222.8 212.8 Unrecognized prior service cost................. 87.9 17.7 Unrecognized net transition obligation (asset)........... -- 101.6 ----------------------------------------------------------------------- Prepaid (accrued) benefit cost. $ 246.5 $ (714.5) ======================================================================= Assumptions used as of December 31, 2001: Discount rate.................. 7.25% 7.25% Expected long-term return on plan assets............... 10.25% 10.25% Rate of compensation increase..................... 4.00% 4.00% 17 FirstEnergy's net pension and other postretirement benefit costs for the year ended December 31, 2001 were computed as follows: Other Pension Benefits Postretirement Benefits ---------------- ----------------------- (In millions) Service cost................... $ 34.9 $18.3 Interest cost.................. 133.3 64.4 Expected return on plan assets.................. (204.8) (9.9) Amortization of transition obligation (asset)........... (2.1) 9.2 Amortization of prior service cost................. 8.8 3.2 Recognized net actuarial loss (gain).................. -- 4.9 Voluntary early retirement program...................... 6.1 2.3 ----------------------------------------------------------------------- Net benefit cost............... $ (23.8) $92.4 ======================================================================= The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase FirstEnergy's total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. Pre-Merger As of December 31, 2000, the Company's balance sheet included accrued benefit costs of $1.8 million and $0.1 million, respectively, related to pension and other postretirement benefit obligations. In addition, for the year ended December 31, 2000, the Company recognized in income net benefit costs/(credits) of $(0.5) million and $0.04 million, respectively, for pension and other postretirement benefits, and for the year ended December 31, 1999, the Company recognized net benefit costs/(credits) of $0.2 million and $0.05 million, respectively. TRANSACTIONS WITH AFFILIATED COMPANIES- During the three years ended December 31, 2001, GPU Service, Inc., an affiliated company, provided legal, accounting, financial and other services to the Company. In addition, prior to the sales of the Company's generating assets in 2000 and 1999, affiliated companies GPU Nuclear, Inc. and GPU Generation, Inc. conducted generation operations for the company. The total cost of services rendered by affiliates was $279 million, $464 million and $580 million for the years 2001, 2000 and 1999, respectively. Of these amounts, $141 million, $259 million and $393 million were charged to income for the years 2001, 2000 and 1999, respectively. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 2001 2000 ------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------------------------------------------------- (In millions) Long-term debt.......... $1,246 $1,250 $1,134 $1,125 Preferred stock......... $ 176 $ 180 $ 187 $ 188 Investments other than cash and cash equivalents...... $ 253 $ 252 $ 243 $ 243 ------------------------------------------------------------------- $1,675 $1,682 $1,564 $1,556 =================================================================== The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to the Company's ratings. Long-term debt and preferred stock subject to mandatory redemption were recognized at fair value in connection with the merger. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on 18 financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Company has no securities held for trading purposes. On January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133." The adoption resulted in the recognition of derivative assets on the Consolidated Balance Sheet as of January 1, 2001 in the amount of $21.8 million with offsetting amounts, net of tax, recorded in Accumulated Other Comprehensive Income, of $5.1 million, and in Regulatory Assets, of $13 million. The Company is exposed to financial risks resulting from the fluctuation of commodity prices, including electricity and natural gas. To manage the volatility relating to these exposures, the Company uses a variety of derivative instruments, including forward contracts, options and futures contracts. These derivatives are used principally for hedging 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. The Company uses derivatives to hedge the risk of price fluctuations. The Company's primary ongoing hedging activity involves cash flow hedges of electricity and natural gas purchases. The majority of the Company's forward commodity contracts are considered "normal purchases and sales," as defined by SFAS 138, and are therefore excluded from the scope of SFAS 138. The forward contracts, options and futures contracts determined to be within the scope of SFAS 133 are accounted for as cash flow hedges and expire on various dates through 2002. Gains and losses from hedges of commodity price risks are included in net income when the underlying hedged commodities are delivered. There is currently a net deferred loss of $0.5 million included in Accumulated Other Comprehensive Loss as of December 31, 2001 related to derivative hedging activity, which will be reclassified to earnings during the next twelve months as hedged transactions occur. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and NJBPU have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are expected to continue to be recovered from customers under the Company's regulatory plan. The Company continues to bill and collect cost-based rates for its transmission and distribution services, which remain regulated; accordingly, it is appropriate that the Company continues the application of SFAS 71 to those operations. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: 2001 2000 ------------------------------------------------------------------- (In millions) Regulatory transition charge......... $2,844.7 $2,592.7 Societal benefits charge............. 166.6 206.6 Property losses and unrecovered plant costs........................ 104.1 119.2 Customer receivables for future income taxes................ 52.4 87.6 Employee postretirement benefit costs...................... 36.5 39.8 Loss on reacquired debt.............. 19.3 21.3 Spent fuel disposal costs............ 20.2 26.1 Other................................ 81.0 91.8 ------------------------------------------------------------------- Total $3,324.8 $3,185.1 =================================================================== 2. MERGER: On November 7, 2001, the merger of FirstEnergy and GPU became effective pursuant to the Agreement and Plan of Merger, dated August 8, 2000. As a result of the merger, GPU's former wholly owned subsidiaries, including the Company, became wholly owned subsidiaries of FirstEnergy. The merger was accounted for by the purchase method of accounting. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by FirstEnergy's management based on information currently available and on current assumptions as to future operations. Merger purchase accounting adjustments recorded in the records of the Company primarily consist of: (1) revaluation of certain property, plant and equipment; (2) adjusting preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (3) recognizing additional obligations related to retirement benefits; and (4) recognizing estimated severance and other compensation liabilities. Other assets and liabilities were not adjusted since they remain subject to rate regulation on a historical cost 19 basis. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which will not be amortized but will be reviewed for impairment at least annually. As of December 31, 2001, the Company had recorded goodwill of approximately $1.9 billion related to the merger. 3. LEASES: Consistent with regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Prior to the sale of its nuclear generating facilities (completed in 2000), the Company's capital lease obligations related primarily to nuclear fuel lease agreements with nonaffiliated fuel trusts for the plants. In 2000, total rentals related to these capital leases were $13.0 million, comprised of an interest element of $1.5 million and other costs of $11.5 million. The Company's most significant operating lease relates to the sale and leaseback of a portion of its ownership interest in the Merrill Creek Reservoir project. The interest element related to this lease was $1.2 million and $0.4 million for the years 2001 and 2000, respectively. As of December 31, 2001, the future minimum lease payments on the Company's Merrill Creek operating lease, net of reimbursements from sublessees, are: $2.3 million, $3.8 million, $1.8 million, $2.3 million and $2.2 million for the years 2002 through 2006, and $73.4 million for the years thereafter. The Company is recovering its Merrill Creek lease payments, net of reimbursements, through distribution rates. 4. CAPITALIZATION: (A) RETAINED EARNINGS- The merger purchase accounting adjustments included resetting the retained earnings balance to zero as of the November 7, 2001 merger date. In general, the Company's first mortgage bond (FMB) indentures restrict the payment of dividends or distributions on or with respect to the Company's common stock to amounts credited to earned surplus since approximately the date of its indenture. At such date, the Company had a balance of $1.7 million in its earned surplus account, which would not be available for dividends or other distributions. As of December 31, 2001, the Company had retained earnings available to pay common stock dividends of $27.6 million, net of amounts restricted under the Company's FMB indentures. (B) PREFERRED AND PREFERENCE STOCK- The Company's 7.52% Series K of preferred stock has a restriction which prevents early redemption prior to June 2002. All other preferred stock may be redeemed by the Company, in whole or in part, with 30-90 days' notice. (C) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Annual sinking fund provisions for the Company's preferred stock are as follows: Redemption Price Per Series Shares Share ------------------------------------- 8.65% J 83,333 100 7.52% K 25,000 100 ------------------------------------- Annual sinking fund requirements for the next five years are $10.8 million in each year 2002 through 2004, and $2.5 million in each year 2005 and 2006. (D) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF LIMITED PARTNERSHIP HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES- JCP&L Capital, L.P. is a special-purpose limited partnership in which a subsidiary of the Company is the sole general partner. The limited partnership invested the gross proceeds from the sale of $125.0 million at 8.56% of monthly income preferred securities (MIPS) in $128.9 million of the Company's 8.56% subordinated debentures. The sole assets of the limited partnership are these subordinated debentures, which have the same rate and maturity date as the preferred securities. The Company has effectively provided a full and unconditional guarantee of its obligations under its limited partnership's MIPS, to the extent that there is sufficient cash on hand to permit such payments and funds legally available therefor, and payments on liquidation or redemption with respect to the MIPS. Distributions on the limited partnership's MIPS (and interest on the subordinated debentures) may be deferred for up to 60 months, but the Company may not pay dividends on, or redeem or acquire, any of its cumulative preferred or common stock until 20 deferred payments on its subordinated debentures are paid in full. The limited partnership's MIPS, which mature in 2044 and have a liquidation value of $25.00 per security, are redeemable at the option of the Company at 100% of their principal amount. (E) LONG-TERM DEBT- The first mortgage indentures and their supplements, which secure all of the Company's FMBs, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company. Based on the amount of bonds authenticated by the Trustee through December 31, 2001, the Company's annual sinking and improvement fund requirements for all bonds issued under the mortgage amount to $16.1 million. The Company expects to fulfill its sinking and improvement fund obligation by providing retired bonds to the Trustee. Sinking fund requirements for FMBs and maturing long-term debt (excluding capital leases) for the next five years are: (In millions) ----------------------- 2002........ $ 50.0 2003........ 150.0 2004........ 160.3 2005........ 50.3 2006........ 240.3 ------------------------ (F) COMPREHENSIVE INCOME- Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholder's equity except those resulting from transactions with the Company's parent. As of December 31, 2001, accumulated other comprehensive loss consisted of unrealized losses on derivative instrument hedges of $0.5 million. 5. SHORT-TERM BORROWINGS: The Company may borrow from its affiliates on a short-term basis. As of December 31, 2001, the Company had total short-term borrowings of $18.1 million from its affiliates with a weighted average interest rate of approximately 4.9%. 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $572 million for property additions and improvements from 2002-2006, of which approximately $144 million is applicable to 2002. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership interest in TMI-2, the Company is exempt from any potential assessment under the industry retrospective rating plan. The Company is also insured as to its interest in TMI-2 under a policy issued to the operating company for the plant. Under this policy, $150 million is provided for property damage and decontamination and decommissioning costs. Under this policy, the Company can be assessed a maximum of approximately $0.2 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at TMI-2 exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. 21 ENVIRONMENTAL MATTERS- Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, the Company's proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. The Company has been named as a "potentially responsible party" (PRP) 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. In addition, the Company has accrued liabilities for environmental remediation of former manufactured gas plants in New Jersey; these costs are being recovered through a non-bypassable societal benefits charge. The Company has total accrued liabilities aggregating approximately $52 million as of December 31, 2001. The Company does not believe environmental remediation costs will have a material adverse effect on its financial condition, cash flows or results of operations. OTHER LEGAL PROCEEDINGS- Various lawsuits, claims and proceedings related to the Company's normal business operations are pending against the Company, the most significant of which are described below. TMI-2, which was damaged during a 1979 accident, is jointly owned by the Company, Met-Ed and Penelec, with the Company having a 25% ownership percentage. Claims for alleged personal injury against the Company, Met-Ed, Penelec and GPU (the defendants) were filed in the U.S. District Court for the Middle District of Pennsylvania. In 1996, the District Court granted a motion for summary judgment filed by the defendants and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. In November 1999, the U.S. Court of Appeals for the Third Circuit affirmed the District Court's dismissal of the ten "test cases," but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. In September 2000, the defendants filed for a summary judgment in the District Court. Meanwhile, the plaintiffs appealed to the Third Circuit for a review of the District Court's decision placing limitations on the remaining plaintiffs' suit. In April 2001, the Third Circuit affirmed the District Court's decision. In July 2001, the defendants renewed their motion for a summary judgment on the remaining 2,100 claims in the District Court. On January 15, 2002, the District Court granted the defendants' amended motion for summary judgment. On February 14, 2002, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. In addition to the approximately 2,100 claims for which summary judgment has been granted, there is other pending litigation arising out of the TMI-2 accident. This litigation consists of the following: eight personal injury cases that were not consolidated with the above-referenced approximately 2,100 claims; two class actions brought on behalf of plaintiffs alleging additional injuries diagnosed after the filing of the complaints in the above-referenced case; a case alleging exposure during the post-accident cleanup of the TMI-2 plant; and claims by individual businesses for economic loss resulting from the TMI-2 accident. Although unable to predict the outcome of this litigation, the Company believes that any liability to which it might be subject by reason of the TMI-2 accident will not exceed its financial protection under the Price-Anderson Act. In July 1999, the Mid-Atlantic states experienced a severe heat storm which resulted in power outages throughout the service territories of many electric utilities, including the Company's territory. In an investigation into the causes of the outages and the reliability of the transmission and distribution systems of all four New Jersey electric utilities, the NJBPU concluded that there was not a prima facie case demonstrating that, overall, the Company provided unsafe, inadequate or improper service to its customers. In July 1999, two class action lawsuits (subsequently consolidated into a single proceeding) were filed against the Company and other GPU companies in New Jersey Superior Court, seeking compensatory and punitive damages arising from the July 1999 service interruptions in the Company's service territory. In May 2001, the court denied without prejudice the Company's motion seeking decertification of the class. Discovery continues in the class action, but no trial date has been set. The judge has set a schedule under which factual legal discovery would conclude in March 2002, and expert reports would be exchanged by June 2002. In October 2001, the court held argument on the plaintiffs' motion for partial summary judgment, which contends that the Company is bound to several findings of the NJBPU investigation. The plaintiffs' motion was denied by the Court in November 2001 and plaintiffs' motion to file an appeal of this decision was denied by the New Jersey Appellate Division. The Company has also filed a motion for partial summary judgement that is currently pending before the Superior Court. The Company is unable to predict the outcome of these matters. 22 7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 2001 and 2000.
Three Months Ended ----------------------------- March 31, June 30, Sept. 30, Oct.1-Nov. 6 Nov. 7-Dec. 31 2001 2001 2001 2001 2001 - ------------------------------------------------------------------------------------------- (In millions) Operating Revenues............ $461.7 $521.0 $672.2 $ 183.7 | $282.9 Operating Expenses and Taxes.. 388.2 451.7 554.0 151.9 | 239.2 - ---------------------------------------------------------------------------|--------------- Operating Income.............. 73.5 69.3 118.2 31.8 | 43.7 Other Income (Expense)........ 1.2 2.3 (2.7) (177.7) | 1.2 Net Interest Charges.......... 23.3 25.6 24.3 8.3 | 14.8 - ---------------------------------------------------------------------------|--------------- Net Income (Loss)............. $ 51.4 $ 46.0 $ 91.2 $(154.2) | $ 30.1 ===========================================================================|=============== Earnings on Common Stock...... $ 50.0 $ 44.7 $ 89.8 $(154.5) | $ 29.3 ===========================================================================================
March 31, June 30, September 30,December 31, Three Months Ended 2000 2000 2000 2000 - ------------------------------------------------------------------------------ (In millions) Operating Revenues............ $452.7 $490.2 $605.0 $431.4 Operating Expenses and Taxes.. 384.8 420.0 509.3 382.0 - ------------------------------------------------------------------------------ Operating Income.............. 67.9 70.2 95.7 49.4 Other Income (Expense)........ 2.4 (2.6) 21.8 2.5 Net Interest Charges.......... 24.8 23.1 24.7 23.9 - ------------------------------------------------------------------------------ Net Income.................... $ 45.5 $ 44.5 $ 92.8 $ 28.0 ============================================================================== Earnings on Common Stock...... $ 43.1 $ 42.8 $ 91.4 $ 26.6 ============================================================================== 23 Report of Independent Public Accountants To the Stockholders and Board of Directors of Jersey Central Power & Light Company: We have audited the accompanying consolidated balance sheet and consolidated statement of capitalization of Jersey Central Power & Light Company (a New Jersey corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of December 31, 2001 (post-merger), and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for the period from January 1, 2001 to November 6, 2001 (pre-merger) and the period from November 7, 2001 to December 31, 2001 (post-merger). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Jersey Central Power & Light Company and subsidiary as of December 31, 2000 and for each of the two years in the period ended December 31, 2000 (pre-merger), were audited by other auditors whose report dated January 31, 2001, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2001 financial statements referred to above present fairly, in all material respects, the financial position of Jersey Central Power & Light Company and subsidiaries as of December 31, 2001 (post-merger), and the results of their operations and their cash flows for the period from January 1, 2001 to November 6, 2001 (pre-merger) and the period from November 7, 2001 to December 31, 2001 (post-merger), in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Cleveland, Ohio, March 18, 2002. 24 Report of Independent Accountants To the Board of Directors and Stockholder of Jersey Central Power & Light Company: In our opinion, the consolidated balance sheet as of December 31, 2000 and the related consolidated statements of income, and cash flows for each of the two years in the period ended December 31, 2000 (appearing on the accompanying index of the Jersey Central Power & Light Company 2001 Annual Report to Stockholders incorporated by reference in this Form 10-K) present fairly, in all material respects, the financial position, results of operations and cash flows of Jersey Central Power & Light Company and Subsidiary Company at December 31, 2000 and for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 31, 2001 25 EX-21 51 ex21-4jc.txt LIST OF SUBS - JCP&L Exhibit 21.4 JERSEY CENTRAL POWER & LIGHT COMPANY SUBSIDIARIES OF THE REGISTRANT STATE OF NAME OF SUBSIDIARY BUSINESS ORGANIZATION - ------------------ -------- ------------ JCP&L PREFERRED CAPITAL, INC. SPECIAL-PURPOSE FINANCE DELAWARE JCP&L CAPITAL, L.P. SPECIAL-PURPOSE FINANCE DELAWARE JCP&L TRANSITION HOLDINGS, INC. SPECIAL-PURPOSE FINANCE DELAWARE JCP&L TRANSITION, INC. SPECIAL-PURPOSE FINANCE DELAWARE JCP&L TRANSITION FUNDING LLC SPECIAL-PURPOSE FINANCE DELAWARE Note: JCP&L, along with its affiliates Met-Ed and Penelec, collectively own all of the common stock of Saxton Nuclear Experimental Corporation, a Pennsylvania nonprofit corporation organized for nuclear experimental purposes which is now inactive. The carrying value of the owners' investment has been written down to a nominal value. EX-23 52 ex23-4jc.txt ARTHUR ANDERSEN CONSENT - JCP&L EXHIBIT 23.4 JERSEY CENTRAL POWER & LIGHT COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into Jersey Central Power & Light Company's previously filed Registration Statements, File No. 333-78717 and No. 333-88783. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 29, 2002. EX-23 53 ex23-5jc.txt PWC CONSENT - JCP&L EXHIBIT 23.5 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-78717 and 333-88783) of Jersey Central Power & Light Company of our report dated January 31, 2001 relating to the financial statements, which appears in this Form 10-K. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 29, 2002 EX-99 54 ex99jcpl.txt LETTER TO SEC RE: ARTHUR ANDERSEN - JCP&L Exhibit 99 March 29, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Temporary Note 3T to Article 3 of Regulation S-X Ladies and Gentlemen: In connection with the audit of the consolidated financial statements of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and for the year then ended, Arthur Andersen LLP (Andersen) has issued its report dated March 18, 2002. Andersen's report is included in FirstEnergy's Annual Report on Form 10-K for the year ended December 31, 2001. FirstEnergy has received the following representations from Andersen with respect to their audit: o The FirstEnergy audit was subject to Andersen's quality control system for their U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards. o There was appropriate continuity of Andersen personnel working on the FirstEnergy audit. o There was appropriate availability of national office consultation for the FirstEnergy audit. o There was appropriate availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the FirstEnergy audit. Sincerely, /s/Harvey L. Wagner ---------------------------------- Harvey L. Wagner Vice President and Controller EX-4 55 ex4-5.txt SUPPLEMENTAL INDENTURE - MET-ED EXECUTED IN 50 COUNTERPARTS OF WHICH THIS IS COUNTERPART NO. METROPOLITAN EDISON COMPANY AND UNITED STATES TRUST COMPANY OF NEW YORK, SUCCESSOR TRUSTEE -------------------- SUPPLEMENTAL INDENTURE (First Mortgage Bonds, Senior Note Bank Series due 2002) -------------------- Dated as of May 1, 2001 TABLE OF CONTENTS Page Parties...................................................................... 1 Recitals .................................................................... 1 Granting Clauses............................................................. 3 Excepted Property ........................................................... 5 Habendum..................................................................... 5 Subject Clause .............................................................. 5 Grant in Trust .............................................................. 5 ARTICLE I. SENIOR NOTE BANKS BONDS.......................................... 9 SECTION 1.01. Creation of Senior Note Bank Bonds............ ............. 9 SECTION 1.02. Dating of Senior Note Bank Bonds............... ............ 9 SECTION 1.03. Payment of Principal and Interest............... ........... 9 SECTION 1.04. Credits with Respect to Senior Note Bank Bonds... .......... 9 SECTION 1.05. Registration of Senior Note Bank Bonds............ .........10 SECTION 1.06. Transferability and Assignability of Senior Note Bank Bonds.10 SECTION 1.07. Redemption of Senior Note Bank Bonds............... ........10 SECTION 1.08. Mandatory Redemption of Senior Note Bank Bonds..............11 SECTION 1.09. Related Series of Senior Note First Mortgage Bonds..........11 SECTION 1.10. Satisfaction and Discharge..................................11 ARTICLE II. FORM OF THE SENIOR NOTE BANK BONDS..............................11 SECTION 2.01. Form of Senior Note Bank Bonds..............................11 ARTICLE III. MISCELLANEOUS..................................................17 SECTION 3.01. Covenants of the Company............................. ......17 SECTION 3.02 Indemnification of the Trustee........................ .....17 SECTION 3.03 Table of Contents and Titles of Articles Not Part...... ....17 SECTION 3.04. Original Indenture Confirmed as Amended and Supplemented....17 SECTION 3.05 Execution in Counterparts...................................18 Names and Addresses of debtor and secured party..............................15 Testimonium..................................................................16 Signatures and seals.........................................................17 Acknowledgments..............................................................18 Certificate of Residence.....................................................20 THIS SUPPLEMENTAL INDENTURE, dated as of May 1, 2001, made and entered into by and between METROPOLITAN EDISON COMPANY, a corporation of the Commonwealth of Pennsylvania (hereinafter sometimes called the "Company"), and UNITED STATES TRUST COMPANY OF NEW YORK, a company organized under the laws of the State of New York (hereinafter sometimes called the "Trustee"), as successor trustee under the Indenture hereinafter referred to. WHEREAS, the Company heretofore executed and delivered its Indenture (hereinafter called the "Original Indenture"), dated as of the first day of November, 1944, to Guaranty Trust Company of New York, as trustee, to secure the First Mortgage Bonds of the Company, unlimited in aggregate principal amount and issuable in series, from time to time, in the manner and subject to the conditions set forth in the Mortgage (as hereinafter defined) and by said Original Indenture granted and conveyed unto the Trustee, upon the trusts, uses and purposes specifically therein set forth, certain real estate, franchises and other property therein described, including property acquired after the date thereof, except as therein otherwise provided; and WHEREAS, the Original Indenture, which was duly amended and supplemented by various indentures supplemental thereto, and which is hereby further supplemented by this Supplemental Indenture, all of which are herein collectively referred to as the "Mortgage"; and WHEREAS, the Original Indenture, certain of said Supplemental Indentures and an Instrument of Resignation, Appointment and Acceptance dated as of October 27, 1995 among the Company, IBJ Schroder Bank & Trust Company and United States Trust Company of New York have been duly recorded in mortgage books in the respective Offices of the Recorders of Deeds in and for the Counties of Pennsylvania in which this Supplemental Indenture is to be recorded, and in the mortgage records of Warren County, New Jersey; and WHEREAS, the Mortgage provides for the issuance of bonds thereunder in one or more series, the form of each series of bonds and of the coupons to be attached to the coupon bonds, if any, of each series to be substantially in the forms set forth therein with such omissions, variations and insertions as are authorized or permitted by the Mortgage and determined and specified by the Board of Directors of the Company; and WHEREAS, the Company has entered into an Indenture dated as of July 1, 1999 (the "Senior Note Indenture") with United States Trust Company of New York, as trustee (the "Senior Note Trustee"), providing for the issuance of notes thereunder (the "Senior Notes") from time to time, and pursuant to the Senior Note Indenture the Company has agreed to issue to the Senior Note Trustee, as security for the Senior Notes, a new series of bonds under the Mortgage at the time of authentication of each series of Senior Notes issued prior to the Release Date (as defined in the Senior Note Indenture); and WHEREAS, for such purposes the Company desires to issue a new series of bonds and by appropriate corporate action in conformity with the terms of the Mortgage has duly determined to create a separate series of bonds, which shall be designated as "First Mortgage Bonds, Senior Note Bank Series due 2002" (hereinafter sometimes referred to as the "Senior Note Bank Bonds"), which said Senior Note Bank Bonds are to be substantially in the form set forth in Article II hereof with the insertion of numbers, denominations, dated dates, maturities, redemption prices and interest rates as determined in accordance with the terms of the Mortgage; and WHEREAS, the Senior Note Bank Bonds shall be issued to the Senior Note Trustee in connection with the issuance by the Company of its Senior Notes, Bank Series (the "Bank Senior Notes"); and WHEREAS, all acts and things prescribed by law and by the charter and by-laws of the Company necessary to make the Senior Note Bank Bonds, when executed by the Company and authenticated by the Trustee, as in the Mortgage provided, valid, binding and legal obligations of the Company, entitled in all respects to the security of the Mortgage, have been performed or will have been performed prior to execution of such Senior Note Bank Bonds by the Company and authentication thereof by the Trustee; WHEREAS, provision is made in Sections 5.11 and 17.01 of the Original Indenture for such further instruments and indentures supplemental to the Original Indenture as may be necessary or proper (a) to carry out more effectually the purposes of the Original Indenture; (b) expressly to subject to the lien of the Original Indenture any property acquired after the date of the Original Indenture and intended to be covered thereby, with the same force and effect as though included in the granting clauses thereof; (c) to set forth the terms and provisions of any series of bonds to be issued and the forms of the bonds and coupons, if any, of such series; (d) to add such further covenants, restrictions or conditions for the protection of the mortgaged and pledged property and the holders of bonds as the Board of Directors of the Company and the Trustee shall consider to be for the protection of the holders of bonds; and (e) to cure any ambiguity of the Original Indenture which shall not adversely affect the interests of the holders of the bonds; and WHEREAS, the Company desires to issue the Senior Note Bank Bonds; and the Company and the Trustee deem it advisable to enter into this Supplemental Indenture for the purposes of carrying out the purposes of the Original Indenture of setting forth the terms and provisions of the Senior Note Bank Bonds, and the form of the Senior Note Bank Bonds; and WHEREAS, it was intended by the execution and delivery of the Original Indenture and the aforesaid Supplemental Indentures to subject to the lien of the Original Indenture, and to grant to the Trustee a security interest in, all of the property, real, personal and mixed, then owned by the Company or thereafter acquired by the Company, as and to the extent set forth therein, subject to the provisions thereof, except such property as was therein expressly excepted and excluded from the lien and operation thereof; and it is the intention of the parties hereto, by the execution and delivery of this Supplemental Indenture, to provide the Trustee with further assurances by also creating in favor of the Trustee a security interest, pursuant to the provisions of the Uniform Commercial Code, in such of the aforesaid property as may by law be subjected to such a security interest, except such thereof as is expressly excepted and excluded as aforesaid or herein; and WHEREAS, the execution and delivery of this Supplemental Indenture have been duly authorized by the Board of Directors of the Company at a meeting duly called and held according to law, and all conditions and requirements necessary to make this Supplemental Indenture a valid, binding and legal instrument in accordance with its terms, for the purposes herein expressed, and the execution and delivery hereof, in the form and terms hereof, have been in all respects duly authorized; 2 NOW, THEREFORE, in order further to secure the payment of the principal and interest of all bonds issued and to be issued under the Original Indenture and any indenture supplemental thereto, including this Supplemental Indenture, according to their tenor, purport and effect and the performance and observance of all the covenants and conditions in said bonds and the Original Indenture and indentures supplemental thereto, including this Supplemental Indenture, contained, and for and in consideration of the premises and of the sum of One Dollar ($1.00), lawful money of the United States of America, to the Company duly paid by the Trustee at or before the unsealing and delivery hereof, and other valuable consideration, the receipt whereof is hereby acknowledged, and intending to be legally bound hereby, the Company has executed and delivered this Supplemental Indenture, and hath granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed, and granted a security interest therein, and by these presents doth grant, bargain, sell, release, convey, assign, transfer, mortgage, pledge, set over and confirm, and grant a security interest therein, subject to the provisions of the Mortgage, unto United States Trust Company of New York, as Trustee, and to its successors in the trust and to its and their assigns forever, all the properties of the Company described or mentioned below, that is to say: All property, real, personal and mixed, tangible and intangible, owned by the Company on the date of the execution hereof or which may be hereafter acquired by it (except such property as is in the Original Indenture or in any indenture supplemental thereto, including this Supplemental Indenture, expressly excepted from the lien and operation of the Original Indenture). The property covered by this Supplemental Indenture shall include particularly, among other property, without prejudice to the generality of the language hereinbefore or hereinafter contained, the following described property: All the electric generating stations, station sites, stations, electric reserve generating stations, substations, substation sites, steam plants, hot water plants, hydro-electric stations, hydro-electric station sites, electric transmission lines, electric distribution systems, steam distribution systems, hot water distribution systems, regulator stations, regulator station sites, office buildings, storeroom buildings, warehouse buildings, boiler houses, plants, plant sites, service plants, coal, other mineral land mining rights and privileges, coal storage yards, pole yards, electric works, power houses, generators, turbines, boilers, engines, furnaces, dynamos, buildings, structures, transformers, meters, towers, poles, tower lines, cables, pole lines, tanks, storage holders, regulators, pipes, pipe-lines, mains, pipe fittings, valves, drips, connections, tunnels, conduits, gates, motors, wires, switch racks, switches, brackets, insulators, and all equipment, improvements, machinery, appliances, devices, appurtenances, supplies and miscellaneous property for generating, producing, transforming, converting, storing and distributing electric energy, steam and hot water, together with all furniture and fixtures located in the aforesaid buildings, and all land on which the same or any part thereof are situated; And all of the real estate, leases, leaseholds (except the last day of the term of each lease and leasehold), and lands owned by the Company, including land located on or adjacent to any river, stream or other water, together with all flowage rights, flooding rights, water rights, riparian rights, dams and dam sites and rights, flumes, canals, races, raceways, head works and diversion works; 3 And all of the municipal and other franchises, licenses, consents, ordinances, permits, privileges, rights, servitudes, easements and rights-of-way and other rights in or relating to real estate or the occupancy of the same, owned by the Company; And all of the other property, real, personal or mixed, owned by the Company, forming a part of any of the foregoing property or used or enjoyed or capable of being used or enjoyed in connection therewith or in anywise appertaining thereto, whether developed or undeveloped, or partially developed, or whether now equipped and operating or not and wherever situated, and all of the Company's right, title and interest in and to the land on which the same or any part thereof are situated or adjacent thereto; And all rights for or relating to the construction, maintenance or operation of any of the foregoing property through, over, under or upon any public streets or highways or other lands, public or private; And (except as in the Original Indenture or in any indenture supplemental thereto, including this Supplemental Indenture, expressly excepted) all the right, title and interest of the Company presently held or hereafter acquired in and to all other property of any of the foregoing kinds or any other kind or nature appertaining to and/or used and/or occupied and/or enjoyed in connection with any property hereinbefore described; And all the items of the kinds hereinabove mentioned including those thereof now owned by the Company and those thereof hereafter acquired by the Company; Also all other land and the buildings and improvements thereon erected hereafter acquired; TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in anywise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder or remainders and (subject to the provisions of Section 9.01 of the Original Indenture) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. IT IS HEREBY AGREED by the Company that all the property, rights and franchises hereafter acquired by the Company (except any in the Original Indenture or in any indenture supplemental thereto, including this Supplemental Indenture, expressly excepted) shall (subject to the provisions of Section 9.01 of the Original Indenture), to the extent permitted by law, be as fully embraced within this Supplemental Indenture as if such property, rights and franchises were now owned by the Company and/or specifically described herein and conveyed hereby; 4 PROVIDED THAT, in addition to the reservations and exceptions herein elsewhere contained, any property hereinbefore mentioned which has been released by the Trustee from the lien of the Mortgage or disposed of by the Company in accordance with the provisions of the Mortgage prior to the date of the execution and delivery of this Supplemental Indenture, and the following, are not and are not intended to be granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed hereunder or to have a security interest created therein, and are hereby expressly excepted from this Supplemental Indenture and from the lien and operation of the Mortgage, viz.: (1) cash and shares of stock and certificates or evidence of interest therein and obligations (including bonds, notes and other securities) not in the Original Indenture or in any indenture supplemental thereto, including this Supplemental Indenture, specifically pledged or covenanted so to be or deposited or delivered hereunder or under any other supplemental indenture; (2) any goods, wares, merchandise, equipment, materials or supplies held or acquired for the purpose of sale or resale in the usual course of business or for consumption in the operation of any properties of the Company, and automobiles and trucks; and (3) all judgments, contracts, accounts and choses in action, the proceeds of which the Company is not obligated as in the Original Indenture provided to deposit with the Trustee hereunder; provided, however, that the property and rights expressly excepted from this Supplemental Indenture in the above subdivisions (2) and (3) shall (to the extent permitted by law) cease to be so excepted, in the event that the Trustee or a receiver or trustee shall take possession of the mortgaged and pledged property in the manner provided in Article X of the Original Indenture, by reason of the occurrence of a completed default, as defined in said Article X of the Original Indenture; TO HAVE AND TO HOLD all such properties, real, personal and mixed, granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed, or in which a security interest has been granted, by the Company as aforesaid, or intended so to be, unto the Trustee and its successors in the trust created in the Original Indenture and its and their assigns forever; SUBJECT, HOWEVER, to the reservations, exceptions, conditions, limitations and restrictions contained in the several deeds, servitudes, franchises and contracts or other instruments through which the Company acquired and/or claims title to and/or enjoys the use of the properties mentioned above; and subject also to such servitudes, easements, rights and privileges in, over, on, and/or through said properties as have been granted to other persons prior to the date of the execution and delivery of this Supplemental Indenture; and subject also to encumbrances of the character in the Original Indenture defined as "excepted encumbrances" insofar as the same may attach to any of the property embraced herein; IN TRUST NEVERTHELESS upon the terms, trusts, uses and purposes specifically set forth in the Mortgage; AND IT IS HEREBY FURTHER COVENANTED AND AGREED, and the Company and the Trustee have mutually agreed, in consideration of the premises, as follows: 5 ARTICLE I. SENIOR NOTE BANK BONDS SECTION 1.01. ...Creation of Senior Note Bank Bonds. The Company hereby creates ---------------------------------- a series of bonds to be issued under and secured by the Mortgage, to be designated and distinguished from bonds of all other series by the title "First Mortgage Bonds, Senior Note Bank Series due 2002." The aggregate principal amount of the Senior Note Bank Bonds which may be initially authenticated and delivered shall be limited to One Hundred Fifty Million Dollars ($150,000,000), shall mature on February 1, 2002, and shall be issued in denominations of $1,000 and any amount in excess thereof. The serial numbers of bonds of the Senior Note Bank Bonds shall be such as may be approved by any officer of the Company, the execution thereof by any such officer either manually or by facsimile signature to be conclusive evidence of such approval. The Senior Note Bank Bonds shall bear interest at the rate of ten per centum (10%) per annum; interest shall accrue from and including the date of the first authentication and delivery of the Senior Note Bank Bonds, except as otherwise provided in the form of bond set forth in Article II hereof and shall be payable on each Interest Payment Date (as defined in the Bank Senior Notes) and at maturity or upon redemption. Interest on the Senior Note Bank Bonds during any period for which payment is made shall be computed in accordance with the Bank Senior Notes until the principal thereof shall have become due and payable. The regular record date for the interest payable on each Interest Payment Date shall be the day next preceding such Interest Payment Date. Interest payable at maturity shall be paid to the person to whom principal shall be paid. Interest on overdue interest shall be payable at the rate per annum specified in this Section 1.01. Except as provided in Sections 2.03, 2.04, 2.05, 8.03 and 17.04 of the Original Indenture, no Senior Note Bank Bonds shall be authenticated and delivered after such initial issue. SECTION 1.02. Dating of Senior Note Bank Bonds. Each Senior Note Bank -------------------------------- Bond shall be dated the date of its authentication. SECTION 1.03. Payment of Principal and Interest. The principal of, and ----------------------------------- interest on any Senior Note Bank Bond shall be payable, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and shall be payable at the "office" or agency of the Company in the Borough of Manhattan, The City of New York. SECTION 1.04. Credits with Respect to Senior Note Bank Bonds. Upon any ----------------------------------------------- payment (or any deemed payment) of the principal of, and interest on, all or any portion of the Bank Senior Notes, whether at maturity or prior to maturity by redemption or otherwise or upon provision for the payment thereof having been made in accordance with Section 5.01(a) of the Senior Note Indenture, Senior Note Bank Bonds in a principal amount equal to the principal amount of such Bank Senior Notes shall, to the extent of such payment of principal, and interest, be deemed paid and the obligation of the Company thereunder to make such payment shall be discharged to such extent and, in the case of the payment of principal, the Senior Note Bank Bonds in an equal principal amount of the related Bank 6 Senior Notes shall be surrendered to the Company for cancellation as provided in Section 4.06 of the Senior Note Indenture. The Trustee may at anytime and all times conclusively assume that the obligation of the Company to make payments with respect to the principal of, and interest on the Senior Note Bank Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged pursuant to the foregoing sentence unless and until the Trustee shall have received a written notice from the Senior Note Trustee signed by one of its officers stating (i) that timely payment of, or premium or interest on, the Bank Senior Notes has not been so made, (ii) that the Company is in arrears as to the payments required to be made by it to the Senior Note Trustee pursuant to the Senior Note Indenture, and (iii) the amount of the arrearage. SECTION 1.05. Registration of Senior Note Bank Bonds. Senior Note Bank --------------------------------------- Bonds are to be issued to and registered in the name of United States Trust Company of New York, as the Senior Note Trustee, or a successor trustee thereto, under the Senior Note Indenture to secure any and all obligations of the Company under the Bank Senior Notes and any other series of Senior Notes from time to time outstanding under the Senior Note Indenture. SECTION 1.06. Transferability and Assignability of Senior Note Bank Bonds. ----------------------------------------------------------- Except (i) as required to effect an assignment to a successor Trustee under the Senior Note Indenture, (ii) pursuant to Section 4.03 or Section 4.06 of the Senior Note Indenture, or (iii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company, the Senior Note Bank Bonds are not transferable. The Senior Note Bank Bonds shall be exchangeable for other registered bonds of the same series and for the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage, upon the surrender of such bonds at the office or agency of the Company in the Borough of Manhattan, The City of New York. The Company covenants and agrees that, notwithstanding Section 2.03 of the Original Indenture, it will not charge any sum for or in connection with any exchange or transfer of any Senior Note Bank Bond, but may require the payment of a sum sufficient to cover any tax or taxes or other governmental charges incident to any exchange, transfer or registration thereof. SECTION 1.07. Redemption of Senior Note Bank Bonds. Senior Note Bank --------------------------------------- Bonds shall not be redeemable, in whole or in part, at the option of the Company. Senior Note Bank Bonds shall not be redeemable by the operation of the improvement fund pursuant to Section 5.07 and Section 9.06 of the Mortgage or otherwise, by operation of the maintenance and replacement provisions pursuant to Sections 5.08 and 9.06 of the Mortgage or otherwise, or with the proceeds of released property pursuant to Section 9.06 of the Mortgage or otherwise. SECTION 1.08. Mandatory Redemption of Senior Note Bank Bonds. The Senior ----------------------------------------------- Note Bank Bonds shall be immediately redeemable at a redemption price of 100% of the principal amount thereof, plus interest accrued to the redemption date, in whole, upon a written demand for redemption by the Senior Note Trustee stating that (i) the Bank Senior Notes have been called for redemption or (ii) the principal of all Senior Notes then outstanding under the Senior Note Indenture have been declared to be immediately due and payable pursuant to the provisions of the first sentence of Section 8.01(a) thereof. 7 SECTION 1.09. Related Series of Senior Note First Mortgage Bonds. For ----------------------------------------------------- purposes of Section 4.07 of the Senior Note Indenture, this bond shall be deemed to be the "Related Series of Senior Note First Mortgage Bonds" in respect of the Bank Senior Notes. SECTION 1.10. Satisfaction and Discharge. At any time a Bank Senior Note -------------------------- shall cease to be entitled to any lien, benefit or security under the Senior Note Indenture pursuant to Section 5.01(b) thereof and the Company shall have provided the Senior Note Trustee with notice thereof, the Senior Note Trustee shall surrender an equal principal amount of the Related Series of Senior Note First Mortgage Bonds, subject to the limitations of Section 4.06 of the Senior Note Indenture, to the Company for cancellation. ARTICLE II. FORM OF THE SENIOR NOTE BANK BONDS SECTION 2.01. Form of Senior Note Bank Bonds. The form of the Senior Note ------------------------------ Bank Bonds and the Trustee's authentication certificate to be endorsed thereon shall be substantially as follows, the maturity date or dates, denominations, redemption prices and interest rates thereof to be appropriately inserted. [FORM OF SENIOR NOTE BANK BONDS] METROPOLITAN EDISON COMPANY FIRST MORTGAGE BOND, SENIOR NOTE BANK SERIES DUE 2002 $ No. METROPOLITAN EDISON COMPANY, a corporation of the Commonwealth of Pennsylvania (hereinafter called the "Company"), for value received, hereby promises to pay to United States Trust Company of New York, as Trustee under the Company's Indenture dated as of July 1, 1999, or registered assigns, Dollars on February 1, 2002, unless this Bond shall have been duly called for previous redemption in whole or in part and payment of the redemption price shall have been duly made or provided for, at the office or agency of the Company in the Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay to the registered holder hereof interest thereon, at said office or agency, in like coin or currency, from the date hereof until said principal sum has been paid or provided for, at the rate or rates per annum provided for in Section 1.01 of the Supplemental Indenture, dated as of May 1, 2001, supplementing the Mortgage, on the interest payment dates provided in said Section 1.01 and, to the extent permitted by law, to pay interest on overdue interest at the rate per annum above specified. 8 This bond is one of an issue of bonds of the Company (hereinafter referred to as the "bonds"), not limited in principal amount, issuable in series, which different series may mature at different times, may bear interest at different rates, and may otherwise vary as in the Mortgage hereinafter mentioned provided, and is one of a series known as its First Mortgage Bonds, Senior Note Bank Series due 2002 (herein called the "Senior Note Bank Bonds"), all bonds of all series issued and to be issued under and equally and ratably secured (except insofar as any sinking fund or analogous fund, established in accordance with the provisions of the Mortgage hereinafter mentioned, may afford additional security for the bonds of any particular series) by an Indenture (herein, together with any indentures supplemental thereto, called the "Mortgage") dated November 1, 1944, executed by the Company to UNITED STATES TRUST COMPANY OF NEW YORK, as successor Trustee to GUARANTY TRUST COMPANY OF NEW YORK (herein called the "Trustee"), to which reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights and limitations of rights of the holders of the bonds and of the Company in respect thereof, the rights, duties and immunities of the Trustee, and the terms and conditions upon which the bonds are, and are to be, issued and secured. The Senior Note Bank Bonds are described in the Supplemental Indenture dated as of May 1, 2001, between the Company and the Trustee (the "Supplemental Indenture"). Under an Indenture dated as of July 1, 1999 (hereinafter sometimes referred to as the "Senior Note Indenture"), between the Company and United Trust Company of New York, as trustee (hereinafter sometimes called the "Senior Note Trustee"), the Company will issue, concurrently with the issuance of this bond, an issue of notes under the Senior Note Indenture entitled Senior Notes, Bank Series (the "Bank Senior Notes"). Pursuant to Article IV of the Senior Note Indenture, this bond is issued to the Senior Note Trustee to secure any and all obligations of the Company under the Bank Senior Notes and any other series of senior notes from time to time outstanding under the Senior Note Indenture. Payment of principal of, or interest on, the Bank Senior Notes shall constitute payments on this bond as further provided herein and in the Supplemental Indenture. Interest on this bond shall be computed in accordance with the Bank Senior Notes. Upon any payment of the principal of, and interest on, all or any portion of the Bank Senior Notes, whether at maturity or prior to maturity by redemption or otherwise or upon provision for the payment thereof having been made in accordance with Section 5.01(a) of the Senior Note Indenture, Senior Note Bank Bonds in a principal amount equal to the principal amount of such Bank Senior Notes shall, to the extent of such payment of principal and interest, be deemed paid and the obligation of the Company thereunder to make such payment shall be discharged to such extent and, in the case of the payment of principal such bonds of said series shall be surrendered to the Company for cancellation as provided in Section 4.06 of the Senior Note Indenture. The Trustee may at anytime and all times conclusively assume that the obligation of the Company to make payments with respect to the principal of, and interest on the Senior Note Bank Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged pursuant to the foregoing sentence unless and until the Trustee shall have received a written notice from the Senior Note Trustee signed by one of its officers stating (i) that timely payment of principal of or interest on, the Bank Senior Notes has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the Senior Note Trustee pursuant to the Senior Note Indenture, and (iii) the amount of the arrearage. 9 For purposes of Section 4.07 of the Senior Note Indenture, this bond shall be deemed to be the "Related Series of Senior Note First Mortgage Bonds" in respect of the Bank Senior Notes. The Mortgage contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than seventy-five per cent (75%) in principal amount of all the bonds at the time outstanding (determined as provided in the Mortgage) evidenced as in the Mortgage provided, or in case the rights under the Mortgage of the holders of bonds of one or more, but less than all, of the series of bonds outstanding shall be affected, then with the consent of the holders of not less than seventy-five per centime (75%) in principal amount of the bonds at the time outstanding of the series affected (determined as provided in the Mortgage) evidenced as in the Mortgage provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Mortgage or modifying in any manner the rights of the holders of the bonds and coupons thereunto appertaining; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any bonds, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof, without the consent of the holder of each bond so affected, or (ii) reduce the aforesaid percentage of bonds, the holders of which are required to consent to any such supplemental indenture without the consent of the holders of all bonds then outstanding. Any such consent by the registered holder of this bond (unless effectively revoked as provided in the Mortgage) shall be conclusive and binding upon such holder and upon all future holders of this bond, irrespective of whether or not any notation of such waiver or consent is made upon this bond. No reference herein to the Mortgage and no provision of this bond or of the Mortgage shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this bond at the time and place and at the rate and in the coin or currency herein prescribed. The Senior Note Bank Bonds are issuable only in fully registered form in denominations of $1,000 and any amount in excess thereof. The Mortgage provides that if the Company shall deposit with the Trustee in trust for the purpose funds sufficient to pay the principal of all of the bonds of any series, or such of the bonds of any series as have been or are to be called for redemption, and premium, if any, thereon, and all interest payable on such bonds to the date on which they become due and payable, at maturity or upon redemption or otherwise, and complies with the other provisions of the Mortgage in respect thereof, then from the date of such deposit such bonds shall no longer be entitled to any lien or benefit under the Mortgage. The Senior Note Bank Bonds shall be redeemable as provided in the Supplemental Indenture. The principal hereof may be declared or may become due prior to the express date of the maturity hereof on the conditions, in the manner and at the time set forth in the Mortgage, upon the occurrence of a completed default as in the Mortgage provided. 10 This bond is not transferable except (i) as required to effect an assignment to a successor Trustee under the Senior Note Indenture, (ii) pursuant to Section 4.03 or Section 4.06 of the Senior Note Indenture, or (iii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company. This bond shall be exchangeable for other registered bonds of the same series and for the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage, upon the surrender of such bonds at the office or agency of the Company in the Borough of Manhattan, the City of New York. However, notwithstanding the provisions of Section 2.05 of the Mortgage, no charge shall be made upon any registration of transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. The Company and the Trustee, any paying agent and any bond registrar may deem and treat the person in whose name this bond is registered as the absolute owner hereof, whether or not this bond shall be overdue, for the purpose of receiving payment and for all other purposes and neither the Company nor the Trustee nor any paying agent nor any bond registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Mortgage, against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director, as such, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors, as such, being waived and released by the holder and owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage. This bond shall not become valid or obligatory for any purpose until UNITED STATES TRUST COMPANY OF NEW YORK, the Trustee under the Mortgage, or its successor thereunder, shall have signed the certificate of authentication endorsed hereon. 11 IN WITNESS WHEREOF, METROPOLITAN EDISON COMPANY has caused this bond to be signed in its name by the manual or facsimile signature of its President or one of its Vice Presidents and its corporate seal, or a facsimile thereof, to be affixed hereto and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Dated: METROPOLITAN EDISON COMPANY By: --------------------------- (Vice) President Attest: - ---------------------------- (Assistant) Secretary 12 [FORM OF TRUSTEE'S CERTIFICATE] TRUSTEE'S AUTHENTICATION CERTIFICATE This bond is one of the bonds of the series herein designated, provided for in the within-mentioned Mortgage. UNITED STATES TRUST COMPANY OF NEW YORK By: ____________________________________ Authorized Officer [END OF FORM OF SENIOR NOTE BANK BOND] 13 ARTICLE III MISCELLANEOUS Section 3.01.. Covenants of the Company. So long as any of the senior note ------------------------ bank bonds shall be secured by the lien of the mortgage: (a) The term "minimum provision for depreciation" when used for any purposes under the Mortgage and with reference to any period of time shall mean an amount computed pursuant to the provisions of Article I, Section 5 of the Supplemental Indenture dated March 1, 1952. (b) Clause (A)(II) of Section 1.06 of the Original Indenture shall be deemed amended as set forth in the quotation contained in Article I, Section 4 of the Supplemental Indenture dated May 1, 1960. (c) The first sentence of Section 5.20 of the Original Indenture shall be deemed amended as set forth in the quotation contained in Article I, Section 6 of the Supplemental Indenture dated December 1, 1950. (d) The Company will keep and perform the covenants and agreements set forth in Article I, Section 7 of the Supplemental Indenture dated June 1, 1957, irrespective of whether any of the bonds of the series created by such Supplemental Indenture shall be then outstanding. (e) The Company will keep and perform the covenants set forth in Article I, Section 4 of the Supplemental Indenture dated March 1, 1952, irrespective of whether any of the bonds of the series created by such Supplemental Indenture shall be then outstanding. Indemnification of the Trustee SECTION 3.02. Indemnification of the Trustee. The Trustee shall be -------------------------------- entitled to rely conclusively on each notice delivered to it by the Senior Note Trustee or the Company pursuant to the terms of this Supplemental Indenture for all purposes under the Mortgage. The Trustee shall have no duty or responsibility to the Company or to the holder or holders of the Senior Note Bank Bonds from time to time to verify independently the information contained in any such notice or with respect to the determinations or calculations of interest which may from time to time or at any given time be due on the Senior Note Bank Bonds. SECTION 3.03. Table of Contents and Titles of Articles Not Part. The table ------------------------------------------------- of contents and the titles of the Articles of this Supplemental Indenture shall not be deemed to be any part thereof. SECTION 3.04. Original Indenture Confirmed as Amended and Supplemented. As -------------------------------------------------------- amended and supplemented by the aforesaid indentures supplemental thereto and by this Supplemental Indenture, the Original Indenture is in all respects ratified and confirmed and the Original Indenture and the aforesaid indentures supplemental thereto and this Supplemental Indenture shall be read, taken and construed as one and the same instrument. 14 SECTION 3.05. Execution in Counterparts. This Supplemental Indenture shall ------------------------- be simultaneously executed in several counterparts, and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. The debtor and its mailing address are Metropolitan Edison Company, 2800 Pottsville Pike, Reading, Pennsylvania 19605. The secured party and an address of the secured party from which information concerning the security interest may be obtained are United States Trust Company of New York, Trustee, 114 West 47th Street, New York, New York 10036. 15 IN WITNESS WHEREOF, METROPOLITAN EDISON COMPANY has caused this instrument to be signed in its name and behalf by its President or a Vice President, and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary, and UNITED STATES TRUST COMPANY OF NEW YORK has caused this instrument to be signed in its name and behalf by a Vice President or an Assistant Vice President and its corporate seal to be hereunto affixed and attested by an Assistant Vice President or an Assistant Secretary, all as of the day and year first above written. ATTEST METROPOLITAN EDISON COMPANY _______________________________ By:________________________________ M. E. Gramlich T. G. Howson Assistant Secretary Vice President Signed, sealed and delivered by said [CORPORATE SEAL] Metropolitan Edison Company in the presence of - ---------------------------------------- - ---------------------------------------- 16 ATTEST UNITED STATES TRUST COMPANY OF NEW YORK _______________________________ By:_______________________________ Kevin Fox Louis P. Young Assistant Secretary Vice President Signed, sealed and delivered by said United States Trust Company of New York in the presence of: [CORPORATE SEAL] - --------------------------------- - --------------------------------- 17 STATE OF NEW JERSEY : : ss: COUNTY OF MORRIS : On this 26th day of April, 2001, before me, Barbara E. Jost, a Notary Public for the State and County aforesaid, the undersigned officer, personally appeared T.G. Howson, who acknowledged himself to be a Vice President of Metropolitan Edison Company, a corporation, and that he as such Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as Vice President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ------------------------------------- Barbara E. Jost Notary Public of New Jersey My Commission Expires August 12, 2001 [NOTARIAL SEAL] 18 STATE OF NEW YORK : : ss: COUNTY OF NEW YORK : On this 26th day of April, 2001, before me, Christine C. Collins, a Notary Public for the State and County aforesaid, the undersigned officer, personally appeared Louis P. Young, who acknowledged himself to be a Vice President of United States Trust Company of New York, a corporation, and that he as such Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as Vice President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. --------------------------------- Christine C. Collins Notary Public, State of New York No. 03-4624735 Qualified in Bronx County Certificate filed in New York County Commission Expires March 30, 2002 [NOTARIAL SEAL] 19 CERTIFICATE OF RESIDENCE United States Trust Company of New York, Mortgagee and Trustee within named, hereby certifies that its precise residence is 114 West 47th Street, in the Borough of Manhattan, in the City of New York, in the State of New York. UNITED STATES TRUST COMPANY OF NEW YORK By:------------------------------------ Vice President 20 EX-12 56 ex12-7me.txt FIXED CHARGE RATIO - MED-ED
EXHIBIT 12.7 Page 1 METROPOLITAN EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ------------------------------------------------ Jan 1- Nov. 7- Nov. 6, Dec. 31, 1997 1998 1999 2000 2001 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.............. $ 93,517 $ 57,720 $ 95,123 $ 81,895 $ 62,381 | $14,617 Interest and other charges, before | reduction for amounts capitalized............ 59,650 59,687 61,842 55,181 48,568 | 8,461 Provision for income taxes..................... 65,769 37,423 61,396 44,088 39,449 | 10,905 Interest element of rentals charged | to income (a)................................ 6,151 9,784 4,381 1,543 284 | (693) -------- -------- -------- -------- -------- | ------ Earnings as defined.......................... $225,087 $164,614 $222,742 $182,707 $150,682 | $33,290 ======== ======== ======== ======== ======== | ====== | FIXED CHARGES AS DEFINED IN REGULATION S-K: | Interest on long-term debt..................... $ 43,885 $ 42,493 $ 45,996 $ 37,886 $ 33,101 | 5,615 Other interest expense......................... 6,765 8,194 2,527 10,639 9,219 | 1,744 Subsidiary's preferred stock dividend | requirements................................. 9,000 9,000 13,319 6,656 6,248 | 1,102 Interest element of rentals charged to | income (a)................................... 6,151 9,784 4,381 1,543 284 | (693) -------- -------- -------- --------- -------- | ------ Fixed charges as defined..................... $ 65,801 $ 69,471 $ 66,223 $ 56,724 $ 48,852 | $7,768 ======== ======== ======== ======== ======== | ====== | CONSOLIDATED RATIO OF EARNINGS TO FIXED | CHARGES........................................ 3.42 2.37 3.36 3.22 3.08 | 4.29 ==== ==== ==== ==== ==== | ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined.
EXHIBIT 12.7 Page 2 METROPOLITAN EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) Year Ended December 31, ------------------------------------------------ Jan 1- Nov. 7- Nov. 6, Dec. 31, 1997 1998 1999 2000 2001 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) | EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $ 93,517 $ 57,720 $ 95,123 $ 81,895 $ 62,381 | $14,617 Interest and other charges, before | reduction for amounts capitalized................ 59,650 59,687 61,842 55,181 48,568 | 8,461 Provision for income taxes......................... 65,769 37,423 61,396 44,088 39,449 | 10,905 Interest element of rentals charged to income (a).. 6,151 9,784 4,381 1,543 284 | (693) -------- -------- -------- -------- -------- | ------- Earnings as defined.............................. $225,087 $164,614 $222,742 $182,707 $150,682 | $33,290 ======== ======== ======== ======== ======== | ======= | FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS | PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS): | Interest on long-term debt......................... $ 43,885 $ 42,493 $ 45,996 $ 37,886 $ 33,101 | $ 5,615 Other interest expense............................. 6,765 8,194 2,527 10,639 9,219 | 1,744 Preferred stock dividend requirements.............. 9,483 9,483 13,319 6,656 6,248 | 1,102 Adjustments to preferred stock dividends | to state on a pre-income tax basis............... 340 313 43 -- -- | -- Interest element of rentals charged to income (a).. 6,151 9,784 4,381 1,543 284 | (693) -------- -------- -------- -------- -------- | ------- Fixed charges as defined plus preferred stock | dividend requirements (pre-income tax basis)... $ 66,624 $ 70,267 $ 66,266 $ 56,724 $ 48,852 | $ 7,768 ======== ======== ======== ======== ======== | ======= CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES | PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS)............................. 3.38 2.34 3.36 3.22 3.08 | 4.29 ==== ==== ==== ==== ==== | ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined.
EX-13 57 ex13-6_me.txt ANNUAL REPORT - METED EXHIBIT 13.6 METROPOLITAN EDISON COMPANY 2001 ANNUAL REPORT TO STOCKHOLDERS Metropolitan Edison Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. It engages in the distribution and sale of electric energy in an area of approximately 3,300 square miles in eastern Pennsylvania. It also engages in the sale, purchase and interchange of electric energy with other electric companies. The area it serves has a population of approximately 1.3 million. In August 2000, FirstEnergy entered into an agreement to merge with GPU, Inc., under which FirstEnergy would acquire all of the outstanding shares of GPU, Inc.'s common stock for approximately $4.5 billion in cash and FirstEnergy common stock. The merger became effective on November 7, 2001 and is being accounted for by the purchase method. Prior to that time, Metropolitan Edison Company was a wholly owned subsidiary of GPU, Inc. Contents Page - -------- ---- Selected Financial Data........................................... 1 Management's Discussion and Analysis.............................. 2-7 Consolidated Statements of Income................................. 8 Consolidated Balance Sheets....................................... 9 Consolidated Statements of Capitalization......................... 10 Consolidated Statements of Common Stockholder's Equity............ 11 Consolidated Statements of Preferred Stock........................ 11 Consolidated Statements of Cash Flows............................. 12 Consolidated Statements of Taxes.................................. 13 Notes to Consolidated Financial Statements........................ 14-21 Reports of Independent Public Accountants......................... 22-23 METROPOLITAN EDISON COMPANY SELECTED FINANCIAL DATA
Years Ended December 31, Nov. 7 - Jan. 1 - ----------------------------------------------- Dec. 31, 2001 Nov. 6, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Operating Revenues.............................. $ 143,760 | $ 824,556 $ 842,333 $ 902,827 $ 919,594 $ 943,109 ========== | =========== ========== ========== =========== ========== | Operating Income................................ $ 17,367 | $ 102,247 $ 135,211 $ 154,774 $ 124,447 $ 150,151 ========== | =========== =========== ========== ========== ========== | Income Before Extraordinary Item................ $ 14,617 | $ 62,381 $ 81,895 $ 95,123 $ 57,720 $ 93,517 ========== | =========== ========== ========== ========== ========== | Net Income...................................... $ 14,617 | $ 62,381 $ 81,895 $ 95,123 $ 50,915 $ 93,517 ========== | ============ ========== ========== ========== ========== | Earnings on Common Stock........................ $ 14,617 | $ 62,381 $ 81,895 $ 94,515 $ 50,432 $ 93,034 ========== | ============ ========== ========== ========== ========== | Total Assets.................................... $3,607,187 | $2,708,062 $2,747,059 $3,347,822 $2,419,509 ========== | ========== ========== ========== ========== | | Capitalization: | Common Stockholder's Equity..................... $1,288,953 | $ 537,013 $ 501,417 $ 687,059 $ 717,594 Cumulative Preferred Stock...................... -- | -- -- 12,056 12,056 Company-Obligated Mandatorily Redeemable | Preferred Securities........................ -- | -- -- 100,000 100,000 Company-Obligated Trust Preferred Securities.... 92,200 | 100,000 100,000 -- -- Long-Term Debt.................................. 583,077 | 496,860 496,883 546,904 576,924 ---------- | ---------- ---------- ---------- ---------- Total Capitalization............................ $1,964,230 | $1,133,873 $1,098,300 $1,346,019 $1,406,574 ========== | ========== ========== ========== ========== | | Capitalization Ratios: | Common Stockholder's Equity..................... 65.6%| 47.4% 45.7% 51.1% 51.0% Cumulative Preferred Stock...................... -- | -- -- 0.9 0.9 Company-Obligated Mandatorily Redeemable | Preferred Securities......................... -- | -- -- 7.4 7.1 Company-Obligated Trust Preferred Securities.... 4.7 | 8.8 9.1 -- -- Long-Term Debt.................................. 29.7 | 43.8 45.2 40.6 41.0 ----- | ----- ----- ----- ----- Total Capitalization............................ 100.0%| 100.0% 100.0% 100.0% 100.0% ===== | ===== ===== ===== ===== | | Transmission and Distribution | Kilowatt-Hour Deliveries (Millions): | Residential..................................... 793 | 3,712 4,377 4,265 4,040 4,034 Commercial...................................... 652 | 3,203 3,699 3,488 3,321 3,209 Industrial...................................... 662 | 3,506 4,412 4,085 4,174 4,098 Other........................................... 6 | 27 38 107 110 116 ----- | ------ ------- ------ ------ ------ Total Retail.................................... 2,113 | 10,448 12,526 11,945 11,645 11,457 Total Wholesale................................. 195 | 1,067 2,120 4,597 1,249 1,024 ----- | ------ ------- ------- ------ ------ Total........................................... 2,308 | 11,515 14,646 16,542 12,894 12,481 ===== | ====== ======= ====== ====== ====== | | Transmission and Distribution Deliveries | Customers Served: | Residential..................................... 442,763 | 436,573 430,746 425,431 421,413 Commercial...................................... 57,278 | 56,080 54,969 53,764 52,821 Industrial...................................... 1,961 | 1,967 2,073 2,090 2,107 Other........................................... 819 | 810 1,057 1,063 1,060 ------- | ------- ------- ------- ------- Total........................................... 502,821 | 495,430 488,845 482,348 477,401 ======= | ======= ======= ======= =======
1 METROPOLITAN EDISON COMPANY Management's Discussion and Analysis of Results of Operations and Financial Condition This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), the availability and cost of capital, ability to accomplish or realize anticipated benefits from strategic initiatives and other similar factors. Results of Operations - --------------------- Earnings on common stock decreased 6.0% to $77.0 million in 2001 from $81.9 million in 2000. Results in 2001 were unfavorably affected by higher other operating costs and slightly higher net interest charges partially offset by greater operating revenues. In 2000, earnings on common stock decreased 13.4% to $81.9 million from $94.5 million in 1999 primarily due to lower operating revenues and greater purchased power costs, partially offset by lower nuclear and other operating costs and net interest charges. Operating revenues increased by $126.0 million in 2001 following a $60.5 million decrease in 2000. The sources of changes in operating revenues during 2001 and 2000, as compared to the prior year, are summarized in the following table. Sources of Revenue Changes 2001 2000 --------------------------------------------------------------- Increase (Decrease) (In millions) Change in kilowatt-hour sales due to level of retail customers shopping for generation service.......... $142.6 $ 0.6 Increase in other retail kilowatt-hour sales...................... 8.2 32.1 Decrease in wholesale sales................ (9.4) (92.9) All other changes.......................... (15.4) (0.3) --------------------------------------------------------------- Net Increase (Decrease) in Operating Revenues....................... $126.0 $(60.5) =============================================================== Electric Sales In 2001, a major source of the increase in operating revenues was the increase in retail generation kilowatt-hour sales due to a large number of customers returning to us in 2001 as full service customers, after receiving their power from alternate suppliers in 2000. In 2001, 83.5% of total retail sales were to full service customers as compared to 57.5% in 2000. Total retail sales were relatively flat, with increases in residential and commercial sales being offset by a decrease in industrial sales. The primary source of the decrease in operating revenues in 2000, compared to the prior year, was lower sales to the wholesale market, as a result of us having additional power available in 1999 due to the delay of the divestiture of our generating assets. Partially offsetting that decrease were higher residential, commercial and industrial sales, all due to greater usage. The number of residential and commercial customers also increased in 2000 over 1999. Changes in kilowatt-hour sales by customer class in 2001 and 2000 are summarized in the following table: Changes in Kilowatt-hour Sales 2001 2000 ------------------------------------------------- Increase (Decrease) Residential.................. 2.9% 2.6% Commercial................... 4.2% 6.0% Industrial................... (5.5)% 8.0% -------------------------------------------------- Total Retail................. 0.3% 4.9% Wholesale.................... (40.5)% (53.9)% -------------------------------------------------- Total Sales.................. (5.6)% (11.5)% -------------------------------------------------- 2 Operating Expenses and Taxes Total operating expenses and taxes increased $141.6 million in 2001 after decreasing $40.9 million in 2000, compared to the preceding year. An increase in purchased power and other operating costs accounted for the majority of the increase in 2001. Purchased power costs also increased significantly in 2000 compared to 1999, but were partially offset by lower nuclear and other operating costs. Purchased power costs increased $91.2 million in 2001 compared to 2000. The change was due to increased amounts of power purchased through two-party agreements and the PJM Power Pool to meet higher demand resulting from customers returning to us in 2001 after receiving their power from alternate suppliers in 2000. The average price of power under the two-party agreements was also higher in 2001 than it was in 2000. Offsetting these increases was the effect of the Pennsylvania Public Utility Commission's (PPUC) June 2001 order that allowed us to defer, for future recovery from customers, energy costs in excess of our fixed generation tariff rates, retroactive to January 1, 2001, in connection with our provider of last resort (PLR) obligation. In 2000, fuel and purchased power costs increased $246.1 million over 1999. Much of the increase was due to the need to purchase substantially all of our energy requirements following the sales of generating assets in 1999, and the absence of deferred accounting treatment for these costs. An offsetting decrease in fuel costs also resulted from the sales of generating assets. The sale of Unit 1 of the Three Mile Island Nuclear Plant, completed in December 1999, eliminated essentially all of our nuclear operating costs in 2000. Other operating costs increased $47.8 million in 2001 as compared to the prior year. The majority of the increase was due to the absence in 2001 of a pension curtailment gain associated with employees who were terminated at the time of the sale of our generating assets. This gain was realized in 2000 as a result of the PPUC's Phase II Order. Other operating costs also increased due to costs related to Voluntary Enhanced Retirement Programs offered to certain bargaining unit employees. In 2000, other operating costs decreased $183.3 million from 1999. The reason for the decline was a reduction in expenses associated with the operation of generating stations due to the sale of essentially all of our remaining generating assets in 1999. Operating costs were also reduced by the pension curtailment gain discussed above. The sale of generating assets in 1999 was also the cause for a decrease in depreciation expense of $20.3 million in 2000 from the previous year. Other Income Other income increased by $11.9 million in 2001 compared to the previous year. The increase was due to higher competitive transition charge interest income and the absence in 2001 of the write-down of regulatory assets for Unit 2 of the Three Mile Island Nuclear Plant (TMI-2) decommissioning, representing the net realized gain previously recorded on the accident-related portion of the TMI-2 decommissioning trust. Offsetting these increases was a charge for a sustainable energy fund in accordance with the Stipulation of Settlement related to the merger of FirstEnergy and GPU, Inc. Net Interest Charges Net interest charges increased by $1.2 million in 2001 after decreasing $6.1 million in 2000 compared to the prior year. In 2001, the increase was due to the September issuance of $100 million of senior notes. In 2000, lower interest charges were due to the redemption of $50 million of first mortgage bonds (FMB) in 2000, and the redemption of $100 million of company obligated mandatorily redeemable preferred securities in 1999. Partially offsetting these reductions were increased preferred dividends associated with the issuance of $100 million of company obligated preferred securities in 1999. Capital Resources and Liquidity - ------------------------------- We had approximately $25.3 million of cash and temporary investments and $72 million of short-term indebtedness on December 31, 2001. We may borrow from our affiliates on a short-term basis. We will not issue FMBs other than as collateral for senior notes, since our senior note indentures prohibit (subject to certain exceptions) us from issuing any debt which is senior to the senior notes. As of December 31, 2001, we had the capability to issue $88 million of additional senior notes based upon FMB collateral. We have no restrictions on the issuance of preferred stock. At the end of 2001, our common equity as a percentage of capitalization stood at 66% compared to 47% at the end of 2000. This increase resulted from the allocation of the purchase price in the merger between FirstEnergy and GPU. Following approval of the merger of FirstEnergy and GPU by the New Jersey Board of Public Utilities on September 26, 2001, Standard and Poor's adjusted our corporate credit rating from A/A-1 to BBB/A-2, and our senior 3 secured debt rating from A+ to BBB+. The lower credit ratings reflect Standard & Poor's consolidated rating methodology, which resulted in essentially the same corporate credit rating for all of FirstEnergy's electric utility operating companies. The credit rating outlook of Standard & Poor's is stable. On February 22, 2002, Moody's announced a change in its outlook for our credit ratings from stable to negative based upon a decision by the Commonwealth Court of Pennsylvania to reverse the PPUC's decision to grant us rate relief (see Regulatory Matters). Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table: Contractual Obligations 2002 2003 2004 2005 2006 Thereafter Total - ----------------------------------------------------------------------------- (In millions) Long-term debt.......... $ 30 $ 90 $ 40 $ 51 $151 $ 235 $ 597 Mandatory preferred stock................. 100 100 Operating leases ....... 1 1 -- -- -- 15 17 Unconditional power purchases............. 365 227 157 160 165 1,410 2,484 - ------------------------------------------------------------------------------ $396 $318 $197 $211 $316 $1,760 $3,198 ============================================================================== Our capital spending for the period 2002-2006 is expected to be about $323 million, of which approximately $66 million applies to 2002. Market Risk Information - ----------------------- We use various market risk sensitive instruments, including derivative contracts, primarily to manage the risk of price. Our Risk Policy Committee, comprised of FirstEnergy executive officers, exercises an independent risk oversight function to ensure compliance with corporate risk management policies and prudent risk management practices. Commodity Price Risk We are exposed to market risk primarily due to fluctuations in electricity and natural gas prices. To manage the volatility relating to these exposures, we use a variety of derivative instruments, including options and futures contracts. These derivatives are used principally for hedging purposes. The change in the fair value of commodity derivative contracts related to energy production during 2001 is summarized in the table below: Increase (Decrease)in the Fair Value of Commodity Derivative Contracts Nov. 7 - Dec. 31 Jan. 1 - Nov. 6 2001 2001 ------------------------------------------------------------------- (In millions) Outstanding as of beginning of period with SFAS 133 cumulative adjustment............. $6.6 $26.0 Contract value when entered......... 0.3 5.2 Decrease in value of existing contracts......................... (4.5) (2.9) Change in techniques/assumptions.... -- (21.3) Settled contracts................... (0.1) (0.4) ------------------------------------------------------------------- Outstanding as of end of period..... $2.3 $6.6 =================================================================== While the valuation of derivative contracts is always based on active market prices when they are available, longer-term contracts can require the use of model-based estimates of prices in later years due to the absence of published market prices. Currently, substantially all of our derivatives are valued based on active market prices. We perform sensitivity analyses to estimate our exposure to the market risk of our commodity position. A hypothetical 10% adverse shift in quoted market prices in the near term on our derivative instruments would not have had a material effect on our consolidated financial position or cash flows as of December 31, 2001. Interest Rate Risk Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 to the consolidated financial statements. 4 Comparison of Carrying Value to Fair Value - -------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value - -------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income........... -- -- -- -- -- $ 68 $ 68 $ 67 Average interest rate............... 4.7% 4.7% - -------------------------------------------------------------------------------- ________________________________________________________________________________ Liabilities - ------------------------------------------------------------------------------- Long-term Debt: Fixed rate.............$30 $90 $40 $51 $151 $235 $597 $601 Average interest rate...............8.1% 7.7% 6.3% 7.0% 5.9% 7.6% 7.1% Variable rate.......... Average interest rate............... Short-term Borrowings..$72 -- -- -- -- -- $ 72 $ 72 Average interest rate...............4.9% 4.9% - -------------------------------------------------------------------------------- Preferred Stock........ -- -- -- -- -- $100 $100 $ 93 Average dividend rate............... 7.4% 7.4% - -------------------------------------------------------------------------------- Outlook - ------- Our industry continues to transition to a more competitive environment. As of January 1, 1999, our customers could select alternative energy suppliers. We continue to deliver power to homes and businesses through our existing distribution system, which remains regulated. The PPUC authorized our rate restructuring plan, establishing separate charges for transmission, distribution, generation and stranded cost recovery, which is recovered through a competitive transition charge (CTC). Customers electing to obtain power from an alternative supplier have their bills reduced based on the regulated generation component, and the customers receive a generation charge from the alternative supplier. We have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier, subject to certain limits, which is referred to as our PLR obligation. Regulatory Matters In June 2001, we entered into a settlement agreement with major parties in the combined merger and rate proceedings that, in addition to resolving certain issues concerning the PPUC's approval of our merger with FirstEnergy, also addressed our request for PLR relief. We are permitted to defer, for future recovery, the difference between our actual energy costs and those reflected in our capped generation rates. Those costs will continue to be deferred through December 31, 2005. If energy costs incurred during that period are below our capped generation rates, the difference would be used to reduce our recoverable deferred costs. Our PLR obligation was extended through December 31, 2010. Our CTC revenues will be applied first to PLR costs, then to stranded costs other than for non-utility generation (NUG) and finally to NUG stranded costs through December 31, 2010. We would be permitted to recover any remaining stranded costs through a continuation of the CTC after December 31, 2010; however, such recovery would extend to no later than December 31, 2015. Any amounts not expected to be recovered by December 31, 2015 would be written off at the time such nonrecovery becomes probable. Several parties had appealed this PPUC decision to the Commonwealth Court of Pennsylvania. On February 21, 2002, the Court affirmed the PPUC decision regarding approval of the merger, remanding the decision to the PPUC only with respect to the issue of merger savings. The Court reversed the PPUC's decision regarding our PLR obligation, and denied our related requests for rate relief. We are considering our response to the Court's decision, which could include asking the Pennsylvania Supreme Court to review the decision. We are unable to predict the outcome of these matters. Supply Plan As part of our Restructuring Order, we are obligated to supply electricity to customers who do not choose an alternate supplier. The total forecasted peak of this obligation in 2002 is 2,500 megawatts (MW). Our current supply portfolio contains approximately 300 MW of long-term purchases from NUGs, and the remaining obligation is expected to be met through a mix of multi-year forward purchases, short-term forward (less than one year) purchases and spot market purchases. Environmental Matters Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, our proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. We have been named as a "potentially responsible party" (PRP) 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 5 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. We have total accrued liabilities aggregating approximately $0.1 million as of December 31, 2001. We do not believe environmental remediation costs will have a material adverse effect on our financial condition, cash flows or results of operations. Legal Matters Various lawsuits, claims and proceedings related to our normal business operations are pending against us, the most significant of which is described below. We have a 50% ownership interest in TMI-2, which was damaged during a 1979 accident. As a result of the accident, claims for alleged personal injury were filed against us, Jersey Central Power & Light Company, Pennsylvania Electric Company and GPU in the U.S. District Court for the Middle District of Pennsylvania. In 1996, the District Court granted a motion for summary judgment filed by the defendants and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. In November 1999, the U.S. Court of Appeals for the Third Circuit affirmed the District Court's dismissal of the ten test cases, but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. Following the resolution of judicial proceedings dealing with admissible evidence, we have again requested summary judgment of the remaining 2,100 claims in the District Court. On January 15, 2002, the District Court granted our motion. On February 14, 2002, the plaintiffs filed a notice of appeal of this decision (see Note 6 - Other Legal Proceedings). Although unable to predict the outcome of this litigation, we believe that any liability to which we might be subject by reason of the TMI-2 accident will not exceed our financial protection under the Price-Anderson Act. Significant Accounting Policies - ------------------------------- We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often requires a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting these specific factors. Our more significant accounting policies are described below: Purchase Accounting On November 7, 2001, the merger between FirstEnergy and GPU became effective, and we became a wholly owned subsidiary of FirstEnergy. The merger was accounted for by the purchase method of accounting, which requires judgment regarding the allocation of the purchase price based on the fair values of the assets acquired (including intangible assets) and the liabilities assumed. The fair values of the acquired assets and assumed liabilities were based primarily on estimates. The adjustments reflected in our records, which are subject to adjustment in 2002 when finalized, primarily consist of: (1) revaluation of certain property, plant and equipment; (2) adjusting preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (3) recognizing additional obligations related to retirement benefits; and (4) recognizing estimated severance and other compensation liabilities. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which will be reviewed for impairment at least annually. As of December 31, 2001, we had recorded goodwill of approximately $784.4 million related to the merger. Regulatory Accounting We are subject to regulation that sets the prices (rates) we are permitted to charge our customers based on costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in Pennsylvania, a significant amount of regulatory assets have been recorded. As of December 31, 2001, we had regulatory assets of $1.3 billion. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislation, judicial or regulatory actions in the future. Derivative Accounting Determination of appropriate accounting for derivative transactions requires the involvement of management representing operations, finance and risk assessment. In order to determine the appropriate accounting for derivative transactions, the provisions of the contract need to be carefully assessed in accordance with the authoritative accounting literature and management's intended use of the derivative. New authoritative guidance continues to shape the application of derivative accounting. Management's expectations and intentions are key factors in determining the 6 appropriate accounting for a derivative transaction and, as a result, such expectations and intentions must be documented. Derivative contracts that are determined to fall within the scope of Statement of Financial Accounting Standards (SFAS) No. 133, as amended, must be recorded at their fair value. Active market prices are not always available to determine the fair value of the later years of a contract, requiring that various assumptions and estimates be used in their valuation. We continually monitor our derivative contracts to determine if our activities, expectations, intentions, assumptions and estimates remain valid. As part of our normal operations we enter into commodities contracts, which increase the impact of derivative accounting judgments. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hours that have been delivered but not yet billed through the end of the year. The determination of unbilled revenues requires management to make various estimates including: - Net energy purchased or generated for retail load - Losses of energy over distribution lines - Mix of kilowatt-hour usage by residential, commercial and industrial customers - Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards - ------------------------------------ The Financial Accounting Standards Board (FASB) approved SFAS 141, "Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 2001. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for using purchase accounting. The provisions of the new standard relating to the determination of goodwill and other intangible assets have been applied to our 2001 merger, which was accounted for as a purchase transaction. Under SFAS 142, amortization of existing goodwill will cease 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 a preliminary analysis. We did not have any goodwill prior to our 2001 merger, and we did not amortize goodwill associated with the merger under the provisions of the new standard. In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of APB 30. Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30. 7 METROPOLITAN EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME
Nov 7 - Jan. 1 - For the Years Ended Dec. 31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ (In thousands) OPERATING REVENUES........................................ $ 143,760 | $824,556 $842,333 $902,827 --------- | -------- -------- -------- | OPERATING EXPENSES AND TAXES: | Fuel and purchased power............................... 83,275 | 478,954 471,070 224,931 Nuclear operating costs................................ -- | -- -- 61,170 Other operating costs.................................. 16,122 | 123,094 91,456 274,743 --------- | -------- -------- -------- Total operation and maintenance expenses............. 99,397 | 602,048 562,526 560,844 Provision for depreciation and amortization............ 8,903 | 51,867 68,695 88,989 General taxes.......................................... 6,509 | 39,845 42,623 39,283 Income taxes........................................... 11,584 | 28,549 33,278 58,937 --------- | -------- -------- -------- Total operating expenses and taxes................... 126,393 | 722,309 707,122 748,053 --------- | -------- -------- -------- | OPERATING INCOME.......................................... 17,367 | 102,247 135,211 154,774 | OTHER INCOME.............................................. 5,465 | 7,807 1,387 1,143 --------- | -------- -------- -------- | INCOME BEFORE NET INTEREST CHARGES........................ 22,832 | 110,054 136,598 155,917 --------- | -------- -------- -------- | NET INTEREST CHARGES: | Subsidiaries' preferred stock dividend requirements.... 1,102 | 6,248 6,656 13,319 Interest on long-term debt............................. 5,615 | 33,101 37,886 45,996 Allowance for borrowed funds used during | construction......................................... 30 | (574) (477) (1,048) Deferred interest income............................... (276) | (321) -- -- Other interest expense................................. 1,744 | 9,219 10,638 2,527 --------- | -------- -------- -------- Net interest charges................................... 8,215 | 47,673 54,703 60,794 --------- | -------- -------- -------- | NET INCOME................................................ 14,617 | 62,381 81,895 95,123 | PREFERRED STOCK DIVIDEND | REQUIREMENTS........................................... -- | -- -- 66 | LOSS ON PREFERRED STOCK | REACQUISITION.......................................... -- | -- -- 542 ---------- | -------- -------- -------- | EARNINGS ON COMMON STOCK.................................. $ 14,617 | $ 62,381 $ 81,895 $ 94,515 ========= | ======== ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
8 METROPOLITAN EDISON COMPANY CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service..................................................................... $1,609,974 | $1,561,848 Less-Accumulated provision for depreciation.................................... 530,006 | 489,607 ---------- | ---------- 1,079,968 | 1,072,241 --------- | ---------- Construction work in progress- | Electric plant............................................................... 14,291 | 22,437 ----------- | ---------- 1,094,259 | 1,094,678 --------- | ---------- OTHER PROPERTY AND INVESTMENTS: | Nuclear plant decommissioning trusts........................................... 157,699 | 154,068 Long-term notes receivable from associated companies........................... 12,418 | 12,418 Other.......................................................................... 13,391 | 4,472 ---------- | ---------- 183,508 | 170,958 ---------- | ---------- CURRENT ASSETS: | Cash and cash equivalents...................................................... 25,274 | 3,439 Receivables- | Customers (less accumulated provisions of $12,271,000 and $13,004,000 | respectively, for uncollectible accounts)................................. 112,257 | 108,806 Associated companies......................................................... 8,718 | 37,314 Other........................................................................ 16,675 | 28,525 Prepayments and other.......................................................... 12,239 | 7,555 ---------- | ---------- 175,163 | 185,639 ---------- | ---------- DEFERRED CHARGES: | Regulatory assets.............................................................. 1,320,412 | 1,224,370 Goodwill....................................................................... 784,443 | -- Other.......................................................................... 49,402 | 32,417 ---------- | ---------- 2,154,257 | 1,256,787 ---------- | ---------- $3,607,187 | $2,708,062 ========== | ========== CAPITALIZATION AND LIABILITIES | | CAPITALIZATION (See Consolidated Statements of Capitalization): | Common stockholder's equity.................................................... $1,288,953 | $ 537,013 Company - obligated trust preferred securities................................. 92,200 | 100,000 Long-term debt................................................................. 583,077 | 496,860 ---------- | ---------- 1,964,230 | 1,133,873 ---------- | ---------- CURRENT LIABILITIES: | Currently payable long-term debt and preferred stock........................... 30,029 | 27 Short-term borrowings (Note 5)- | Associated companies......................................................... 72,011 | -- Other........................................................................ -- | 46,600 Accounts payable- | Associated companies......................................................... 67,351 | 69,462 Other........................................................................ 36,750 | 36,011 Accrued taxes................................................................. 7,037 | 20,768 Accrued interest............................................................... 17,468 | 14,375 Other.......................................................................... 13,652 | 14,687 ---------- | ---------- 244,298 | 201,930 ---------- | ---------- DEFERRED CREDITS: | Accumulated deferred income taxes.............................................. 300,438 | 279,009 Accumulated deferred investment tax credits.................................... 13,310 | 14,159 Power purchase contract loss liability......................................... 730,662 | 727,503 Nuclear fuel disposal costs.................................................... 36,906 | 35,456 Nuclear plant decommissioning costs............................................ 268,967 | 262,505 Other.......................................................................... 48,376 | 53,627 ---------- | ---------- 1,398,659 | 1,372,259 ---------- | ---------- COMMITMENTS AND CONTINGENCIES | (Notes 3 and 6)................................................................ | ---------- | ---------- $3,607,187 | $2,708,062 ========== | ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
9 METROPOLITAN EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
As of December 31, 2001 2000 - ---------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, without par value, authorized 900,000 shares 859,500 shares outstanding........................................................ $1,274,325 |$ 66,273 Other paid-in capital.............................................................. -- | 400,200 Accumulated other comprehensive income (Note 4E).................................... 11 | 64 Retained earnings (Note 4A)......................................................... 14,617 | 70,476 ---------- |---------- Total common stockholder's equity................................................. 1,288,953 | 537,013 ---------- |---------- | COMPANY OBLIGATED TRUST | PREFERRED SECURITIES | OF SUBSIDIARY TRUST | (NOTE 4C): | 7.35% due 2039...................................................................... 92,200 | 100,000 | LONG-TERM DEBT (Note 4D): | First mortgage bonds: | 8.05% due 2002.................................................................... 30,000 | 30,000 6.60% due 2003.................................................................... 20,000 | 20,000 7.22% due 2003.................................................................... 40,000 | 40,000 9.10% due 2003.................................................................... 30,000 | 30,000 6.34% due 2004.................................................................... 40,000 | 40,000 6.77% due 2005.................................................................... 30,000 | 30,000 7.35% due 2005.................................................................... 20,000 | 20,000 6.36% due 2006.................................................................... 17,000 | 17,000 6.40% due 2006.................................................................... 33,000 | 33,000 6.00% due 2008.................................................................... 8,700 | 8,700 6.10% due 2021.................................................................... 28,500 | 28,500 8.60% due 2022.................................................................... 30,000 | 30,000 8.80% due 2022.................................................................... 30,000 | 30,000 6.97% due 2023.................................................................... 30,000 | 30,000 7.65% due 2023.................................................................... 30,000 | 30,000 8.15% due 2023.................................................................... 60,000 | 60,000 5.95% due 2027.................................................................... 13,690 | 13,690 ---------- |---------- Total first mortgage bonds...................................................... 490,890 | 490,890 ---------- |---------- | Secured note: | 5.72% due 2006.................................................................... 100,000 | -- | Unsecured note: | 7.69% due 2039.................................................................... 5,997 | 6,024 | Net unamortized premium(discount) on debt........................................... 16,219 | (27) ---------- |---------- Long-term debt due within one year.................................................. (30,029)| (27) ---------- |---------- Total long-term debt ........................................................... 583,077 | 496,860 ---------- |---------- TOTAL CAPITALIZATION................................................................... $1,964,230 |$1,133,873 ========== |========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
10 METROPOLITAN EDISON COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Common Stock Accumulated -------------------- Other Other Comprehensive Number Carrying Paid-In Comprehensive Retained Income of Shares Value Capital Income (Loss) Earnings ------------- --------- -------- ------- ------------- --------- (Dollars in thousands) Balance, January 1, 1999................................ 859,500 $ 66,273 $ 370,200 $16,520 $234,066 Net income........................................... $ 95,123 95,123 Net unrealized gains(loss) on investments............ 4,315 4,315 Minimum pension liability............................ 528 528 -------- Comprehensive Income................................. 99,966 -------- Cash dividends on preferred stock.................... (66) Cash dividends on common stock....................... (315,000) Contributions from parent company.................... 30,000 Loss on preferred stock reacquisition................ (542) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999.............................. 859,500 66,273 400,200 21,363 13,581 Net income........................................... 81,895 81,895 Net unrealized gain (loss) on investments............ (21,295) (21,295) Minimum pension liability............................ (4) (4) -------- Comprehensive Income................................. 60,596 -------- Cash dividends on common stock....................... (25,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2000.............................. 859,500 66,273 400,200 64 70,476 Net income........................................... 62,381 62,381 Net unrealized gain (loss) on investments............ 5 5 Net unrealized gain (loss) on derivative instruments. (174) (174) -------- Comprehensive Income................................. 62,212 -------- Cash dividends on common stock....................... (65,000) --------------------------------------------------------------------------------------------------------------------------------- Balance, November 6, 2001............................... 859,500 66,273 400,200 (105) 67,857 Purchase accounting fair value adjustment............ 1,208,052 (400,200) 105 (67,857) ____________________________________________________________________________________________________________________________________ Balance, November 7, 2001............................... 859,500 1,274,325 -- -- -- Net income........................................... 14,617 14,617 Net unrealized gain (loss) on investments............ 22 22 Net unrealized gain (loss) on derivative instruments. (11) (11) -------- Comprehensive Income................................. $ 14,628 -------- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2001.............................. 859,500 $1,274,325 $ -- $ 11 $14,617 ==================================================================================================================================== CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Carrying Number Carrying of Shares Value of Shares Value --------- ----- --------- ----- (Dollars in thousands) Balance, January 1, 1999............ 119,475 $12,056 4,000,000 $100,000 Redemptions- 3.90% Series .................. (64,384) (6,527) 4.35% Series.................... (22,517) (2,256) 3.85% Series.................... (9,252) (929) 3.80% Series.................... (7,982) (807) 4.45% Series.................... (15,340) (1,537) 9.00% Series.................... (4,000,000) (100,000) Issuance- 7.35% Series.................... 4,000,000 100,000 ----------------------------------------------------------------------------------------- Balance, December 31, 1999.......... -- -- 4,000,000 100,000 ========================================================================================= Balance, December 31, 2000.......... -- -- 4,000,000 100,000 ========================================================================================= Purchase accounting fair value adjustment............. (7,800) ----------------------------------------------------------------------------------------- Balance, December 31, 2001.......... -- $ -- 4,000,000 $ 92,200 ========================================================================================= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
11 METROPOLITAN EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
Nov. 7 - Jan. 1 - For the Years Ended Dec. 31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- - - (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income........................................................... $14,617 || $ 62,381 $ 81,895 $ 95,123 Adjustments to reconcile net income to net | cash from operating activities: | Provision for depreciation and amortization..................... 8,903 | 51,867 68,695 88,989 Nuclear fuel and lease amortization............................. -- | -- -- 12,041 Other amortization.............................................. 154 | 1,147 5,684 2,586 Impact of PPUC rate order, net.................................. -- | -- (44,580) -- Deferred costs, net............................................. 1,045 | (91,182) (7,941) (8,291) Deferred income taxes, net...................................... 906 | 53,464 22,483 (66,995) Investment tax credits, net..................................... (128)| (721) (851) (12,146) Receivables..................................................... 10,213 | 33,714 33,348 (93,309) Materials and supplies.......................................... -- | -- -- 36,944 Accounts payable................................................ (4,339)| (60,868) (48,395) (23,039) Other........................................................... 8,286 | (59,313) (25,896) (137,153) ------- | -------- -------- -------- Net cash provided from (used for) operating activities........ 39,657 | (9,511) 84,442 (105,250) ------- | -------- -------- -------- | CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing- | Long-term debt.................................................. -- | 99,500 -- -- Short-term borrowings, net...................................... -- | 51,400 46,600 -- Company-obligated trust preferred securities.................... -- | -- -- 96,535 Contributions from parent....................................... -- | -- -- 30,000 Redemptions and Repayments- | Preferred stock................................................. -- | -- -- 12,598 Long-term debt.................................................. -- | -- 50,000 30,024 Short-term borrowings, net...................................... 25,989 | -- -- 79,540 Capital lease principal payments................................ -- | -- -- 15,786 Company-obligated mandatorily redeemable | preferred securities........................................ -- | -- -- 100,000 Dividend Payments- | Common stock.................................................... -- | 65,000 25,000 315,000 Preferred stock................................................. -- | -- -- 66 ------- | -------- -------- -------- Net cash used for (provided from) financing activities........ 25,989 | (85,900) 28,400 426,479 ------- | --------- --------- --------- | CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions................................................... 7,787 | 47,660 58,481 66,388 Contributions to decommissioning trusts.............................. -- | 7,113 8,700 33,556 Sale of investments.................................................. -- | -- (3,519) (641,273) Other................................................................ 453 | 5,209 -- 45 ------- | -------- -------- -------- Net cash used for (provided from) investing activities........ 8,240 | 59,982 63,662 (541,284) ------- | -------- -------- -------- Net increase (decrease) in cash and cash equivalents................. 5,428 | 16,407 (7,620) 9,555 Cash and cash equivalents at beginning of period..................... 19,846 | 3,439 11,059 1,504 ------- | -------- -------- -------- Cash and cash equivalents at end of period........................... $25,274 | $ 19,846 $ 3,439 $ 11,059 ======= | ======== ======== ======== | SUPPLEMENTAL CASH FLOWS INFORMATION: | Cash Paid During the Year- | Interest (net of amounts capitalized)........................... $ - | $ 41,473 $ 47,451 $ 55,011 ======= | ======== ======== ======== Income taxes (refund).......................................... $(2,990)| $ 7,486 $ 45,534 $120,277 ======= | ========= ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
12 METROPOLITAN EDISON COMPANY CONSOLIDATED STATEMENTS OF TAXES
Nov. 7 - Jan. 1 - For the Years Ended Dec.31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property......................................... $ 5 | $ 1,236 $ 1,826 $ 3,979 State gross receipts............................................... 5,730 | 31,353 35,288 26,757 Social security and unemployment................................... (1) | 14 -- 171 Other.............................................................. 775 | 7,242 5,509 8,376 --------- | -------- --------- -------- Total general taxes......................................... $ 6,509 | $ 39,845 $ 42,623 $ 39,283 ========= | ======== ======== ======== | PROVISION FOR INCOME TAXES: | Currently payable- | Federal......................................................... $ 7,693 | $(11,534) $ 17,080 $107,335 State........................................................... 2,433 | (1,760) 5,377 33,202 --------- | -------- --------- -------- 10,126 | (13,294) 22,457 140,537 --------- | -------- --------- -------- Deferred, net- | Federal......................................................... 934 | 41,297 19,476 (46,758) State........................................................... (28) | 12,167 3,007 (20,237) --------- | -------- --------- -------- 906 | 53,464 22,483 (66,995) --------- | -------- --------- -------- Investment tax credit amortization................................. (128) | (721) (851) (12,146) --------- | -------- --------- -------- Total provision for income taxes............................ $ 10,904 | $ 39,449 $ 44,089 $ 61,396 ========= | ======== ========= ======== | INCOME STATEMENT CLASSIFICATION | OF PROVISION FOR INCOME TAXES: | Operating income................................................... $ 11,584 | $ 28,549 $ 33,278 $ 58,937 Other income....................................................... (680) | 10,900 10,811 2,459 ---------- | -------- --------- -------- Total provision for income taxes............................ $ 10,904 | $ 39,449 $ 44,089 $ 61,396 ========= | ======== ========= ======== | RECONCILIATION OF FEDERAL INCOME TAX | EXPENSE AT STATUTORY RATE TO TOTAL | PROVISION FOR INCOME TAXES: | Book income before provision for income taxes...................... $ 25,521 | $101,831 $ 125,983 $156,520 ========= | ======== ========= ======== Federal income tax expense at statutory rate....................... $ 8,932 | $ 35,641 $ 44,094 $ 54,782 Increases (reductions) in taxes resulting from- | Amortization of investment tax credits.......................... (128) | (721) (851) (12,145) Depreciation.................................................... 304 | 926 300 7,152 State income tax, net of federal tax............................ 938 | 7,388 7,379 10,257 Allocated share of consolidated tax savings..................... -- | (3,151) -- (1,100) Other, net...................................................... 858 | (634) (6,833) 2,450 --------- | -------- --------- -------- Total provision for income taxes............................ $ 10,904 | $ 39,449 $ 44,089 $ 61,396 ========= | ======== ========= ======== | ACCUMULATED DEFERRED INCOME TAXES AT | DECEMBER 31: | Property basis differences......................................... $ 211,394 | $ 203,352 $210,673 Nuclear decommissioning............................................ (5,623) | (9,797) (1,501) Deferred sale and leaseback costs.................................. (12,077) | (11,298) (13,491) Non-utility generation costs....................................... 36,099 | 12,238 8,787 Purchase accounting basis difference............................... (37,143) | -- -- Regulatory transition charge....................................... 85,414 | 69,828 20,946 Customer receivables for future income taxes....................... 49,755 | 51,247 48,815 Other.............................................................. (27,381) | (36,561) (21,565) --------- | --------- -------- Net deferred income tax liability........................... $ 300,438 | $ 279,009 $252,664 ========= | ========= ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include Metropolitan Edison Company (Company) and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. FirstEnergy also holds directly all of the issued and outstanding common shares of Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE), American Transmission Systems, Inc. (ATSI), Jersey Central Power & Light Company (JCP&L) and Pennsylvania Electric Company (Penelec). The Company, JCP&L and Penelec were formerly wholly owned subsidiaries of GPU, Inc., which merged with FirstEnergy on November 7, 2001. Pre-merger period and post-merger period financial results are separated by a heavy black line. The Company follows the accounting policies and practices prescribed by the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES- The Company's principal business is providing electric service to customers in Pennsylvania. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers and sales to wholesale customers. There was no material concentration of receivables as of December 31, 2001 or 2000, with respect to any particular segment of the Company's customers. REGULATORY PLAN- Pennsylvania enacted its electric utility competition law in 1996 with the phase-in of customer choice for generation suppliers completed as of January 1, 2001. The PPUC authorized a rate restructuring plan for the Company in 1998 which essentially resulted in the deregulation of the Company's generation business. The Company has a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier, subject to certain limits, which is referred to as the Company's provider of last resort (PLR) obligation. In 2000, the PPUC disallowed a portion of the requested additional stranded costs above those amounts granted in the Company's 1998 rate restructuring plan order. The PPUC required the Company to seek an IRS ruling regarding the return of certain unamortized investment tax credits and excess deferred income tax benefits to ratepayers. If the IRS ruling ultimately supports returning these tax benefits to ratepayers, the Company would then reduce stranded costs by $12 million plus interest and record a corresponding charge to income. As a result of its generating asset divestitures, the Company obtains its supply of electricity to meet its PLR obligation almost entirely from contracted and open market purchases. During 2000, the Company's purchased power costs substantially exceeded the amounts it could recover under its capped generation rates, which are in effect for varying periods, pursuant to its 1998 rate restructuring plan. In November 2000, the Company filed a petition with the PPUC seeking permission to defer for future recovery its energy costs in excess of amounts reflected in its capped generation rates. In January 2001, the PPUC consolidated this petition with the FirstEnergy and GPU merger proceeding (see Note 2 - Merger) for consideration and resolution in accordance with the merger procedural schedule. In June 2001, the Company entered into a Settlement Stipulation with all of the major parties in the combined merger and rate relief proceedings, that, in addition to resolving certain issues concerning the PPUC's approval of the merger, also addressed the Company's request for PLR relief. On June 20, 2001, the PPUC entered orders approving the Settlement Stipulation, which approved the merger and provided PLR relief. The Company is permitted to defer for future recovery the difference between its actual energy costs and those reflected in its capped generation rates, retroactive to January 1, 2001. Deferral accounting will continue for such cost differences through December 31, 2005 and, should energy costs incurred by the Company during that period be below its capped generation rates, the difference would be used to reduce its recoverable deferred costs. The Company's PLR obligation has been extended through December 31, 2010. The Company's competitive transition charge (CTC) revenues will be applied first to PLR costs, then to stranded costs other than for non-utility generation (NUG) and finally to NUG stranded costs through December 31, 2010. The Company would be permitted to recover any remaining stranded costs through a continuation of the CTC after December 31, 2010; however, such recovery would extend to no later than December 31, 2015. Any amounts not expected to be recovered by December 31, 2015 would be written off at the time such nonrecovery becomes probable. 14 Several parties had filed Petitions for Review with the Commonwealth Court of Pennsylvania regarding the PPUC's orders. On February 21, 2002, the Court affirmed the PPUC decision regarding approval of the merger, remanding the decision to the PPUC only with respect to the issue of merger savings. The Court reversed the PPUC's decision regarding the Company's PLR obligation, and denied the Company's related requests for rate relief. The Company is considering its response to the Court's decision, which could include asking the Pennsylvania Supreme Court to review the decision. The Company is unable to predict the outcome of these matters. The application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," was discontinued in 1998 with respect to the Company's generation operations. The Company subsequently divested substantially all of its generating assets. The Securities and Exchange Commission issued interpretive guidance regarding asset impairment measurement, concluding that any supplemental regulated cash flows such as a CTC should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $18 million as of December 31, 2001. All of the Company's regulatory assets are expected to continue to be recovered under provisions of the Company's regulatory orders. PROPERTY, PLANT AND EQUIPMENT- As a result of the merger, certain of the Company's property, plant and equipment have been adjusted to reflect fair value. The majority of the Company's property, plant and equipment is reflected at original cost since such assets remain subject to rate regulation on a historical cost basis. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annualized composite rate was approximately 3.0% in 2001, 2.9% in 2000 and 3.0% in 1999. Annual depreciation expense in 2001 included approximately $11.1 million for future decommissioning costs applicable to the Company's ownership in Unit 2 of the Three Mile Island Nuclear Plant (TMI-2), a demonstration nuclear reactor owned by a wholly owned subsidiary of the Company (in conjunction with JCP&L and Penelec) and decommissioning liabilities for its previously divested nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $254.5 million in current dollars and (using a 4.0% escalation rate) approximately $421.9 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Decommissioning of the demonstration nuclear reactor is expected to be completed in 2003; payments for decommissioning of TMI-2 are expected to begin in 2014, when actual decommissioning work is expected to begin. The Company has recovered approximately $54 million for decommissioning through its electric rates from customers through December 31, 2001. The Company has also recognized an estimated liability of approximately $4.6 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required as of January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the costs to settle the retirement obligation differs from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trusts will be recorded as investment income. The Company is currently assessing the new standard and has not yet quantified the impact on its financial statements. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Results for the period January 1, 2001 through November 6, 2001 are included in the final consolidated federal income tax return of GPU, and results for the period November 7, 2001 through December 31, 2001 are included in FirstEnergy's 2001 consolidated federal income tax return. In both cases, the consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing the tax benefit for any tax losses or credits it contributed to the consolidated return. 15 RETIREMENT BENEFITS- Effective December 31, 2001, the Company's defined benefit pension plan was merged into FirstEnergy's defined benefit pension plan. FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Company's full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the GPU pension plans were merged with the FirstEnergy plan. FirstEnergy uses the projected unit credit method for funding purposes. The assets of the pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. Costs for the year 2001 include the former GPU companies' pension and other postretirement benefit costs for the period November 7, 2001 through December 31, 2001. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheet as of December 31, 2001: Other Pension Benefits Postretirement Benefits ---------------- ----------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1......................... $1,506.1 $ 752.0 Service cost........................ 34.9 18.3 Interest cost....................... 133.3 64.4 Plan amendments..................... 3.6 -- Actuarial loss...................... 123.1 73.3 Voluntary early retirement program.. -- 2.3 GPU acquisition..................... 1,878.3 716.9 Benefits paid....................... (131.4) (45.6) --------------------------------------------------------------------------- Benefit obligation as of December 31 3,547.9 1,581.6 --------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1................... 1,706.0 23.0 Actual return on plan assets........ 8.1 12.7 Company contribution................ -- 43.3 GPU acquisition..................... 1,901.0 462.0 Benefits paid....................... (131.4) (6.0) --------------------------------------------------------------------------- Fair value of plan assets as of December 31....................... 3,483.7 535.0 --------------------------------------------------------------------------- Funded status of plan............... (64.2) (1,046.6) Unrecognized actuarial loss (gain).. 222.8 212.8 Unrecognized prior service cost..... 87.9 17.7 Unrecognized net transition obligation (asset)................ -- 101.6 --------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 246.5 $ (714.5) =========================================================================== Assumptions used as of December 31, 2001: Discount rate....................... 7.25% 7.25% Expected long-term return on plan assets....................... 10.25% 10.25% Rate of compensation increase....... 4.00% 4.00% FirstEnergy's net pension and other postretirement benefit costs for the year ended December 31, 2001 were computed as follows: Other Pension Benefits Postretirement Benefits ---------------- ----------------------- (In millions) Service cost........................ $ 34.9 $18.3 Interest cost....................... 133.3 64.4 Expected return on plan assets...... (204.8) (9.9) Amortization of transition obligation (asset)................ (2.1) 9.2 Amortization of prior service cost.. 8.8 3.2 Recognized net actuarial loss (gain)....................... -- 4.9 Voluntary early retirement program.. 6.1 2.3 --------------------------------------------------------------------------- Net benefit cost.................... $ (23.8) $92.4 =========================================================================== The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported 16 for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase FirstEnergy's total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. Pre-Merger As of December 31, 2000, the Company had on its balance sheet accrued benefit costs of $0.9 million and $0.4 million, respectively, related to pension and other postretirement benefit obligations. In addition, for the year ended December 31, 2000, the Company recognized in income net benefit costs/(credits) of $0.1 million and $0.2 million, respectively, for pension and other postretirement benefits, and for the year ended December 31, 1999, the Company recognized net benefit costs/(credits) of $0.2 million and $0.3 million, respectively. TRANSACTIONS WITH AFFILIATED COMPANIES- During the three years ended December 31, 2001, GPU Service, Inc., an affiliated company, provided legal, accounting, financial and other services to the Company. In addition, prior to the sales of the Company's generating assets in 1999, affiliated companies GPU Nuclear, Inc. and GPU Generation, Inc. conducted generation operations for the company. The total cost of services rendered by affiliates was $141 million, $99 million and $350 million for the years 2001, 2000 and 1999, respectively. Of these amounts, $95 million, $77 million and $264 million were charged to income for the years 2001, 2000 and 1999, respectively. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 2001 2000 --------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value --------------------------------------------------------------------- (In millions) Long-term debt................. $597 $601 $497 $504 Preferred stock................ $100 $ 93 $100 $ 97 Investments other than cash and cash equivalents........ $159 $160 $156 $156 --------------------------------------------------------------------- $848 $854 $753 $757 ===================================================================== The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to the Company's ratings. Long-term debt and preferred stock subject to mandatory redemption were recognized at fair value in connection with the merger. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Company has no securities held for trading purposes. On January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133." The adoption resulted in the recognition of derivative assets on the Consolidated Balance Sheet at January 1, 2001 in the amount of $13.0 million, with a substantially offsetting amount recorded in Regulatory Assets of $12.2 million. As of January 1, 2001, a cumulative effect of accounting change was recognized as an expense in Other Income (Deductions), Net on the Consolidated Statement of Income in the amount of $0.1 million. 17 The Company is exposed to financial risks resulting from the fluctuation of commodity prices, including electricity and natural gas. To manage the volatility relating to these exposures, the Company uses a variety of derivative instruments, including options and futures contracts. These derivatives are used principally for hedging 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. The Company uses derivatives to hedge the risk of price fluctuations. The Company's primary ongoing hedging activity involves cash flow hedges of electricity and natural gas purchases. The majority of the Company's forward commodity contracts are considered "normal purchases and sales," as defined by SFAS 133, and are therefore excluded from the scope of SFAS 138. The options and futures contracts determined to be within the scope of SFAS 133 are accounted for as cash flow hedges and expire on various dates through 2002. Gains and losses from hedges of commodity price risks are included in net income when the underlying hedged commodities are delivered. There is currently a net deferred loss of $0.01 million included in Accumulated Other Comprehensive Loss as of December 31, 2001 related to derivative hedging activity, which will be reclassified to earnings during the next twelve months as hedged transactions occur. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are expected to continue to be recovered from customers under the Company's regulatory plan. The Company continues to bill and collect cost-based rates for its transmission and distribution services, which remain regulated; accordingly, it is appropriate that the Company continues the application of SFAS 71 to those operations. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: 2001 2000 ---------------------------------------------------------------------- (In millions) Regulatory transition charge................... $1,115.9 $1,053.1 Customer receivables for future income taxes... 110.9 114.5 Nuclear decommissioning costs.................. 34.7 27.6 Provider of last resort deferrals.............. 32.7 -- Employee postretirement benefit costs.......... 21.4 23.4 Loss on reacquired debt........................ 4.8 5.3 Other.......................................... -- 0.5 ---------------------------------------------------------------------- Total...................................... $1,320.4 $1,224.4 ====================================================================== 2. MERGER: On November 7, 2001, the merger of FirstEnergy and GPU became effective pursuant to the Agreement and Plan of Merger, dated August 8, 2000. As a result of the merger, GPU's former wholly owned subsidiaries, including the Company, became wholly owned subsidiaries of FirstEnergy. The merger was accounted for by the purchase method of accounting. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by FirstEnergy's management based on information currently available and on current assumptions as to future operations. Merger purchase accounting adjustments recorded in the records of the Company primarily consist of: (1) revaluation of certain property, plant and equipment; (2) adjusting preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (3) recognizing additional obligations related to retirement benefits; and (4) recognizing estimated severance and other compensation liabilities. Other assets and liabilities were not adjusted since they remain subject to rate regulation on a historical cost basis. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which will not be amortized but will be reviewed for impairment at least annually. As of December 31, 2001, the Company had recorded goodwill of approximately $784.4 million related to the merger. 3. LEASES: Consistent with regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Prior to the sale of its nuclear generating facility in December 1999, the Company's capital lease obligations related primarily to nuclear fuel lease agreements with nonaffiliated fuel trusts for the plant. The Company's most significant operating lease relates to the sale and leaseback of a portion of its ownership interest in the Merrill Creek Reservoir project. The interest element related to this lease was $1.9 million for the years 2001 and 2000. 18 As of December 31, 2001, the future minimum lease payments on the Company's Merrill Creek operating lease, net of reimbursements from sublessees, are: $0.4 million in 2002, $1.3 million in 2003, zero in 2004, $0.2 million in 2005 and in 2006, and $15.0 million for the years thereafter. The Company's Merrill Creek lease payments were offset against the actual net divestiture proceeds received from the 1999 sales of its generating assets. 4. CAPITALIZATION: (A) RETAINED EARNINGS- The merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 7, 2001 merger date. In general, the Company's first mortgage bond (FMB) indentures restrict the payment of dividends or distributions on or with respect to the Company's common stock to amounts credited to earned surplus since approximately the date of its indenture. At such date, the Company had a balance of $3.4 million in its earned surplus account, which would not be available for dividends or other distributions. As of December 31, 2001, the Company had retained earnings available to pay common stock dividends of $11.2 million, net of amounts restricted under the Company's FMB indentures. (B) PREFERRED AND PREFERENCE STOCK- The Company's preferred stock authorization consists of 10 million shares without par value. No preferred shares are currently outstanding. (C) COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY PARTNERSHIP PREFERRED SECURITIES- The Company has formed a statutory business trust, Met-Ed Capital Trust, which is owned through a wholly-owned limited partnership of the Company, Met-Ed Capital II, L.P., of which a wholly-owned subsidiary of the Company is the sole general partner. In this transaction, Met-Ed Capital Trust invested the gross proceeds from the sale of $100.0 million of its 7.35% trust preferred securities in the preferred securities of Met-Ed Capital II, L.P., which in turn invested those proceeds in $103.1 million of 7.35% subordinated debentures of the Company. The sole assets of Met-Ed Capital Trust are the preferred securities of Met-Ed Capital II, L.P., whose sole assets are the Company's subordinated debentures with the same rate and maturity date as the preferred securities. The Company has effectively provided a full and unconditional guarantee of its obligations under its trust's preferred securities. The trust preferred securities, which mature in 2039 and have a liquidation value of $25.00 per security, are redeemable at the option of the Company beginning in May 2004 at 100% of their principal amount. The interest on the subordinated debentures (and therefore the distributions on the preferred securities) may be deferred for up to 60 months, but the Company may not pay dividends on, or redeem or acquire, any of its cumulative preferred or common stock until deferred payments on its subordinated debentures are paid in full. (D) LONG-TERM DEBT- The first mortgage indentures and their supplements, which secure all of the Company's FMBs, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company. Based on the amount of bonds authenticated by the Trustee through December 31, 2001, the Company's annual sinking and improvement fund requirements for all bonds issued under the mortgage amount to $6.7 million. The Company expects to fulfill its sinking and improvement fund obligation by providing bondable property additions to the Trustee. Sinking fund requirements for FMBs and maturing long-term debt (excluding capital leases) for the next five years are: (In millions) ---------------------- 2002........ $ 30.1 2003........ 90.5 2004........ 40.5 2005........ 50.5 2006........ 150.5 ---------------------- The Company's obligations to repay certain pollution control revenue bonds are secured by several series of FMBs. Certain pollution control revenue bonds are entitled to the benefit of noncancelable municipal bond insurance policies of $42.2 million to pay principal of, or interest on, the pollution control revenue bonds. 19 (E) COMPREHENSIVE INCOME- Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholder's equity except those resulting from transactions with the Company's parent. As of December 31, 2001, accumulated other comprehensive income consisted of an unrealized gain on investment of securities available for sale of $0.02 million and unrealized losses on derivative instrument hedges of $0.01 million. 5. SHORT-TERM BORROWINGS: The Company may borrow from its affiliates on a short-term basis. As of December 31, 2001, the Company had total short-term borrowings of $72 million from its affiliates with a weighted average interest rate of approximately 4.9%. 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $323 million for property additions and improvements from 2002-2006, of which approximately $66 million is applicable to 2002. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership interest in TMI-2, the Company is exempt from any potential assessment under the industry retrospective rating plan. The Company is also insured as to its interest in TMI-2 under a policy issued to the operating company for the plant. Under this policy, $150 million is provided for property damage and decontamination and decommissioning costs. Under this policy, the Company can be assessed a maximum of approximately $0.4 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at TMI-2 exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. ENVIRONMENTAL MATTERS- Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, the Company's proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. The Company has been named as a "potentially responsible party" (PRP) 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. The Company has total accrued liabilities aggregating approximately $0.1 million as of December 31, 2001. The Company does not believe environmental remediation costs will have a material adverse effect on its financial condition, cash flows or results of operations. OTHER LEGAL PROCEEDINGS- Various lawsuits, claims and proceedings related to the Company's normal business operations are pending against the Company, the most significant of which is described below. TMI-2, which was damaged during a 1979 accident, is jointly owned by the Company, JCP&L and Penelec, with the Company having a 50% ownership percentage. Claims for alleged personal injury against the Company, JCP&L, Penelec and GPU (the defendants) were filed in the U.S. District Court for the Middle District of Pennsylvania. In 1996, the District Court granted a motion for summary judgment filed by the defendants and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. In November 20 1999, the U.S. Court of Appeals for the Third Circuit affirmed the District Court's dismissal of the ten "test cases," but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. In September 2000, the defendants filed for a summary judgment in the District Court. Meanwhile, the plaintiffs appealed to the Third Circuit for a review of the District Court's decision placing limitations on the remaining plaintiffs' suit. In April 2001, the Third Circuit affirmed the District Court's decision. In July 2001, the defendants renewed their motion for a summary judgment on the remaining 2,100 claims in the District Court. On January 15, 2002, the District Court granted the defendants' amended motion for summary judgment. On February 14, 2002, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. In addition to the approximately 2,100 claims for which summary judgment has been granted, there is other pending litigation arising out of the TMI-2 accident. This litigation consists of the following: eight personal injury cases that were not consolidated with the above-referenced approximately 2,100 claims; two class actions brought on behalf of plaintiffs alleging additional injuries diagnosed after the filing of the complaints in the above-referenced case; a case alleging exposure during the post-accident cleanup of the TMI-2 plant; and claims by individual businesses for economic loss resulting from the TMI-2 accident. Although unable to predict the outcome of this litigation, the Company believes that any liability to which it might be subject by reason of the TMI-2 accident will not exceed its financial protection under the Price-Anderson Act. 7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 2001 and 2000.
Three Months Ended ----------------------------- March 31, June 30, Sept. 30, Oct.1-Nov. 6 Nov. 7-Dec. 31 2001 2001 2001 2001 2001 - ------------------------------------------------------------------------------------------- (In millions) Operating Revenues............ $221.0 $222.6 $283.5 $97.5 | $143.7 Operating Expenses and Taxes.. 196.6 197.9 248.3 79.5 | 126.4 - ----------------------------------------------------------------------------|-------------- Operating Income.............. 24.4 24.7 35.2 18.0 | 17.3 Other Income (Expense)........ 4.7 5.3 2.6 (4.8) | 5.5 Net Interest Charges.......... 13.1 14.1 13.3 7.2 | 8.2 - ----------------------------------------------------------------- ----------|-------------- Net Income.................... $ 16.0 $ 15.9 $ 24.5 $ 6.0 | $ 14.6 ===========================================================================================
Three Months Ended ----------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 2000 2000 2000 2000 - ------------------------------------------------------------------------- (In millions) Operating Revenues............ $203.0 $197.8 $227.5 $214.0 Operating Expenses and Taxes.. 164.2 180.2 215.7 147.0 - ------------------------------------------------------------------------- Operating Income.............. 38.8 17.6 11.8 67.0 Other Income (Expense)........ 1.8 4.8 (2.1) (3.1) Net Interest Charges.......... 14.1 13.7 13.5 13.4 - ------------------------------------------------------------------------- Net Income (Loss)............. $ 26.5 $ 8.7 $ (3.8) $ 50.5 ========================================================================= 21 Report of Independent Public Accountants To the Stockholders and Board of Directors of Metropolitan Edison Company: We have audited the accompanying consolidated balance sheet and consolidated statement of capitalization of Metropolitan Edison Company (a Pennsylvania corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of December 31, 2001 (post-merger), and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for the period from January 1, 2001 to November 6, 2001 (pre-merger) and the period from November 7, 2001 to December 31, 2001 (post-merger). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Metropolitan Edison Company and subsidiaries as of December 31, 2000 and for each of the two years in the period ended December 31, 2000 (pre-merger), were audited by other auditors whose report dated January 31, 2001, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2001 financial statements referred to above present fairly, in all material respects, the financial position of Metropolitan Edison Company and subsidiaries as of December 31, 2001 (post-merger), and the results of their operations and their cash flows for the period from January 1, 2001 to November 6, 2001 (pre-merger) and the period from November 7, 2001 to December 31, 2001 (post-merger), in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Cleveland, Ohio, March 18, 2002. 22 Report of Independent Accountants To the Board of Directors and Stockholder of Metropolitan Edison Company: In our opinion, the consolidated balance sheet as of December 31, 2000 and the related consolidated statements of income, and cash flows for each of the two years in the period ended December 31, 2000 (appearing on the accompanying index of the Metropolitan Edison Company 2001 Annual Report to Stockholders incorporated by reference in this Form 10-K) present fairly, in all material respects, the financial position, results of operations and cash flows of Metropolitan Edison Company and Subsidiary Companies at December 31, 2000 and for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 31, 2001 23 EX-21 58 ex21-5me.txt LIST OF SUBS - METED Exhibit 21.5 METROPOLITAN EDISON COMPANY SUBSIDIARIES OF THE REGISTRANT STATE OF NAME OF SUBSIDIARY BUSINESS ORGANIZATION - ------------------ -------- ------------ YORK HAVEN POWER COMPANY HYDROELECTRIC GENERATION NEW YORK MET-ED PREFERRED CAPITAL, INC. SPECIAL-PURPOSE FINANCE DELAWARE MET-ED CAPITAL, L.P. SPECIAL-PURPOSE FINANCE DELAWARE MET-ED PREFERRED CAPITAL II, INC. SPECIAL-PURPOSE FINANCE DELAWARE MET-ED CAPITAL II, L.P. SPECIAL-PURPOSE FINANCE DELAWARE MET-ED CAPITAL TRUST SPECIAL-PURPOSE FINANCE DELAWARE Note: Met-Ed, along with its affiliates JCP&L and Penelec, collectively own all of the common stock of Saxton Nuclear Experimental Corporation, a Pennsylvania nonprofit corporation organized for nuclear experimental purposes which is now inactive. The carrying value of the owners' investment has been written down to a nominal value. EX-23 59 ex23-6me.txt ARTHUR ANDERSEN CONSENT - MET-ED EXHIBIT 23.6 METROPOLITAN EDISON COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into Metropolitan Edison Company's previously filed Registration Statements, File No. 333-62967, No. 333-62967-01 and No. 333-62967-02. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 29, 2002. EX-23 60 ex23-7me.txt PWC CONSENT - METED EXHIBIT 23.7 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-62967, 333-62967-01 and 333-62967-02) of Metropolitan Edison Company of our report dated January 31, 2001 relating to the financial statements, which appears in this Form 10-K. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 29, 2002 EX-99 61 ex99met.txt LETTER TO SEC RE: ARTHUR ANDERSEN - METED Exhibit 99 March 29, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Temporary Note 3T to Article 3 of Regulation S-X Ladies and Gentlemen: In connection with the audit of the consolidated financial statements of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and for the year then ended, Arthur Andersen LLP (Andersen) has issued its report dated March 18, 2002. Andersen's report is included in FirstEnergy's Annual Report on Form 10-K for the year ended December 31, 2001. FirstEnergy has received the following representations from Andersen with respect to their audit: o The FirstEnergy audit was subject to Andersen's quality control system for their U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards. o There was appropriate continuity of Andersen personnel working on the FirstEnergy audit. o There was appropriate availability of national office consultation for the FirstEnergy audit. o There was appropriate availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the FirstEnergy audit. Sincerely, /s/Harvey L. Wagner ---------------------------------- Harvey L. Wagner Vice President and Controller EX-4 62 ex4-6.txt SUPPLEMENTAL INDENTURE - PENELEC EXECUTED IN 50 COUNTERPARTS OF WHICH THIS IS COUNTERPART NO. PENNSYLVANIA ELECTRIC COMPANY AND UNITED STATES TRUST COMPANY OF NEW YORK, SUCCESSOR TRUSTEE -------------------- SUPPLEMENTAL INDENTURE (First Mortgage Bonds, Senior Note Series due 2002) -------------------- Dated as of May 1, 2001 TABLE OF CONTENTS PAGE Parties................................................................ 1 Recitals............................................................... 1 Granting Clauses....................................................... 4 Excepted Property...................................................... 6 Habendum............................................................... 6 Subject Clause......................................................... 6 Grant in Trust......................................................... 6 ARTICLE I SENIOR NOTE SERIES BONDS.................................... 7 SECTION 1.01. Creation of Senior Note Series Bonds................. 7 SECTION 1.02. Dating of Senior Note Series Bonds................... 7 SECTION 1.03. Payment of Principal and Interest.................... 7 SECTION 1.04. Registration of Senior Note Series Bonds............. 8 SECTION 1.05. Transferability and Assignability of Senior Note Series Bonds................................... 8 SECTION 1.06. Redemption of Senior Note Series Bonds............... 8 SECTION 1.07. Release Date and Surrender........................... 8 ARTICLE II FORM OF THE SENIOR NOTE SERIES BONDS....................... 10 SECTION 2.01. Form of Senior Note Series Bonds..................... 10 ARTICLE III MISCELLANEOUS............................................. 15 SECTION 3.01. Covenants of the Company............................. 15 SECTION 3.02. Indemnification of Trustee........................... 15 SECTION 3.03. Table of Contents and Titles of Articles not Part.... 16 SECTION 3.04. Original Indenture Confirmed as Amended and Supplemented..................................... 16 SECTION 3.05. Execution in Counterparts............................ 16 Names and Addresses of debtor and secured party....................... 15 Testimonium........................................................... 16 Signatures and seals.................................................. 16 Acknowledgments....................................................... 18 Certificate of Residence.............................................. 19 Schedule A........................................................... A-1 SUPPLEMENTAL INDENTURE, dated as of May 1, 2001, made and entered into by and between PENNSYLVANIA ELECTRIC COMPANY, a corporation of the Commonwealth of Pennsylvania (hereinafter sometimes called the "Company"), party of the first part, and UNITED STATES TRUST COMPANY OF NEW YORK, a company organized under the laws of the State of New York (hereinafter sometimes called the "Trustee"), as successor trustee under the Mortgage and Deed of Trust hereinafter referred to, party of the second part. WHEREAS, the Company heretofore executed and delivered its Mortgage and Deed of Trust (hereinafter called the "Original Indenture"), dated as of the first day of January, 1942, to Bankers Trust Company, as trustee, to secure the First Mortgage Bonds of the Company, unlimited in aggregate principal amount and issuable in series, from time to time, in the manner and subject to the conditions set forth in the Mortgage (as hereinafter defined) and by said Original Indenture granted and conveyed unto the Trustee, upon the trusts, uses and purposes specifically therein set forth, certain real estate, franchises and other property therein described, including property acquired after the date thereof, except as therein otherwise provided; and WHEREAS, indentures supplemental to and amendatory of the Original Indenture have been executed and delivered by the Company and the Trustee, namely, Supplemental Indentures dated March 7, 1942, April 28, 1943, August 20, 1943, August 30, 1943, August 31, 1943, April 26, 1944, April 19, 1945, October 25, 1945, as of June 1, 1946, as of November 1, 1949, as of October 1, 1951, as of August 1, 1952, as of June 1, 1953, as of March 1, 1954, as of April 30, 1956, as of May 1, 1956, as of March 1, 1958, as of August 1, 1959, as of May 1, 1960, as of May 1, 1961, October 1, 1964, November 1, 1966, as of June 1, 1967, as of August 1, 1968, as of May 1, 1969, as of April 1, 1970, as of December 1, 1971, as of July 1, 1973, as of June 1, 1974, as of December 1, 1974, as of August 1, 1975, as of December 1, 1975, as of April 1, 1976, as of June 1, 1976, as of July 1, 1976, as of November 1, 1976, as of November 30, 1977, as of December 1, 1977, as of June 1, 1978, as of June 1, 1979, as of September 1, 1984, as of December 1, 1985, as of December 1, 1986, as of May 1, 1989, as of December 1, 1990, as of March 1, 1992, as of June 1, 1993, as of November 1, 1995 and as of August 15, 1996, respectively; and the Original Indenture as supplemented and amended by said Supplemental Indentures and by this Supplemental Indenture is hereinafter referred to as the "Mortgage"; and WHEREAS, the Original Indenture, certain of said Supplemental Indentures and an Instrument of Resignation, Appointment and Acceptance dated as of October 27, 1995 among the Company, Bankers Trust Company and United States Trust Company of New York have been duly recorded in mortgage books in the respective Offices of the Recorders of Deeds in and for the Counties of Pennsylvania in which this Supplemental Indenture is to be recorded, and in the mortgage records of Garrett County, Maryland; and WHEREAS, the Mortgage provides for the issuance of bonds thereunder in one or more series, the form of each series of bonds and of the coupons to be attached to the coupon bonds, if any, of each series to be substantially in the forms set forth therein with such omissions, variations and insertions as are authorized or permitted by the Mortgage and determined and specified by the Board of Directors of the Company; and WHEREAS, the Company has entered into an Indenture dated as of April 1, 1999 (the "Original Senior Note Indenture") with United States Trust Company of New York, as trustee (the "Senior Note Trustee"), as heretofore amended and supplemented by Supplemental Indenture No. 1, dated as of May 1, 2001 (the "First Supplemental Senior Note Indenture"; the Original Senior Note Indenture as supplemented and amended by the First Supplemental Senior Note Indenture is hereinafter referred to as the "Senior Note Indenture"), providing for the issuance of notes thereunder (the "Senior Notes") from time to time, and pursuant to the Senior Note Indenture the Company has agreed, under certain circumstances, to deliver to the Senior Note Trustee, as security for the Senior Notes outstanding from time to time under the Senior Notes Indenture, a new series of bonds issued under the Mortgage; and WHEREAS, for such purposes the Company desires to issue a new series of bonds and by appropriate corporate action in conformity with the terms of the Mortgage has duly determined to create a separate series of bonds, which shall be designated as "First Mortgage Bonds, Senior Note Series due 2002" (hereinafter sometimes referred to as the "Senior Note Series Bonds"), which said Senior Note Series Bonds are to be substantially in the form set forth in Article II hereof with the insertion of numbers, denominations, dated dates, maturities, redemption prices and interest rates as determined in accordance with the terms of the Mortgage; and WHEREAS, the Senior Note Series Bonds shall be issued and delivered to United States Trust Company of New York, as escrow agent (the "Escrow Agent"), pursuant to an Escrow Agreement, dated as of May 1, 2001, among the Company, The Chase Manhattan Bank, as Administrative Agent, and the Escrow Agent, for subsequent delivery, in the event certain conditions are satisfied, to the Senior Note Trustee, in connection with the execution and delivery of the First Supplemental Senior Note Indenture; and WHEREAS, all acts and things prescribed by law and by the charter and by-laws of the Company necessary to make the Senior Note Series Bonds, when executed by the Company and authenticated by the Trustee, as in the Mortgage provided, valid, binding and legal obligations of the Company, entitled in all respects to the security of the Mortgage, have been performed or will have been performed prior to execution of such Senior Note Series Bonds by the Company and authentication thereof by the Trustee; and WHEREAS, provision is made in Sections 5.11 and 17.01 of the Original Indenture for such further instruments and indentures supplemental to the Original Indenture as may be necessary or proper (a) to carry out more effectually the purposes of the Original Indenture; (b) expressly to subject to the lien of the Original Indenture any property acquired after the date of the 2 Original Indenture and intended to be covered thereby, with the same force and effect as though included in the granting clauses thereof; (c) to set forth the terms and provisions of any series of bonds to be issued and the forms of the bonds and coupons, if any, of such series; (d) to add such further covenants, restrictions or conditions for the protection of the mortgaged and pledged property and the holders of bonds as the Board of Directors of the Company and the Trustee shall consider to be for the protection of the holders of bonds; and (e) to cure any ambiguity of the Original Indenture which shall not adversely affect the interests of the holders of the bonds; and WHEREAS, the Company has acquired additional property; and it is desired to add certain further covenants, restrictions and conditions for the protection of the mortgaged and pledged property and the holders of bonds which the Board of Directors of the Company and the Trustee consider to be for the protection of the holders of bonds; and the Company desires to issue the Senior Note Series Bonds; and the Company and the Trustee deem it advisable to enter into this Supplemental Indenture for the purposes of carrying out the purposes of the Original Indenture, of expressly subjecting additional property to the lien of the Mortgage, of setting forth the terms and provisions of the Senior Note Series Bonds, and the form of the Senior Note Series Bonds, and of setting forth such further covenants, restrictions and conditions; and WHEREAS, it was intended by the execution and delivery of the Original Indenture and the aforesaid Supplemental Indentures to subject to the lien of the Original Indenture, and to grant to the Trustee a security interest in, all of the property, real, personal and mixed, then owned by the Company or thereafter acquired by the Company, as and to the extent set forth therein, subject to the provisions thereof, except such property as was therein expressly excepted and excluded from the lien and operation thereof; and it is the intention of the parties hereto, by the execution and delivery of this Supplemental Indenture, to provide the Trustee with further assurances by also creating in favor of the Trustee a security interest, pursuant to the provisions of the Uniform Commercial Code, in such of the aforesaid property as may by law be subjected to such a security interest, except such thereof as is expressly excepted and excluded as aforesaid or herein; and WHEREAS, the execution and delivery of this Supplemental Indenture have been duly authorized by the Board of Directors of the Company at a meeting duly called and held according to law, and all conditions and requirements necessary to make this Supplemental Indenture a valid, binding and legal instrument in accordance with its terms, for the purposes herein expressed, and the execution and delivery hereof, in the form and terms hereof, have been in all respects duly authorized; NOW, THEREFORE, in order further to secure the payment of the principal and interest of all bonds issued and to be issued under the Original Indenture and any indenture supplemental thereto, including this Supplemental Indenture, according to their tenor, purport and effect and the performance and observance of all the covenants and conditions in said bonds and the Original Indenture and indentures supplemental thereto, including this Supplemental Indenture, contained, and for and in consideration of the premises and of the sum of One 3 Dollar ($1.00), lawful money of the United States of America, to the Company duly paid by the Trustee at or before the unsealing and delivery hereof, and other valuable consideration, the receipt whereof is hereby acknowledged, and intending to be legally bound hereby, the Company has executed and delivered this Supplemental Indenture, and hath granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed, and granted a security interest therein, and by these presents doth grant, bargain, sell, release, convey, assign, transfer, mortgage, pledge, set over and confirm, and grant a security interest therein, subject to the provisions of the Mortgage, unto United States Trust Company of New York, as Trustee, and to its successors in the trust and to its and their assigns forever, all the properties of the Company described or mentioned below, that is to say: All property, real, personal and mixed, tangible and intangible, owned by the Company on the date of the execution hereof or which may be hereafter acquired by it (except such property as is in the Original Indenture or in any indenture supplemental thereto, including this Supplemental Indenture, expressly excepted from the lien and operation of the Original Indenture). The property covered by this Supplemental Indenture shall include particularly, among other property, without prejudice to the generality of the language hereinbefore or hereinafter contained, the following described property: All the electric generating stations, station sites, stations, electric reserve generating stations, substations, substation sites, steam plants, hot water plants, hydro-electric stations, hydro-electric station sites, electric transmission lines, electric distribution systems, steam distribution systems, hot water distribution systems, regulator stations, regulator station sites, office buildings, storeroom buildings, warehouse buildings, boiler houses, plants, plant sites, service plants, coal, other mineral land mining rights and privileges, coal storage yards, pole yards, electric works, power houses, generators, turbines, boilers, engines, furnaces, dynamos, buildings, structures, transformers, meters, towers, poles, tower lines, cables, pole lines, tanks, storage holders, regulators, pipes, pipe-lines, mains, pipe fittings, valves, drips, connections, tunnels, conduits, gates, motors, wires, switch racks, switches, brackets, insulators, and all equipment, improvements, machinery, appliances, devices, appurtenances, supplies and miscellaneous property for generating, producing, transforming, converting, storing and distributing electric energy, steam and hot water, together with all furniture and fixtures located in the aforesaid buildings, and all land on which the same or any part thereof are situated; And all of the real estate, leases, leaseholds (except the last day of the term of each lease and leasehold), and lands owned by the Company, including land located on or adjacent to any river, stream or other water, together with all flowage rights, flooding rights, water rights, riparian rights, dams and dam sites and rights, flumes, canals, races, raceways, head works and diversion works; And all of the municipal and other franchises, licenses, consents, ordinances, permits, privileges, rights, servitudes, easements and rights-of-way and other rights in or relating to real estate or the occupancy of the same, owned by the Company; 4 And all of the other property, real, personal or mixed, owned by the Company, forming a part of any of the foregoing property or used or enjoyed or capable of being used or enjoyed in connection therewith or in anywise appertaining thereto, whether developed or undeveloped, or partially developed, or whether now equipped and operating or not and wherever situated, and all of the Company's right, title and interest in and to the land on which the same or any part thereof are situated or adjacent thereto; And all rights for or relating to the construction, maintenance or operation of any of the foregoing property through, over, under or upon any public streets or highways or other lands, public or private; And (except as in the Original Indenture or in any indenture supplemental thereto, including this Supplemental Indenture, expressly excepted) all the right, title and interest of the Company presently held or hereafter acquired in and to all other property of any of the foregoing kinds or any other kind or nature appertaining to and/or used and/or occupied and/or enjoyed in connection with any property hereinbefore described; And all the items of the kinds hereinabove mentioned including those thereof now owned by the Company and those thereof hereafter acquired by the Company; Without limitation of the generality of the foregoing, all of the parcels of land and interests in land situate as set forth in Schedule A, attached hereto and hereby made a part hereof, and buildings and improvements thereon erected, owned by the Company, and whether used or not used in connection with the Company's operations, all of which real estate was conveyed to the Company or its predecessors in title as set forth by the conveyances set forth in said Schedule A to which conveyances reference is made for a more particular description; Also all other land and the buildings and improvements thereon erected hereafter acquired; TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in anywise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder or remainders and (subject to the provisions of Section 9.01 of the Original Indenture) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. IT IS HEREBY AGREED by the Company that all the property, rights and franchises hereafter acquired by the Company (except any in the Original Indenture or in any indenture supplemental thereto, including this Supplemental Indenture, expressly excepted) shall (subject to the provisions of Section 9.01 of the Original Indenture), to the extent permitted by law, be as fully embraced within this Supplemental Indenture as if such property, rights and franchises were now owned by the Company and/or specifically described herein and conveyed hereby; 5 PROVIDED THAT, in addition to the reservations and exceptions herein elsewhere contained, any property hereinbefore mentioned which has been released by the Trustee from the lien of the Mortgage or disposed of by the Company in accordance with the provisions of the Mortgage prior to the date of the execution and delivery of this Supplemental Indenture, and the following, are not and are not intended to be granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed hereunder or to have a security interest created therein, and are hereby expressly excepted from this Supplemental Indenture and from the lien and operation of the Mortgage, viz.: (1) cash and shares of stock and certificates or evidence of interest therein and obligations (including bonds, notes and other securities) not in the Original Indenture or in any indenture supplemental thereto, including this Supplemental Indenture, specifically pledged or covenanted so to be or deposited or delivered hereunder or under any other supplemental indenture; (2) any goods, wares, merchandise, equipment, materials or supplies held or acquired for the purpose of sale or resale in the usual course of business or for consumption in the operation of any properties of the Company, and automobiles and trucks; and (3) all judgments, contracts, accounts and chooses in action, the proceeds of which the Company is not obligated as in the Original Indenture provided to deposit with the Trustee hereunder; provided, however, that the property and rights expressly excepted from this Supplemental Indenture in the above subdivisions (2) and (3) shall (to the extent permitted by law) cease to be so excepted, in the event that the Trustee or a receiver or trustee shall take possession of the mortgaged and pledged property in the manner provided in Article X of the Original Indenture, by reason of the occurrence of a completed default, as defined in said Article X of the Original Indenture; TO HAVE AND TO HOLD all such properties, real, personal and mixed, granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed, or in which a security interest has been granted, by the Company as aforesaid, or intended so to be, unto the Trustee and its successors in the trust created in the Original Indenture and its and their assigns forever; SUBJECT, HOWEVER, to the reservations, exceptions, conditions, limitations and restrictions contained in the several deeds, servitudes, franchises and contracts or other instruments through which the Company acquired and/or claims title to and/or enjoys the use of the properties mentioned above; and subject also to such servitudes, easements, rights and privileges in, over, on, and/or through said properties as have been granted to other persons prior to the date of the execution and delivery of this Supplemental Indenture; and subject also to encumbrances of the character in the Original Indenture defined as "excepted encumbrances" insofar as the same may attach to any of the property embraced herein; IN TRUST NEVERTHELESS upon the terms, trusts, uses and purposes specifically set forth in the Mortgage; AND IT IS HEREBY FURTHER COVENANTED AND AGREED, and the Company and the Trustee have mutually agreed, in consideration of the premises, as follows: 6 ARTICLE I SENIOR NOTE SERIES BONDS SECTION 1.01. Creation of Senior Note Series Bonds. The Company hereby ------------------------------------ creates a series of bonds to be issued under and secured by the Mortgage, to be designated and to be distinguished from bonds of all other series by the title "First Mortgage Bonds, Senior Note Series due 2002." The aggregate principal amount of the Senior Note Series Bonds which may be initially authenticated and delivered shall be limited to Four Hundred Twenty Million Dollars ($420,000,000), shall mature on February 1, 2002 and shall be issued only as a single registered bond without coupons. The serial numbers of bonds of the Senior Note Series Bonds shall be such as may be approved by any officer of the Company, the execution thereof by any such officer either manually or by facsimile signature to be conclusive evidence of such approval. Senior Note Series Bonds shall bear interest at a rate of 6% per annum, payable upon the maturity or the redemption thereof. Except as provided in Sections 2.03, 2.04, 2.05, 8.03 and 17.04 of the Original Indenture, no Senior Note Series Bonds shall be authenticated and delivered after such initial issue. SECTION 1.02. Dating of Senior Note Series Bonds. Each Senior Note Series ---------------------------------- Bond shall be dated the date of its authentication. SECTION 1.03. Payment of Principal and Interest. The principal of and ----------------------------------- interest on any Senior Note Series Bond shall be payable, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and shall be payable at the office or agency of the Company in the Borough of Manhattan, The City of New York. Interest on the Senior Note Series Bonds shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The obligation of the Company to pay the principal of and accrued interest on the Senior Note Series Bonds at or after maturity or redemption (x) shall be deemed to have been satisfied and discharged in full in the event that all amounts then due in respect of the Senior Notes shall have been paid or (y) shall be deemed to remain unsatisfied in an amount equal to the aggregate amount then due in respect of the Senior Notes and remaining unpaid (not in excess, however, of the amount otherwise then due in respect of principal of and accrued interest on the Senior Note Series Bonds); The Trustee may at anytime and all times conclusively assume that the obligation of the Company to make payments with respect to the principal of and interest on the Senior Note Series Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged unless and until the Trustee shall have received a written notice from the Senior Note Trustee signed by one of its officers stating (i) that timely payment of, or interest on, the Senior Notes has not been so made, (ii) that the Company is in arrears as to the payments required to be made by it to the Senior Note Trustee pursuant to the Senior Note Indenture, and (iii) the amount of the arrearage. 7 SECTION 1.04. Registration of Senior Note Series Bonds. Each Senior Note ---------------------------------------- Series Bond is to be issued to and registered in the name of United States Trust Company of New York, as the Senior Note Trustee, or a successor trustee thereto, under the Senior Note Indenture to secure any and all obligations of the Company under the Senior Notes from time to time outstanding under the Senior Note Indenture. SECTION 1.05. Transferability and Assignability of Senior Note Series ---------------------------------------------------------- Bonds. Except (i) as required to effect an assignment to a successor Trustee - ----- under the Senior Note Indenture, (ii) pursuant to Section 4.03 of the First Supplemental Indenture, or (iii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company, the Senior Note Series Bonds are not transferable. The Senior Note Series Bonds shall be exchangeable for other registered bonds of the same series and for the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage, upon the surrender of such bonds at the office or agency of the Company in the Borough of Manhattan, The City of New York. The Company covenants and agrees that, notwithstanding Section 2.03 of the Original Indenture, it will not charge any sum for or in connection with any exchange or transfer of any Senior Note Series Bond, but may require the payment of a sum sufficient to cover any tax or taxes or other governmental charges incident to any exchange, transfer or registration thereof. SECTION 1.06. Redemption of Senior Note Series Bonds. (a) Senior Note ---------------------------------------- Series Bonds shall not be redeemable except the Senior Note Series Bonds shall be immediately redeemable at a redemption price of 100% of the principal amount thereof, plus interest accrued to the redemption date, in whole, upon a written demand for redemption by the Senior Note Trustee stating that the principal of all Senior Notes then outstanding under the Senior Note Indenture have been declared to be immediately due and payable pursuant to the provisions of the first sentence of Section 7.01(a) thereof. Senior Note Series Bonds are not redeemable by the operation of the improvement fund or the maintenance and replacement provisions of the Mortgage or with the proceeds of released property. SECTION 1.07. Release Date and Surrender. As provided in Section 4.06 of -------------------------- the First Supplemental Indenture, from and after the Release Date, the obligations of the Company with respect to the principal of, and interest on the Senior Note Series Bonds shall be deemed to be satisfied and discharged, the Senior Note Series Bonds shall cease to secure in any manner any Senior Notes theretofore or subsequently issued under the Senior Note Indenture, and, pursuant to Section 4.03 of the First Supplemental Indenture, the Senior Note Trustee shall forthwith deliver the Senior Note Series Bonds to the Company for cancellation. Upon the surrender for cancellation, at any time, of Senior Note Series Bonds by the Senior Note Trustee or the Escrow Agent to the Trustee, the Senior Note Series Bonds so surrendered shall be deemed to be satisfied and discharged and the obligations of the Company thereunder shall be terminated, and such Senior Note Series Bonds shall be cancelled by the Trustee and delivered to the Company. 8 ARTICLE II FORM OF THE SENIOR NOTE SERIES BONDS SECTION 2.01. Form of Senior Note Series Bonds. The form of the Senior --------------------------------- Note Series Bonds and the Trustee's authentication certificate to be endorsed thereon shall be substantially as follows, the maturity date or dates, denominations, redemption prices and interest rates thereof to be appropriately inserted. [FORM OF SENIOR NOTE SERIES BONDS] PENNSYLVANIA ELECTRIC COMPANY FIRST MORTGAGE BOND, SENIOR NOTE SERIES DUE 2002 $ No. PENNSYLVANIA ELECTRIC COMPANY, a corporation of the Commonwealth of Pennsylvania (hereinafter called the "Company"), for value received, hereby promises to pay to United States Trust Company of New York, as trustee under an Indenture, dated as of April 1, 1999 hereinafter referred to, or registered assigns, _______________ Dollars on February 1, 2002, unless this Bond shall have been duly called for previous redemption in whole and payment of the redemption price shall have been duly made or provided for, at the office or agency of the Company in the Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay to the registered holder hereof interest thereon, at said office or agency, in like coin or currency, at maturity and upon redemption, at the rate or rates per annum provided for in Section 1.01 of the Supplemental Indenture amending and supplementing the Mortgage, dated as of May 1, 2001 between the Company and the Trustee (the "Supplemental Indenture"). This bond is one of an issue of bonds of the Company (hereinafter referred to as the "bonds"), not limited in principal amount, issuable in series, which different series may mature at different times, may bear interest at different rates, and may otherwise vary as in the Mortgage hereinafter mentioned provided, and is one of a series known as its First Mortgage Bonds, Senior Note Series due 2002 (herein called the "Senior Note Series Bonds"), all bonds of all series issued and to be issued under and equally and ratably secured (except insofar as any sinking fund or analogous fund, established in accordance with the provisions of the Mortgage hereinafter mentioned, may afford additional security for the bonds of any particular series) by a Mortgage and Deed of Trust (herein, together with any indentures supplemental thereto, called the "Mortgage") dated as of January 1, 1942, executed by the Company to UNITED STATES TRUST COMPANY OF 9 NEW YORK, as successor Trustee to BANKERS TRUST COMPANY (herein called the "Trustee"), to which reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights and limitations of rights of the holders of the bonds and of the Company in respect thereof, the rights, duties and immunities of the Trustee, and the terms and conditions upon which the bonds are, and are to be, issued and secured. The Senior Note Series Bonds are described in the Supplemental Indenture. Interest on this bond shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Under an Indenture dated as of April 1, 1999, as heretofore supplemented by the Supplemental Indenture No. 1, dated as of May 1, 2001 (the "First Supplemental Senior Note Indenture") (hereinafter sometimes referred to as the "Senior Note Indenture"), between the Company and United States Trust Company of New York, as trustee (hereinafter sometimes called the "Senior Note Trustee"), providing for the issuance of notes thereunder (the "Senior Notes") from time to time, the Company has agreed, under certain circumstances to deliver this bond to the Senior Note Trustee to secure equally and ratably any and all obligations of the Company under the Senior Notes from time to time outstanding under the Senior Note Indenture. As provided in Section 4.06 of the First Supplemental Senior Note Indenture, from and after the Release Date (as defined in the Senior Note Indenture), the obligations of the Company with respect to this bond shall be deemed to be satisfied and discharged, this bond shall cease to secure in any manner any senior notes outstanding under the Senior Note Indenture, and, pursuant to Section 4.03 of the First Supplemental Senior Note Indenture, the Senior Note Trustee shall forthwith deliver this bond to the Company for cancellation. The obligation of the Company to pay the principal of and accrued interest on the bonds of this series at or after maturity or redemption (x) shall be deemed to have been satisfied and discharged in full in the event that all amounts then due in respect of the Senior Notes shall have been paid or (y) shall be deemed to remain unsatisfied in an amount equal to the aggregate amount then due in respect of the Senior Notes and remaining unpaid interest (not in excess, however, of the amount otherwise then due in respect of principal of and accrued interest on the bonds of the series). The Trustee may at anytime and all times conclusively assume that the obligation of the Company to make payments with respect to the principal of and interest on the Senior Note Series Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged unless and until the Trustee shall have received a written notice from the Senior Note Trustee signed by one of its officers stating (i) that timely payment of, or premium or interest on, the Senior Notes, has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the Senior Note Trustee pursuant to the Senior Note Indenture, and (iii) the amount of the arrearage. 10 The Mortgage contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than seventy-five per centum (75%) in principal amount of all the bonds at the time outstanding (determined as provided in the Mortgage) evidenced as in the Mortgage provided, or in case the rights under the Mortgage of the holders of bonds of one or more, but less than all, of the series of bonds outstanding shall be affected, then with the consent of the holders of not less than seventy-five per centum (75%) in principal amount of the bonds at the time outstanding of the series affected (determined as provided in the Mortgage) evidenced as in the Mortgage provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Mortgage or modifying in any manner the rights of the holders of the bonds and coupons thereunto appertaining; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any bonds, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof, without the consent of the holder of each bond so affected, or (ii) reduce the aforesaid percentage of bonds, the holders of which are required to consent to any such supplemental indenture without the consent of the holders of all bonds then outstanding. Any such consent by the registered holder of this bond (unless effectively revoked as provided in the Mortgage) shall be conclusive and binding upon such holder and upon all future holders of this bond, irrespective of whether or not any notation of such waiver or consent is made upon this bond. No reference herein to the Mortgage and no provision of this bond or of the Mortgage shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this bond at the time and place and at the rate and in the coin or currency herein prescribed. The Senior Note Series Bonds are issuable only in fully registered form and shall be issued only as one single bond. The Senior Note Series Bonds shall be redeemable as provided in the Supplemental Indenture. The Mortgage provides that if the Company shall deposit with the Trustee in trust for the purpose funds sufficient to pay the principal of all of the bonds of any series, or such of the bonds of any series as have been or are to be called for redemption, and premium, if any, thereon, and all interest payable on such bonds to the date on which they become due and payable, at maturity or upon redemption or otherwise, and complies with the other provisions of the Mortgage in respect thereof, then from the date of such deposit such bonds shall no longer be entitled to any lien or benefit under the Mortgage. The principal hereof may be declared or may become due prior to the express date of the maturity hereof on the conditions, in the manner and at the time set forth in the Mortgage, upon the occurrence of a completed default as in the Mortgage provided. This bond is not transferable except (i) as required to effect an assignment to a successor Trustee under the Senior Note Indenture, (ii) pursuant to Section 4.03 of the First Supplemental Senior Note Indenture, or (iii) in 11 compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company. This bond shall be exchangeable for other registered bonds of the same series and for the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage, upon the surrender of such bonds at the office or agency of the Company in the Borough of Manhattan, the City of New York. However, notwithstanding the provisions of Section 2.05 of the Mortgage, no charge shall be made upon any registration of transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. The Company and the Trustee, any paying agent and any bond registrar may deem and treat the person in whose name this bond is registered as the absolute owner hereof, whether or not this bond shall be overdue, for the purpose of receiving payment and for all other purposes and neither the Company nor the Trustee nor any paying agent nor any bond registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Mortgage, against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director, as such, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors, as such, being waived and released by the holder and owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage. This bond shall not become valid or obligatory for any purpose until UNITED STATES TRUST COMPANY OF NEW YORK, the Trustee under the Mortgage, or its successor thereunder, shall have signed the certificate of authentication endorsed hereon. IN WITNESS WHEREOF, PENNSYLVANIA ELECTRIC COMPANY has caused this bond to be signed in its name by the manual or facsimile signature of its President or one of its Vice Presidents and its corporate seal, or a facsimile thereof, to be affixed hereto and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Dated: PENNSYLVANIA ELECTRIC COMPANY By --------------------------------- (Vice) President Attest: - ----------------------- (Assistant) Secretary 12 [FORM OF TRUSTEE'S CERTIFICATE] TRUSTEE'S AUTHENTICATION CERTIFICATE This bond is one of the bonds of the series herein designated, provided for in the within-mentioned Mortgage. UNITED STATES TRUST COMPANY OF NEW YORK By: ____________________________________ Authorized Officer [END OF FORM OF SENIOR NOTE SERIES BOND] 13 ARTICLE III MISCELLANEOUS SECTION 3.01. Covenants of the Company. The Company covenants and agrees ------------------------ that, so long as any of the Senior Note Series Bonds shall be secured by the lien of the Mortgage, the following provisions of the following aforesaid Supplemental Indentures shall be effective, and the Company will observe and perform each and all of the conditions and of its covenants and agreements therein set forth, as if the Senior Note Series Bonds were specified therein: (a) Section 1 of Article II of the Supplemental Indenture dated as of November 1, 1949, as amended by paragraph (a) of Section 2.01 of Article II of the Supplemental Indenture dated as of August 1, 1959. (b) Section 2 of Article II of the Supplemental Indenture dated as of November 1, 1949. (c) Section 1 of Article III of the Supplemental Indenture dated as of October 1, 1951. (d) Section 2 of Article II of the supplemental Indenture dated as of June 1, 1953. Subsection (D) thereof as heretofore amended is hereby further amended to read as follows: "(D) the provisions of this Section shall be effective only so long as any of the Senior Note Series Bonds shall be outstanding, and may be waived by the holders of not less than 75% in aggregate principal amount of all bonds specifically entitled to the benefit of the covenants set forth in this Section (which need not include 75% in principal amount of the then outstanding Senior Note Series Bonds or any other series of bonds specifically entitled to the benefit of such covenants), outstanding at the time of such acquisition, by a consent given in writing or given at a meeting of the holders of the Senior Notes Bank Bonds and such other bonds, if any, held pursuant to the applicable provisions of Article XVI of the Original Indenture. Moreover, none of the provisions of subsection (B) of this Section shall be applicable to any acquisition of property ordered, approved or permitted by the Securities and Exchange Commission under the provisions of the Public Utility Holding Company Act of 1935 as then in force, or by any successor regulatory body of the United States of America having jurisdiction in the premises." (e) Section 2 of Article II of the Supplemental Indenture dated as of May 1, 1956. 14 SECTION 3.02. Indemnification of Trustee. The Trustee shall be entitled to -------------------------- rely conclusively on each notice delivered to it by the Senior Note Trustee or the Company pursuant to the terms of this Supplemental Indenture for all purposes under the Mortgage. The Trustee shall have no duty or responsibility to the Company or to the holder or holders of the Senior Note Series Bonds from time to time to verify independently the information contained in any such notice or with respect to the determinations or calculations of interest which may from time to time or at any given time be due on the Senior Note Series Bonds. SECTION 3.03. Table of Contents and titles of Articles not Part. The table ------------------------------------------------- of contents and the titles of the Articles of this Supplemental Indenture shall not be deemed to be any part thereof. SECTION 3.04. Original Indenture Confirmed as Amended and Supplemented. As -------------------------------------------------------- amended and supplemented by the aforesaid indentures supplemental thereto and by this Supplemental Indenture, the Original Indenture is in all respects ratified and confirmed and the Original Indenture and the aforesaid indentures supplemental thereto and this Supplemental Indenture shall be read, taken and construed as one and the same instrument. SECTION 3.05. Execution in Counterparts. This Supplemental Indenture shall ------------------------- be simultaneously executed in several counterparts, and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. The debtor and its mailing address are Pennsylvania Electric Company, 2800 Pottsville Pike, Reading, Pennsylvania 19605. The secured party and an address of the secured party from which information concerning the security interest may be obtained are United States Trust Company of New York, Trustee, 114 West 47th Street, New York, New York 10036. 15 IN WITNESS WHEREOF, PENNSYLVANIA ELECTRIC COMPANY, party of the first part, has caused this instrument to be signed in its name and behalf by its President or a Vice President, and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary, and UNITED STATES TRUST COMPANY OF NEW YORK, party of the second part, has caused this instrument to be signed in its name and behalf by a President or a Vice President and its corporate seal to be hereunto affixed and attested by an Assistant Vice President or an Assistant Secretary, all as of the day and year first above written. ATTEST: PENNSYLVANIA ELECTRIC COMPANY By: - ------------------- -------------------------------- M.E. Gramlich T.G. Howson Assistant Secretary Vice President Signed, sealed and delivered by said [CORPORATE SEAL] Pennsylvania Electric Company in the presence of: - ------------------------------------- - ------------------------------------- 16 ATTEST: UNITED STATES TRUST COMPANY OF NEW YORK ________________________________ By:___________________________ Kevin Fox Louis P. Young Assistant Secretary Vice President Signed, sealed and delivered by said [CORPORATE SEAL] United States TrustCompany of New York in the presence of: - ------------------------------------- - ------------------------------------- 17 STATE OF NEW JERSEY : ss.: COUNTY OF MORRIS : On this 26th day of April, 2001, before me, Barbara E. Jost, a Notary Public for the State and County aforesaid, the undersigned officer, personally appeared T.G. Howson, who acknowledged himself to be a Vice President of Pennsylvania Electric Company, a corporation, and that he as such Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as Vice President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ------------------------------------- Barbara E. Jost Notary Public of New Jersey My Commission Expires August 12, 2001 [NOTARIAL SEAL] 18 STATE OF NEW YORK : : ss: COUNTY OF NEW YORK : On this 26th day of April, 2001, before me, Christine C. Collins, a Notary Public for the State and County aforesaid, the undersigned officer, personally appeared Louis P. Young, who acknowledged himself to be a Vice President of United States Trust Company of New York, a corporation, and that he as such Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as Vice President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ----------------------------------- Christine C. Collins Notary Public, State of New York No. 03-4624735 Qualified in Bronx County Certificate filed in New York County Commission Expires March 30, 2002 [NOTARIAL SEAL] 19 CERTIFICATE OF RESIDENCE United States Trust Company of New York, Mortgagee and Trustee within named, hereby certifies that its precise residence is 114 West 47th Street, in the Borough of Manhattan, in the City of New York, in the State of New York. UNITED STATES TRUST COMPANY OF NEW YORK By:___________________________ Vice President 20 SCHEDULE A ---------- I. Greengarden Substation to EGS Line ALL that certain piece or parcel of land situated in the Township of Millcreek, County of Erie and Commonwealth of Pennsylvania, being part of the South Gore Tract and being more particularly bounded and described as follows, to-wit: BEGINNING at the northeasterly corner of the piece, at a point in the southerly line of West Grandview Boulevard (60 foot Right-of-Way), said point being located South 63 degrees, 22 minutes, 57 seconds West, a distance of 150 feet from a concrete monument located at the northwesterly corner of Lot 21 of Wyngate Subdivision No. 1 as recorded in Erie County Court House Map Book 7, page 29, said corner also being the northwesterly corner of lands of Karen J. Ziegler. THENCE South 26 degrees, 50 minutes, 50 seconds East, passing over an iron pipe at a distance of 310 feet, a total distance of 593 feet to a rebar survey point, and the southwesterly corner of said lands of Karen J. Zeigler; THENCE North 62 degrees, 49 minutes, 41 seconds East along the southerly line of said lands of Karen J. Zeigler, a distance of 150 feet to an iron pipe; THENCE South 26 degrees, 50 minutes, 50 seconds East along the westerly line of Wyngate Subdivision Nos. 2, 3 and 4 as recorded in Erie County Court House Map Books 7, 7, 8, pages 50, 112 and 39 respectively, passing over an iron survey point at a distance of 318.64 feet, a total distance of 603.69 feet to a point; THENCE South 64 degrees, 13 minutes, 37 seconds West along the northerly line of lands of David F. Bayer and Kathleen Banko a distance of 184.48 feet to a rebar survey point; THENCE North 26 degrees, 09 minutes, 17 seconds West along the easterly line of Interstate Route 0079 a distance of 1192.55 feet to a rebar survey point in the southerly line of West Grandview Boulevard; THENCE North 63 degrees, 22 minutes, 57 seconds East along the southerly line of West Grandview Boulevard, a distance of 20.03 feet to an iron pipe and the place of beginning. Containing 122, 769 square feet or 2.818 acres of land therein, net measure. The description of the property referenced above was prepared pursuant to a survey by John Bradley Laird, P.L.S. Said property bears Erie County Tax Index No. (33) 97-665-1. A-1 II. The Gore Junction Substation All that certain piece or parcel of land, situate in the South Gore Tract, Millcreek Township, Erie County, Pennsylvania, being Lot "B" on a map entitled "Plot of Survey of the Land of Pastore/GPU Energy Subdivision", by Henry T. Welka Associates, dated January 12, 1999 and recorded April 1, 1999 as Erie County Map Number 1999-69, and being more particularly described as follows, to-wit: BEGINNING at the northwesterly corner of the piece herein described, as a Point marked by a monument found in the easterly line of Lot 79 as shown on a map entitled "Plot of Survey for Pleasant Valley Subdivision No. 4", by Henry T. Welka Associates, dated June 25, 1992, revised September 29, 1993 and recorded October 26, 1993 as Erie County Map Number 1993-255, said point being South 25 Degrees 57 Minutes 52 Seconds East, a distance of 100 feet along the easterly line of Lot 79 from a monument found at its northeasterly corner; thence North 64 Degrees 02 Minutes 08 Seconds East, along the residue of the lands of Pennsylvania Electric Company d/b/a GPU Energy (Erie County Deed Book 854, page 123), and also along the southerly line of Lot "A" as shown on said subdivision of Pastore/GPU Energy, in all 150.00 feet to a point; thence South 25 Degrees 57 Minutes 52 Seconds East, along the residue of the lands of Paul, Anthony and Donald Pastore (Erie County Record Book 320, page 917 and Erie County Record Book 451 page 1567), 95.88 feet to a point; thence South 64 Degrees 26 Minutes 11 Seconds West, along the southerly line of the South Gore Tract, 150.00 feet to a point; thence North 25 Degrees 57 Minutes 52 Seconds West, along the easterly line of said Lot 79, 94.83 feet to the point of beginning. Containing 14,296 square feet (0.328 acre) of land. Being currently known and designated as part of Erie County Tax Index No. (33) 96-414-5. A-2 I. GESG 115 KV Line - South Gore Tract No. I ALL that certain piece or parcel of land situated in the Township of Millcreek, County of Erie and Commonwealth of Pennsylvania, being part of the South Gore Tract and being more particularly bounded and described as follows, to-wit: BEGINNING at the northeasterly corner of the piece, at a point in the southerly line of West Grandview Boulevard (60 foot Right-of-Way), said point being located South 63 degrees, 22 minutes, 57 seconds West, a distance of 150 feet from a concrete monument located at the northwesterly corner of Lot 21 of Wyngate Subdivision No. 1 as recorded in Erie County Court House Map Book 7, page 29, said corner also being the northwesterly corner of lands of Karen J. Ziegler. THENCE South 26 degrees, 50 minutes, 50 seconds East, passing over an iron pipe at a distance of 310 feet, a total distance of 593 feet to a rebar survey point, and the southwesterly corner of said lands of Karen J. Zeigler; THENCE North 62 degrees, 49 minutes, 41 seconds East along the southerly line of said lands of Karen J. Zeigler, a distance of 150 feet to an iron pipe; THENCE South 26 degrees, 50 minutes, 50 seconds East along the westerly line of Wyngate Subdivision Nos. 2, 3 and 4 as recorded in Erie County Court House Map Books 7, 7, 8, pages 50, 112 and 39 respectively, passing over an iron survey point at a distance of 318.64 feet, a total distance of 603.69 feet to a point; THENCE South 64 degrees, 13 minutes, 37 seconds West along the northerly line of lands of David F. Bayer and Kathleen Banko a distance of 184.48 feet to a rebar survey point; THENCE North 26 degrees, 09 minutes, 17 seconds West along the easterly line of Interstate Route 0079 a distance of 1192.55 feet to a rebar survey point in the southerly line of West Grandview Boulevard; THENCE North 63 degrees, 22 minutes, 57 seconds East along the southerly line of West Grandview Boulevard, a distance of 20.03 feet to an iron pipe and the place of beginning. Containing 122, 769 square feet or 2.818 acres of land therein, net measure. The description of the property referenced above was prepared pursuant to a survey by John Bradley Laird, P.L.S. Said property bears Erie County Tax Index No. (33) 97-665-1. A-3 II. GESG 115 KV Line - South Gore Tract No. II All that certain piece or parcel of land, situate in the South Gore Tract, Millcreek Township, Erie County, Pennsylvania, being Lot "B" on a map entitled "Plot of Survey of the Land of Pastore/GPU Energy Subdivision", by Henry T. Welka Associates, dated January 12, 1999 and recorded April 1, 1999 as Erie County Map Number 1999-69, and being more particularly described as follows, to-wit: BEGINNING at the northwesterly corner of the piece herein described, as a Point marked by a monument found in the easterly line of Lot 79 as shown on a map entitled "Plot of Survey for Pleasant Valley Subdivision No. 4", by Henry T. Welka Associates, dated June 25, 1992, revised September 29, 1993 and recorded October 26, 1993 as Erie County Map Number 1993-255, said point being South 25 Degrees 57 Minutes 52 Seconds East, a distance of 100 feet along the easterly line of Lot 79 from a monument found at its northeasterly corner; thence North 64 Degrees 02 Minutes 08 Seconds East, along the residue of the lands of Pennsylvania Electric Company d/b/a GPU Energy (Erie County Deed Book 854, page 123), and also along the southerly line of Lot "A" as shown on said subdivision of Pastore/GPU Energy, in all 150.00 feet to a point; thence South 25 Degrees 57 Minutes 52 Seconds East, along the residue of the lands of Paul, Anthony and Donald Pastore (Erie County Record Book 320, page 917 and Erie County Record Book 451 page 1567), 95.88 feet to a point; thence South 64 Degrees 26 Minutes 11 Seconds West, along the southerly line of the South Gore Tract, 150.00 feet to a point; thence North 25 Degrees 57 Minutes 52 Seconds West, along the easterly line of said Lot 79, 94.83 feet to the point of beginning. Containing 14,296 square feet (0.328 acre) of land. Being currently known and designated as part of Erie County Tax Index No. (33) 96-414-5. A-4 EX-4 63 ex4-7.txt SUPPLEMENTAL INDENTURE - PENELEC ============================================================================== Supplemental Indenture No. 1 ---------------------- PENNSYLVANIA ELECTRIC COMPANY and UNITED STATES TRUST COMPANY OF NEW YORK, Trustee ---------------------- Dated as of May 1, 2001 ---------------------- Supplemental to Indenture, dated as of April 1, 1999 ---------------------- Creating A Series of Notes Designated Senior Notes, Bank Series ---------------------- ============================================================================== SUPPLEMENTAL INDENTURE NO. 1, dated as of May 1, 2001, between PENNSYLVANIA ELECTRIC COMPANY (hereinafter sometimes called (the "Company"), a corporation organized and subsisting under the laws of the Commonwealth of Pennsylvania, and UNITED STATES TRUST COMPANY OF NEW YORK, as trustee (the "Trustee"), under the Indenture, dated as of April 1, 1999 (hereinafter called the "Original Indenture"), this Supplemental Indenture No. 1 being supplemental thereto (the Original Indenture as supplemented hereby, and as it may from time to time be further supplemented, modified, altered or amended by any supplemental indenture entered into in accordance with and pursuant to the provisions thereof, is hereinafter called the "Indenture"). Recitals of the Company WHEREAS the Original Indenture was authorized, executed and delivered by the Company to provide for the issuance from time to time of its Notes (such term and all other capitalized terms used herein without definition having the meanings assigned to them in the Original Indenture), to be issued in one or more series as therein contemplated; WHEREAS, Section 5.06 of the Original Indenture provides that, so long as any Notes are Outstanding, the Company will not issue, assume, guarantee or permit any Debt secured by any Lien on any Operating Property of the Company without effectively securing the Outstanding Notes equally and ratably with such Debt (but only so long as such Debt is so secured); WHEREAS, Section 5.09 of the Original Indenture provides that, after the issuance of the first series of Notes, the Company shall not issue any additional First Mortgage Bonds under the First Mortgage; WHEREAS, Section 12.01(a) of the Original Indenture provides that the Company and the Trustee may, without the consent of the Holders of any Notes at the time Outstanding, enter into an indenture supplemental to the Indenture for the purposes, among others, of adding to the security for the Notes and to make any other change that is not prejudicial to the Holders in any material respect; WHEREAS, the Company proposes to establish a series of Notes designated "Senior Notes, Bank Series" and to be limited in aggregate principal amount (except as contemplated in Section 2.07 of the Original Indenture) to $150,000,000, such series of Notes and such Notes to be hereinafter sometimes called "Bank Senior Notes"; WHEREAS, subject to the terms and provisions hereof, the Company may deliver Senior Note First Mortgage Bonds (as hereinafter defined) to the Trustee to hold in trust for the benefit of the respective Holders from time to time of the Notes or require the Trustee to deliver to the Company, for cancellation, any and all Senior Note First Mortgage Bonds held by the Trustee; and WHEREAS, all acts and proceedings required by law and by the articles of incorporation and by-laws of the Company, including all action requisite on the part of its shareholders, directors and officers, necessary to make the Bank Senior Notes, when executed by the Company, authenticated and delivered by the Trustee and duly issued, the valid, binding and legal obligations of the Company, and to constitute this Supplemental Indenture a valid, binding and legal instrument, in accordance with its and their terms, have been done and taken; and the execution and delivery of this Supplemental Indenture No. 1 have been in all respects duly authorized. NOW THEREFORE, THIS SUPPLEMENTAL INDENTURE NO. 1 WITNESSETH: That in order to declare the terms and conditions upon which the Bank Senior Notes are, and are to be authenticated, issued and delivered, and in consideration of the premises, of the purchase and acceptance of the Notes by the Holders thereof and of the sum of one dollar duly paid to it by the Trustee at the execution of this Supplemental Indenture No. 1, the receipt whereof is hereby acknowledged, the Company, intending to be legally bound hereby, covenants and agrees with the Trustee for the equal and proportionate benefit of the respective Holders from time to time of the Notes, as follows: ARTICLE I ADDITIONAL DEFINITIONS Section 1.01 Applicability of Article. For all purposes of this -------------------------- Supplemental Indenture No. 1, except as otherwise expressly provided or unless the context otherwise requires, the terms defined in this Article shall have the meanings herein specified and include the plural as well as the singular. Section 1.02 Additional Definitions. ---------------------- "Administrative Agent" shall mean The Chase Manhattan Bank, in its capacity as Administrative Agent under the Credit Agreement. "Credit Agreement" shall mean the Amended and Restated Credit Agreement, dated as of May 1, 2001, among the Company, GPU, Inc., Jersey Central Power & Light Company, Metropolitan Edison Company, the lenders parties thereto, and The Chase Manhattan Bank, as Administrative Agent, as amended, supplemented or otherwise modified from time to time. "Interest Payment Date" shall mean each day upon which interest is payable on Advances pursuant to the Credit Agreement. 2 "Release Date" shall mean the date that all Bank Senior Notes (as hereinafter defined) have been retired (whether at, before or after the maturity thereof) through payment, redemption, purchase, defeasance or otherwise; provided that the Company shall have delivered to the Trustee (A) an Officers' Certificate stating the existence of the above facts and that, upon giving effect to the Release Date, no Event of Default or event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default will have occurred and be continuing, (B) the certificate of an Expert required pursuant to Section 4.04 of this Supplemental Indenture No. 1 and (C) the Officers' Certificate and Opinion of Counsel required pursuant to Section 14.05 of the Original Indenture. "Senior Note First Mortgage Bonds" shall mean the First Mortgage Bonds issued by the Company under the First Mortgage pursuant to the Supplemental Indenture dated as of May 1, 2001, to the First Mortgage. "Senior Note First Mortgage Bond Period" shall mean the period commencing on the Collateral Note Delivery Date and ending on the Release Date. The following terms shall have the meanings specified in the Credit Agreement: "Advances", Escrow Agent", "Escrow Agreement" and "Collateral Note Delivery Date" ARTICLE II Bank Senior Notes Section 2.01 Bank Senior Notes. There is hereby established a series of ----------------- Notes having the following terms and characteristics: (a) the title of the Notes of such series shall be "Senior Notes, Bank Series" (such Notes being hereinafter sometimes called the "Bank Senior Notes"); (b) the aggregate principal amount of Bank Senior Notes which may be authenticated and delivered under the Indenture shall be limited to $150,000,000, except as contemplated in Section 2.07 of the Original Indenture; (c) the Bank Senior Notes shall mature on February 1, 2002; (d) the Bank Senior Notes shall bear interest at the rate of ten per centum (10%) per annum; interest on the Bank Senior Notes shall accrue from and including the date of the first authentication and delivery of the Bank Senior Notes, except as otherwise provided in the form of note attached hereto as Exhibit A; interest on the Bank Senior Notes shall be payable on each Interest Payment Date and at Maturity, and the Regular Record Date for the interest payable on each Interest Payment Date shall be the day next preceding such Interest Payment Date; interest payable at Maturity shall be paid to the Person to whom principal shall be paid; and interest on the Bank Senior Notes during any period for which payment is made shall be computed in accordance with the Credit Agreement; 3 (e) the office of the Trustee in New York, New York, shall be the office or agency of the Company in The City of New York where (i) the principal of the Bank Senior Notes and interest payable thereon at Maturity shall be payable upon presentation thereof, (ii) notices, presentations and demands to or upon the Company in respect of the Bank Senior Notes or the Indenture may be served or made and (iii) Bank Senior Notes may be surrendered for registration of transfer or exchange; interest payable on the Bank Senior Notes prior to Maturity shall be paid by the Company directly to the Holders thereof. (f) the Bank Senior Notes shall not be redeemable, in whole or in part, at the option of the Company; (g) upon (i) the occurrence of an Event of Default under the Credit Agreement, and further upon the condition that, in accordance with the terms of the Credit Agreement, the Commitments shall have been or shall have terminated and the Advances of the Company shall have been declared to be or shall have otherwise become due and payable immediately and the Administrative Agent shall have delivered to the Company a notice demanding redemption of the Bank Senior Notes which notice states that it is being delivered pursuant to Section 6.2 of the Credit Agreement, or (ii) the occurrence of an Event of Default relating to the Company or any Significant Subsidiary of the Company under clause (e) or (f) of Section 6.1 of the Credit Agreement, then all Bank Senior Notes shall be redeemed immediately at the principal amount thereof plus accrued interest to the date of redemption; (h) the Bank Senior Notes shall be issued in denominations of $1,000 and any amount in excess thereof; (i) no service charge shall be made for the registration of transfer or exchange of Bank Senior Notes; (j) (i) the Bank Senior Notes are to be issued and upon the Collateral Note Delivery Date, delivered to the Administrative Agent in order to further evidence the obligation of the Company under the Credit Agreement to pay the Advances, to the extent and subject to the limitations set forth in clauses (ii) and (iii) of this subdivision; (ii) the obligation of the Company to pay interest on the Bank Senior Notes on any Interest Payment Date prior to Maturity (a) shall be deemed to have been satisfied and discharged in full in the event that all amounts then due in respect of interest payable on the Advances shall have been paid and (b) shall be deemed to remain unsatisfied in an amount equal to the aggregate amount then due in respect of interest payable on the Advances and remaining unpaid (not in excess, however, of the amount otherwise then due in respect of interest on the Bank Senior Notes); (iii) the obligation of the Company to pay the principal of and accrued interest on the Bank Senior Notes at or after Maturity (x) shall be deemed to have been satisfied and discharged in full in the event that all amounts then due in respect of the Advances shall have been paid and (y) shall be deemed to remain unsatisfied in an amount equal to the aggregate amount then due in respect of the Advances and remaining unpaid (not in excess, however, of the amount otherwise then due in respect of principal of and accrued interest on the Bank Senior Notes); 4 (iv) the Trustee shall be entitled to presume that the obligation of the Company to pay the principal of and interest on the Bank Senior Notes as the same shall become due and payable shall have been fully satisfied and discharged unless and until it shall have received a written notice from the Administrative Agent, signed by an authorized officer thereof, stating that the principal of and/or interest on the Bank Senior Notes has become due and payable and has not been fully paid, and specifying the amount of funds required to make such payment; (v) upon the surrender for cancellation, at any time or from time to time, of Bank Senior Notes by the Administrative Agent as the Escrow Agent, the Bank Senior Notes so surrendered shall be deemed satisfied and discharged and the obligations of the Company thereunder shall be terminated, and such Bank Senior Notes shall be cancelled by the Trustee and delivered to the Company; (k) in the event of an application by the Administrative Agent for a substituted Bank Senior Note pursuant to Section 2.07 of the Original Indenture, the Administrative Agent shall not be required to provide any indemnity or pay any expenses or charges as contemplated in said Section 2.07; and (l) the Bank Senior Notes shall have such other terms as are set forth in the form of note attached hereto as Exhibit A, which form is hereby designated as the form of the Bank Senior Notes. ARTICLE III ARTICLE I DELIVERY OF SENIOR NOTE FIRST MORTGAGE BONDS Section 3.01 Issuance of Senior Note First Mortgage Bonds. The Company ---------------------------------------------- shall, concurrently with the initial authentication and delivery of the Bank Senior Notes, issue the Senior Note First Mortgage Bonds registered in the name of the Senior Note Trustee in an aggregate principal amount $420,000,000.00. The Company shall cause the Senior Note First Mortgage Bonds to be delivered to the Escrow Agent to hold pursuant to the Escrow Agreement. Section 3.02 Delivery of Senior Note First Mortgage Bonds. (a) If the ---------------------------------------------- Collateral Note Delivery Date shall occur, the Administrative Agent shall, in accordance with the Credit Agreement and pursuant to the Escrow Agreement, cause the Escrow Agent to deliver the Senior Note First Mortgage Bonds to the Trustee. (b) The Trustee shall receive the Senior Note First Mortgage Bonds from the Escrow Agent and shall hold the Senior Note First Mortgage Bonds, and any and all sums payable thereon or with respect thereto or realized therefrom, in trust for the equal and ratable benefit of the holders of the Notes, as herein provided. All payments made by or on behalf of the Company to the Trustee on any Senior Note First Mortgage Bonds shall be deemed to be a payment by the Company pursuant to Section 2.12 of the Original Indenture and shall be applied by the Trustee or pay, when due, principal of, premium, if any, and/or interest on the Notes and, to the extent so applied, shall satisfy the Company's obligations on such Notes or shall, to the extent that an Event of Default has occurred and shall be continuing, applied in accordance with the provisions of Article VII of the Original Indenture. 5 (c) Prior to the Collateral Note Delivery Date, the Trustee shall have no right, title or interest in or to the Senior Note First Mortgage Bonds. ARTICLE IV SENIOR NOTE FIRST MORTGAGE BONDS Section 4.01 Senior Note First Mortgage Bonds Held By The Trustee. During ---------------------------------------------------- the Senior Note First Mortgage Bond Period, the Trustee shall, as the holder of Senior Note First Mortgage Bonds, attend such meeting or meetings of bondholders under the First Mortgage or, at its option, deliver its proxy in connection therewith, as relate to matters with respect to which it is entitled to vote or consent. The Trustee shall vote all Senior Note First Mortgage Bonds then held by it, or consent with respect thereto, proportionally with the vote or consent of the holders of all other First Mortgage Bonds which are outstanding under the First Mortgage, the holders of which are eligible to vote or consent; provided, however, that the Trustee shall not so vote in favor of, or so consent to, any amendment or modification of the First Mortgage which, it is were an amendment or modification of this Indenture, would require the consent of the Holders, without the prior consent, obtained in the manner prescribed in Section 12.02 of the Original Indenture, of the Holders of Outstanding Notes which would be required under said Section 12.02 for such an amendment or modification of the Indenture. Section 4.02 No Transfer of Senior Note First Mortgage Bonds; Exceptions. ------------------------------------------------------------ Except (i) as required to effect an assignment to a successor trustee under this Indenture, (ii) pursuant to Section 4.03 hereof, or (iii) in compliance with a final order of a court of competent jurisdiction in connection with any bankruptcy or reorganization proceeding of the Company, the Trustee shall not sell, assign or transfer the Senior Note First Mortgage Bonds and the Company shall issue stop transfer instructions to the Mortgage trustee and any transfer agent under the First Mortgage to effect compliance with this Section 4.02. Section 4.03 Deliver To The Company Of All Senior Note First Mortgage --------------------------------------------- Bonds. On the date when the obligation of the Company to make payment with - ----- respect to the principal of all Senior Note First Mortgage Bonds shall be satisfied or deemed satisfied pursuant to Section 4.06 hereof, the Trustee shall, upon written request of the Company in the form on an Officers' Certificate and receipt of the certificate of the Expert described in Section 4.04 hereof (if such certificate is then required by Section 4.04 hereof), deliver to the Company without charge therefor all of the Senior Note First Mortgage Bonds, together with such appropriate instruments of transfer or release as may be reasonably requested by the Company. All Senior Note First Mortgage Bonds delivered to the Company in accordance with this Section 4.03 shall be delivered by the Company to the Mortgage Trustee for cancellation. 6 Section 4.04 Fair Value Certificate. If Senior Note First Mortgage Bonds ----------------------- are delivered or surrendered to the Company pursuant to Section 4.03 hereof, the Company shall simultaneously therewith deliver to the Trustee a certificate of an Expert (1) stating that it is familiar with the provisions of such Senior Note First Mortgage Bonds and of this Indenture, (2) stating the principal amount of such Senior Note First Mortgage Bonds so delivered, the stated interest rate (or method of calculation of interest) of such Senior Note First Mortgage Bonds (if any) and the Stated Maturity date of such Senior Note First Mortgage Bonds, (3) if applicable, identifying the Notes, the payment of the interest on and principal of which has been discharged hereunder, and (4) stating that such delivery and release will not impair the lien of this Indenture in contravention of the provisions of this Indenture. If, prior to the Release Date, the fair value of the Senior Note First Mortgage Bonds so delivered and released, as described in the certificate to be delivered pursuant to this Section 4.04, both (1) is equal to or exceeds (A) $25,000 and (B) 1% of the principal amount of the Outstanding Notes at the date of release of such Senior Note First Mortgage Bonds and (2) together with the fair value as described in the certificates to be delivered pursuant to this Section 4.04, of all other Senior Note First Mortgage Bonds released from the lien of this Indenture since the commencement of the then current calendar year, is equal to or exceeds 10% of the principal amount of the Notes Outstanding at the date of release of such Senior Note First Mortgage Bonds, then the certificate required by this Section 4.04 shall be delivered by an Expert who shall be independent of the Company. If, in connection with a release of outstanding Senior Note First Mortgage Bonds, the Company provides to the Trustee an Opinion of Counsel stating that the certificate described by this Section 4.04 is not required by law, such certificate shall not be required to be delivered thereunder in connection with such delivery or release. Section 4.05 Further Assurances. During the Senior Note First Mortgage ------------------- Bond Period, the Company, at its own expense, shall do such further lawful acts and things, and execute and deliver such additional conveyances, assignments, assurances, agreements, financing statements and instruments, as may be necessary in order to better assign, assure and confirm to the Trustee its interest in the Senior Note First Mortgage Bonds and for maintaining, protecting and preserving such interest. Section 4.06 Senior Note First Mortgage Bonds As Security For Notes. Until ------------------------------------------------------ the Release Date and subject to Article V hereof, Senior Note First Mortgage Bonds delivered to the Trustee, for the benefit of the Holders of the Notes, shall constitute part of the trust estate and security for any and all obligations of the Company under the Notes, including, but not limited to (1) the full and prompt payment of the principal of and premium, if any, on such Notes when and as the same shall become due and payable in accordance with the terms and provisions of this Indenture or the Notes, either at the Stated Maturity thereof, upon acceleration of the Maturity thereof or upon redemption, and (2) the full and prompt payment of any interest on such Notes when and as the same shall become due and payable in accordance with the terms and provisions of this Indenture or the Notes. 7 Notwithstanding anything in this Indenture to the contrary, from and after the Release Date, the obligation of the Company to make payment with respect to the principal of, and interest on the Senior Note First Mortgage Bonds shall be deemed satisfied and discharged as provided in the supplemental indenture to the First Mortgage creating such Senior Note First Mortgage Bonds, and the Senior Note First Mortgage Bonds shall cease to secure in any manner Notes theretofore or subsequently issued. The Company shall notify the Trustee promptly of the occurrence of the Release Date. Notice of the occurrence of the Release Date shall be given by the Trustee to the Holders of the Notes in the manner provided in Section 14.10 of the Original Indenture not later than 30 days after the Release Date. ARTICLE V AMENDED PROVISIONS Section 5.01 Amended Provisions. (a) Section 4.01(a) of the Original ------------------- Indenture is hereby amended to add the following at the end thereof: During the Senior Note First Mortgage Bond Period, if the Notes are deemed paid and discharged pursuant to this Section 4.01(a), the obligation of the Company to make payment with respect to the principal of, and interest on the Senior Note First Mortgage Bonds shall be satisfied and discharged and the Senior Note First Mortgage Bonds shall cease to secure the Notes in any manner. (a) Clause (v) of Section 5.06 of the Original Indenture is hereby amended to add the words "or when such Debt consists of Senior Note First Mortgage Bonds" after the word "above". (b) Section 5.09 of the Original Indenture is hereby amended to add the words "other than the Senior Note First Mortgage Bonds" at the end thereof. (c) Section 7.01(a) of the Original Indenture is hereby amended by (i) deleting the word "or" at the end of clause (4) of the first paragraph; (ii) inserting the word "or" at the end of clause (5) of the first paragraph and (iii) deleting the provisions thereof following clause (5) of the first paragraph and substituting therefore the following: (6) during the Senior Note First Mortgage Bond Period, a completed default (as defined in the First Mortgage) has occurred and is continuing; provided, however, that anything in this Indenture to the contrary notwithstanding, the waiver or cure of such default under the First Mortgage and the rescission and annulment of the consequences thereof under the First Mortgage shall constitute a waiver of the corresponding Event of Default hereunder and a rescission and annulment of the consequences thereof hereunder; 8 then, unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the Holders of a majority in aggregate principal amount of the Notes then Outstanding, by notice in writing to the Company (and to the Trustee if given by such Holders), may declare the principal of and interest on all the Notes to be due and payable immediately and upon any such declaration the same shall become immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding and, during the Senior Note First Mortgage Bond Period, upon the Notes being declared to be due and payable, the Trustee shall immediately file with the Mortgage Trustee a written demand for redemption of all Senior Note First Mortgage Bonds to the extent provided in the applicable provisions of the First Mortgage. The foregoing paragraph, however, is subject to the condition that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, and during the Senior Note First Mortgage Bond Period, prior to the acceleration of all of the first mortgage bonds issued and outstanding under the First Mortgage, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all of the Notes and the principal of and any premium on any and all Notes which shall have become due otherwise than by acceleration (with interest on overdue installments of interest, to the extent that payment of such interest is enforceable under applicable law, and on such principal and any applicable premium at the rate borne by the Notes to the date of such payment or deposit) and all sums paid or advanced by the Trustee hereunder, the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 8.06 hereof, and any and all defaults under this Indenture, other than the non-payment of principal of and accrued interest on Notes which shall have become due solely by acceleration of Maturity, shall have been cured or waived (including any defaults under the First Mortgage, as evidenced by notice thereof from the Mortgage Trustee to the Trustee) -- then and in every such case such payment or deposit shall cause an automatic waiver of the Event of Default and its consequences (including, if given, the written demand for redemption of all Senior Note First Mortgage Bonds) and shall cause an automatic rescission and annulment of the acceleration of the Notes; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default, or shall impair any right consequent thereon. (d) Article VII of the Original Indenture as hereby amended by adding a new Section 7.12 thereto as follows: Section 7.12 Defaults Under The First Mortgage. In addition to every --------------------------------- other right and remedy provided herein, during the Senior Note First Mortgage Bond Period, the Trustee may exercise any right or remedy available to the Trustee in its capacity as owner and holder of Senior Note First Mortgage Bonds which arises as a result of a completed default under the First Mortgage whether or not an Event of Default under this Indenture shall then have occurred and be continuing. 9 ARTICLE VI MISCELLANEOUS PROVISIONS Section 6.01 Miscellaneous Provisions. This Supplemental Indenture ------------------------- No. 1 is a supplement to the Original Indenture. As heretofore supplemented and further supplemented by this Supplemental Indenture No. 1, the Original Indenture is in all respects ratified approved and confirmed, and the Original Indenture as heretofore supplemented and this Supplemental Indenture No. 1 shall together constitute one and the same instrument. 10 IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed the instrument on behalf of the respective portion hereto as of the date first above written. PENNSYLVANIA ELECTRIC COMPANY By: --------------------------------------- Name: T. G. Howson Title: Vice President UNITED STATES TRUST COMPANY OF NEW YORK By: --------------------------------------- Name: Title: 11 Exhibit A [Form of Note] This note is non-transferable, except to a successor Administrative Agent under the Credit Agreement referred to herein. No._______________ $___________ PENNSYLVANIA ELECTRIC COMPANY SENIOR NOTE, BANK SERIES DUE FEBRUARY 1, 2002 PENNSYLVANIA ELECTRIC COMPANY, a corporation of the Commonwealth of Pennsylvania (hereinafter sometimes called the Company), for valued received, promises to pay to as Administrative Agent under the Credit Agreement hereinafter referred to (for the benefit of the Lenders referred to in such Credit Agreement) or registered assigns, the principal sum of DOLLARS on February 1, 2002, in coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts, at the office or agency of the Company in The City of New York, upon presentation hereof, and on each Interest Payment Date (as defined in Supplemental Indenture No. 1 hereinafter referred to), and at Maturity (as defined in Supplemental Indenture No. 1 hereinafter referred to), to pay interest thereon in like coin or currency at the rate specified below, from the date hereof on each Interest Payment Date until the Company's obligation with respect to such principal sum shall be discharged. A-1 The notes of this series shall bear interest at the rate of ten per centum (10%) per annum. Interest on the notes of this series during the period of which payment is made shall be computed in accordance with the Credit Agreement. This note is one of an issue of notes of the Company, issued and to be issued in one or more series under and equally and ratably secured (except as any sinking, amortization, improvement, renewal or other fund, established in accordance with the provisions of the indenture hereinafter mentioned, may afford additional security for the notes of any particular series) by the Indenture, dated as of April 1, 1999 (the "Original Indenture"), between the Company and United States Trust Company of New York, trustee (the "Trustee"), as supplemented by Supplemental Indenture No. 1, dated as of May 1, 2001 (the Original Indenture, as so supplemented, and such Supplemental Indenture being hereafter called the "Indenture" and "Supplemental Indenture No. 1", respectively), to which Indenture reference is hereby made for a description of the rights and limitations of rights of the Company, the Trustee and the holders of said notes with respect to any security provided by the Indenture, the powers, duties and immunities of the Trustee, the terms and conditions upon which such notes are and are to be secured, and the circumstances under which additional notes may be issued. The acceptance of this note shall be deemed to constitute the consent and agreement by the holder hereof to all of the terms and provisions of the Indenture. This note is one of a series of notes designated as the Senior Notes, Bank Series, of the Company. The Company has issued and delivered the notes of this series to The Chase Manhattan Bank, as Administrative Agent (the "Administrative Agent") and for the benefit of the Lenders under the Amended and Restated Credit Agreement, dated as of May 1, 2001, among the Company, GPU, Inc., Jersey Central Power & Light Company, Metropolitan Edison Company, the lenders parties thereto, and the Administrative Agent, as amended, supplemented or otherwise modified from time to time (the "Credit Agreement") in order to provide further evidence of the obligation of the Company thereunder to pay the Advances (as defined in Supplement Indenture No. 1) and interest thereon as specified in the Credit Agreement. Upon the occurrence of an Event of Default under the Credit Agreement, and further upon such additional conditions as are set forth in Section 2.01(g) of Supplemental Indenture No. 1 then all notes of this series shall be redeemed immediately at the principal amount thereof plus accrued interest to the date of redemption. The obligation of the Company to pay interest on the notes of this Series on any Interest Payment Date prior to Maturity (a) shall be deemed to have been satisfied and discharged in full in the event that all amounts then due in respect of interest payable on the Advances shall have been paid and (b) shall be deemed to remain unsatisfied in an amount equal to the aggregate amount then due in respect of interest payable on the Advances and remaining unpaid (not in excess, however, of the amount otherwise then due in respect of interest on the notes of this Series). A-2 The obligation of the Company to pay the principal of and accrued interest on the notes of this series at or after Maturity (x) shall be deemed to have been satisfied and discharged in full in the event that all amounts then due in respect of the Advances shall have been paid or (y) shall be deemed to remain unsatisfied in an amount equal to the aggregate amount then due in respect of the Advances and remaining unpaid interest (not in excess, however, of the amount otherwise then due in respect of principal of and accrued interest on the notes of the series). The principal of this note and the interest accrued hereon may become or be declared due and payable before the stated maturity hereof, on the conditions, in the manner and at the times set forth in the Indenture, upon the happening of a default as therein provided. This note is non-transferable except as required to effect transfer to any successor administrative agent under the Credit Agreement, any such transfer to be made at the office or agency of the Company in The City of New York, upon surrender and cancellation of this note, and upon any such transfer a new note of this series, for the same aggregate principal amount and having the same stated maturity date, will be issued to the transferee in exchange herefor. Prior to due presentment for registration of transfer, the Company and the Trustee may deem and treat the person in whose name this note is registered as the absolute owner hereof for the purpose of receiving payment and for all other purposes. This note, alone or with other notes of this series, may in like manner be exchanged at such office or agency for one or more notes of this series of the same aggregate principal amount and having the same stated maturity date and interest rate, all as provided in the Indenture. No recourse shall be had for the payment of the principal of or interest on this note, or for any claim based hereon or otherwise in respect hereof or of the Indenture, against any incorporator, shareholder, director or officer, as such, past, present or future, of the Company or of any predecessor or successor corporation, either directly or through the Company or any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or by any legal or equitable proceeding or otherwise howsoever (including, without limiting the generality of the foregoing, any proceeding to enforce any claimed liability of shareholders of the Company, based upon any theory of disregarding the corporate entity of the Company or upon any theory that the Company was acting as the agent or instrumentality of the shareholders); all such liability being, by the acceptance hereof and as a part of the consideration for the issuance hereof, expressly waived and released by every holder hereof, and being likewise waived and released by the terms of the Indenture under which this note is issued, as more fully provided in said Indenture. The Company, at its option, and subject to the terms and conditions provided in the Indenture, will be discharged from any and all obligations in respect of the notes (except for certain obligations including obligations to register the transfer or exchange of the notes, replace stolen, lost or mutilated notes, maintain paying agencies and hold monies for payment in trust, all as set forth in the Indenture) if the Company deposits with the Trustee cash, U.S. Government Obligations which through the payment of interest thereon and principal thereof in accordance with their terms will provide cash, or a combination of cash and U.S. Government Obligations, in any event in an amount sufficient, without reinvestment, to pay all the principal of and any premium and interest on the notes on the dates such payments are due in accordance with the terms of the notes. A-3 If an Event of Default shall occur and be continuing, the principal of the notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modifications of the rights and obligations of the Company and the rights of the note holders under the Indenture at any time by the Company and the Trustee with the consent of the holders of not less than a majority in principal amount of the outstanding notes. Any such consent or waiver by the holder of this note shall be conclusive and binding upon such holder and upon all future holders of this note and of any note issued upon the registration of transfer hereof or in exchange therefor or in lieu thereof whether or not notation of such consent or waiver is made upon the note. As set forth in and subject to the provisions of the Indenture, no holder of any notes will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder unless such holder shall have previously given to the Trustee written notice of a continuing Event of Default with respect to such notes, the holders of not less than a majority in principal amount of the outstanding notes affected by such Event of Default shall have made written request and offered reasonable indemnity to the Trustee to institute such proceeding as Trustee and the Trustee shall have failed to institute such proceeding within 60 days; provided, however, that such limitations do not apply to a suit instituted by the holder hereof for the enforcement of payment of the principal of and premium or interest on this note on or after the respective due dates expressed here. No reference herein to the Indenture and to provisions of this note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this note at the times, places and rates and the coins or currency prescribed in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, this note may be transferred only as permitted by the legend hereto. All terms used in this note which are defined in the Indenture shall have the meaning assigned to them. This note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by United States Trust Company of New York, or its successor, as Trustee under the Indenture. A-4 IN WITNESS WHEREOF, the Company has caused this note to be signed in its name by the manual or facsimile signature of its President or one of its Vice Presidents, and its corporate seal, or a facsimile thereof, to be impressed or imprinted hereon and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Dated PENNSYLVANIA ELECTRIC COMPANY By: --------------------------------------- Attest: - --------------------------- A-5 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the notes, of the series designated therein, described in the within-mentioned Indenture. UNITED STATES TRUST COMPANY OF NEW YORK By: --------------------------------- A-6 EX-12 64 ex12-8pe.txt FIXED CHARGE RATIO - PENELEC
EXHIBIT 12.8 Page 1 PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ------------------------------------------------ Jan 1- Nov. 7- Nov. 6, Dec. 31, 1997 1998 1999 2000 2001 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $ 95,023 $ 58,590 $152,491 $ 39,250 $23,718 | $10,795 Interest and other charges, before reduction | for amounts capitalized.......................... 66,651 65,114 45,149 48,544 40,998 | 7,052 Provision for income taxes......................... 71,299 42,537 54,383 29,754 19,402 | 8,231 Interest element of rentals charged to | income (a)....................................... 4,236 4,970 4,306 3,020 891 | 311 -------- -------- -------- -------- ------- | ------- Earnings as defined............................ $237,209 $171,211 $256,329 $120,568 $85,009 | $26,389 ======== ======== ======== ======== ======= | ======= | FIXED CHARGES AS DEFINED IN REGULATION S-K: | Interest on long-term debt......................... $ 49,125 $ 47,729 $ 31,837 $ 29,964 $28,751 | $ 3,972 Other interest expense............................. 8,338 8,197 4,359 11,546 6,008 | 1,979 Subsidiary's preferred stock dividend | requirements..................................... 9,188 9,188 8,953 7,034 6,239 | 1,101 Interest element of rentals charged to | income (a)....................................... 4,236 4,970 4,306 3,020 891 | 311 -------- -------- -------- -------- ------- | ------- Fixed charges as defined......................... $ 70,887 $ 70,084 $ 49,455 $ 51,564 $41,889 | $ 7,363 ======== ======== ======== ======== ======= | ======= | CONSOLIDATED RATIO OF EARNINGS TO FIXED | CHARGES............................................ 3.35 2.44 5.18 2.34 2.03 | 3.58 ==== ==== ==== ==== ==== | ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined.
EXHIBIT 12.8 Page 2 PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) Year Ended December 31, ------------------------------------------------ Jan 1- Nov. 7- Nov. 6, Dec. 31, 1997 1998 1999 2000 2001 2001 ---- ---- ---- ---- ---- ---- (Dollars in Thousands) | EARNINGS AS DEFINED IN REGULATION S-K: | Income before extraordinary items.................. $ 95,023 $ 58,590 $152,491 $ 39,250 $23,718 | $10,795 Interest and other charges, before | reduction for amounts capitalized................ 66,651 65,114 45,149 48,544 40,998 | 7,052 Provision for income taxes......................... 71,299 42,537 54,383 29,754 19,402 | 8,231 Interest element of rentals charged to | income (a)....................................... 4,236 4,970 4,306 3,020 891 | 311 -------- -------- -------- -------- ------- | ------- Earnings as defined.............................. $237,209 $171,211 $256,329 $120,568 $85,009 | $26,389 ======== ======== ======== ======== ======= | ======= | FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS | PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS): | Interest on long-term debt......................... $ 49,125 $ 47,729 $ 31,837 $ 29,964 $28,751 | $ 3,972 Other interest expense............................. 8,338 8,197 4,359 11,546 6,008 | 1,979 Preferred stock dividend requirements.............. 9,853 9,883 9,107 7,034 6,239 | 1,101 Adjustments to preferred stock dividends to | state on a pre-income tax basis.................. 499 505 55 -- -- | -- Interest element of rentals charged to | income (a)....................................... 4,236 4,970 4,306 3,020 891 | 311 -------- -------- -------- -------- ------- | ------- Fixed charges as defined plus preferred stock | dividend requirements (pre-income tax basis)... $ 72,051 $ 71,284 $ 49,664 $ 51,564 $41,889 | $ 7,363 ======== ======== ======== ======== ======= | ======= CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES | PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS | (PRE-INCOME TAX BASIS) .......................... 3.29 2.40 5.16 2.34 2.03 | 3.58 ==== ==== ==== ==== ==== | ==== - ------------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined.
EX-13 65 ex13-7_pe.txt ANNUAL REPORT - PENELEC EXHIBIT 13.7 PENNSYLVANIA ELECTRIC COMPANY 2001 ANNUAL REPORT TO STOCKHOLDERS Pennsylvania Electric Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. It engages in the distribution and sale of electric energy in an area of approximately 17,600 square miles in western Pennsylvania. It also engages in the sale, purchase and interchange of electric energy with other electric companies. The area it serves has a population of approximately 1.6 million. The Company, as lessee of the property of the Waverly Electric Light & Power Company, also serves a population of about 13,400 in Waverly, New York and vicinity. In August 2000, FirstEnergy entered into an agreement to merge with GPU, Inc., under which FirstEnergy would acquire all of the outstanding shares of GPU, Inc.'s common stock for approximately $4.5 billion in cash and FirstEnergy common stock. The merger became effective on November 7, 2001 and is being accounted for by the purchase method. Prior to that time, Pennsylvania Electric Company was a wholly owned subsidiary of GPU, Inc. Contents Page - -------- ---- Selected Financial Data........................................... 1 Management's Discussion and Analysis.............................. 2-8 Consolidated Statements of Income................................. 9 Consolidated Balance Sheets....................................... 10 Consolidated Statements of Capitalization......................... 11 Consolidated Statements of Common Stockholder's Equity............ 12 Consolidated Statements of Preferred Stock........................ 12 Consolidated Statements of Cash Flows............................. 13 Consolidated Statements of Taxes.................................. 14 Notes to Consolidated Financial Statements........................ 15-22 Reports of Independent Public Accountants......................... 23-24 PENNSYLVANIA ELECTRIC COMPANY SELECTED FINANCIAL DATA
Years Ended December 31, Nov. 7 - Jan. 1 - -------------------------------------------------- Dec. 31, 2001 Nov. 6, 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Operating Revenues............................. $ 140,062 | $ 834,548 $ 901,881 $ 921,965 $ 1,032,226 $ 1,052,936 =========== | =========== =========== ========== =========== =========== | Operating Income............................... $ 14,341 | $ 70,049 $ 80,336 $ 140,925 $ 125,623 $ 157,950 =========== | =========== =========== ========== =========== =========== | Income Before Extraordinary Item............... $ 10,795 | $ 23,718 $ 39,250 $ 152,491 $ 58,590 $ 95,023 =========== | =========== =========== ========== =========== =========== | Net Income..................................... $ 10,795 | $ 23,718 $ 39,250 $ 152,491 $ 39,640 $ 95,023 =========== | =========== =========== ========== =========== =========== | Earnings on Common Stock....................... $ 10,795 | $ 23,718 $ 39,250 $ 151,611 $ 38,945 $ 94,358 =========== | =========== =========== ========== =========== =========== | Total Assets................................... $ 3,300,269 | $ 2,331,484 $2,463,052 $ 3,565,747 $ 2,499,703 =========== | =========== ========== =========== =========== | | Capitalization: | Common Stockholder's Equity.................... $ 1,306,576 | $ 469,837 $ 461,182 $ 767,304 $ 791,338 Cumulative Preferred Stock..................... -- | -- -- 16,681 16,681 Company-Obligated Mandatorily Redeemable | Preferred Securities........................ -- | -- -- 105,000 105,000 Company-Obligated Trust Preferred Securities... 92,000 | 100,000 100,000 -- -- Long-Term Debt................................. 472,400 | 519,481 426,795 629,027 679,716 ----------- | ----------- ---------- ----------- ----------- Total Capitalization........................... $ 1,870,976 | $ 1,089,318 $ 987,977 $ 1,518,012 $ 1,592,735 =========== | =-========= ========== =========== =========== | | Capitalization Ratios: | Common Stockholder's Equity.................... 69.8%| 43.1% 46.7% 50.5% 49.7% Cumulative Preferred Stock..................... -- | -- -- 1.1 1.0 Company-Obligated Mandatorily Redeemable | Preferred Securities........................ -- | -- -- 6.9 6.6 Company-Obligated Trust Preferred Securities... 4.9 | 9.2 10.1 -- -- Long-Term Debt................................. 25.3 | 47.7 43.2 41.5 42.7 ------ | ----- ----- ----- ------ Total Capitalization........................... 100.0%| 100.0% 100.0% 100.0% 100.0% ===== | ===== ===== ===== ===== | | Transmission and Distribution | Kilowatt-Hour deliveries (Millions): | Residential.................................... 721 | 3,264 3,949 3,864 3,756 3,801 Commercial..................................... 758 | 3,733 4,509 4,319 4,198 4,098 Industrial..................................... 685 | 3,658 4,698 4,865 4,996 4,835 Other.......................................... 7 | 34 40 43 42 45 ----- | ------- -------- ------ ------ ------ Total Retail................................... 2,171 | 10,689 13,196 13,091 12,992 12,779 Total Wholesale................................ 107 | 1,351 2,885 4,219 4,309 3,461 ----- | ------- -------- ------- ------ ------ Total.......................................... 2,278 | 12,040 16,081 17,310 17,301 16,240 ===== | ====== ======== ====== ====== ====== | | Transmission and Distribution Deliveries | Customers Served:: | Residential.................................... 502,901 | 502,052 500,930 499,484 498,229 Commercial..................................... 76,005 | 74,282 73,979 73,014 72,271 Industrial..................................... 2,652 | 2,703 2,844 2,910 2,949 Other.......................................... 1,099 | 1,110 1,110 1,111 1,117 ------- | -------- ------- ------- ------- Total.......................................... 582,657 | 580,147 578,863 576,519 574,566 ======= | ======== ======= ======= =======
1 PENNSYLVANIA ELECTRIC COMPANY Management's Discussion and Analysis of Results of Operations and Financial Condition This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), the availability and cost of capital, ability to accomplish or realize anticipated benefits from strategic initiatives and other similar factors. Results of Operations - --------------------- Earnings on common stock decreased 12.1% to $34.5 million in 2001 from $39.2 million in 2000. In 2001, earnings were negatively impacted by higher other operating costs, as well as lower other income. Offsetting this were higher revenues and lower net interest charges. In 2000, earnings on common stock decreased 74.1% to $39.2 million from $151.6 million in 1999. The decrease was primarily due to greater purchased power costs, the absence of a net gain related to wholesale operations from the sale of substantially all of our generating facilities in 1999, and, to a lesser extent, higher net interest charges. Lower other operating costs and depreciation expense positively affected earnings on common stock in 2000. Operating revenues increased by $72.7 million in 2001 following a $20.1 million decrease in 2000. The sources of the changes in operating revenues during 2001 and 2000, as compared to the prior year, are summarized in the following table. Sources of Revenue Changes 2001 2000 -------------------------------------------------------------------- Increase (Decrease) (In millions) Change in kilowatt-hour sales due to level of retail customers shopping for generation service.................. $134.5 $ 9.5 Change in other retail kilowatt-hour sales......... (12.2) 10.1 Decrease in wholesale sales........................ (50.6) (32.4) All other changes.................................. 1.0 (7.3) -------------------------------------------------------------------- Net Increase (Decrease) in Operating Revenues...... $ 72.7 $(20.1) ==================================================================== Electric Sales In 2001, a major source of the increase in operating revenues was the increase in retail generation kilowatt-hour sales due to a large number of customers returning to us in 2001 as full service customers, after receiving their power from alternate suppliers in 2000. In 2001, 85.3% of total retail sales were to full service customers as compared to 62.7% in 2000. Residential sales remained relatively flat, while commercial sales were slightly lower in 2001 compared to 2000, primarily due to lower usage. Industrial sales also decreased in 2001 compared to 2000 due almost evenly to a decrease in the number of customers and lower usage by existing customers. Sales to wholesale customers decreased in 2001 compared to 2000 due to a reduction in our available capacity. The primary source of the decrease in operating revenues in 2000, compared to the prior year, was lower sales to the wholesale market, as a result of us having additional power available in 1999 due to the delay of the divestiture of our generating assets. Operating revenues also increased due to higher residential and commercial sales, partially offset by lower industrial sales. Changes in kilowatt-hour sales by customer class in 2001 and 2000 are summarized in the following table: 2 Changes in Kilowatt-hour Sales 2001 2000 -------------------------------------------------- Increase (Decrease) Residential.................. 0.9% 2.2% Commercial................... (0.4)% 4.4% Industrial................... (7.6)% (3.4)% -------------------------------------------------- Total Retail................. (2.5)% 0.8% Wholesale.................... (49.5)% (31.6)% -------------------------------------------------- Total Sales.................. (11.0)% (7.1)% -------------------------------------------------- Operating Expenses and Taxes Total operating expenses and taxes increased $68.7 million in 2001 and $40.5 million in 2000, compared to the preceding year. Higher purchased power costs accounted for the majority of the increased costs in 2001. Purchased power costs also increased significantly in 2000 but were partially offset by lower nuclear costs, other operating costs and depreciation expenses. Purchased power costs increased $54.5 million in 2001, compared to 2000. The higher costs resulted from increased quantities of power purchased through the PJM Power Pool due to a large number of customers returning to us in 2001 after receiving their power from alternate suppliers in 2000, as well as higher average prices of power purchased under two-party agreements. Also included in 2001 purchased power costs was a $16 million charge related to the termination of a wholesale energy contract with Allegheny Electric Cooperative. Offsetting these increases was the effect of the Pennsylvania Public Utility Commission's (PPUC) June 2001 order that allowed us to defer, for future rate recovery from customers, energy costs in excess of our fixed generation tariff rates, retroactive to January 1, 2001, in connection with our provider of last resort (PLR) obligation. In 2000, fuel and purchased power costs increased $183.2 million over 1999. The majority of the increase was due to the need to purchase substantially all of our energy requirements following the sales of generating assets in 1999, and the absence of deferred accounting treatment for these costs. An offsetting decrease in fuel costs also resulted from the sales of generating assets. The sale of Unit 1 of the Three Mile Island Nuclear Plant, completed in December 1999, eliminated essentially all of our nuclear operating costs in 2000. Other operating costs increased $9.9 million in 2001, compared to 2000, primarily due the absence in 2001 of a pension curtailment gain associated with employees who were terminated at the time of the sale of our generating assets. This gain was realized in 2000 as a result of the PPUC's Phase II Order. Other operating costs also increased due to costs related to Voluntary Enhanced Retirement Programs offered to certain bargaining unit employees. In 2000, other operating costs decreased $68.7 million compared to the previous year. The primary reason for the decline was a reduction in expenses associated with the operation of generating stations due to the sale of all our remaining generating assets in 1999. Other operating costs were also reduced as a result of the net impact of the PPUC's Phase II Order issued in December 2000, which allowed us to realize the pension curtailment gain discussed above, offset by a write-off for the disallowance of a portion of our stranded costs. The sale of generating assets in 1999 was also the cause for a decrease in depreciation expense of $21.9 million in 2000 from the previous year. Other Income Other income decreased $10.3 million in 2001 from the previous year. The decrease was attributed to charges for a sustainable energy fund and renewable energy projects in accordance with the Stipulation of Settlement related to the merger of FirstEnergy and GPU, Inc. Also contributing to the decrease was lower interest income. In 2000, other income decreased $48.9 million from the previous year. The decrease was due to the absence in 2000 of net gains related to wholesale operations as a result of the sale of substantially all our generating stations and lower interest income. Partially offsetting these reductions was the reversal of an estimated 1999 tax penalty. Net Interest Charges Net interest charges decreased by $1.5 million in 2001 after increasing $3.7 million in 2000 compared to the prior year. In 2001, the decrease was due to the absence of prior year expense associated with a federal income tax deficiency, higher deferred interest income, and lower short-term borrowing levels. These decreases were partially offset by additional interest expense on $93 million of senior notes issued during 2000. The issuance of the $93 million of senior notes during 2000 was also responsible for the increase in interest expense in 2000 compared to 1999. 3 Capital Resources and Liquidity - ------------------------------- We had approximately $39 million of cash and temporary investments and $77.6 million of short-term indebtedness on December 31, 2001. We may borrow from our affiliates on a short-term basis. We will not issue first mortgage bonds (FMB) other than as collateral for senior notes, since our senior note indentures prohibit (subject to certain exceptions) us from issuing any debt which is senior to the senior notes. As of December 31, 2001, we had the capability to issue $450 million of additional senior notes based upon FMB collateral. We have no restrictions on the issuance of preferred stock. At the end of 2001, our common equity as a percentage of capitalization, including debt relating to assets held for sale, stood at 70% compared to 43% at the end of 2000. This increase resulted from the allocation of the purchase price in the merger between FirstEnergy and GPU. Following approval of the merger of FirstEnergy and GPU by the New Jersey Board of Public Utilities on September 26, 2001, Standard and Poor's adjusted our corporate credit rating from A/A-1 to BBB/A-2, and our senior unsecured debt rating from A to BBB. The lower credit ratings reflect Standard & Poor's consolidated rating methodology, which resulted in essentially the same corporate credit rating for all of FirstEnergy's electric utility operating companies. The credit rating outlook of Standard & Poor's is stable. On February 22, 2002, Moody's announced a change in its outlook for our credit ratings from stable to negative based upon a decision by the Commonwealth Court of Pennsylvania to reverse the PPUC's decision to grant us rate relief (see Regulatory Matters). Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table: Contractual Obligations 2002 2003 2004 2005 2006 Thereafter Total - ------------------------------------------------------------------------------- (In millions) Long-term debt..................$ 50 $ -- $125 $ 8 $ -- $ 336 $ 519 Mandatory preferred stock....... 100 100 Capital leases ................. 1 1 -- -- -- -- 2 Unconditional power purchases... 415 261 200 194 197 1,882. 3,149 - ------------------------------------------------------------------------------- $466 $262 $325 $202 $197 $2,318 $3,770 =============================================================================== Our capital spending for the period 2002-2006 is expected to be about $375 million, of which approximately $72 million applies to 2002. Market Risk Information - ----------------------- We use various market risk sensitive instruments, including derivative contracts, primarily to manage the risk of price and interest rate fluctuations. Our Risk Policy Committee, comprised of FirstEnergy executive officers, exercises an independent risk oversight function to ensure compliance with corporate risk management policies and prudent risk management practices. Commodity Price Risk We are exposed to market risk primarily due to fluctuations in electricity and natural gas prices. To manage the volatility relating to these exposures, we use a variety of derivative instruments, including options, futures contracts and swaps. These derivatives are used principally for hedging purposes. The change in the fair value of commodity derivative contracts related to energy production during 2001 is summarized in the table below: Increase (Decrease)in the Fair Value of Commodity Derivative Contracts ----------------------------------------------------------------------- Nov. 7-Dec. 31 Jan. 1-Nov. 6 2001 2001 ----------------------------------------------------------------------- (In millions) Outstanding as of beginning of period with SFAS 133 cumulative adjustment.............. $3.6 $12.8 Contract value when entered................... 0.3 5.2 Decrease in value of existing contracts....... (2.5) (3.5) Change in techniques/assumptions.............. -- (10.6) Settled contracts............................. (0.1) (0.3) ----------------------------------------------------------------------- Outstanding as of end of period............... $1.3 $3.6 ======================================================================= 4 While the valuation of derivative contracts is always based on active market prices when they are available, longer-term contracts can require the use of model-based estimates of prices in later years due to the absence of published market prices. Currently, substantially all of our derivatives are valued based on active market prices. We perform sensitivity analyses to estimate our exposure to the market risk of our commodity position. A hypothetical 10% adverse shift in quoted market prices in the near term on our derivative instruments would not have had a material effect on our consolidated financial position or cash flows as of December 31, 2001. Interest Rate Risk Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 to the consolidated financial statements. Comparison of Carrying Value to Fair Value - -------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value - -------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income............. -- -- -- -- -- $192 $192 $194 Average interest rate.. 4.7% 4.7% - -------------------------------------------------------------------------------- ________________________________________________________________________________ Liabilities - -------------------------------------------------------------------------------- Long-term Debt: Fixed rate............... $ 50 -- $125 $ 8 -- $336 $519 $509 Average interest rate.. 6.5% 5.8% 7.5% 6.4% 6.3% Variable rate............ Average interest rate.. Short-term Borrowings.... $ 78 -- -- -- -- -- $ 78$ 78 Average interest rate.. 4.9% 4.9% - -------------------------------------------------------------------------------- Preferred Stock.......... -- -- -- -- -- $100 $100 $ 90 Average dividend rate.. 7.4% 7.4% - -------------------------------------------------------------------------------- Interest Rate Swap Agreements We use interest rate swap agreements to manage the risk of increases in variable interest rates. All of the agreements convert variable rate debt to fixed rate debt. As of December 31, 2001, interest rate swaps had a weighted average fixed interest rate of 7.16%. The swap agreements in effect as of December 31, 2001 had a notional amount of $50 million, a maturity date of 2002 and a fair value of ($1.8) million. Outlook - ------- Our industry continues to transition to a more competitive environment. As of January 1, 1999, all of our customers could select alternative energy suppliers. We continue to deliver power to homes and businesses through our existing distribution system, which remains regulated. The PPUC authorized our rate restructuring plan, establishing separate charges for transmission, distribution, generation and stranded cost recovery, which is recovered through a competitive transition charge (CTC). Customers electing to obtain power from an alternative supplier have their bills reduced based on the regulated generation component, and the customers receive a generation charge from the alternative supplier. We have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier, subject to certain limits, which is referred to as our PLR obligation. Regulatory Matters In June 2001, we entered into a settlement agreement with major parties in the combined merger and rate proceedings that, in addition to resolving certain issues concerning the PPUC's approval of our merger with FirstEnergy, also addressed our request for PLR relief. We are permitted to defer, for future recovery, the difference between our actual energy costs and those reflected in our capped generation rates. Those costs will continue to be deferred through December 31, 2005. If energy costs incurred during that period are below our capped generation rates, the difference would be used to reduce our recoverable deferred costs. Our PLR obligation was extended through December 31, 2010. Our CTC 5 revenues will be applied first to PLR costs, then to stranded costs other than for non-utility generation (NUG) and finally to NUG stranded costs through December 31, 2010. We would be permitted to recover any remaining stranded costs through a continuation of the CTC after December 31, 2010; however, such recovery would extend to no later than December 31, 2015. Any amounts not expected to be recovered by December 31, 2015 would be written off at the time such nonrecovery becomes probable. Several parties had appealed this PPUC decision to the Commonwealth Court of Pennsylvania. On February 21, 2002, the Court affirmed the PPUC decision regarding approval of the merger, remanding the decision to the PPUC only with respect to the issue of merger savings. The Court reversed the PPUC's decision regarding our PLR obligation, and denied our related requests for rate relief. We are considering our response to the Court's decision, which could include asking the Pennsylvania Supreme Court to review the decision. We are unable to predict the outcome of these matters. Supply Plan As part of our Restructuring Order, we are obligated to supply electricity to customers who do not choose an alternate supplier. The total forecasted peak of this obligation in 2002 is 2,300 megawatts (MW). Our current supply portfolio contains approximately 400 MW of long-term purchases from NUGs, and our remaining obligation is expected to be met through a mix of multi-year forward purchases, short-term forward (less than one year) purchases and spot market purchases. Environmental Matters Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, our proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. The Company has been named as a "potentially responsible party" (PRP) 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. We have total accrued liabilities aggregating approximately $1 million as of December 31, 2001. We do not believe environmental remediation costs will have a material adverse effect on our financial condition, cash flows or results of operations. Legal Matters Various lawsuits, claims and proceedings related to our normal business operations are pending against us, the most significant of which is described below. We have a 25% ownership interest in Unit 2 of the Three Mile Island Nuclear Plant (TMI-2), which was damaged during a 1979 accident. As a result of the accident, claims for alleged personal injury were filed against us, Jersey Central Power & Light Company, Metropolitan Edison Company and GPU in the U.S. District Court for the Middle District of Pennsylvania. In 1996, the District Court granted a motion for summary judgment filed by the defendants and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. In November 1999, the U.S. Court of Appeals for the Third Circuit affirmed the District Court's dismissal of the ten test cases, but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. Following the resolution of judicial proceedings dealing with admissible evidence, we have again requested summary judgment of the remaining 2,100 claims in the District Court. On January 15, 2002, the District Court granted our motion. On February 14, 2002, the plaintiffs filed a notice of appeal of this decision (see Note 6 - Other Legal Proceedings). Although unable to predict the outcome of this litigation, we believe that any liability to which we might be subject by reason of the TMI-2 accident will not exceed our financial protection under the Price-Anderson Act. Significant Accounting Policies - ------------------------------- We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often requires a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting these specific factors. Our more significant accounting policies are described below: Purchase Accounting On November 7, 2001, the merger between FirstEnergy and GPU became effective, and we became a wholly owned subsidiary of FirstEnergy. The merger was accounted for by the purchase method of accounting, which requires judgment regarding the allocation of the purchase price based on the fair values of the assets acquired (including 6 intangible assets) and the liabilities assumed. The fair values of the acquired assets and assumed liabilities were based primarily on estimates. The adjustments reflected in our records, which are subject to adjustment in 2002 when finalized, primarily consist of: (1) revaluation of certain property, plant and equipment; (2) adjusting preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (3) recognizing additional obligations related to retirement benefits; and (4) recognizing estimated severance and other compensation liabilities. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which will be reviewed for impairment at least annually. As of December 31, 2001, we had recorded goodwill of approximately $797.4 million related to the merger. Regulatory Accounting We are subject to regulation that sets the prices (rates) we are permitted to charge our customers based on costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in Pennsylvania, a significant amount of regulatory assets have been recorded. As of December 31, 2001, we had regulatory assets of $769.8 million. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislation, judicial or regulatory actions in the future. Derivative Accounting Determination of appropriate accounting for derivative transactions requires the involvement of management representing operations, finance and risk assessment. In order to determine the appropriate accounting for derivative transactions, the provisions of the contract need to be carefully assessed in accordance with the authoritative accounting literature and management's intended use of the derivative. New authoritative guidance continues to shape the application of derivative accounting. Management's expectations and intentions are key factors in determining the appropriate accounting for a derivative transaction and, as a result, such expectations and intentions must be documented. Derivative contracts that are determined to fall within the scope of Statement of Financial Accounting Standards (SFAS) No. 133, as amended, must be recorded at their fair value. Active market prices are not always available to determine the fair value of the later years of a contract, requiring that various assumptions and estimates be used in their valuation. We continually monitor our derivative contracts to determine if our activities, expectations, intentions, assumptions and estimates remain valid. As part of our normal operations we enter into commodities contracts, which increase the impact of derivative accounting judgments. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hours that have been delivered but not yet billed through the end of the year. The determination of unbilled revenues requires management to make various estimates including: - Net energy purchased or generated for retail load - Losses of energy over distribution lines - Mix of kilowatt-hour usage by residential, commercial and industrial customers - Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards - ------------------------------------ The Financial Accounting Standards Board (FASB) approved SFAS 141, "Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 2001. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for using purchase accounting. The provisions of the new standard relating to the determination of goodwill and other intangible assets have been applied to our 2001 merger, which was accounted for as a purchase transaction. Under SFAS 142, amortization of existing goodwill will cease 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 a preliminary analysis. We did not have any goodwill prior to our 2001 merger, and we did not amortize goodwill associated with the merger under the provisions of the new standard. In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. 7 In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of APB 30. Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30. 8 PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME
Nov 7 - Jan. 1 - For the Years Ended Dec.31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------- (In thousands) OPERATING REVENUES........................................ $140,062 | $834,548 $901,881 $921,965 -------- | -------- -------- -------- | OPERATING EXPENSES AND TAXES: | Fuel and purchased power............................... 79,815 | 519,838 545,117 361,901 Nuclear operating costs................................ -- | -- -- 30,626 Other operating costs.................................. 20,015 | 138,543 148,698 217,408 -------- | -------- -------- -------- Total operation and maintenance expenses............. 99,830 | 658,381 693,815 609,935 Provision for depreciation and amortization............ 8,613 | 49,191 56,505 78,384 General taxes.......................................... 6,281 | 39,532 45,890 42,046 Income taxes........................................... 10,997 | 17,395 25,335 50,675 -------- | -------- -------- --------- Total operating expenses and taxes................... 125,721 | 764,499 821,545 781,040 -------- | -------- -------- -------- | OPERATING INCOME.......................................... 14,341 | 70,049 80,336 140,925 | OTHER INCOME (EXPENSE).................................... 3,049 | (6,610) 6,716 55,641 -------- | -------- -------- -------- | INCOME BEFORE NET INTEREST CHARGES........................ 17,390 | 63,439 87,052 196,566 -------- | -------- -------- -------- | NET INTEREST CHARGES: | Subsidiaries preferred dividends....................... 1,101 | 6,239 7,034 8,953 Interest on long-term debt............................. 3,972 | 28,751 29,964 31,837 Allowance for borrowed funds used during | construction......................................... 47 | (494) (742) (1,074) Deferred interest income............................... (504) | (783) -- -- Other interest expense ................................ 1,979 | 6,008 11,546 4,359 -------- | -------- -------- -------- Net interest charges................................... 6,595 | 39,721 47,802 44,075 -------- | -------- -------- -------- | NET INCOME................................................ 10,795 | 23,718 39,250 152,491 | PREFERRED STOCK DIVIDEND | REQUIREMENTS........................................... -- | -- -- 154 -------- | -------- -------- -------- | LOSS ON PREFERRED STOCK REACQUISITION..................... -- | -- -- 726 -------- | -------- -------- -------- | EARNINGS ON COMMON STOCK.................................. $ 10,795 | $ 23,718 $ 39,250 $151,611 ======== | ======== ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
9 PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service..................................................................... $1,845,187 | $1,794,259 Less-Accumulated provision for depreciation.................................... 630,957 | 588,377 ---------- | ---------- 1,214,230 | 1,205,882 ---------- - ---------- Construction work in progress- | Electric plant............................................................... 12,857 | 25,895 ---------- | ---------- 1,227,087 | 1,231,777 ---------- | ---------- OTHER PROPERTY AND INVESTMENTS: | Nonutility generation trusts................................................... 154,067 | 190,710 Nuclear plant decommissioning trusts........................................... 96,610 | 98,426 Long-term notes receivable from associated companies........................... 15,515 | 15,515 Other.......................................................................... 2,265 | 833 ---------- | ---------- 268,457 | 305,484 ---------- | ---------- CURRENT ASSETS: | Cash and cash equivalents...................................................... 39,033 | 581 Receivables- | Customers (less accumulated provisions of $14,719,000 and $14,851,000 | respectively, for uncollectible accounts)................................. 107,170 | 117,515 Associated companies......................................................... 40,203 | 9,558 Other........................................................................ 14,842 | 21,205 Prepayments ................................................................... 8,605 | 11,868 ---------- | ---------- 209,853 | 160,727 ---------- | ---------- DEFERRED CHARGES: | Regulatory assets.............................................................. 769,807 | 614,182 Goodwill....................................................................... 797,362 | -- Other.......................................................................... 27,703 | 19,314 ---------- | ---------- 1,594,872 | 633,496 ---------- | ---------- $3,300,269 | $2,331,484 ---------- | ---------- CAPITALIZATION AND LIABILITIES | | CAPITALIZATION (See Consolidated Statements of Capitalization): | Common stockholder's equity.................................................... $1,306,576 | $ 469,837 Company-obligated trust preferred securities................................... 92,000 | 100,000 Long-term debt................................................................. 472,400 | 519,481 ---------- | ---------- 1,870,976 | 1,089,318 ---------- | ---------- CURRENT LIABILITIES: | Currently payable long-term debt and preferred stock........................... 50,756 | 499 Short-term borrowings (Note 5)- | Associated companies......................................................... 77,623 | -- Other........................................................................ -- | 55,800 Accounts payable- | Associated companies......................................................... 126,390 | 29,788 Other........................................................................ 38,720 | 49,452 Accrued taxes.................................................................. 29,255 | 23,895 Accrued interest............................................................... 12,284 | 11,582 Other.......................................................................... 10,993 | 7,970 ---------- | ---------- 346,021 | 178,986 ---------- | ---------- DEFERRED CREDITS: | Accumulated deferred income taxes.............................................. 21,682 | 25,013 Accumulated deferred investment tax credits.................................... 11,956 | 13,098 Nuclear plant decommissioning costs............................................ 135,483 | 132,717 Nuclear fuel disposal costs.................................................... 18,453 | 17,728 Power purchase contract loss liability......................................... 867,046 | 846,992 Other.......................................................................... 28,652 | 27,632 ---------- | ---------- 1,083,272 | 1,063,180 ---------- | ---------- COMMITMENTS AND CONTINGENCIES | (Notes 3 and 6) ---------- | ---------- $3,300,269 | $2,331,484 ========== | ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
10 PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
As of December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, par value $20 per share, authorized 5,400,000 shares 5,290,596 shares outstanding................................................... $ 105,812 | $ 105,812 Other paid-in capital............................................................ 1,188,190 | 320,487 Accumulated other comprehensive income (Note 4E)................................. 1,779 | 23 Retained earnings (Note 4A)...................................................... 10,795 | 43,515 ---------- | ---------- Total common stockholder's equity.............................................. 1,306,576 | 469,837 ---------- | ---------- | COMPANY OBLIGATED TRUST | PREFERRED SECURITIES | OF SUBSIDIARY TRUST | (NOTE 4C): | 7.34% due 2039................................................................. 92,000 | 100,000 | LONG-TERM DEBT (Note 4D): | First mortgage bonds: | 6.125% due 2007................................................................ 4,110 | 4,110 5.35% due 2010................................................................. 12,310 | 12,310 5.35% due 2010................................................................. 12,000 | 12,000 5.80% due 2020................................................................. 20,000 | 20,000 6.05% due 2025................................................................. 25,000 | 25,000 ---------- | ---------- Total first mortgage bonds................................................... 73,420 | 73,420 ---------- | ---------- | Unsecured notes: | 6.42% due 2002................................................................. 25,000 | 25,000 6.47% due 2002................................................................. 25,000 | 25,000 5.75% due 2004................................................................. 125,000 | 125,000 7.50% due 2005................................................................. 8,000 | 8,000 6.125% due 2009................................................................ 100,000 | 100,000 7.77% due 2010................................................................. 35,000 | 35,000 6.625% due 2019................................................................ 125,000 | 125,000 7.69% due 2039................................................................. 2,998 | 3,012 ---------- | ---------- Total senior notes........................................................... 445,998 | 446,012 ---------- | ---------- | Capital lease obligations (Note 3)............................................... 1,670 | 2,153 ---------- | ---------- Net unamortized premium (discount) on debt....................................... 2,068 | (1,605) ---------- | ---------- Long-term debt due within one year............................................... (50,756) | (499) ---------- | ---------- Total long-term debt............................................................. 472,400 | 519,481 ---------- | ---------- TOTAL CAPITALIZATION................................................................ $1,870,976 | $1,089,318 ========== | ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
11 PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Common Stock Accumulated ------------ Other Other Comprehensive Number Par Paid-In Comprehensive Retained Income of Shares Value Capital Income (Loss) Earnings ------------- --------- ----- ------- ------------- -------- (Dollars in thousands) Balance, January 1, 1999....................... 5,290,596 $105,812 $ 285,487 $8,353 $ 367,653 Net income.................................. $152,491 152,491 Net unrealized gain (loss) on investments... 2,101 2,101 Minimum pension liability................... 165 165 -------- Comprehensive income........................ 154,757 -------- Loss on preferred stock reacquisition....... (725) Cash dividends on preferred stock........... (154) Cash dividends on common stock.............. (460,000) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999..................... 5,290,596 105,812 285,487 10,619 59,265 Net income.................................. 39,250 39,250 Net unrealized gain (loss) on investments... (10,596) (10,596) -------- Comprehensive income........................ 28,654 -------- Contributions from parent company........... 35,000 Cash dividends on common stock.............. (55,000) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000..................... 5,290,596 105,812 320,487 23 43,515 Net income.................................. 23,718 23,718 Net unrealized gain on investments.......... 12 12 Net unrealized gain (loss) on derivative instruments............................... (1,064) (1,064) -------- Comprehensive income........................ 22,666 -------- Contributions from parent company........... 50,000 - ----------------------------------------------------------------------------------------------------------------------------- Balance, November 6, 2001...................... 5,290,596 105,812 370,487 (1,029) 67,233 Purchase accounting fair value adjustment... 817,703 1,029 (67,233) _____________________________________________________________________________________________________________________________ Balance, November 7, 2001...................... 5,290,596 105,812 1,188,190 -- -- Net income.................................. 10,795 10,795 Net unrealized gain (loss) on investments... (2) (2) Net unrealized gain (loss) on derivative instruments.................... 1,781 1,781 -------- Comprehensive Income........................ $ 12,574 -------- - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001..................... 5,290,596 $105,812 $1,188,190 $1,779 $ 10,795 ============================================================================================================================= CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Carrying Number Carrying of Shares Value of Shares Value --------- ----- --------- ----- (Dollars in thousands) Balance, January 1, 1999............ 165,485 $16,681 4,200,000 $105,000 Redemptions- 4.40% Series B................ (29,678) (3,026) 3.70% Series C................ (49,568) (4,983) 4.05% Series D................ (28,219) (2,852) 4.70% Series E................ (14,103) (1,411) 4.50% Series F................ (17,081) (1,714) 4.60% Series G................ (26,836) (2,695) 8.75% Series.................. (4,200,000) (105,000) Issuances- 7.34% Series.................... 4,000,000 100,000 ---------------------------------------------------------------------------------------- Balance, December 31, 1999.......... -- -- 4,000,000 100,000 ======================================================================================== Balance, December 31, 2000.......... -- -- 4,000,000 100,000 ======================================================================================== Purchase accounting fair value adjustment............... (8,000) ---------------------------------------------------------------------------------------- Balance, December 31, 2001.......... -- $ -- 4,000,000 $ 92,000 ======================================================================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
12 PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Nov. 7 - Jan. 1 - For the Years Ended Dec. 31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: Net Income...........................................................$ 10,795 | $ 23,718 $ 39,250 $ 152,491 Adjustments to reconcile net income to net | cash from operating activities: | Provision for depreciation and amortization..................... 8,613 | 49,191 56,505 78,384 Nuclear fuel and lease amortization............................. -- | -- -- 6,036 Other amortization.............................................. 309 | 1,672 347 -- Impact of PPUC rate order, net.................................. -- | -- (21,550) -- Deferred costs, net............................................. (7,467) | (143,462) (76,957) (57,474) Deferred income taxes, net...................................... (23,127) | 60,170 15,946 (394,872) Investment tax credits, net..................................... (171) | (970) (1,142) (22,687) Receivables..................................................... (26,592) | 16,566 (19,089) (11,216) Materials and supplies.......................................... -- | -- -- 56,559 Accounts payable................................................ (19,382) | 29,462 (20,608) 6,110 Other........................................................... 41,590 | (36,884) (89,125) (81,187) --------- | ---------- --------- ---------- Net cash used for operating activities........................ (15,432) | (537) (116,423) (267,856) --------- | ---------- --------- ---------- | CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing- | Long-term debt.................................................. -- | -- 118,000 348,218 Short-term borrowings, net...................................... 2,623 | 19,200 2,200 -- Company-obligated trust preferred securities.................... -- | -- -- 96,535 Contributions from parent....................................... -- | 50,000 35,000 -- Redemptions and Repayments- | Preferred stock................................................. -- | -- -- 17,406 Long-term debt.................................................. -- | -- 25,000 600,011 Short-term borrowings, net...................................... -- | -- -- 32,423 Company-obligated mandatorily redeemable | preferred securities......................................... -- | -- -- 105,383 Capital lease principal payments................................ -- | -- -- 7,907 Dividend Payments- | Common stock.................................................... -- | -- 55,000 460,000 Preferred stock................................................. -- | -- -- 154 -------- | ---------- --------- ---------- Net cash used for (provided from) financing activities........ (2,623) | (69,200) (75,200) 778,531 -------- | ---------- --------- ---------- | CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions................................................... 9,687 | 50,543 73,247 78,331 Contributions to (proceeds from) nonutility generation trusts........ (29,944) | (18,339) (75,991) 266,701 Contributions to decommissioning trusts.............................. -- | 15 40 75,926 Sale of investments.................................................. -- | -- -- (1,493,444) Other................................................................ 246 | 5,194 (6,617) (1,002) -------- | ---------- --------- ---------- Net cash used for (provided from) investing activities........ (20,011) | 37,413 (9,321) (1,073,488) -------- | ---------- --------- ---------- Net increase (decrease) in cash and cash equivalents................. 7,202 | 31,250 (31,902) 27,101 Cash and cash equivalents at beginning of period..................... 31,831 | 581 32,483 5,382 -------- | ---------- --------- ---------- Cash and cash equivalents at end of period...........................$ 39,033 | $ 31,831 $ 581 $ 32,483 ======== | ========== ========= ========== | SUPPLEMENTAL CASH FLOWS INFORMATION: | Cash Paid During the Year- | Interest (net of amounts capitalized)...........................$ 2,018 | $ 35,134 $ 33,409 $ 46,826 ======== | ========== ========= ========== Income taxes (refund)...........................................$(12,176) | $ (14,542) $ 110,395 $ 413,810 ======== | ========== ========= ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
13 PENNSYLVANIA ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF TAXES
Nov. 7 - Jan. 1 - For the Years Ended Dec. 31, Dec. 31, 2001 Nov. 6, 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property......................................... $ (146) | $ 1,622 $ 1,139 $ 5,998 State gross receipts............................................... 5,560 | 30,932 37,222 27,498 Other.............................................................. 867 | 6,978 7,529 8,550 -------- | ---------- --------- ---------- Total general taxes......................................... $ 6,281 | $ 39,532 $ 45,890 $ 42,046 ======== | ========== ========= ========== | PROVISION FOR INCOME TAXES: | Currently payable- | Federal......................................................... $ 23,861 | $ (36,615) $ 11,593 $ 358,267 State........................................................... 7,667 | (3,183) 3,357 113,675 -------- | ---------- --------- ---------- 31,528 | (39,798) 14,950 471,942 -------- | ---------- --------- ---------- Deferred, net- | Federal......................................................... (17,511) | 46,346 11,732 (298,890) State........................................................... (5,616) | 13,824 4,214 (95,982) -------- | ---------- --------- ---------- (23,127) | 60,170 15,946 (394,872) -------- | ---------- --------- ---------- Investment tax credit amortization................................. (171) | (970) (1,142) (22,687) -------- | ---------- --------- ---------- Total provision for income taxes............................ $ 8,230 | $ 19,402 $ 29,754 $ 54,383 ======== | ========== ========= ========== | INCOME STATEMENT CLASSIFICATION | OF PROVISION FOR INCOME TAXES: | Operating income................................................... $ 10,997 | $ 17,395 $ 25,335 $ 50,675 Other income....................................................... (2,767) | 2,007 4,419 3,708 -------- | ---------- --------- ---------- Total provision for income taxes............................ $ 8,230 | $ 19,402 $ 29,754 $ 54,383 ======== | ========== ========= ========== | RECONCILIATION OF FEDERAL INCOME TAX | EXPENSE AT STATUTORY RATE TO TOTAL | PROVISION FOR INCOME TAXES: | Book income before provision for income taxes $ 19,025 | $ 43,120 $ 69,003 $ 206,875 ======== | ========== ========= ========== Federal income tax expense at statutory rate....................... $ 6,659 | $ 15,092 $ 24,151 $ 72,406 Increases (reductions) in taxes resulting from- | Amortization of investment tax credits.......................... (171) | (969) (1,140) (22,686) Depreciation.................................................... 555 | 1,407 1,183 109 State income tax, net of federal tax............................ 1,404 | 7,156 3,590 14,951 Allocated share of consolidated tax savings..................... -- | (2,912) -- (880) Other, net...................................................... (217) | (372) 1,970 (9,517) -------- | ---------- --------- ---------- Total provision for income taxes............................ $ 8,230 | $ 19,402 $ 29,754 $ 54,383 ======== | ========== ========= ========== | ACCUMULATED DEFERRED INCOME TAXES AT | DECEMBER 31: | Property basis differences......................................... $256,951 | $ 250,410 $ 257,820 Nuclear decommissioning............................................ (42,138) | (35,495) 2,693 Non-utility generation costs....................................... (214,492) | (112,291) (103,621) Purchase accounting basis difference............................... (38,407) | -- -- Sale of generation assets.......................................... 5,302 | 5,302 (245,097) Regulatory transition charge....................................... (9,329) | (9,329) 22,904 Customer receivables for future income taxes....................... 61,493 | 65,506 68,816 Other.............................................................. 2,302 | (139,090) 14,250 -------- | --------- ---------- Net deferred income tax liability........................... $ 21,682 | $ 25,013 $ 17,765 ======== | ========= ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include Pennsylvania Electric Company (Company) and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. FirstEnergy also holds directly all of the issued and outstanding common shares of Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE), American Transmission Systems, Inc. (ATSI), Jersey Central Power & Light Company (JCP&L) and Metropolitan Edison Company (Met-Ed). The Company, JCP&L and Met-Ed were formerly wholly owned subsidiaries of GPU, Inc., which merged with FirstEnergy on November 7, 2001. Pre-merger period and post-merger period financial results are separated by a heavy black line. The Company follows the accounting policies and practices prescribed by the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES- The Company's principal business is providing electric service to customers in Pennsylvania. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers and sales to wholesale customers. There was no material concentration of receivables as of December 31, 2001 or 2000, with respect to any particular segment of the Company's customers. REGULATORY PLAN- Pennsylvania enacted its electric utility competition law in 1996 with the phase-in of customer choice for generation suppliers completed as of January 1, 2001. The PPUC authorized a rate restructuring plan for the Company in 1998 which essentially resulted in the deregulation of the Company's generation business. The Company has a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier, subject to certain limits, which is referred to as the Company's provider of last resort (PLR) obligation. In 2000, the PPUC disallowed a portion of the requested additional stranded costs above those amounts granted in the Company's 1998 rate restructuring plan order. The PPUC required the Company to seek an IRS ruling regarding the return of certain unamortized investment tax credits and excess deferred income tax benefits to ratepayers. If the IRS ruling ultimately supports returning these tax benefits to ratepayers, the Company would then reduce stranded costs by $25 million plus interest and record a corresponding charge to income. As a result of its generating asset divestitures, the Company obtains its supply of electricity to meet its PLR obligation almost entirely from contracted and open market purchases. During 2000, the Company's purchased power costs substantially exceeded the amounts it could recover under its capped generation rates, which are in effect for varying periods, pursuant to its 1998 rate restructuring plan. In November 2000, the Company filed a petition with the PPUC seeking permission to defer for future recovery its energy costs in excess of amounts reflected in its capped generation rates. In January 2001, the PPUC consolidated this petition with the merger proceeding (see Note 2 - Merger) for consideration and resolution in accordance with the FirstEnergy and GPU merger procedural schedule. In June 2001, the Company entered into a Settlement Stipulation with all of the major parties in the combined merger and rate relief proceedings, that, in addition to resolving certain issues concerning the PPUC's approval of the merger, also addressed the Company's request for PLR relief. On June 20, 2001, the PPUC entered orders approving the Settlement Stipulation, which approved the merger and provided PLR relief. The Company is permitted to defer for future recovery the difference between its actual energy costs and those reflected in its capped generation rates, retroactive to January 1, 2001. Deferral accounting will continue for such cost differences through December 31, 2005 and, should energy costs incurred by the Company during that period be below its capped generation rates, the difference would be used to reduce its recoverable deferred costs. The Company's PLR obligation has been extended through December 31, 2010. The Company's competitive transition charge (CTC) revenues will be applied first to PLR costs, then to stranded costs other than for non-utility generation (NUG) and finally to NUG stranded costs through December 31, 2010. The Company would be permitted to recover any remaining stranded costs through a continuation of the CTC after December 31, 2010; however, such recovery would extend to no later than December 31, 2015. Any amounts not expected to be recovered by December 31, 2015 would be written off at the time such nonrecovery becomes probable. 15 Several parties had filed Petitions for Review with the Commonwealth Court of Pennsylvania regarding the PPUC's orders. On February 21, 2002, the Court affirmed the PPUC decision regarding approval of the merger, remanding the decision to the PPUC only with respect to the issue of merger savings. The Court reversed the PPUC's decision regarding the Company's PLR obligation, and denied the Company's related requests for rate relief. The Company is considering its response to the Court's decision, which could include asking the Pennsylvania Supreme Court to review the decision. The Company is unable to predict the outcome of these matters. The application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," was discontinued in 1998 with respect to the Company's generation operations. The Company subsequently divested substantially all of its generating assets. The Securities and Exchange Commission issued interpretive guidance regarding asset impairment measurement, concluding that any supplemental regulated cash flows such as a CTC should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. All of the Company's regulatory assets are expected to continue to be recovered under provisions of the Company's regulatory orders. PROPERTY, PLANT AND EQUIPMENT- As a result of the merger, certain of the Company's property, plant and equipment have been adjusted to reflect fair value. The majority of the Company's property, plant and equipment is reflected at original cost since such assets remain subject to rate regulation on a historical cost basis. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annualized composite rate was approximately 2.9% in 2001, 2.7% in 2000 and 2.8% in 1999. Annual depreciation expense in 2001 included approximately $1.5 million for future decommissioning costs applicable to the Company's ownership in Unit 2 of the Three Mile Island Nuclear Plant (TMI-2), a demonstration nuclear reactor owned by a wholly owned subsidiary of the Company (in conjunction with JCP&L and Met-Ed) and decommissioning liabilities for its previously divested nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $128.1 million in current dollars and (using a 4.0% escalation rate) approximately $211.8 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Decommissioning of the demonstration nuclear reactor is expected to be completed in 2003; payments for decommissioning of TMI-2 are expected to begin in 2014, when actual decommissioning work is expected to begin. The Company has recovered approximately $50 million for decommissioning through its electric rates from customers through December 31, 2001. The Company has also recognized an estimated liability of approximately $2.3 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required as of January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the costs to settle the retirement obligation differs from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trusts will be recorded as investment income. The Company is currently assessing the new standard and has not yet quantified the impact on its financial statements. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Results for the period January 1, 2001 through November 6, 2001 are included in the final consolidated federal income tax return of GPU, and results for the period November 7, 2001 through December 31, 2001 are included in FirstEnergy's 2001 consolidated federal income tax return. In both cases, the consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing the tax benefit for any tax losses or credits it contributed to the consolidated return. 16 RETIREMENT BENEFITS- Effective December 31, 2001, the Company's defined benefit pension plan was merged into FirstEnergy's defined benefit pension plan. FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Company's full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the GPU pension plans were merged with the FirstEnergy plan. FirstEnergy uses the projected unit credit method for funding purposes. The assets of the pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. Costs for the year 2001 include the former GPU companies' pension and other postretirement benefit costs for the period November 7, 2001 through December 31, 2001. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheet as of December 31, 2001: Other Pension Benefits Postretirement Benefits ---------------- ----------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1.. $1,506.1 $ 752.0 Service cost........................ 34.9 18.3 Interest cost....................... 133.3 64.4 Plan amendments..................... 3.6 -- Actuarial loss...................... 123.1 73.3 Voluntary early retirement program.. -- 2.3 GPU acquisition..................... 1,878.3 716.9 Benefits paid....................... (131.4) (45.6) --------------------------------------------------------------------------- Benefit obligation as of December 31 3,547.9 1,581.6 --------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1................... 1,706.0 23.0 Actual return on plan assets........ 8.1 12.7 Company contribution................ -- 43.3 GPU acquisition..................... 1,901.0 462.0 Benefits paid....................... (131.4) (6.0) --------------------------------------------------------------------------- Fair value of plan assets as of December 31................... 3,483.7 535.0 --------------------------------------------------------------------------- Funded status of plan............... (64.2) (1,046.6) Unrecognized actuarial loss (gain).. 222.8 212.8 Unrecognized prior service cost..... 87.9 17.7 Unrecognized net transition obligation (asset)................ -- 101.6 --------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 246.5 $ (714.5) =========================================================================== Assumptions used as of December 31, 2001: Discount rate....................... 7.25% 7.25% Expected long-term return on plan assets.................... 10.25% 10.25% Rate of compensation increase....... 4.00% 4.00% FirstEnergy's net pension and other postretirement benefit costs for the year ended December 31, 2001 were computed as follows: Other Pension Benefits Postretirement Benefits ---------------- ----------------------- (In millions) Service cost......................... $ 34.9 $18.3 Interest cost........................ 133.3 64.4 Expected return on plan assets (204.8) (9.9) Amortization of transition obligation (asset)................. (2.1) 9.2 Amortization of prior service cost... 8.8 3.2 Recognized net actuarial loss (gain). -- 4.9 Voluntary early retirement program... 6.1 2.3 -------------------------------------------------------------------------- Net benefit cost..................... $ (23.8) $92.4 ========================================================================== The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported 17 for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase FirstEnergy's total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. Pre-Merger As of December 31, 2000, the Company had on its balance sheet accrued benefit costs of $1.0 million related to pension obligations. In addition, in each of the years ended December 31, 2000 and 1999, the Company recognized in income net benefit costs/(credits) of $0.1 million for pension benefits. TRANSACTIONS WITH AFFILIATED COMPANIES- During the three years ended December 31, 2001, GPU Service, Inc., an affiliated company, provided legal, accounting, financial and other services to the Company. In addition, prior to the sales of the Company's generating assets in 1999, affiliated companies GPU Nuclear, Inc. and GPU Generation, Inc. conducted generation operations for the company. The total cost of services rendered by affiliates was $156 million, $139 million and $337 million for the years 2001, 2000 and 1999, respectively. Of these amounts, $110 million, $109 million and $259 million were charged to income for the years 2001, 2000 and 1999, respectively. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 2001 2000 ---------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value --------------------------------------------------------------------- (In millions) Long-term debt............... $519 $509 $518 $497 Preferred stock.............. $ 92 $ 90 $100 $ 97 Investments other than cash and cash equivalents....... $251 $251 $289 $289 --------------------------------------------------------------------- $862 $850 $907 $883 ===================================================================== The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to the Company's ratings. Long-term debt and preferred stock subject to mandatory redemption were recognized at fair value in connection with the merger. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Company has no securities held for trading purposes. On January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133." The adoption resulted in the recognition of derivative assets on the Consolidated Balance Sheet as of January 1, 2001 in the amount of $26.0 million, with an offsetting amount, net of tax, recorded in Regulatory Assets of $25.9 million. As of January 1, 2001, the Company also recorded derivative liabilities in the amount of $1.0 million as a result of adopting SFAS 133, with a substantially offsetting amount recorded in Accumulated Other Comprehensive Income, of $0.5 million. As of January 1, 2001, a cumulative effect of accounting change was recognized as an expense in Other Income (Deductions), Net on the Consolidated Statement of Income in the amount of $0.8 million. The Company is exposed to financial risks resulting from the fluctuation of interest rates and commodity prices, including electricity and natural gas. To manage the volatility relating to these exposures, the Company uses a 18 variety Of derivative instruments, including options, futures contracts and swaps. These derivatives are used principally for hedging 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. The Company uses derivatives to hedge the risk of price and interest rate fluctuations. The Company's primary ongoing hedging activity involves cash flow hedges of electricity and natural gas purchases. The majority of the Company's forward commodity contracts are considered "normal purchases and sales," as defined by SFAS 133, and are therefore excluded from the scope of SFAS 138. The options and futures contracts determined to be within the scope of SFAS 133 are accounted for as cash flow hedges and expire on various dates through 2002. Gains and losses from hedges of commodity price risks are included in net income when the underlying hedged commodities are delivered. The Company also uses interest rate swap agreements to manage the risk of increases in variable interest rates. The interest rate swap agreements, which were entered into to convert variable rate debt to fixed rate debt, are accounted for as cash flow hedges under SFAS 133, and expire on various dates through 2002. There is currently a net deferred gain of $1.8 million included in Accumulated Other Comprehensive Income as of December 31, 2001 related to derivative hedging activity, which will be reclassified to earnings during the next twelve months as hedged transactions occur. REGULATORY ASSETS- The Companies recognize, as regulatory assets, costs which the FERC and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are expected to continue to be recovered from customers under the Company's regulatory plan. The Company continues to bill and collect cost-based rates for its transmission and distribution services, which remain regulated; accordingly, it is appropriate that the Company continues the application of SFAS 71 to those operations. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: 2001 2000 ------------------------------------------------------------ (In millions) Regulatory transition charge...... $515.9 $439.4 Customer receivables for future income taxes............. 140.2 149.4 Provider of last resort deferrals. 83.5 -- Nuclear decommissioning costs..... 24.0 18.5 Loss on reacquired debt........... 5.8 6.6 Other............................. 0.4 0.3 ------------------------------------------------------------ Total......................... $769.8 $614.2 ============================================================ 2. MERGER: On November 7, 2001, the merger of FirstEnergy and GPU became effective pursuant to the Agreement and Plan of Merger, dated August 8, 2000. As a result of the merger, GPU's former wholly owned subsidiaries, including the Company, became wholly owned subsidiaries of FirstEnergy. The merger was accounted for by the purchase method of accounting. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by FirstEnergy's management based on information currently available and on current assumptions as to future operations. Merger purchase accounting adjustments recorded in the records of the Company primarily consist of: (1) revaluation of certain property, plant and equipment; (2) adjusting preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (3) recognizing additional obligations related to retirement benefits; and (4) recognizing estimated severance and other compensation liabilities. Other assets and liabilities were not adjusted since they remain subject to rate regulation on a historical cost basis. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which will not be amortized but will be reviewed for impairment at least annually. As of December 31, 2001, we had recorded goodwill of approximately $797.4 million related to the merger. 3. LEASES: Consistent with regulatory treatment, the rentals for capital leases are charged to operating expenses on the Consolidated Statements of Income. The Company has a capital lease for an operations building, which expires in 2004. In both 2001 and 2000, total rentals related to this capital lease were $0.7 million, comprised of an interest element of $0.2 million and other costs of $0.5 million. 19 As of December 31, 2001, the future minimum lease payments on the Company's capital lease discussed above are: $0.7 million, $0.7 million and $0.6 million for the years 2002 through 2004. The present value of the net minimum lease payments is $1.7 million and the total interest portion is $0.3 million. 4. CAPITALIZATION: (A) RETAINED EARNINGS- The merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 7, 2001 merger date. In general, the Company's first mortgage bond (FMB) indentures restrict the payment of dividends or distributions on or with respect to the Company's common stock to amounts credited to earned surplus since approximately the date of its indenture. At such date, the Company had a balance of $10.1 million in its earned surplus account, which would not be available for dividends or other distributions. As of December 31, 2001, the Company had retained earnings available to pay common stock dividends of $0.7 million, net of amounts restricted under the Company's FMB indentures. (B) PREFERRED AND PREFERENCE STOCK- The Company's preferred stock authorization consists of 11.435 million shares without par value. No preferred shares are currently outstanding. (C) COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY PARTNERSHIP PREFERRED SECURITIES- The Company has formed a statutory business trust, Penelec Capital Trust, which is owned through a wholly-owned limited partnership of the Company, Penelec Capital II, L.P., of which a wholly-owned subsidiary of the Company is the sole general partner. In this transaction, Penelec Capital Trust invested the gross proceeds from the sale of $100.0 million of its 7.34% trust preferred securities in the preferred securities of Penelec Capital II, L.P., which in turn invested those proceeds in $103.1 million of 7.34% subordinated debentures of the Company. The sole assets of Penelec Capital Trust are the preferred securities of Penelec Capital II, L.P., whose sole assets are the Company's subordinated debentures with the same rate and maturity date as the preferred securities. The Company has effectively provided a full and unconditional guarantee of its obligations under its trust's preferred securities. The trust preferred securities, which mature in 2039 and have a liquidation value of $25.00 per security, are redeemable at the option of the Company beginning in September 2004 at 100% of their principal amount. The interest on the subordinated debentures (and therefore the distributions on the preferred securities) may be deferred for up to 60 months, but the Company may not pay dividends on, or redeem or acquire, any of its cumulative preferred or common stock until deferred payments on its subordinated debentures are paid in full. (D) LONG-TERM DEBT- The first mortgage indentures and their supplements, which secure all of the Company's FMBs, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company. Based on the amount of bonds authenticated by the Trustee through December 31, 2001, the Company's annual sinking and improvement fund requirements for all bonds issued under the mortgage amount to $12.7 million. The Company expects to fulfill its sinking and improvement fund obligation by providing bondable property additions to the Trustee. Sinking fund requirements for FMBs and maturing long-term debt (excluding capital leases) for the next five years are: (In millions) --------------------- 2002........ $ 50.2 2003........ 0.2 2004........ 125.2 2005........ 8.2 2006........ 0.2 ---------------------- 20 The Company's obligations to repay certain pollution control revenue bonds are secured by several series of FMBs. Certain pollution control revenue bonds are entitled to the benefit of noncancelable municipal bond insurance policies of $69.3 million to pay principal of, or interest on, the pollution control revenue bonds. (E) COMPREHENSIVE INCOME- Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholder's equity except those resulting from transactions with the Company's parent. As of December 31, 2001, accumulated other comprehensive income consisted primarily of unrealized gains on derivative instrument hedges of $1.8 million. 5. SHORT-TERM BORROWINGS: The Company may borrow from its affiliates on a short-term basis. As of December 31, 2001, the Company had total short-term borrowings of $77.6 million from its affiliates with a weighted average interest rate of approximately 4.9%. 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $375 million for property additions and improvements from 2002-2006, of which approximately $72 million is applicable to 2002. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership interest in TMI-2, the Company is exempt from any potential assessment under the industry retrospective rating plan. The Company is also insured as to its interest in TMI-2 under a policy issued to the operating company for the plant. Under this policy, $150 million is provided for property damage and decontamination and decommissioning costs. Under this policy, the Company can be assessed a maximum of approximately $0.2 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at TMI-2 exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. ENVIRONMENTAL MATTERS- Various environmental liabilities have been recognized on the Consolidated Balance Sheet as of December 31, 2001, based on estimates of the total costs of cleanup, the Company's proportionate responsibility for such costs and the financial ability of other nonaffiliated entities to pay. The Company has been named as a "potentially responsible party" (PRP) 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. The Company has total accrued liabilities aggregating approximately $1 million as of December 31, 2001. The Company does not believe environmental remediation costs will have a material adverse effect on its financial condition, cash flows or results of operations. OTHER LEGAL PROCEEDINGS- Various lawsuits, claims and proceedings related to the Company's normal business operations are pending against the Company, the most significant of which is described below. 21 TMI-2, which was damaged during a 1979 accident, is jointly owned by the Company, JCP&L and Met-Ed, with the Company having a 25% ownership percentage. Claims for alleged personal injury against the Company, JCP&L, Met-Ed and GPU (the defendants) were filed in the U.S. District Court for the Middle District of Pennsylvania. In 1996, the District Court granted a motion for summary judgment filed by the defendants and dismissed the ten initial "test cases" which had been selected for a test case trial, as well as all of the remaining 2,100 pending claims. In November 1999, the U.S. Court of Appeals for the Third Circuit affirmed the District Court's dismissal of the ten "test cases," but set aside the dismissal of the additional pending claims, remanding them to the District Court for further proceedings. In September 2000, the defendants filed for a summary judgment in the District Court. Meanwhile, the plaintiffs appealed to the Third Circuit for a review of the District Court's decision placing limitations on the remaining plaintiffs' suit. In April 2001, the Third Circuit affirmed the District Court's decision. In July 2001, the defendants renewed their motion for a summary judgment on the remaining 2,100 claims in the District Court. On January 15, 2002, the District Court granted the defendants' amended motion for summary judgment. On February 14, 2002, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. In addition to the approximately 2,100 claims for which summary judgment has been granted, there is other pending litigation arising out of the TMI-2 accident. This litigation consists of the following: eight personal injury cases that were not consolidated with the above-referenced approximately 2,100 claims; two class actions brought on behalf of plaintiffs alleging additional injuries diagnosed after the filing of the complaints in the above-referenced case; a case alleging exposure during the post-accident cleanup of the TMI-2 plant; and claims by individual businesses for economic loss resulting from the TMI-2 accident. Although unable to predict the outcome of this litigation, the Company believes that any liability to which it might be subject by reason of the TMI-2 accident will not exceed its financial protection under the Price-Anderson Act. 7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 2001 and 2000.
Three Months Ended ------------------------------- March 31, June 30, September 30, Oct. 1-Nov. 6, Nov. 7-Dec. 31, 2001 2001 2001 2001 2001 - ---------------------------------------------------------------------------------------------- (In millions) Operating Revenues............ $243.8 $230.6 $265.6 $94.5 | $140.1 Operating Expenses and Taxes.. 235.0 212.2 238.8 78.5 | 125.7 - ----------------------------------------------------------------------------|----------------- Operating Income.............. 8.8 18.4 26.8 16.0 | 14.4 Other Income (Expense)........ 0.6 1.4 (1.2) (7.4) | 3.0 Net Interest Charges.......... 11.5 12.6 11.2 4.4 | 6.6 - ----------------------------------------------------------------------------|----------------- Net Income (Loss)............. $ (2.1) $ 7.2 $ 14.4 $ 4.2 | $ 10.8 ============================================================================|=================
Three Months Ended --------------------------------------------- March 31, June 30, September 30,December 31, 2000 2000 2000 2000 - ------------------------------------------------------------------------------ (In millions) Operating Revenues............ $220.1 $206.8 $236.7 $238.3 Operating Expenses and Taxes.. 184.4 193.2 237.8 206.2 - ------------------------------------------------------------------------------ Operating Income (Loss)....... 35.7 13.6 (1.1) 32.1 Other Income (Expense)........ 0.3 2.0 (0.8) 5.2 Net Interest Charges.......... 9.1 11.1 12.1 15.5 - ------------------------------------------------------------------------------ Net Income (Loss)............. $ 26.9 $ 4.5 $(14.0) $ 21.8 ============================================================================== 22 Report of Independent Public Accountants To the Stockholders and Board of Directors of Pennsylvania Electric Company: We have audited the accompanying consolidated balance sheet and consolidated statement of capitalization of Pennsylvania Electric Company (a Pennsylvania corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of December 31, 2001 (post-merger), and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for the period from January 1, 2001 to November 6, 2001 (pre-merger) and the period from November 7, 2001 to December 31, 2001 (post-merger). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Pennsylvania Electric Company and subsidiaries as of December 31, 2000 and for each of the two years in the period ended December 31, 2000 (pre-merger), were audited by other auditors whose report dated January 31, 2001, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2001 financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Electric Company and subsidiaries as of December 31, 2001 (post-merger), and the results of their operations and their cash flows for the period from January 1, 2001 to November 6, 2001 (pre-merger) and the period from November 7, 2001 to December 31, 2001 (post-merger), in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Cleveland, Ohio, March 18, 2002. 23 Report of Independent Accountants To the Board of Directors and Stockholder of Pennsylvania Electric Company: In our opinion, the consolidated balance sheet as of December 31, 2000 and the related consolidated statements of income, and cash flows for each of the two years in the period ended December 31, 2000 (appearing on the accompanying index of the Pennsylvania Electric Company 2001 Annual Report to Stockholders incorporated by reference in this Form 10-K) present fairly, in all material respects, the financial position, results of operations and cash flows of Pennsylvania Electric Company and Subsidiary Companies at December 31, 2000 and for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 31, 2001 24 EX-21 66 ex21-6pe.txt LIST OF SUBS - PENELEC Exhibit 21.6 PENNSYLVANIA ELECTRIC COMPANY SUBSIDIARIES OF THE REGISTRANT STATE OF NAME OF SUBSIDIARY BUSINESS ORGANIZATION - ------------------ -------- ------------ NINEVEH WATER COMPANY WATER SERVICE PENNSYLVANIA THE WAVERLY ELECTRIC LIGHT ELECTRIC DISTRIBUTION PENNSYLVANIA AND POWER COMPANY PENELEC PREFERRED CAPITAL, INC. SPECIAL-PURPOSE FINANCE DELAWARE PENELEC CAPITAL, L.P. SPECIAL-PURPOSE FINANCE DELAWARE PENELEC PREFERRED CAPITAL II, INC. SPECIAL-PURPOSE FINANCE DELAWARE PENELEC CAPITAL II, L.P. SPECIAL-PURPOSE FINANCE DELAWARE PENELEC CAPITAL TRUST SPECIAL-PURPOSE FINANCE DELAWARE Note: Penelec, along with its affiliates JCP&L and Met-Ed, collectively own all of the common stock of Saxton Nuclear Experimental Corporation, a Pennsylvania nonprofit corporation organized for nuclear experimental purposes which is now inactive. The carrying value of the owners' investment has been written down to a nominal value. EX-23 67 ex23-8.txt ARTHUR ANDERSEN CONSENT - PENELEC EXHIBIT 23.8 PENNSYLVANIA ELECTRIC COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into Pennsylvania Electric Company's previously filed Registration Statements, File No. 333-62295, No. 333-62295-01 and No. 333-62295-02. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 29, 2002. EX-23 68 ex23-9pn.txt PWC CONSENT - PENELEC EXHIBIT 23.9 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-62295, 333-62295-01 and 333-62295-02) of Pennsylvania Electric Company of our report dated January 31, 2001 relating to the financial statements, which appears in this Form 10-K. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 29, 2002 EX-99 69 ex99pen.txt LETTER TO SEC RE: ARTHUR ANDERSEN - PENELEC Exhibit 99 March 29, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Temporary Note 3T to Article 3 of Regulation S-X Ladies and Gentlemen: In connection with the audit of the consolidated financial statements of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and for the year then ended, Arthur Andersen LLP (Andersen) has issued its report dated March 18, 2002. Andersen's report is included in FirstEnergy's Annual Report on Form 10-K for the year ended December 31, 2001. FirstEnergy has received the following representations from Andersen with respect to their audit: o The FirstEnergy audit was subject to Andersen's quality control system for their U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards. o There was appropriate continuity of Andersen personnel working on the FirstEnergy audit. o There was appropriate availability of national office consultation for the FirstEnergy audit. o There was appropriate availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the FirstEnergy audit. Sincerely, /s/Harvey L. Wagner ---------------------------------- Harvey L. Wagner Vice President and Controller -----END PRIVACY-ENHANCED MESSAGE-----