-----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, BEoIM3PhkrlOjgyRrkqN7vif2l4Ha6uzKkWa+42p40SUEcwtbFuIMC5jrxPnbSrj fyTmD5ua6g+4pCVTQ8aiVA== 0001031296-00-000008.txt : 20000411 0001031296-00-000008.hdr.sgml : 20000411 ACCESSION NUMBER: 0001031296-00-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 38 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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: SEC FILE NUMBER: 333-21011 FILM NUMBER: 582454 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 BUSINESS PHONE: 3303845100 MAIL ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLEVELAND ELECTRIC ILLUMINATING CO CENTRAL INDEX KEY: 0000020947 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340150020 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02323 FILM NUMBER: 582455 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET STREET 2: C/O FIRSTENERGY CORP CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2166229800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO EDISON CO CENTRAL INDEX KEY: 0000073960 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340437786 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02578 FILM NUMBER: 582456 BUSINESS ADDRESS: STREET 1: 76 S MAIN ST CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2163845100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA POWER CO CENTRAL INDEX KEY: 0000077278 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 250718810 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03491 FILM NUMBER: 582457 BUSINESS ADDRESS: STREET 1: 1 E WASHINGTON ST STREET 2: P O BOX 891 CITY: NEW CASTLE STATE: PA ZIP: 16103-0891 BUSINESS PHONE: 4126525531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLEDO EDISON CO CENTRAL INDEX KEY: 0000352049 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 344375005 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03583 FILM NUMBER: 582458 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET CITY: AKRON STATE: OH ZIP: 43308 BUSINESS PHONE: 2166229800 10-K 1 1999 10-K 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification No. - ----------- ----------------------------------- ------------------ 333-21011 FIRSTENERGY CORP. 34-1843785 (An Ohio Corporation) 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-2578 OHIO EDISON COMPANY 34-0437786 (An Ohio Corporation) 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-2323 THE CLEVELAND ELECTRIC ILLUMINATING 34-0150020 COMPANY (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3491 PENNSYLVANIA POWER COMPANY 25-0718810 (A Pennsylvania Corporation) 1 East Washington Street P. O. Box 891 New Castle, PA 16103 Telephone (412)652-5531 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: $4,238,859,520 as of March 10, 2000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: OUTSTANDING CLASS AT MARCH 24, 2000 ----- ----------------- FirstEnergy Corp., $.10 par value 231,119,841 Ohio Edison Company, $9 par value 100 The Cleveland Electric Illuminating Company, no par value 79,590,689 The Toledo Edison Company, $5 par value 39,133,887 Pennsylvania Power Company, $30 par value 6,290,000 FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company common stock; Ohio Edison Company is the sole holder of Pennsylvania Power Company common stock. 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, 1999 (Pages 16-47) Part II Proxy Statement for 2000 Annual Meeting of Stockholders to be held April 27, 2000 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 4.40% Series on New York Stock 4.44% Series Exchange and Chicago 4.56% Series Stock Exchange Cumulative Preferred Stock, $25 par value 7.75% Series Registered on New York Stock Exchange and Chicago Stock Exchange The Cleveland Cumulative Serial Preferred Electric Stock, without par value: Illuminating $7.40 Series A All series registered Company $7.56 Series B on New York Stock Adjustable Rate, Series L Exchange Depository Shares: 1993 Series A, each New York Stock Exchange share representing 1/20 of a share of Serial Preferred Stock, $42.40 Series T (without par value) The Toledo Edison Cumulative Preferred Stock, par Company value $100 per share: 4-1/4% Series All series registered 8.32% Series on American Stock 7.76% Series Exchange 10% Series Cumulative Preferred Stock, par value $25 per share: 8.84% Series All series registered $2.365 Series on New York Stock Adjustable Rate, Series A Exchange Adjustable Rate, Series B First Mortgage Bonds: 8% Series due 2003 All series registered on New York Stock Exchange Pennsylvania Cumulative Preferred Stock, Power $100 par value: Company 4.24% Series All series registered 4.25% Series on Philadelphia Stock 4.64% Series Exchange, Inc. SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: (Cont'd) This combined Form 10-K is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to any of the four FirstEnergy subsidiaries is also attributed to FirstEnergy. FORM 10-K TABLE OF CONTENTS Page ---- Part I Item 1. Business 1 The Company 1 Utility Regulation 1 PUCO Rate Matters 2 PPUC Rate Matters 3 FERC Rate Matters 3 Fuel Recovery Procedures 4 Capital Requirements 4 Central Area Power Coordination Group 6 Nuclear Regulation 6 Nuclear Insurance 7 Environmental Matters 7 Air Regulation 8 Water Regulation 9 Waste Disposal 9 Summary 9 Fuel Supply 10 System Capacity and Reserves 10 Regional Reliability 11 Competition 11 Research and Development 11 Executive Officers 11 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 15 Part III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 15 Item 13. Certain Relationships and Related Transactions 15 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 PART 1 ITEM 1. BUSINESS The Company FirstEnergy Corp. (Company) was organized under the laws of the State of Ohio in 1996 and became a holding company on November 8, 1997 in connection with the merger of Ohio Edison Company (OE) and Centerior Energy Corporation (Centerior). The Company's principal business is the holding, directly or indirectly, of all of the outstanding common stock of its four principal electric utility operating subsidiaries, OE, The Cleveland Electric Illuminating Company (CEI), Pennsylvania Power Company (Penn) and The Toledo Edison Company (TE). These utility subsidiaries are referred to throughout as "Companies." The Company's consolidated revenues are primarily derived from electric service provided by its utility operating subsidiaries and the revenues of its other principal subsidiaries: FirstEnergy Services Corp. (FE Services), FirstEnergy Facilities Services Group, LLC. (FE Facilities); FirstEnergy Trading Services, Inc. (FETS), and MARBEL Energy Corporation (MARBEL). In addition, the Company holds all of the outstanding common stock of five other direct subsidiaries: FirstEnergy Properties, Inc., FirstEnergy Ventures, Corp., FirstEnergy Nuclear Operating Co. (FENOC), American Transmission Systems, Inc., and FirstEnergy Securities Transfer Company. The Companies' combined service areas encompass approximately 13,200 square miles in central and northern Ohio and western Pennsylvania. The areas they serve have combined populations of approximately 5.8 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 furnishes electric service to communities in a 7,500 square mile area of central and northeastern Ohio. It also provides transmission services and electric energy for resale to certain municipalities in OE's service area and transmission services to certain rural cooperatives. 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, a Pennsylvania corporation, which furnishes electric service to communities in a 1,500 square mile area of western Pennsylvania. Penn also provides transmission services and electric energy for resale to certain municipalities in Pennsylvania. The area served by Penn has a population of approximately 0.4 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. It also has ownership interests in certain generating facilities in Pennsylvania. CEI furnishes electric service in an area of approximately 1,700 square miles in northeastern Ohio, including the City of Cleveland. 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. It also has ownership interests in certain generating facilities in Pennsylvania. TE furnishes electric service in an area of approximately 2,500 square miles in northwestern Ohio, including the City of Toledo. The area TE serves has a population of approximately 0.8 million. FE Services was organized under the laws of the State of Ohio in 1997 and offers energy-related products and services primarily on a regional basis. FE Services has one subsidiary, Penn Power Energy, Inc. (a Pennsylvania corporation) which provides electric generation services and other energy services to Pennsylvania customers under Pennsylvania's deregulated environment. FE Facilities is the parent company of eleven direct subsidiaries, which are heating, ventilating, air conditioning and energy management companies. FETS, which was organized as a corporation in Delaware in 1995, acquires and arranges for the delivery of electricity and natural gas to FE Services' retail customers. MARBEL, which was acquired by the Company in June 1998, is a company whose 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 other subsidiaries owning interests in natural gas distribution and transmission facilities. Utility Regulation The Companies are subject to broad regulation as to rates and other matters by the Public Utilities Commission of Ohio (PUCO) and the Pennsylvania Public Utility Commission (PPUC). With respect to their wholesale and interstate electric operation and rates, the 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. The Energy Policy Act of 1992 (1992 Act) amended portions of the 1935 Act, providing independent power producers and other nonregulated generating facilities easier entry into electric generation markets. The 1992 Act also amended portions of the Federal Power Act, authorizing the FERC, under certain circumstances, to mandate access to utility-owned transmission facilities. Following the enactment of the 1992 Act, the FERC has ordered all utilities to file open access tariffs applicable to transmission facilities, including provisions which require utilities to offer comparable services on a nondiscriminatory basis. The FirstEnergy system has such an open access tariff in effect (see "FERC Rate Matters"). PUCO Rate Matters The PUCO approved OE's Rate Reduction and Economic Development Plan in 1995 and a Rate Reduction and Economic Development Plan for CEI and TE in January 1997. These plans were designed to enhance and accelerate economic development within the Companies' Ohio service areas and to assure the Companies' customers in those service areas of long-term competitive pricing for energy services. These plans were to maintain current base electric rates for OE, CEI and TE through December 31, 2005, unless additional revenues were needed to recover the costs of changes in environmental, regulatory or tax laws or regulations. At the end of the plan periods, OE base rates were to be reduced by $300 million (approximately 20 percent below current levels) and CEI and TE base rates were to be reduced by a combined $310 million (approximately 15 percent below current levels). As part of these plans, transition rate credits were implemented for customers, which are expected to reduce operating revenues for OE by approximately $600 million and CEI and TE by approximately $391 million during the plan period. The plans also established revised fuel recovery rate formulas which eliminated the automatic pass- through of fuel costs to their retail customers (see "Fuel Recovery Procedures"). In July 1999, Ohio's new electric utility restructuring legislation, which will allow Ohio electric customers to select their generation suppliers beginning January 1, 2001, was signed into law. Among other things, the new law provides for a 5% reduction on the generation portion of residential customers' bills and the opportunity to recover transition costs, including regulatory assets, from January 1, 2001 through December 31, 2005. The period for the recovery of regulatory assets only can be extended up to December 31, 2010. The PUCO was authorized to determine the level of transition cost recovery, as well as the recovery period for the regulatory assets portion of those costs, in considering each Ohio electric utility's transition plan application. The Company, on behalf of its Ohio electric utility operating companies -- OE, CEI and TE -- on December 22, 1999 refiled its transition plan under Ohio's new electric utility restructuring law. The plan was originally filed with the PUCO on October 4, 1999, but was refiled to conform to PUCO rules established on November 30, 1999. The new filing also included additional information on the Company's plans to turn over control, and perhaps ownership, of its transmission assets to the Alliance Regional Transmission Organization. The PUCO indicated that it will endeavor to issue its order in the Company's case within 275 days of the initial October filing date. The transition plan itemizes, or unbundles, the current price of electricity into its component elements - including generation, transmission, distribution and transition charges. As required by the PUCO's rules, the Company's filing also included its proposals on corporate separation of its regulated and unregulated operations, operational and technical support changes needed to accommodate customer choice, an education program to inform customers of their options under the law, and how the Company's transmission system will be operated to ensure access to all users. Under the plan, customers who remain with OE, CEI, or TE as their generation provider will continue to receive savings under the Company's rate plans, expected to total $759 million between 2000 and 2005. In addition, customers will save $358 million through reduced charges for taxes and the 5% reduction in the price of generation for residential customers beginning January 1, 2001. Customer prices are expected to be frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the 5% reduction in the price of generation for residential customers. The plan proposes recovery of generation-related transition costs of approximately $1.8 billion ($1.6 billion, net of deferred income taxes), $1.9 billion ($1.7 billion, net of deferred income taxes) and $0.8 billion ($0.7 billion, net of deferred income taxes) for OE, CEI and TE, respectively, over the market development period; transition costs related to regulatory assets aggregating approximately $1.5 billion ($1.0 billion, net of deferred income taxes), $1.9 billion ($1.4 billion, net of deferred income taxes) and $0.8 billion ($0.5 billion, net of deferred income taxes) for OE, CEI and TE, respectively, will be recovered over the period of 2001 through 2004 for OE; 2001 through 2007 for TE; and 2001 through 2010 for CEI. The PUCO indicated that it will endeavor to issue its order related to the transition plan filing by mid-2000. The application of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effect of Certain Types of Regulation" (SFAS 71) to OE's generation business and the nonnuclear generation businesses of CEI and TE will be discontinued at that time. If the transition plans ultimately approved by the PUCO for OE, CEI and TE do not provide adequate recovery of their nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on the results of operations and financial condition for the Company, OE, CEI and TE. The Companies will continue to bill and collect cost-based rates for their transmission and distribution services, which will remain regulated; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those respective operations after December 31, 2000. All of OE's regulatory assets and CEI's and TE's regulatory assets related to their nonnuclear operations are being recovered under provisions of the regulatory plans currently in effect. In addition, the PUCO has authorized OE to recognize additional capital recovery related to its generating assets (which is reflected as additional depreciation expense) and additional amortization of regulatory assets during the plan period of at least $2 billion more than the amount that would have been recognized if OE's plan were not in effect. These additional amounts are being recovered through current rates. CEI and TE recognized fair value purchase accounting adjustments to reduce nuclear plant by $1.71 billion and $.84 billion, respectively, in connection with the FirstEnergy merger. These fair value adjustments recognized for financial reporting purposes will ultimately satisfy the asset reduction commitments of at least $1.4 billion for CEI and $0.6 billion for TE contained in the CEI and TE plan. For regulatory purposes, CEI and TE will recognize the accelerated amortization over the period that their rate plan is in effect. Based on the Ohio plans, at this time, OE, CEI and TE are continuing to bill and collect cost-based rates (with the exception of CEI's and TE's nuclear operations) and they continue the application of SFAS 71 to those respective operations. CEI's and TE's plan does not provide for full recovery of their nuclear operations. As a result, in October 1997 CEI and TE discontinued application of SFAS 71 for their nuclear operations and decreased their regulatory assets of customer receivables for future income taxes related to the nuclear assets by $499 million and $295 million, respectively, in addition to the fair value adjustments referred to above. PPUC Rate Matters In December 1996, Pennsylvania enacted "The Electricity Generation Customer Choice and Competition Act," which permitted customers, including Penn's customers, to choose their electric generation supplier, while transmission and distribution services will continue to be supplied by their current providers. In June 1998, the PPUC authorized a rate-restructuring plan for Penn in accordance with this law, which essentially resulted in the deregulation of Penn's generation business as of June 30, 1998. Penn 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, Penn 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 a CTC over a seven-year transition period; the remaining net amount of $78 million was written off. The charge of $51.7 million ($30.5 million after income taxes) for discontinuing the application of SFAS 71 to Penn's generation business was recorded as a 1998 extraordinary item on the Company's, OE's and Penn's respective Statement of Income. Customer choice is being phased in over three years with 66% of each customer class able to choose alternative suppliers of generation by January 2, 2000, and all remaining customers having choice as of January 1, 2001. Under the plan, Penn continues to deliver power to homes and businesses through its transmission and distribution systems, which remain regulated by the PPUC. Penn'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 Penn's rates will be excluded from their bill 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 that started in 1999 and ends in 2006. FERC Rate Matters Rates for wholesale customers are regulated by the FERC. The FirstEnergy merger was approved by the FERC on October 29, 1997, and the Companies have operated as a single utility system since December 1997. An open access transmission tariff and joint dispatch agreement for the FirstEnergy system submitted with the merger application were approved by the FERC on February 9, 2000. The current FirstEnergy open access rates were approved by the FERC on March 16, 2000. In October 1998, the Company announced plans to transfer the Companies' transmission assets into a new subsidiary, American Transmission Systems, Inc. (ATSI), with the transfer expected to be finalized in 2000. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent transmission company (TransCo). The Company believes that a TransCo better addresses the FERC's stated transmission objectives of providing non-discriminatory service, while providing for streamlined and cost-efficient operation. On October 27, 1999, the FERC approved the plan to transfer the Company's transmission assets to ATSI. The PUCO approved the transfer in February 2000. PPUC and SEC regulatory approvals are also required. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent, regional transmission organization (RTO). In working toward that goal, the Company joined with four other companies -- American Electric Power, Consumers Energy, Detroit Edison and Virginia Power -- to form the Alliance RTO. On June 3, 1999, the Alliance submitted an application to the FERC to form an independent, for profit RTO. On December 15, 1999, the FERC issued an order conditionally approving the Alliance's application. Fuel Recovery Procedures In accordance with their respective rate plans, OE's, CEI's and TE's fuel recovery rates have been frozen, subject only to limited periodic adjustments. The respective rates are adjusted annually based on changes in the GDP Implicit Price Deflator, unless significant changes in environmental, regulatory or tax laws or regulations increase or decrease the cost of fuel. Such changes in laws, regulations and/or taxes would require PUCO approval in order to be reflected as an adjustment to the Electric Fuel Component (EFC) rate. Furthermore, for the period July 1, 1999 through June 30, 2000, the OE EFC rate is limited to the average fuel cost rate of certain utilities within the state. Commencing July 1, 2000, the OE EFC rate will be limited to 97% of the average fuel cost rate of three of these companies. The average fuel cost rate for these three utilities may be adjusted by the PUCO to reflect any significant changes in the Phase II environmental compliance plans of such companies involving capital additions or equipment utilization. On March 1, 2000, the respective EFC rates in effect for CEI and TE were reduced to reflect the elimination of annual fixed charges related to a Bruce Mansfield Plant coal supply contract (see "Fuel Supply"), which amounts to $13.96 million for CEI and $8.74 million for TE. The resulting reduced EFC rates will be used as the basis for the annual GDP adjustment, but, in no event, would either company's annual EFC rate exceed 1.465 cents per kWh during the rate plan period. Under the Ohio deregulation legislation the EFC will be repealed effective with the beginning of the market development period on January 1, 2001. The unbundled retail electric rates for OE, CEI and TE during the market development period will reflect the respective EFC rates in effect when the legislation was effective in 1999. Under its 1996 plan, Penn eliminated its energy cost rate for the recovery of fuel and net purchased power costs as a separate component of customer charges. Energy costs were rolled into Penn's base electric rates at their projected 1996-1997 level. Capital Requirements Capital expenditures for the Company and its subsidiaries for the years 1999 through 2004, excluding nuclear fuel, are shown on the following table. Such costs include expenditures for the betterment of existing facilities and for the construction of generating capacity, transmission lines, distribution lines, substations and other additions. See "Environmental Matters" below with regard to possible environment-related expenditures not included in the forecast.
1999 2000-2004 Capital Expenditures Forecast --------------------------------------- Actual 2000 2001-2004 Total ------ ---- --------- ----- (In millions) OE $167 $213 $ 553 $ 766 Penn 22 38 196 234 CEI 122 112 417 529 TE 107 97 162 259 Other subsidiaries 81 190 1,022 1,212 ---- ---- ------ ------ Total $499 $650 $2,350 $3,000
During the 2000-2004 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 2000-2004 Redemption Schedule --------------------------------------- 2000 2001-2004 Total ---- --------- ----- (In millions) OE $177 $ 883 $1,060 Penn 29 81 110 CEI 209 780 989 TE 76 505 581 Other subsidiaries 3 10 13 ---- ------ ------ Total $494 $2,259 $2,753
OE's and Penn's nuclear fuel purchases are financed through OES Fuel (a wholly owned subsidiary of OE) commercial paper and loans, both of which are supported by a $180.5 million long-term bank credit agreement. CEI and TE severally lease their respective portions of nuclear fuel and pay for the fuel as it is consumed. The Companies' respective investments for additional nuclear fuel, and nuclear fuel investment reductions as the fuel is consumed, during the 2000-2004 period are presented in the following table. The table also shows the Companies' operating lease commitments, net of capital trust cash receipts for the 2000-2004 period.
Other Net Nuclear Fuel 2000-2004 Forecasts Operating Lease Commitments ----------------------------------------- New Investments Consumption 2000-2004 Schedule ------------------------ ------------------------ ------------------------ 2000 2001-2004 Total 2000 2001-2004 Total 2000 2001-2004 Total ---- --------- ----- ---- --------- ----- ---- --------- ----- (In millions) OE $ 40 $ 88 $128 $ 28 $101 $129 $ 71 $286 $357 Penn 24 66 90 18 68 86 -- 1 1 CEI 56 110 166 36 123 159 6 55 61 TE 39 74 113 24 82 106 69 294 363 ---- ---- ---- ---- ---- ---- ---- ---- ---- Total $159 $338 $497 $106 $374 $480 $146 $636 $782
Short-term borrowings outstanding at December 31, 1999, consisted of $257.8 million of bank borrowings (Company - $90.0 million, OE-$162.7 and FE Facilities - $5.1) and $160.0 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. The Company and its utility operating subsidiaries also had $137 million (Company-$60 million and OE-$77 million) available under revolving lines of credit as of December 31, 1999. The Company may borrow under the facility and could transfer any of its borrowings under its $150 million line of credit to CEI and/or TE. In addition, Penn had a $2 million bank facility available that provides 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 2000 from the following sources: funds to be received from operations; available cash and temporary cash investments (approximate amounts as of December 31, 1999: Company's nonutility subsidiaries-$24 million, OE-$81 million, Penn-$6 million and CEI-$1 million); the issuance of long-term debt (for refunding purposes) 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 $162 million. OE is currently able to issue $833 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 $114 million principal amount of first mortgage bonds, with up to $94 million of such amount issuable against property additions; the remainder could be issued against previously retired bonds. CEI and TE can issue $615 million and $367 million, respectively, principal amount of first mortgage bonds against previously retired bonds and against property additions. OE's, Penn's and TE'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 1999 and an assumed dividend rate of 10.25%, OE would be permitted, under the earnings coverage test contained in its charter, to issue at least $1.3 billion of preferred stock. Based on its 1999 earnings, TE could issue $250 million of additional preferred stock. There are no restrictions on CEI' s ability 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. Central Area Power Coordination Group (CAPCO) In September 1967, the CAPCO companies, which consisted of the Companies and Duquesne Light Company (Duquesne), announced a program for joint development of power generation and transmission facilities. Included in the program are Unit 7 at the W H Sammis Plant, Unit 5 at the Eastlake Plant, Units 1, 2 and 3 at the Bruce Mansfield Plant, Units 1 and 2 at the Beaver Valley Power Station, the Perry Nuclear Power Plant and the Davis- Besse Nuclear Power Station, each now in service. On March 26, 1999, the Company completed its agreements with Duquesne to exchange certain generating assets. All regulatory approvals were received by October 1999. In December 1999, Duquesne transferred 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Companies. The agreements for the exchange of assets, which was structured as a like-kind exchange for tax purposes, provides the Companies with exclusive ownership and operating control of all CAPCO generating units. The three FirstEnergy plants transferred are being sold by Duquesne to a wholly owned subsidiary of Orion Power Holdings, Inc. (Orion). The Companies will continue to operate those plants until the assets are transferred to the new owners. Duquesne funded decommissioning costs equal to its percentage interest in the three nuclear generating units that were transferred to FirstEnergy. The Duquesne asset transfer to the Orion subsidiary could take place by the middle of 2000. Under the agreements, Duquesne is no longer a participant in the CAPCO arrangements after the exchange. Nuclear Regulation The construction and operation of nuclear generating units are subject to the regulatory jurisdiction of the Nuclear Regulatory Commission (NRC) including the issuance by it of construction permits and operating licenses. 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. Davis-Besse was placed in commercial operation in 1977, and its operating license expires in 2017. Beaver Valley Unit 1 was placed in commercial operation in 1976, and its operating license expires in 2016. 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. The NRC has promulgated and continues to promulgate regulations related to the safe operation of nuclear power plants. The Companies cannot predict what additional regulations will be promulgated or design changes required or the effect that any such regulations or design changes, 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 the Company'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 or licensing 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 $1.43 billion (OE-$339 million, Penn-$367 million, CEI-$443 million and TE-$276 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 $7.9 million (OE-$2.0 million, Penn-$2.3 million, CEI-$2.2 million and TE-$1.4 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 $36.1 million (OE-$10.3 million, Penn-$7.5 million, CEI-$10.9 million and TE-$7.4 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. The Companies have estimated capital expenditures for environmental compliance of approximately $292 million, which is included in the construction estimate given under "Capital Requirements" for 2000 through 2004. Air Regulation Under the provisions of the Clean Air Act of 1970, both the State of Ohio and the Commonwealth of Pennsylvania 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 both Ohio and Pennsylvania the construction or modification 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 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 purchasing emission allowances. NOx reductions are being achieved through combustion controls and generating more electricity from lower-emitting plants. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In March 2000, the U.S. Court of Appeals for the D.C. Circuit upheld EPA's NOx Transport Rule except as applied to the State of Wisconsin and portions of Georgia and Missouri. The Court's decision left in place a stay which delays the requirement for states to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA contemplating an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Companies' Ohio and Pennsylvania plants, by May 2003, in the event implementation of the NOx Transport Rule is delayed. New Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. The Companies continue to evaluate their compliance plans and other compliance options. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30- day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards back to the EPA finding constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. The Companies cannot predict the EPA's action in response to the Court's remand order. The cost of compliance with these regulations, if they are reinstated, may be substantial and depends on the manner in which they are ultimately implemented, if at all, by the states in which the Companies operate affected facilities. In September 1999, the Company received, and subsequently in October 1999, OE and Penn received, a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. In November 1999, OE and Penn received a citizen suit notification letter from the Connecticut Attorney General's office alleging Clean Air Act violations at the Sammis Plant. In November 1999 and March 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 36 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor-owned utilities, which included a complaint against OE and Penn in the U.S. District Court for the Southern District of Ohio. On March 1, 2000, the Department of Justice added 12 additional plants owned by the other utilities to the complaints. 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 this litigation, the Company 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. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. 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 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 (NPDES) water discharge permits can be assumed by a state. Ohio 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 EPA's evaluation of the need for future regulation. EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. CEI and TE have been named as "potentially responsible parties" (PRPs) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. CEI and TE have accrued a liability totaling $5.4 million at December 31, 1999 based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. CEI and TE believe that waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. 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 in the process of development 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 1999 were:
Coal Nuclear ---- ------- OE 75.2% 24.8% Penn 61.1% 38.9% CEI 59.0% 41.0% TE 42.3% 57.7%
The Company currently has long-term coal contracts which will provide approximately 6,300,000 tons for the year 2000. The contracts are shared between the Companies based on various economic considerations and the coal is produced primarily from mines located in Pennsylvania, Kentucky and West Virginia. The contracts expire at various times through December 31, 2004. The Companies estimate their 2000 coal requirements to be approximately 17,950,000 tons (OE - 8,420,000, Penn - 1,160,000, CEI - 6,030,000, and TE - 2,340,000). See "Environmental Matters" for factors pertaining to meeting environmental regulations affecting coal-fired generating units. OES Fuel is the sole lessor for OE's and Penn's nuclear fuel requirements (see "Capital Requirements" and Note 3G of Notes to OE's Consolidated Financial Statements). Nuclear fuel is currently financed for CEI and TE through leases with a special-purpose corporation. The Company has contracts for uranium material through 2002 and conversion services through 2002. The enrichment services are contracted for the majority of the enrichment requirements for nuclear fuel through 2005. Fabrication services for fuel assemblies are contracted for the next four reloads for Beaver Valley Unit 1, three reloads for Beaver Valley Unit 2 (through approximately 2006 and 2005, respectively), the next four 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, the Company intends to make additional arrangements for the supply of uranium and for the subsequent conversion, enrichment, fabrication, and waste disposal services. Due to the present lack of availability of domestic reprocessing services, to the continuing absence of any program to begin development of such reprocessing capability and questions as to the economics of reprocessing, nuclear fuel costs are calculated based on the assumption that spent fuel will not be reprocessed. 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 2022. After on-site storage capacity is exhausted, additional storage capacity will have to be obtained which could result in significant additional costs unless reprocessing services, interim off-site disposal, or permanent waste disposal facilities become available. The Federal Nuclear Waste Policy Act of 1982 provides for the construction of facilities for the disposal of high-level nuclear wastes, including spent fuel from nuclear power plants operated by electric utilities; however, the selection of a suitable site has become embroiled in the political process. The Company has contracts with the U.S. Department of Energy (DOE) for the disposal of spent fuel. On December 17, 1996, the DOE notified the Companies that it would be unable to begin acceptance of spent fuel for disposal by January 31, 1998 as mandated by Section 302(a)(5)(B) of the Nuclear Waste Policy Act (NPA). 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. System Capacity and Reserves The respective 1999 net maximum hourly demand on each of the Companies was OE-5,750,000 kilowatts (kW) (including 301,000 kW of firm power sales which extend through 2005 as discussed under "Competition") on July 30, 1999; Penn-905,000 kW (including 63,000 kW of firm power sales which extend through 2005 as discussed under "Competition") on September 2, 1999; CEI- 4,451,000 kW (including 18,000 kW of firm power sales which extend through 2002 as discussed under "Competition") on July 30, 1999; and TE-2,085,000 kW on July 30, 1999. During the next three years, twelve combustion turbines (CT) are scheduled to be added to the FirstEnergy system. The timing of the capacity additions is: three CTs (390 MW) in 2000; five CTs (425 MW) in 2001; and four CTs (340 MW) in 2002. Based on existing capacity plans, the load forecast made in November 1999, and anticipated term power sales to other utilities, the capacity margin anticipated for the year 2000 is 13%. With the start of electric utility industry deregulation in Ohio in 2001, the Company's risk management strategy with respect to power supply is addressing existing capacity, new capacity additions, retail risk products such as interruptible contracts and demand-side management options, and financial hedges such as call options, futures and forwards. Regional Reliability The Companies participate with 24 other electric companies operating in nine states in the East Central Area Reliability Coordination Agreement (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. Competition The Companies have 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. In an effort to more fully utilize their facilities and hold down rates to their other customers, OE and Penn have entered into a long-term power sales agreement with another utility. Currently, OE and Penn are selling 450,000 kW annually under this contract through December 31, 2005. OE and Penn have the option to reduce this commitment by 150,000 kW, with three years' advance notice. In addition, CEI has entered into a long-term power sales contract with another utility and is currently selling up to 20,000 kW under this contract through December 31, 2002. As a result of the actions taken by state legislative bodies over the last few years, major changes in the retail utility business are now occurring in some parts of the United States, including states in which the Company's utility companies operate. Although it is too early to accurately predict all of the effects of the changes that are beginning to take place in the retail energy market, it is anticipated that these changes will result in fundamental alterations in the way traditional integrated utilities and holding company systems, like FirstEnergy, conduct their business. These changes will likely result in increased costs associated with utility unbundling and transitioning to new organizational structures and ways of conducting business. Sales of electricity in these deregulated markets are diversifying the Company's revenue sources through its competitive subsidiaries in areas outside of its traditional native load. This strategy has positioned the Company to compete in the northeast quadrant of the United States - the region targeted by the Company for growth. The Company's competitive subsidiaries have actively participated in three of the deregulated energy markets: Pennsylvania, New Jersey and Delaware. Currently, FE Services is providing electric generation to more than 20,000 accounts within these states. As additional states within the northeast region of the United States become deregulated, FE Services is preparing to enter into these markets. 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, generating, delivery, energy management and conservation, environment 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 1999, approximately 60% 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 ---- --- ------------------------------------- ----------- H. P. Burg 53 Chairman of the Board and Chief Executive Officer 2000-present 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 1996-1997 Senior Vice President and Chief Financial Officer-OE *-1996 A. J. Alexander 48 President 2000-present Executive Vice President and General Counsel 1997-2000 Senior Vice President and General Counsel-OE *-1997 E. T. Carey 57 Vice President - Distribution 1997-present Vice President - Regional Operations and Customer Service-OE 1995-1997 Vice President - Marketing and Customer Service Support-OE *-1995 M. B. Carroll 48 Vice President - Corporate Affairs 1997-present Manager - Sandusky Area-OE *-1997 K. W. Dindo 50 Vice President - Energy Services 1998-present Vice President and Controller - Caliber System, Inc. *-1998 D. S. Elliott 45 Vice President - Sales and Marketing 1997-present Manager - FirstEnergy Services - OE 1997 Manager - Eastern Division - OE 1996-1997 Manager - Youngstown Division - OE *-1996 A. R. Garfield 61 Senior Vice President 2000-present Vice President - Business Development 1997-2000 Vice President - System Operations - OE *-1997 J. A. Gill 63 Senior Vice President - Administrative Services 1998-present Vice President - Administrative Services 1997-1998 Vice President - Administration - OE *-1997 R. H. Marsh 49 Vice President and Chief Financial Officer 1998-present Vice President - Finance 1997-1998 Treasurer - OE *-1997 G. L. Pipitone 50 Vice President - Fossil Production 1997-present Vice President - Generation and Transmission - OE 1996-1997 Manager - Akron Division - OE *-1996 S. F. Szwed 47 Vice President - Transmission 1997-present Vice President - Engineering & Planning - Centerior Service Company 1995-1997 Director - System Planning & Operations - Centerior Service Company *-1995 L. L. Vespoli 40 Vice President and General Counsel 2000-present Associate General Counsel 1997-2000 Senior Attorney - OE 1995-1997 Attorney - OE *-1995 N. C. Ashcom 52 Corporate Secretary 1997-present Secretary - OE *-1997 T. C. Navin 42 Treasurer 1998-present Assistant Treasurer 1998-1998 Director, Treasury Services 1998-1998 Director, Asset Strategy 1997-1998 Staff Business Analyst - OE 1997-1997 Senior Business Analyst - OE 1995-1997 Senior Planning Analyst - OE *-1995 H. L. Wagner 47 Controller 1997-present Comptroller - OE *-1997 Except for H. P. Burg, A. J. Alexander, M. B. Carroll, K. W. Dindo and D. S. Elliott, the officers above hold the same office for FirstEnergy, OE, CEI and TE. Except for R. Joseph Hrach holding the office of President and J. A. Gill and A. R. Garfield holding the offices of Vice President, and except for H. P. Burg, A. J. Alexander, M. B. Carroll, K. W. Dindo and D. S. Elliott, the officers above hold the same offices for Penn. * Indicates position held at least since January 1, 1995. At December 31, 1999, the Company's nonutility subsidiaries and the Companies had a total of 13,461 employees consisting of the following: Company - 1,942, OE - 1,839, CEI - 1,694, TE - 977, Penn - 895, FE Services - 409, FENOC - 2,278, FE Facilities - 3,383 and MARBEL - 44 employees. 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, 2000, shown on the table below.
Net Demonstrated Capacity (MW) ------------- OE Penn CEI TE ------------- ----------- ------------- -------------- Unit Total % MW % MW % MW % MW ---- ----- --- -- --- -- --- -- --- -- Plant - Location - ---------------- Coal-Fired Units - ---------------- Ashtabula- 5,7,8,9 376 -- -- -- -- 100.00% 376 -- -- Ashtabula, OH Bay Shore- 1-4 631 -- -- -- -- -- -- 100.00% 631 Toledo, OH R. E. Burger- 3-5 406 100.00% 406 -- -- -- -- -- -- Shadyside, OH Eastlake-Eastlake, OH 1-5 1,233 -- -- -- -- 100.00% 1,233 -- -- Lakeshore- 18 245 -- -- -- -- 100.00% 245 -- -- Cleveland, OH B. Mansfield- 1 780 60.00% 468 33.50% 261 6.50%(b) 51 -- -- Shippingport, PA 2 780 43.06% 336 9.36% 73 30.28%(b) 236 17.30%(b) 135 3 800 49.34% 395 6.28% 50 24.47%(b) 196 19.91%(b) 159 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 2,524 925 ------ ----- ----- ----- ----- Nuclear Units - ------------- Beaver Valley- 1 810 35.00% 283 65.00% 527 -- -- -- -- Shippingport, PA 2 820 41.88%(a) 343 13.74% 113 24.47% 201 19.91%(c) 163 Davis-Besse- 1 883 -- -- -- -- 51.38% 454 48.62% 429 Oak Harbor, OH Perry- 1 1,194 30.00%(a) 358 5.24% 63 44.85% 535 19.91% 238 N. Perry Village, OH (d) ------ ----- ----- ----- ----- Total 3,707 984 703 1,190 830 ------ ----- ----- ----- ----- Oil/Gas-Fired/ Pumped Storage Units Edgewater-Lorain, OH 4 100 100.00% 100 -- -- -- -- -- -- Seneca-Warren, PA 435 -- -- -- -- 100.00% 435 -- -- West Lorain- Lorain, OH 1 120 100.00% 120 -- -- -- -- -- -- Other 238 109 19 33 77 ------ ----- ----- ----- ----- Total 893 329 19 468 77 ------ ----- ----- ----- ----- Total 12,071 4,826 1,231 4,182 1,832 ====== ===== ===== ===== ===== Notes: (a) 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. (b) CEI's interests consist of 1.68% owned and 28.60% leased and TE's interests are leased. (c) 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 8,752 miles. The Companies' electric distribution systems include 55,932 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 50,456,000 kilovolt-amperes. The Companies' transmission lines also interconnect with those of AEP, The Dayton Power and Light Company, Duquesne, Monogahela Power Company, West Penn Power Company, Detroit Edison Company and Pennsylvania Electric Company. These interconnections make possible utilization by the Companies of generating capacity constructed as a part of the CAPCO program, as well as providing opportunities for the sale of power to other utilities.
Substation Distribution Transmission Transformer Lines Lines Capacity ------------ ------------ ----------- (Miles) (kV-amperes) OE 26,668 4,040 20,468,000 Penn 5,183 651 4,282,000 CEI 23,518 3,013 17,304,000 TE 563 1,048 8,402,000 ------ ----- ---------- Total 55,932 8,752 50,456,000
FE OE Penn CEI TE -- -- ---- --- -- Report of Independent Public Accountants 16 25 21 27 27 Statements of Income-Three Years Ended December 31, 1999 25 7 6 8 8 Balance Sheets-December 31, 1999 and 1998 26 8 7 9 9 Statements of Capitalization- December 31, 1999 and 1998 27-29 9-10 8 10-11 10-11 Statements of Common Stockholders' Equity-Three Years Ended December 31, 1999 30 11 9 12 12 Statements of Preferred Stock-Three Years Ended December 31, 1999 30 11 9 12 12 Statements of Cash Flows-Three Years Ended December 31, 1999 31 12 10 13 13 Statements of Taxes-Three Years Ended December 31, 1999 32 13 11 14 14 Notes to Financial Statements 33-47 14-24 12-20 15-26 15-26
2. Financial Statement Schedules Included in Part IV of this report:
FE OE Penn CEI TE -- -- ---- --- -- Report of Independent Public Accountants 47 48 51 49 50 Schedule - Three Years Ended December 31, 1999: II - Consolidated Valua- tion and Qualifying Accounts 52 53 56 54 55
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 show 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) 10-1 - FirstEnergy Corp. Executive and Director Incentive Compensation Plan, revised November 15, 1999. (A) 10-2 - Amended FirstEnergy Corp. Deferred Compensation Plan for Directors, revised November 15, 1999. (A) 10-3 - Employment, severance and change of control agreement between FirstEnergy Corp. and executive officers. (A) 10-4 - FirstEnergy Corp. Supplemental Executive Retirement Plan, amended January 1, 1999. (A) 10-5 - FirstEnergy Corp. Executive Incentive Compensation Plan. (A) 10-6 - Restricted stock agreement between FirstEnergy Corp. and A. J. Alexander. 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) (A) 12.1 - Consolidated fixed charge ratios. (A) 13 - 1999 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, 1999. (A) 23 - Consent of Independent Public Accountants. (A) 27 - Financial Data Schedule. (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.) 3-2 - Code of Regulations of OE as amended April 24, 1986. (Registration No. 33-5081, Exhibit (4)(d).) (A) 3-3 - Code of Regulations of OE as amended September 27, 1999. (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) 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 (A) (4)(2) (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 - Participation Agreement No. 1 relating to the financing of the development of certain coal mines, dated as of October 1, 1973, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration No. 2-61146, Exhibit 5(e)(1). 10-16 - Amendment No. 1 dated as of September 15, 1978 to Participation Agreement No. 1 dated as of October 1, 1973 among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, National City Bank as Loan Trustee and National City Bank as Bond Trustee. (Registration No. 2- 68906 of Pennsylvania Power Company, Exhibit 5(e)(2).) 10-17 - Participation Agreement No. 2 relating to the financing of the development of certain coal mines, dated as of August 1, 1974, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc. General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration No. 2-53059, Exhibit 5(h)(2).) 10-18 - Amendment No. 1 dated as of September 15, 1978 to Participation Agreement No. 2 dated as of August 1, 1974 among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, National City Bank as Loan Trustee and National City Bank as Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 5(e)(4).) 10-19 - Participation Agreement No. 3 dated as of September 15, 1978 among Quarto Mining Company, the CAPCO Companies, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, and National City Bank as Loan Trustee and Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 5(e)(5).) 10-20 - Participation Agreement No. 4 dated as of October 31, 1980 among Quarto Mining Company, the CAPCO Group, the Loan Participants listed in Schedule A thereto and National City Bank as Bond Trustee. (Registration No. 2- 68906 of Pennsylvania Power Company, Exhibit 10-16.) 10-21 - Participation Agreement dated as of May 1, 1986, among Quarto Mining Company, the CAPCO Companies, the Loan Participants thereto, and National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-22.) 10-22 - Participation Agreement No. 6 dated as of December 1, 1991 among Quarto Mining Company, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company, the Loan Participants listed in Schedule A thereto, National City Bank, as Mortgage Bond Trustee and National City Bank, as Refunding Bond Trustee. (1991 Form 10-K, Exhibit 10-19.) 10-23 - Agreement entered into as of October 20, 1981 among the CAPCO Companies regarding the use of Quarto coal at Mansfield Units 1, 2 and 3. (1981 Form 10-K, Exhibit 20- 1.) 10-24 - Restated Option Agreement dated as of May 1, 1983 by and between the North American Coal Corporation and the CAPCO Companies. (1983 Form 10-K, Exhibit 19-1.) 10-25 - Trust Indenture and Mortgage dated as of October 1, 1973 between Quarto Mining Company and National City Bank, as Bond Trustee, together with Guaranty dated as of October 1, 1973 with respect thereto by the CAPCO Group. (Registration No. 2-61146, Exhibit 5(e)(5).) 10-26 - Amendment No. 1 dated August 1, 1974 to Trust Indenture and Mortgage dated as of October 1, 1973 between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 1 dated August 1, 1974 to Guaranty dated as of October 1, 1973 with respect thereto by the CAPCO Group. (Registration No. 2-53059, Exhibit 5(h)(2).) 10-27 - Amendment No. 2 dated as of September 15, 1978 to the Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 2 dated as of September 15, 1978 to Guaranty dated as of October 1, 1973 with respect to the CAPCO Group. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibits 5(e)(11) and 5(e)(12).) 10-28 - Amendment No. 3 dated as of October 31, 1980, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended between Quarto Mining Company and National City Bank as Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 10-16.) 10-29 - Amendment No. 4 dated as of July 1, 1985 to the Trust Indenture and Mortgage dated as of October 1, 1973, as amended between Quarto Mining Company and National City Bank as Bond Trustee. (1985 Form 10-K, Exhibit 10-28.) 10-30 - Amendment No. 5 dated as of May 1,1986, to the Trust Indenture and Mortgage between Quarto and National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-30.) 10-31 - Amendment No. 6 dated as of December 1, 1991, to the Trust Indenture and Mortgage dated as of October 1, 1973, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-28.) 10-32 - Trust Indenture dated as of December 1, 1991, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-29.) 10-33 - 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.) 10-34 - 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.) 10-35 - 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.) 10-36 - 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.) 10-37 - 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.) 10-38 - 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.) 10-39 - Open end Mortgage dated as of October 1, 1973 between Quarto Mining Company and the CAPCO Companies and Amendment No. 1 thereto, dated as of September 15, 1978. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 10-23.) 10-40 - Repayment and Security Agreement and Assignment of Lease dated as of October 1, 1973 between Quarto Mining Company and Ohio Edison Company as Agent for the CAPCO Companies and Amendment No. 1 thereto, dated as of September 15, 1978. (1980 Form 10-K, Exhibit 20-2.) 10-41 - Restructuring Agreement dated as of April 1, 1985 among Quarto Mining Company, the Company and the other CAPCO Companies, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants signatories thereto, Central National Bank of Cleveland, as Owner Trustee and National City Bank as Loan Trustee and Bond Trustee. (1985 Form 10- K, Exhibit 10-33.) 10-42 - Unsecured Note Guaranty dated as of July 1, 1985 by the CAPCO Companies to General Electric Credit Corporation. (1985 Form 10-K, Exhibit 10-34.) 10-43 - Memorandum of Understanding dated March 31, 1985 among the CAPCO Companies. (1985 Form 10-K, Exhibit 10-35.) (C) 10-44 - Ohio Edison System Executive Supplemental Life Insurance Plan. (1995 Form 10-K, Exhibit 10- 44.) (C) 10-45 - Ohio Edison System Executive Incentive Compensation Plan. (1995 Form 10-K, Exhibit 10-45.) (C) 10-46 - Ohio Edison System Restated and Amended Executive Deferred Compensation Plan. (1995 Form 10-K, Exhibit 10- 46.) (C) 10-47 - Ohio Edison System Restated and Amended Supplemental Executive Retirement Plan. (1995 Form 10-K, Exhibit 10- 47.) (C) 10-48 - Severance pay agreement between Ohio Edison Company and W. R. Holland. (1995 Form 10-K, Exhibit 10-48.) (C) 10-49 - Severance pay agreement between Ohio Edison Company and H. P. Burg. (1995 Form 10-K, Exhibit 10-49.) (C) 10-50 - Severance pay agreement between Ohio Edison Company and A. J. Alexander. (1995 Form 10-K, Exhibit 10-50.) (C) 10-51 - Severance pay agreement between Ohio Edison Company and J. A. Gill. (1995 Form 10K, Exhibit 10.51.) (D) 10-52 - 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) 10-53 - 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) 10-54 - 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) 10-55 - 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) 10-56 - 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, PNPPII 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) 10-57 - 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) 10-58 - 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) 10-59 - 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) 10-60 - 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) 10-61 - 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) 10-62 - 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) 10-63 - 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) 10-64 - 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) 10-65 - 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) 10-66 - 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) 10-67 - 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) 10-68 - 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) 10-69 - 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) 10-70 - 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) 10-71 - 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) 10-72 - 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) 10-73 - 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) 10-74 - 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) 10-75 - Partial Mortgage Release dated as of March 19, 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) 10-76 - 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) 10-77 - 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) 10-78 - 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) 10-79 - 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.) 10-80 - 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.) 10-81 - 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.) 10-82 - 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.) 10-83 - 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.) 10-84 - 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.) 10-85 - 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.) 10-86 - 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.) 10-87 - 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.) 10-88 - 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.) 10-89 - 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.) 10-90 - 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.) 10-91 - 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 From 10-K, Exhibit 10-87.) 10-92 - 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.) 10-93 - 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.) 10-94 - 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.) 10-95 - 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, and Irving Trust Company, as Indenture Trustee. (1986 Form 10-K, Exhibit 28-18.) 10-96 - 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.) 10-97 - 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.) 10-98 - 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.) 10-99 - 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.) 10-100 - 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.) 10-101 - 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.) 10-102 - 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.) 10-103 - 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.) 10-104 - 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.) 10-105 - 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.) 10-106 - 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.) 10-107 - 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.) 10-108 - Ohio Edison Company Master Decommissioning Trust Agreement for Perry Nuclear Power Plant Unit One, Station Unit One and Beaver Valley Power Station Unit Two dated July 1, 1993. (1993 Form 10-K, Exhibit 10-94.) 10-109 - 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.) 10-110 - 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.) 10-111 - Guarantee Agreement entered into by Ohio Edison Company dated as of January 17, 1991. (1990 Form 10-K, Exhibit 10-64.) 10-112 - 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.) 10-113 - 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.) 10-114 - 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.) 10-115 - 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.) 10-116 - 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.) 10-117 - 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) 10-118 - 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) 10-119 - 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) 10-120 - 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) 10-121 - 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) 10-122 - 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) 10-123 - 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) 10-124 - 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 Beaver Valley Two Pi Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-4.) (E) 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 Beaver Valley Two Pi Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-103.) (E) 10-126 - 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) 10-127 - 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) 10-128 - 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) 10-129 - 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) 10-130 - 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) 10-131 - 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) 10-132 - 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) 10-133 - 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) 10-134 - 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) 10-135 - 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) 10-136 - 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) 10-137 - 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) 10-138 - 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) 10-139 - 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) 10-140 - 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) 10-141 - 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) 10-142 - 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) 10-143 - 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) 10-144 - 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) 10-145 - 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) 10-146 - 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) 10-147 - 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 118.) (F) 10-148 - 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) 10-149 - 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) 10-150 - 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) 10-151 - 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) 10-152 - 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) 10-153 - 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) 10-154 - 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) 10-155 - 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) 10-156 - 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) 10-157 - 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) 10-158 - 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) 10-159 - 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.) 10-160 - Operating Agreement dated March 10, 1987 with respect to Perry Unit No. 1 between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-24.) 10-161 - 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.) 10-162 - 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.) 10-163 - 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.) 10-164 - 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.) 10-165 - 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.) 10-166 - 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 - 1999 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, 1999. (A) 23.1 - Consent of Independent Public Accountants. (A) 27.1 - Financial Data Schedule. (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 3-1 - Agreement of Merger and Consolidation dated April 1, 1929, among Pennsylvania Power Company (Penn), Harmony Electric Company and Peoples Power Company (consummated May 31, 1930), copies of Letters Patent issued thereon, together with the Election Return and Treasurer's Return, relative to decrease of capital stock; Election Return authorizing change of capital stock and increase of indebtedness; Election Return authorizing change of capital stock; Election Return establishing 4.24% Preferred Stock; Certificate with respect to the establishment of 4.64% Preferred Stock; Election Returns and Certificates of Actual Sale in connection with the purchase by Penn Power of all the property of Pine- Mercer Electric Company, Industry Borough Electric Company, Ohio Township Electric Company, and Shippingport Borough Electric Company; Certificate of Change of Location of Penn Power's principal office; Certificate of Consent authorizing increase in authorized Common Stock; Certificate of Consent with respect to the removal of limitations on the authorized amount of indebtedness of Penn Power; Election Returns and Certificates of Actual Sale in connection with the purchase by Penn Power of all the property of Borolak Public Service Company, Eastfax Public Service Company, Norango Public Service Company, Sadwick Public Service Company, Sosango Public Service Company, Surrick Public Service Company, Wesango Public Service Company, and Westfax Public Service Company; Certificate of Change of Location of Penn Power's principal office; Amendment to the Charter extending the territory in which Penn Power may operate in the Borough of Shippingport, Beaver County, Pennsylvania; Certificate of Consent authorizing increase in authorized Common Stock; Certificate with respect to the establishment of the 8% Preferred Stock; Certificate accepting Business Corporation Law of Pennsylvania for government and regulation of affairs of Penn Power; Articles of Amendment incorporating certain protective provisions relating to Preferred Stock, increasing amount of authorized Preferred Stock and authorizing future increases in amounts of authorized Preferred Stock without a vote of the holders of Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 7.64% Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Articles of Amendment increasing the number of authorized shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 8.48% Preferred Stock; Articles of Amendment authorizing sinking fund requirements for Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11% Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 9.16% Preferred Stock; Articles of Amendment increasing authorized number of shares of Common Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 8.24% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 10.50% Preferred Stock; Articles of Amendment increasing authorized number of shares of Common Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 15.00% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11.50% Preferred Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 13.00% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11.50% Preferred Stock, Series B; Articles of Amendment effective April 2, 1987, adding a standard of care for, and limiting the personal liability of, officers and directors; Articles of Amendment effective April 1, 1992, setting forth corporate purposes of the Company; Statement With Respect to Shares with respect to the establishment of the 7.625% Preferred Stock and Statement with Respect to Shares with respect to the establishment of the 7.75% Preferred Stock. (Physically filed and designated respectively, as follows: in Form A-2, Registration No. 2-3889, as Exhibit A-1; in Form 1- MD for 1938, File No. 2-3889, as Exhibit (a)-1; in Form 1-MD for 1945, File No. 2-3889, as Exhibit A; in Form U- 1, File No. 70-2310, as Exhibit A-3 (d); in Form 8-K for March 1951, File No. 1-3491, as Exhibit B; in Form 8-K for June 1958, File No. 1-3491B, as Exhibit 1; in Form 10-K for 1959 as Exhibits 1, 2, 3 and 4; in Form 8-K for March 1960, File No. 1-3491B as Exhibit A; in Form U-1, File No. 70-3971, as Exhibit A-2; in Form U-1, File No. 70-4055, as Exhibit A-2; as Exhibits 1 through 8 in Form 8-K for January 1962, File No. 1-3491; as Exhibit A in Form 8-K for August 1963, File No. 1-3491; as Exhibits A and B in Form 8-K for September 1969, File No. 1-3491; as Exhibit B in Form 8-K for April 1971, File No. 1- 3491; as Exhibit B in Form 8-K for September 1971, File No. 1-3491; in Form U-1, File No. 70-5264, as Exhibit A- 2; as Exhibit A in Form 8-K for September 1972, File No. 1-3491; as Exhibit A in Form 8-K for December 1972, File No. 1-3491; as Exhibit A in Form 8-K for March 1973, File No. 1-3491; as Exhibit A in Form 8-K for December 1973, File No. 1-3491; as Exhibits A and C in Form 8-K for February 1974, File No. 1-3491; as Exhibits A and B in Form 8-K for January 1975, File No. 1-3491; as Exhibit F in Form 8-K for May 1975, File No. 1-3491; as Exhibit A in Form 8-K for April 1976, File No. 1-3491; as Exhibit G in Form 10-Q for quarter ended June 30, 1977, File No. 1-3491; as Exhibit C in Form 10-K for 1977, File No. 1-3491; as Exhibit A in Form 10-K for 1977, File No. 1-3491, as Exhibit D in Form 10-Q for quarter ended June 30, 1980, File No. 1-3491; as Exhibit (4) in Form 10-Q for quarter ended June 30, 1981, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended June 30, 1982, File No. 1-3491; as Exhibit 4 in Form 10- Q for quarter ended September 30, 1982, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended September 30, 1983, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended March 31, 1984, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended June 30, 1984, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended September 30, 1985, File No. 1-3491; as Exhibit 3- 2 in Form 10-K for 1987 File No. 1-3491; as Exhibit 3-2 in Form 10-K for 1992 File No. 1-3491; as Exhibit 19-2 in Form 10-K for 1992 File No. 1-3491; and as Exhibit 3- 2 in Form 10-K for 1993 File No. 1-3491.) 3-2 - By-Laws of Penn as amended March 25, 1992. (1992 Form 10-K, Exhibit 3-3, File No. 1-3491.) (A) 3-3 - By-Laws of Penn as amended September 27, 1999. 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.) - ---------------------- * 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. 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.) (A) 4-5 - Supplemental Indenture dated as of September 29, 1999, between Penn and Citibank, N.A., as Trustee. (A) 4-6 - Supplemental Indenture dated as of November 15, 1999, between Penn and Citibank, N.A., as Trustee. 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.) 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 - Participation Agreement No. 1 relating to the financing of the development of certain coal mines, dated as of October 1, 1973, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration Statement of Ohio Edison Company, File No. 2-61146, Exhibit 5 (e) (1).) 10-16 - Amendment No. 1 dated as of September, 15, 1978, to Participation Agreement No. 1 dated as of October 1, 1973, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 5 (e) (2).) 10-17 - Participation Agreement No. 2 relating to the financing of the development of certain coal mines, dated as of August 1, 1974, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Ohio Edison Company, File No. 2-53059, Exhibit 5 (h) (2).) 10-18 - Amendment No. 1 dated as of September 15, 1978, to Participation Agreement No. 2 dated as of August 1, 1974, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 5(e) (4).) 10-19 - Participation Agreement No. 3 relating to the financing of the development of certain coal mines, dated as of September 15, 1978, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 5 (e) (5).) 10-20 - Participation Agreement No. 4 relating to the financing of the development of certain coal mines, dated as of October 31, 1980, among Quarto Mining Company, the CAPCO Group, the Loan Participants listed in Schedule A thereto and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 10-16.) 10-21 - Participation Agreement No. 5 dated as of May 1, 1986, among Quarto Mining Company, the CAPCO Companies, the Loan Participants listed in Schedule A thereto, and National City Bank, as Bond Trustee. (1986 Form 10-K, Exhibit 10-22, File No. 1-2578, Ohio Edison Company.) 10-22 - Participation Agreement No. 6 dated as of December 1, 1991, among Quarto Mining Company, the CAPCO Companies, the Loan Participants listed in Schedule A thereto, National City Bank, as Mortgage Bond Trustee, and National City Bank, as Refunding Bond Trustee. (1991 Form 10-K, Exhibit 10-19, File No. 1-2578, Ohio Edison Company.) 10-23 - Agreement entered into as of October 20, 1981, among the CAPCO Companies regarding the use of Quarto Coal at Mansfield Units Nos. 1, 2 and 3. (1981 Form 10-K, Exhibit 20-1, File No. 1-2578, Ohio Edison Company.) 10-24 - Restated Option Agreement dated as of May 1, 1983, by and between The North American Coal Corporation and the CAPCO Companies. (1983 Form 10-K, Exhibit 19-1, File No. 1-2578, Ohio Edison Company.) 10-25 - Trust Indenture and Mortgage dated as of October 1, 1973, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Guaranty, dated as of October 1, 1973, with respect thereto by the CAPCO Group. (Registration Statement of Ohio Edison Company, File No. 2-61146, Exhibit 5 (e) (5).) 10-26 - Amendment No. 1 dated August 1, 1974, to Trust Indenture and Mortgage dated as of October 1, 1973, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 1 dated August 1, 1974, to Guaranty dated as of October 1, 1973, with respect thereto by the CAPCO Group. (Registration Statement of Ohio Edison Company, File No. 2-53059, Exhibit 5 (h) (2).) 10-27 - Amendment No. 2 dated as of September 15, 1978, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 2 dated as of September 15, 1978, to Bond Guaranty dated as of October 1, 1973, as amended, between the CAPCO Group and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibits 5 (e) (11) and 5 (e) (12).) 10-28 - Amendment No. 3 dated as of October 31, 1980, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee. (Registration Statement No. 2- 68906, Exhibit 10-16.) 10-29 - Amendment No. 4 dated as of July 1, 1985, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee. (1985 Form 10-K, Exhibit 10-28, File No. 1-2578, Ohio Edison Company.) 10-30 - Amendment No 5 dated as of May 1, 1986, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee. (1986 Form 10-K, Exhibit 10-30, File No. 1-2578, Ohio Edison Company.) 10-31 - Amendment No. 6 dated as of December 1, 1991, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-28, File No. 1-2578, Ohio Edison Company.) 10-32 - Trust Indenture dated as of December 1, 1991, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-29, File No. 1-25- 78, Ohio Edison Company.) 10-33 - 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 Statement No. 2-68906, Exhibit 10-16.) 10-34 - Amendment No. 4 dated as of July 1, 1985, to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank, as Bond Trustee. (1985 Form 10-K, Exhibit 10-30, File No. 1-2578, Ohio Edison Company.) 10-35 - Amendment No. 5 dated as of May 1, 1986, to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank, as Bond Trustee. (1986 Form 10-K, Exhibit 10-33, File No. 1-2578, Ohio Edison Company.) 10-36 - Amendment No. 6A dated as of December 1, 1991, to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-33, File No. 1- 2578, Ohio Edison Company.) 10-37 - Amendment No. 6B dated as of December 30, 1991, to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-34, File No. 1- 2578, Ohio Edison Company.) 10-38 - Bond Guaranty dated as of December 1, 1991, by the CAPCO Companies to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-35, File No. 1-2578, Ohio Edison Company.) 10-39 - Open End Mortgage dated as of October 1, 1973, between Quarto Mining Company and the CAPCO Companies and Amendment No. 1 thereto dated as of September 15, 1978. (Registration Statement No. 2-68906, Exhibit 10-23.) 10-40 - Restructuring Agreement dated as of April 1, 1985, among Quarto Mining Company, the CAPCO Companies, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in schedules thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (1985 Form 10-K, Exhibit 10-33, File No. 1-2578, Ohio Edison Company.) 10-41 - Unsecured Note Guaranty dated as of July 1, 1985, by the CAPCO Companies to General Electric Credit Corporation. (1985 Form 10-K, Exhibit 10-34, File No. 1-2578, Ohio Edison Company.) 10-42 - 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) 10-43 - Ohio Edison System Executive Supplemental Life Insurance Plan. (1995 Form 10-K, Exhibit 10-44, File No. 1-2578, Ohio Edison Company.) (B) 10-44 - Ohio Edison System Executive Incentive Compensation Plan. (1995 Form 10-K, Exhibit 10-45, File No. 1-2578, Ohio Edison Company.) (B) 10-45 - 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) 10-46 - Ohio Edison System Restated and Amended Supplemental Executive Retirement Plan. (1995 Form 10-K, Exhibit 10- 47, File No. 1-2578, Ohio Edison Company.) 10-47 - 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.) 10-48 - 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.) 10-49 - 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.) 10-50 - 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.) 10-51 - 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.) 10-52 - 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.) 10-53 - 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.) 10-54 - 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.) 10-55 - 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 - 1999 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) 27.4 - Financial Data Schedule. (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. 33-20128, 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). (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 27, 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 4(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). (A) 4b(81) - September 29, 1999. (A) 4b(82) - January 15, 2000. 4c - Open-End Subordinate Indenture of Mortgage between The Cleveland Electric Illuminating Company and Bank One, Columbus N.A., as Trustee, Dated as of June 1, 1994 (Exhibit 4(a), August 26, 1994 Form 8-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 - 1999 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, 1999. (A)23.2 - Consent of Independent Public Accountants. (A)27.2 - Financial Data Schedule. (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). 3b - Code of Regulations of TE dated January 28, 1987, as amended effective July 1 and October 1, 1988 and April 24, 1990 (Exhibit 3b, 1990 Form 10-K, File No. 1-3583). (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). 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). (A) 4b(49) - January 15, 2000. 4c - Open-End Subordinate Indenture of Mortgage between The Toledo Edison Company and Bank One, Columbus, N.A., as Trustee, dated as of June 1, 1994 (Exhibit 4(b), August 26, 1994 Form 8-K, File No. 1-3583). (A) 12.4 - Consolidated fixed charge ratios. (A) 13.3 - 1999 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, 1999. (A) 27.3 - Financial Data Schedule. (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. (b) Reports on Form 8-K FirstEnergy, OE, CEI, TE, Penn- ------------------------------- None. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of FirstEnergy Corp.: We have audited, in accordance with generally accepted auditing standards, 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 February 11, 2000. 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 February 11, 2000 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Ohio Edison Company: We have audited, in accordance with generally accepted auditing standards, 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 February 11, 2000. 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 February 11, 2000 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of The Cleveland Electric Illuminating Company: We have audited, in accordance with generally accepted auditing standards, 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 February 11, 2000. 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 February 11, 2000 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of The Toledo Edison Company: We have audited, in accordance with generally accepted auditing standards, 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 February 11, 2000. 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 February 11, 2000 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Pennsylvania Power Company: We have audited, in accordance with generally accepted auditing standards, 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 February 11, 2000. 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 February 11, 2000 SCHEDULE II FIRSTENERGY CORP. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Additions ------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- --------- ------- (In Thousands) Year Ended December 31, 1999: Accumulated provision for uncollectible accounts - customers $ 6,397 $ 8,668 $2,313 (a) $10,659 (b) $ 6,719 ======= ======= ====== ======= ======= - other $46,251 $ 4,039 $ 18 (a) $44,949 (b) $ 5,359 ======= ======= ====== ======= ======= Year Ended December 31, 1998: Accumulated provision for uncollectible accounts - customers $ 5,618 $28,984 $2,290 (a) $30,495 (b) $ 6,397 ======= ======= ====== ======= ======= - other $ 4,026 $45,836 $ 42 (a) $ 3,653 (b) $46,251 ======= ======= ====== ======= ======= Year Ended December 31, 1997: Accumulated provision for uncollectible accounts - customers $ 2,306 $13,565 $2,277 (a) $12,530 (b) $ 5,618 ======== ======= ====== ======= ======= - other $ -- $ 941 $4,808 (c) $ 1,723 $ 4,026 ======== ======= ====== ======= ======= - --------------------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible. (c) Includes the $4,026,000 effect of the FirstEnergy merger on November 8, 1997.
SCHEDULE II OHIO EDISON COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Additions ------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- --------- ------- (In Thousands) 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 ====== ======= ====== ======= ======= Year Ended December 31, 1998: Accumulated provision for uncollectible accounts $5,618 $ 7,933 $2,290 (a) $ 9,444 (b) $6,397 ====== ======= ====== ======= ====== Year Ended December 31, 1997: Accumulated provision for uncollectible accounts $2,306 $10,979 $2,277 (a) $ 9,944 (b) $5,618 ====== ======= ====== ======= ====== - ------------------------ (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, 1999, 1998 AND 1997
Additions ------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- --------- ------- (In Thousands) Year Ended December 31, 1999: Accumulated provision for uncollectible accounts $ 491 $ 1,180 $ 18 (a) $ 689 (b) $1,000 ====== ======= ====== ======= ====== Year Ended December 31, 1998: Accumulated provision for uncollectible accounts $1,226 $ (16) $ 42 (a) $ 761 (b) $ 491 ====== ======= ====== ======= ====== Year Ended December 31, 1997: Accumulated provision for uncollectible accounts: Nov. 8 - Dec. 31, 1997 $1,226 $ 2,331 $ 216 (a) $ 2,547 (b) $1,226 ====== ======= ====== ======= ====== - ----------------------------------------------------------------------------------------------------- Jan. 1 - Nov. 7, 1997 $ 58 $12,853 $1,366 (a) $13,051 (b) $1,226 ====== ======= ====== ======= ====== - --------------------- (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, 1999, 1998 AND 1997
Additions ------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- --------- ------- (In Thousands) Year Ended December 31, 1999: Accumulated provision for uncollectible accounts $ 100 $ -- $ -- $ 100 (b) $ -- ====== ====== ====== ====== ====== Year Ended December 31, 1998: Accumulated provision for uncollectible accounts $2,800 $ 192 $ -- $2,892 (b) $ 100 ====== ====== ====== ====== ====== Year Ended December 31, 1997: Accumulated provision for uncollectible accounts: Nov. 8 - Dec. 31, 1997 $2,800 $1,196 $ 566 (a) $1,762 (b) $2,800 ====== ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------ Jan. 1 - Nov. 7, 1997 $ 100 $9,367 $1,797 (a) $8,464 (b) $2,800 ====== ====== ====== ====== ====== - ------------------------ (a) Represents recoveries and reinstatements of accounts previously written off. (b) 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, 1999, 1998 AND 1997
Additions ------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- --------- ------- (In Thousands) Year Ended December 31, 1999: Accumulated provision for uncollectible accounts $3,599 $1,289 $300 (a) $1,651 (b) $3,537 ====== ====== ==== ====== ====== Year Ended December 31, 1998: Accumulated provision for uncollectible accounts $3,609 $1,242 $409 (a) $1,661 (b) $3,599 ====== ====== ==== ====== ====== Year Ended December 31, 1997: Accumulated provision for uncollectible accounts $ 569 $4,409 $397 (a) $1,766 (b) $3,609 ====== ====== ==== ====== ====== - ------------------------ (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 Chairman of the Board and Chief Executive Officer Date: March 21, 2000 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/ Anthony J. Alexander - ------------------------------------- ------------------------------------ H. Peter Burg Anthony J. Alexander Chairman of the Board President and Director and Chief Executive Officer and Director (Principal Executive Officer) /s/ Richard H. Marsh /s/ Harvey L. Wagner - ------------------------------------- ------------------------------------ Richard H. Marsh Harvey L. Wagner Vice President and Controller Chief Financial Officer (Principal Accounting Officer) (Principal Financial Officer) /s/ Carol A. Cartwright /s/ Glenn H. Meadows - ------------------------------------- ------------------------------------ Carol A. Cartwright Glenn H. Meadows Director Director /s/ William F. Conway /s/ Paul J. Powers - ------------------------------------- ------------------------------------ William F. Conway Paul J. Powers Director Director /s/ Robert B. Heisler, Jr. /s/ Robert C. Savage - ------------------------------------- ------------------------------------ Robert B. Heisler, Jr. Robert C. Savage Director Director /s/ Robert L. Loughhead /s/ George M. Smart - ------------------------------------- ------------------------------------ Robert L. Loughhead George M. Smart Director Director /s/ Russell W. Maier /s/ Jesse T. Williams, Sr. - ------------------------------------- ------------------------------------ Russell W. Maier Jesse T. Williams, Sr. Director Director Date: March 21, 2000 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 21, 2000 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 Vice President and Director (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ Anthony J. Alexander - ------------------------------------- ------------------------------------ Harvey L. Wagner Anthony J. Alexander Controller Director (Principal Accounting Officer) Date: March 21, 2000 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 21, 2000 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 Vice President and Director (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ Anthony J. Alexander - ------------------------------------- ------------------------------------ Harvey L. Wagner Anthony J. Alexander Controller Director (Principal Accounting Officer) Date: March 21, 2000 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 21, 2000 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 Vice President and Director (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ Anthony J. Alexander - ------------------------------------- ------------------------------------ Harvey L. Wagner Anthony J. Alexander Controller Director (Principal Accounting Officer) Date: March 21, 2000 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 21, 2000 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 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 Controller Director (Principal Accounting Officer) Date: March 21, 2000 EX-10.1 2 FIRSTENERGY CORP. EXECUTIVE AND DIRECTOR INCENTIVE COMPENSATION PLAN FE Plan effective May 1, 1998 Revised November 16, 1998 Revised November 16, 1999 Table of Contents Page ---- Article 1 Establishment, Purpose, and Duration 1 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 1 2.1 Definitions 2.1.1 Award 1 2.1.2 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 4 2.1.18 Option 4 2.1.19 Outside Director 4 2.1.20 Participant 4 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 Article 3 Administration 3.1 The Committee 5 3.2 Authority of the Committee 5 3.3 Selection of Participants 6 3.4 Decisions Binding 6 3.5 Delegation of Certain Responsibilities 6 Table of Contents Page ---- 3.6 Procedures of the Committee 6 3.7 Award Agreements 7 Conditions on Awards 7 Saturdays, Sundays, and Holidays 7 Article 4 Stock Subject to the Plan Number of Shares 7 Lapsed Awards 8 Adjustments in Authorized Shares 8 Article 5 Eligibility and Participation Eligibility 8 Actual Participation 8 Article 6 Stock Options Grant of Options 8 Option Agreement 9 Option Price 9 Duration of Options 9 Exercise of Options 9 Payment 9 Restrictions on Stock Transferability 10 Termination of Employment Due to Death, Disability, 10 or Retirement Termination of Employment for Other Reasons 10 Nontransferability of Options 10 Article 7 Stock Appreciation Rights Grant of Stock Appreciation Rights 11 Exercise of SARS in Lieu of Options 11 Exercise of SARS in Addition to Options 11 Exercise of SARS Independent of Options 11 Payment of SAR Amount 12 Form and Timing of Payment 12 Term of SAR 12 Termination of Employment 12 Nontransferability of SARs 12 Article 8 Restricted Stock Grant of Restricted Stock 12 Restricted Stock Agreement 12 Transferability 12 Other Restrictions 13 Certificate Legend 13 Removal of Restrictions 13 Voting Rights 13 Dividends and Other Distributions 13 Table of Contents Page ---- Termination of Employment Due to Retirement 13 Termination of Employment Due to Death or Disability 14 Termination of Employment for Other Reasons 14 Article 9 Performance Shares Grant of Performance Shares 14 Value of Performance Shares 14 Payment of Performance Shares 15 Committee Discretion to Adjust Awards 15 Form and Timing of Payment 15 Termination of Employment Due to Death, Disability, 15 or Retirement Termination of Employment for Other Reasons 15 Nontransferability 16 Article 10 Cash Awards Grant of Cash Award 16 Cash Award Performance Criteria 16 Payout of Cash awards 16 Conversion of Cash Award Payout to Restricted Stock 16 Article 11 Directors' Awards Grant of Director's Awards 17 Conversion of Retainer to Stock 17 Conversion of Retainer to Restricted Stock 17 Conversion of Retainer to Stock Options 17 Article 12 Beneficiary Designation 17 Article 13 Rights of Employees Employment 18 Participation 18 No Implied Rights; Rights on Termination of Service 18 No Right to Company Assets 18 Article 14 Change in Control Stock Based Awards 18 All Awards Other than Stock Based Awards 18 Article 15 Amendment, Modification, and Termination Amendment, Modification, and Termination 19 Awards Previously Granted 19 Deferral of Payments and Distributions 19 Article 16 Withholding and Deferral Tax Withholding 19 Table of Contents Page ---- Stock Delivery or Withholding 19 Article 17 Successors 20 Article 18 Requirements of Law Requirements of Law 20 Governing Law 20 Scope of Revision 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 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 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 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 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, 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 Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (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, 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 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 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. 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. 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. 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: 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 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. 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 7,500,000 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. 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 two hundred thousand (200,000) 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 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: in cash or its equivalent; by tendering Shares of previously acquired Stock having a Fair Market Value at the time of exercise equal to the total Option price, by foregoing compensation under rules established by the Committee, 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 such other consideration as the Committee may deem appropriate. 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: stock certificates in an appropriate amount based upon the number of Options exercised, issued in the Participant's name: 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 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 (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 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. 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 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. 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: in lieu of Options; in addition to Options; independent of Options; or 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 two hundred thousand (200,000) 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; the SAR amount may be for no 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 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. 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: 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 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, 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 one hundred thousand (100,000) 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. 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, 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. 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. 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, 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 one hundred thousand (100,000), 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 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 $1,000,000. 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. 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, 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. 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 $1,000,000. 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. 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. 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. 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: Increase the total amount of Stock which may be issued under this Plan, except as provided in Section 4.3 herein; or Change the class of Employees eligible to participate in the Plan; Materially increase the cost of the Plan or materially increase the benefits to Participants; or 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. 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. Plan, Rev 2.doc 11/30/99 6:02 AM EX-10.2 3 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 stock) 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 stock 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 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, 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, in a lump sum as soon as practicable, but no later than January 1 of the 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. 01/07/00 * * * Deferred Plan (Rev. 3).doc Scope of Changes - ---------------- 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-10.3 4 xxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxx Special Severance Agreement --------------------------- Dear Mr. xxxxxx: The Board of Directors (the "Board") of FirstEnergy (the "Company") recognizes that, as is the case with many publicly held corporations, there always exists the possibility of a change of control of the Company. This possibility and the uncertainty it creates may result in the loss or distraction of members of management of the Company and its subsidiaries to the detriment of the Company and its shareholders. The Board considers the establishment, maintenance, and continuity of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. The Board also believes that when a change of control is perceived as imminent, or is occurring, the Board should be able to receive and rely on disinterested advice from management regarding the best interests of the Company and its shareholders without concern that members of management might be distracted or concerned by the personal uncertainties and risks created by their perception of an imminent or occurring change of control. Accordingly, the Board has determined that appropriate steps should be taken to assure the Company of the continued employment and attention and dedication to duty of certain members of management of the Company and to ensure the availability of their disinterested advice, notwithstanding the possibility, threat or occurrence of a change of control. Therefore, in order to fulfill the above purposes, the Board has designated you as eligible for severance benefits as set forth below. 1. Offer ----- In order to induce you to remain in the employ of the Company and to provide continued services to the Company now and in the event that a Change of Control is imminent or occurring, this letter agreement (the "Agreement") sets forth severance benefits which the Company offers to pay to you in the event of a termination of your employment (in the manner described in Section 5 below) subsequent to a Change of Control of the Company (as defined in Section 4 below). 2. Operation --------- This Agreement shall be effective immediately upon its execution but anything in this Agreement to the contrary notwithstanding, neither this Agreement nor any of its provisions shall be operative unless and until there has been a Change of Control while you are still an employee of the Company, nor shall this Agreement govern or affect your employment relationship with the Company except as explicitly set forth herein. Upon a Change of Control, if you are still employed by the Company, this Agreement and all of its provisions shall become operative immediately. If your employment relationship with the Company is terminated before a Change of Control, you shall have no rights or obligations under this Agreement. 3. Term ---- (a) Term of Agreement: The term of this Agreement shall commence ----------------- immediately upon the date hereof and continue until December 31, 1999. (b) One-Year Evergreen Provision: Subject to subsection (c) ---------------------------- below, this Agreement shall be reviewed annually by the Board at a regular meeting held between October 1 and December 31 of each year. At such yearly review, the Board shall consider whether or not to extend the term of this Agreement for an additional year. Unless the Board affirmatively votes not to extend this Agreement, the term of this Agreement shall be extended for a period of one year from the previous termination date. In the event the Board votes not to extend this Agreement, the termination date of this Agreement shall be the later of December 31, 1999 or thirty-six full calendar months from December 31st of the year in which this Agreement was last extended. (c) Subsection (b) above notwithstanding, upon the occurrence of a Change of Control, this Agreement shall be automatically extended for a period of thirty-six full calendar months commencing on the date of such Change of Control. At the end of such thirty-six month period, this Agreement shall terminate. 4. Change of Control ----------------- For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "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 (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) 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 of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 4 are satisfied; or (b) 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 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 (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) 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, (ii) no Person (excluding the Company, any 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 (iii) 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 (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) 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, (A) 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, (B) 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 Company 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 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 (C) 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. 5. Termination ----------- (a) Termination Following Change of Control: If, within a --------------------------------------- period of thirty-six full calendar months after a Change of Control (as defined above) of the Company, you are discharged without Cause or resign for Good Reason (as defined below), you shall be entitled to the benefits provided by this Agreement as set forth in Section 6 below. (b) Good Reason: If any of the following events occurs ----------- without your express consent and within thirty-six full calendar months after a Change of Control, you may voluntarily terminate your employment within 30 days of the occurrence of such event and be entitled to the severance benefits set forth in Section 6 below: (1) The Company assigns any duties to you which are inconsistent with your position, duties, offices, titles, status (including membership on the Board of Directors) responsibilities or reporting requirements in effect immediately prior to a Change of Control, or your removal from or any failure to re-elect you to any of such positions or offices, except in connection with termination of your employment for Cause, Disability, Death or Normal Retirement, or by you other than for Good Reason, or; (2) Changes to your base salary are inconsistent with your annual performance review and the salary program applicable to other senior executives of the Company; or (3) The Company discontinues any bonus or other compensation plans or any other benefit, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health plan, disability plan or similar plan (as the same existed immediately prior to the Change of Control) in which you participated or were eligible to participate in immediately prior to the Change of Control and in lieu thereof does not make available plans providing at least comparable benefits; or (4) The Company takes action which adversely affects your participation in, or eligibility for, or materially reduces your benefits otherwise earned or payable under, any of the plans described in (3) above (unless such action is required by law), or which deprives you of any material fringe benefit enjoyed by you immediately prior to the Change of Control, or fails to provide you with the number of paid vacation days to which you were entitled in accordance with normal vacation policy immediately prior to the Change of Control; or (5) The Company requires you to be based at any office or location other than one within a 50 mile radius of the office or location at which you were based immediately prior to the Change of Control; (except for required travel on the Company's business to an extent substantially consistent with your business travel obligations as they existed at the time of a Change of Control of the Company); or, in the event you consent to being based anywhere more than fifty miles from such location, the failure by the Company to pay (or reimburse you for) all reasonable moving expenses incurred by you relating to a change of your principal residence in connection with such relocation and to indemnify you against any loss (defined as the difference between the actual sale price of such residence after the deduction of all real estate brokerage charges and related selling expenses) and the higher of (1) your aggregate investment in such residence or (2) the fair market value of such residence (as determined by a real estate appraiser designated by you and reasonably satisfactory to the Company) realized upon the sale of such residence in connection with any such change of residence; or (6) The Company's requiring you to perform duties or services which necessitate absence overnight from your place of residence, because of travel involving the business or affairs of the Company, to a degree not substantially consistent with the extent of such absence necessitated by such travel during the period of twelve months immediately preceding a Change of Control of the Company; or (7) The Company purports to terminate your employment otherwise than as expressly permitted by this Agreement; or (8) The Company fails to comply with and satisfy Section 9 below, provided that such successor has received at least ten days prior written notice from the Company or from you of the requirements of Section 9 below. You shall have the sole right to determine, in good faith, whether any of the above events has occurred. (c) Cause: Cause shall mean: conviction of a felony or ----- crime involving an act of moral turpitude, dishonesty, or misfeasance. (d) Notice of Termination: Any termination by the Company --------------------- for Cause, or by you for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the Date of Termination. (e) Date of Termination: "Date of Termination" means (1) if ------------------- your employment is terminated by the Company for Cause or without Cause, or by you for Good Reason or other than for Good Reason, the date of receipt by the other of the Notice of Termination, and (2) if your employment is terminated by reason of Death, Disability or Normal Retirement (as defined below), the Date of Termination shall be the date of your death, the date of receipt of your Notice of Termination, or the first of the month following the month you reach the normal retirement age for employees in your position, respectively. (f) Normal Retirement: If your employment is terminated due ----------------- to normal retirement, you shall not be entitled to severance benefits under this Agreement, regardless of the occurrence of a Change of Control. A termination by normal retirement shall have occurred where your termination is caused by the fact that you have reached normal retirement age for employees in your position. (g) Termination for Cause: If subsequent to a Change of --------------------- Control, your employment is terminated by the Company for Cause, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and you shall also receive all accrued or vested benefits of any kind to which you are, or would otherwise have been, entitled throughout the Date of Termination (as defined in subsection (e) of this Section 5), and the Company shall thereupon have no further obligation to you under this Agreement. (h) Disability or Death: If termination of your employment ------------------- results from your Disability or death, you shall not be entitled to severance benefits under this Agreement, regardless of the occurrence of a Change of Control. You or your designated beneficiary, in the case of your death, shall receive all accrued or vested benefits of any kind to which you are, or would otherwise have been, entitled through the Date of Termination, and the Company shall thereupon have no further obligation to you under this Agreement. "Disability" shall mean, for the purposes of this Agreement, your total and permanent disability such that you would be entitled to receive Disability Retirement Income under the Company's qualified pension plans, except for purposes of this provision you need not have completed ten (10) years of service with the Company, followed by the Company giving you thirty days written notice of its intention to terminate your employment by reason thereof, and your failure because of your Disability to resume the full-time performance of your duties within such period of thirty days and thereafter perform the same for a period of two consecutive months. 6. Severance Benefits ------------------ If, within a period of thirty-six full calendar months after a Change of Control of the Company, you are discharged without Cause or resign for Good Reason, the following shall be applicable: (a) The Company shall pay to you within ten business days following the Date of Termination a lump sum severance benefit, payable in cash, the amounts determined as provided below: (1) Your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination, is given. (2) In lieu of further salary payments to you for periods subsequent to the Date of Termination, an amount equal to 2.99 multiplied by the sum of your annual base salary at the rate in effect as of the Date of Termination (or, if higher, at the rate in effect as of the time of the Change of Control) plus the average annual short-term incentive amount awarded to you under the Ohio Edison System Executive Incentive Compensation Plan ("Executive Incentive Plan") for the three years immediately preceding the year during which the Date of Termination occurs whether or not fully paid. (b) For purposes of the Executive Incentive Plan, you shall be considered to have retired and will be paid the pro rata portion of your short-term incentive award earned, if any, and any long-term deferred incentive awards earned, if any, per the terms of the plan. (c) For purposes of determining the amount of benefits you may continue after the Date of Termination under the Company's group health and life insurance plans, you shall be considered as having retired at your current age or age 55, whichever is greater, and your current years of service calculated as if you are age 55, whichever is greater. (d) For purposes of the Ohio Edison System Executive Deferred Compensation Plan ("Deferred Compensation Plan"), you shall be considered to have retired at age 62, entitling you to the full amount of your Retirement Account, if any, payable in accordance with the terms of the Deferred Compensation Plan. (e) For purposes of calculating your benefit under the Ohio Edison System Supplemental Executive Retirement Plan ("SERP"), you shall be considered as having retired from the Company at your current age or age 55, whichever is greater, and your current years of service or 5 years of service, whichever is greater. Your benefit under the SERP will commence on the first of the month following the Date of Termination as follows: (1) If, on the Date of Termination, you are less than age 55, your monthly benefit from the SERP shall be calculated in accordance with the terms of the SERP except that (a) until you reach age 55, such SERP benefit shall be offset by any compensation earned by you from a subsequent employer as provided in paragraph (j) below; (b) at age 55, such SERP benefit shall only be offset by the monthly amounts to which you will be entitled at age 55 from the Company's tax-qualified pension plan, the supplementary pension make-up benefit under the Deferred Compensation Plan and/or the tax-qualified pension plan of any previous employers (collectively, "Pension Income"), irrespective of whether you receive such benefits at that time; and, (c) at age 62 such SERP benefit shall be offset only by Pension Income and the monthly primary Social Security Benefit to which you will be entitled at age 62, irrespective of whether you receive such benefits at that time; (2) If, on the Date of Termination, you are at least age 55 but less than age 62, your monthly benefit from the SERP shall be calculated in accordance with the terms of the SERP, except that (a) until you reach age 62, such SERP benefit shall be offset only by your Pension Income, irrespective of whether you receive such benefits at that time; and (b) at age 62 such SERP benefit shall be offset only by Pension Income and the monthly primary Social Security benefit to which you will be entitled at age 62, irrespective of whether you receive such benefits at that time; (3) If, on the Date of Termination, you are at least age 62, your monthly benefit from the SERP shall be calculated and offset in accordance with the terms of the SERP. (f) For purposes of the Executive Supplemental Life Plan ("ESLP"), you may continue to participate as if you retired from the Company prior to age 65 in accordance with the terms of the ESLP, irrespective of your age at the Date of Termination. (g) In the event that because of their relationship to you, members of your family or other individuals are covered by any plan, program, or arrangement described in subsection (b) above immediately prior to the Date of Termination, the provisions set forth in subsection (b) shall apply equally to require the continued coverage of such persons; provided, however, that if under the terms of any such plan, program or arrangement, any such person would have ceased to be eligible for coverage during the period in which the Company is obligated to continue coverage for you, nothing set forth herein shall obligate the Company to continue to provide coverage which would have ceased even if you had remained an employee of the Company. (h) The Company shall enable you to purchase the automobile, if any, which the Company was providing for your use at the time Notice of Termination was given at the wholesale value of such automobile at such time. (i) Other Benefits Payable: The severance benefits described ---------------------- in Subsections (a), (b), (c), (d), (e), (f), (g) and (h) above shall be payable in addition to, and not in lieu of, all other accrued or vested or earned but deferred compensation, rights, options or other benefits which may be owed to you following your discharge or resignation (and are not contingent on any Change of Control preceding such termination), including but not limited to, accrued and/or banked vacation, amounts or benefits payable, if any, under any bonus or other compensation plans, stock option plan, stock ownership plan, stock purchase plan, life insurance plan, health plan, disability plan or similar plan. (j) Payment Obligations: Other than as set forth in the ------------------- Deferred Compensation Plan or the SERP, upon a Change of Control the Company's obligations to pay the severance benefits or make any other payments described in this Section 6 shall not be affected by any set-off, counterclaim, recoupment, defense or other right which the Company or any of its subsidiaries may have against the Executive or anyone else. If you are less than age 55 at the time of your discharge without Cause or your resignation for Good Reason, then, commencing 24 months after the Date of Termination, you shall be required to seek employment elsewhere and thereby mitigate the amount of SERP benefit payable under Paragraph (d)(1). You shall not be required to accept a position other than as a senior executive of an entity comparable in size to the Company and having duties, responsibilities and authority substantially similar in scope and nature to your position with the Company immediately prior to the Date of Termination. Upon obtaining such employment, you shall promptly notify the Company of the compensation and benefits you received or will receive from such new employer and of any changes therein. (k) Legal Fees and Expenses: Subject to and contingent upon ----------------------- the occurrence of a Change of Control the Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which you may reasonably thereafter incur as a result of any contest, litigation or arbitration (regardless of the outcome thereof) by the Company, you or others of the validity or enforceability of, or liability under, any provision of this Agreement, the Deferred Compensation Plan, or the SERP (including any contest by you about the amount of any payment pursuant to this Agreement, the Deferred Compensation Plan or the SERP), plus in each case interest on any delayed payment at the rate of 150% of the Prime Rate as published in the Wall Street Journal in the Money Rates Table on the business day immediately preceding the conclusion of any such contest, litigation or arbitration. (l) Certain Additional Payments by the Company: ------------------------------------------ (1) Anything in this Agreement to the contrary notwithstanding, in the event that the Executive becomes entitled to severance benefits under this Section 6 hereof, the Deferred Compensation Plan, the SERP or otherwise, and it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, the Deferred Compensation Plan, the SERP or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (2) All determinations required to be made under this subsection (i), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made in good faith by the Company which shall provide detailed supporting calculations to the Executive within 15 business days of the date of termination of the Executive's employment, if applicable, or such earlier time as is requested by the Company. If the Company determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an opinion of counsel that he has substantial authority not to report any Excise Tax on his federal income tax return. Except as hereinafter provided, any determination by the Company shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Company hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Executive is required to make a payment of any Excise Tax, the Company shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. 7. Assignability ------------- This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to any subsidiary or affiliate) or by you. 8. Non-Competition --------------- If subsequent to a Change of Control of the Company you should for Good Reason terminate your employment, then for a period of two years after the Date of Termination, you shall not on your own account without the consent of the Company, or as a shareholder, employee, officer, director, consultant or otherwise, engage directly or indirectly in any business or enterprise which is in competition with the Company. For all purposes of this agreement the words "competition with the Company" shall mean the provision of gas and/or electric services on a retail and wholesale basis in the State of Ohio and in any other state contiguous to the State of Ohio; provided, however, that nothing herein contained shall prevent you from purchasing and holding for investment less than 5% of the shares of any corporation the shares of which are regularly traded either on a national securities exchange or in the over-the-counter market. 9. Successor --------- The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. Failure of the Company to obtain such agreement prior to the effectiveness of such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. This agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amounts would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid to such beneficiary or beneficiaries as you shall have designated by written notice delivered to the Company prior to your death or, failing such written notice, to your estate. 10. Amendment; Waiver ----------------- This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 11. Notices ------- All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to you: xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx xxxxxxxxxxxxxxx If to the Company: ----------------- Secretary FirstEnergy 76 South Main Street Akron, Ohio 44308 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 12. Validity -------- The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect, nor shall the invalidity or unenforceability of a portion of any provision of this Agreement affect the validity or enforceability of the balance of such provision. If any provision of this Agreement, or portion thereof is so broad, in scope or duration, as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 13. Withholding ----------- The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 14. Entire Agreement ---------------- This Agreement contains the entire understanding of the Company and you with respect to the subject matter hereof. 15. Applicable Law -------------- This Agreement shall be governed by and construed in accordance with the substantive internal law and not the conflict of law provisions of the State of Ohio. If the terms of the foregoing Agreement are acceptable to you, please sign and return to the Company the enclosed copy of this Agreement whereupon this Agreement shall become a valid and legally binding contract between you and the Company. Very truly yours, FIRSTENERGY By: ------------------------------ Accepted and Agreed as of the date first above written: --------------------------------- xxxxxxxxxxxxxxxx EX-10.4 5 FirstEnergy Corp. Supplemental Executive Retirement Plan Effective September 29, 1985 Amended and Restated as of January 1, 1999 TABLE OF CONTENTS PAGE ---- ARTICLE I - PURPOSE 1 ARTICLE II - ELIGIBILITY AND PARTICIPATION 1 2.1 Eligibility 1 2.2 Participation 1 2.3 Designation of Participating Companies 1 2.4 Withdrawal From Plan of Participating Employer 1 2.5 Delegation of Authority 2 ARTICLE III - TYPE AND LEVEL OF BENEFITS 2 3.1 Supplemental Benefit After Termination of Employment 2 3.2 Month of Service; Year of Service 2 3.3 Eligible Spouse 2 3.4 Conditions of Benefits 3 3.5 Forfeiture of Benefits 5 3.6 Change of Control 6 ARTICLE IV - UNFUNDED PLAN 6 4.1 Unfunded Plan 6 4.2 Nontransferability 7 ARTICLE V - ADMINISTRATION 7 5.1 Committee; Duties 7 5.2 Agents 7 5.3 Indemnity of Committees 7 ARTICLE VI - CLAIMS PROCEDURES 8 6.1 Claim 8 6.2 Denial of Claim 8 6.3 Review of Claim 8 6.4 Final Decision 8 TABLE OF CONTENTS PAGE ---- ARTICLE VII - MISCELLANEOUS 9 7.1 Unsecured General Creditor 9 7.2 Obligations to Company 9 7.3 Not a Contract of Employment 9 7.4 Protective Provisions 9 7.5 Captions 9 7.6 Governing Law 9 7.7 Validity 9 7.8 Mistaken Information 10 7.9 Taxes and Expenses 10 7.10 Notice 10 ARTICLE VIII - EFFECTIVE DATE, TERMINATION, AND AMENDMENT 10 ARTICLE IX - SUCCESSORS 10 APPENDIX A APPENDIX B FIRSTENERGY CORP. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ARTICLE I-PURPOSE The Supplemental Executive Retirement Plan (the "Plan") was established on September 29, 1985 as part of an integrated executive compensation program that is intended to attract, retain, and motivate certain key executives ("Executives") who are in positions to make significant contributions to the operation and profitability of FirstEnergy Corp. (the "Company") for the benefit of stockholders and customers. The Plan provides for the payment of supplemental retirement, death, and disability benefits to or in respect of key senior Executives designated by the Chief Executive Officer of the FirstEnergy Corp. (the "Chief Executive Officer"). The Chief Executive Officer shall appoint an Administrative Committee (the "Committee") to administer this Plan. The Committee shall consist of three or more individuals. ARTICLE II - ELIGIBILITY AND PARTICIPATION 2.1 Eligibility Eligibility to participate in the Plan shall be limited to those Executives who are designated by the Chief Executive Officer. 2.2 Participation An Executive's participation in the Plan shall be effective on January 1 of the year following the year in which he or she becomes eligible. 2.3 Designation of Participating Companies The Compensation Committee of the Board of Directors of FirstEnergy Corp. (the "Compensation Committee") or the Chief Executive Officer may allow other corporations or other entities affiliated with or subsidiary to the Company to participate in the Plan without approval or ratification by the Company's Board of Directors. Such companies ("Participating Companies") and their adoption dates shall be added to Appendix A, which is attached hereto and incorporated herein by reference. 2.4 Withdrawal From Plan of Participating Employer Any Participating Company may at any time, by resolution of its Board of Directors (with notice thereof to the Company's Board of Directors if the terminating company is not FirstEnergy Corp.), terminate its participation in the Plan. Participating Companies which cease to be Participating Companies shall be shown in Appendix A together with their adoption dates and termination dates. 2.5 Delegation of Authority The Company is hereby fully empowered to act on behalf of itself and the other Participating Companies as it may deem appropriate in maintaining the Plan. Furthermore, the adoption by the Company of any amendment to the Plan or the termination thereof will constitute and represent, without any further action on the part of any Participating Company, the approval, adoption, ratification or confirmation by each Participating Company of any such amendment or termination. In addition, the appointment of or removal by the Company of any Committee member or other person under the Plan shall constitute and represent, without any further action on the part of any Participating Company, the appointment or removal by each Participating Company of such person. ARTICLE III - TYPE AND LEVEL OF BENEFITS 3.1 Supplemental Benefit After Termination of Employment An Executive included in the Plan shall, subject to the terms and conditions set forth herein, be eligible to receive a supplemental benefit under the Plan after termination of employment due to retirement, death, disability or involuntary separation that is directly related to either: (a) The Executive's Highest Average Monthly Base Earnings which is defined as the average of the highest twelve (12) consecutive full months of base salary earnings paid to the Executive in the one hundred twenty (120) consecutive full months prior to termination of employment, including any salary deferred in the FirstEnergy Corp. Executive Deferred Compensation Plan ("Deferred Plan") or the FirstEnergy Corp. Savings Plan ("Savings Plan"), but excluding any incentive payments, or (b) The Executive's Highest Average Monthly Total Compensation which is defined as the average of the highest thirty-six (36) consecutive full months of base salary earnings paid to the Executive in the one hundred twenty (120) consecutive full months prior to termination of employment, including any salary deferred into the Deferred Plan and Savings Plan. Highest Total Compensation shall also include any Annual Incentive Award from the Executive Incentive Compensation Plan either paid to the Executive or deferred into the Deferred Plan after January 1, 1996. 3.2 Month of Service; Year of Service For the purpose of this Plan, a "Month of Service" shall be a whole month of service with a Participating Company based upon the Executive's service anniversary date with the Company. Further, a "Year of Service" shall be equal to a twelve "Months of Service," with a Participating Company based upon the Executive's service anniversary date with the Company. 3.3 Eligible Spouse For the purposes of this Plan, Eligible Spouse shall mean the spouse to whom the Executive is married at the time payment of a supplemental benefit from the Plan commences and who is so designated, or deemed to have been designated in accordance with the FirstEnergy Corp. Pension Plan ("Pension Plan"). 3.4 Conditions of Benefits A supplemental benefit under this Plan will be determined in accordance with and shall be nonforfeitable upon the date the Executive terminates employment under the conditions described in the following sections: (a) Retirement Benefits (i) An Executive retiring from the Company on or after age fifty-five (55) who has completed ten (10) Years of Service will be entitled to receive, commencing at retirement, a monthly supplemental retirement benefit under the Plan equal to sixty- five percent (65%) of the Executive's Highest Average Monthly Base Earnings or fifty-five percent (55%) of the Executive's Highest Average Monthly Total Compensation, whichever is greater, multiplied by the number of Months of Service the Executive has completed after having completed ten (10) Years of Service, up to a maximum of sixty (60) months, divided by sixty (60), less: a) The monthly primary Social Security benefit to which the Executive may be entitled at such retirement (or the projected age sixty-two (62) benefit if retirement occurs prior to age sixty-two (62)), irrespective of whether the Executive actually receives such benefit at the time of retirement, and b) The monthly early, normal or deferred retirement income benefit to which the Executive may be entitled at such retirement, under the Pension Plan, the monthly supplemental pension benefit under the Deferred Plan and the monthly benefit, or actuarial equivalent, under the tax-qualified or nonqualified defined benefit pension plans of previous employers, all calculated by an actuary selected by the Company, with the following assumptions based on the Executive's marital status at the time of such retirement: i) In the case of a married Executive in the form of a fifty percent (50%) joint and survivor annuity. ii) In the case of an unmarried Executive, in the form of a single-life annuity. For an Executive who retires prior to attaining age sixty- five (65), the net dollar amount above shall be further reduced by one-fourth (1/4) of one percent (1%) for each month the commencement of benefits under this Plan precedes the month the Executive attains age sixty-five (65). (ii) After commencement of supplemental retirement benefits to the Executive, such payments shall continue in monthly installments thereafter ending with a payment for the month in which such Executive's death occurs. At death, benefits under Section 3.4(c)(ii) may be paid to the Executive's surviving Eligible Spouse. (b) Disability Benefits (i) An Executive who becomes disabled while employed by the Company will be entitled to receive, commencing at the time the Executive's employment terminates by reason of disability, a monthly supplemental disability benefit under the Plan equal to sixty-five percent (65%) of the Executive's Highest Base Earnings or fifty-five (55%) of the Executive's Highest Total Compensation, whichever is greater, less: a) The monthly Social Security disability benefit to which the Executive may become entitled due to such disability. b) The monthly disability pension payment under the Pension Plan, the monthly benefit provided by the Long-Term Disability Plan of the Company and the monthly disability or pension benefits, or actuarial equivalent, from plans of previous employers to which the Executive may be entitled at termination of employment. "Disabled" means a disability such that an Executive would be entitled to receive a monthly disability payment under the Pension Plan, except for the purposes of this provision an Executive need not have completed ten (10) Years of Service. (ii) After commencement of supplemental disability benefits to the Executive, such payments shall continue in monthly installments thereafter ending with a payment in the month in which the Executive attains age sixty-five (65) or retires from the Company, dies, or is no longer disabled, whichever first occurs. Upon retirement, benefits under Section 3.4(a) may be paid. At death, benefits under Section 3.4(c)(i) may be paid to the Executive's surviving Eligible Spouse. (c) Death Benefits (i) If an Executive, including an Executive receiving a supplemental disability benefit under the Plan, dies prior to retiring from the Company, the Executive's surviving Eligible Spouse shall be entitled to receive commencing in the month following the Executive's death, a monthly supplemental surviving spouse benefit under the Plan equal to fifty percent (50%) of the monthly supplemental retirement benefit, calculated in accordance with Section 3.4(a), which the Executive would have received had he or she retired in the month of death, except that if the Executive dies prior to attaining age fifty-five (55), such monthly supplemental retirement benefit will be calculated as if the Executive had attained age fifty-five (55) and retired on the date of his or her death. In addition, if at the time of his or her death the deceased Executive had completed less than ten (10) Years of Service with a Participating Company, the Death Benefit, if any, shall be calculated as if the executive had been credited with five(5) Years of Service at the time of his/her employment with the Company. The surviving spouse benefit payment shall be paid in monthly installments thereafter ending with a payment for the month in which such surviving Eligible Spouse's death occurs, or for a period of one hundred eighty (180) payments less the number of supplemental disability payments the Executive had received, whichever first occurs. (ii) If an Executive dies after retiring from the Company but prior to receiving one hundred eighty (180) monthly supplemental retirement and/or supplemental disability payments under the Plan, the Executive's surviving Eligible Spouse shall be entitled to receive a monthly supplemental surviving spouse benefit under the Plan equal to fifty percent (50%) of the supplemental retirement benefit which the deceased Executive was receiving on the day before his or her death. This monthly supplemental surviving spouse benefit payment shall commence in the month following the Executive's death and shall be paid in monthly installments thereafter ending with a payment for the month in which such surviving Eligible Spouse's death occurs, or for a period of one hundred eighty (180) payments less the number of supplemental retirement and/or supplemental disability payments the Executive had received, whichever first occurs. (d) Involuntary Separation Benefits An Executive under age fifty-five (55) with ten or more years of service at the time of an involuntary separation, due to the closing of a facility, corporate restructuring, reduction in the work force, or job elimination, will be entitled to receive, beginning at age fifty-five (55), a supplemental retirement benefit under the Plan calculated in accordance with Section 3.4(a). If the Executive dies prior to or after commencement of his or her supplemental retirement benefit, the Executive's surviving Eligible Spouse shall be entitled to receive a monthly supplemental surviving spouse benefit under the Plan calculated in accordance with Section 3.4(c). Such supplemental benefits will be calculated using the number of Months of Service the Executive had with the Company at separation of employment. However, the Executive will not be eligible for a supplemental retirement benefit beginning at age fifty-five (55) if the separation is due to any other reason including but not limited to: voluntary resignation; discharge for misconduct or poor job performance; failure to return from a leave of absence; or as a result of a merger or acquisition of the Company or any of its assets and the Executive's employment with the acquiring or merging company is continued and the Executive does not suffer unemployment. 3.5 Forfeiture of Benefits: 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 Executive has engaged in any of the following enumerated actions, and unless such engagement has been approved by the Committee or its delegate in writing, all future SERP benefit payments shall be immediately forfeited. Notwithstanding any other provision of this paragraph 3.4, the forfeiture of benefits will only apply to those supplemental retirement benefits accrued on or after January 1, 1999 and shall not apply to supplemental benefits accrued before January 1, 1999. 1. Participate or engage, 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 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 for 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; 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 that he/she became aware of as a consequence of his/her employment. The term "Customer" shall mean any person, firm, association, corporation or other entity to which Executive or the Company has sold the Company's products or services within the twenty-four (24) month period immediately preceding the termination of Executive's employment with Company or to which Executive or the Company is in the process of selling its products or services, or to which Executive or the Company has submitted a bid, or is in the process of submitting a bid to sell the Company's products or services. Should it be necessary for FE to initiate legal action to recover any amounts due, FE shall be entitled to recover from Executive, in addition to such amounts due, all costs, including reasonable attorneys fees, incurred as a result of such legal action. 3.6 Change of Control In the event of a Change in Control, as defined in Appendix B, the Forfeiture of Benefit provisions in section 3.5 will not apply. ARTICLE IV-Unfunded Plan 4.1 Unfunded Plan The Plan shall be unfunded. The Plan is intended to benefit key senior Executives who are considered to be a select group of management or highly compensated employees within the meaning of the Employee Retirement Income Security Act of 1974, as amended. The Chief Executive Officer reserves the right to restrict participation to such Executives. 4.2 Nontransferability Neither an Executive nor any other person shall have any right to transfer, pledge, or otherwise encumber, in advance of actual receipt, any amounts payable hereunder. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony, or separate maintenance owed by an Executive or any other person, nor be transferable by operation of law in the event of an Executive's or any other person's bankruptcy or insolvency. ARTICLE V-ADMINISTRATION 5.1 Committee; Duties This Plan shall be administered by and under the direction of the Committee. Members of the Committee may be participants in this Plan. However, no member of the Committee may participate in a review of his or her own claim under Article VI. The Committee shall administer the Plan and shall have the power and the duty to take all action and to make all decisions necessary or proper to carry out the Plan. The determination of the Committee as to any question involving the general administration and interpretation of the Plan shall be final, conclusive, and binding except as otherwise provided in Article VI. A majority vote of the Committee members shall control any decision. Any discretionary actions to be taken under the Plan by the Committee with respect to the Executives' contributions or benefits shall be uniform in nature and applicable to all persons similarly situated. Without limiting the generality of the foregoing, the Committee shall have the following discretionary authority, powers and duties: (a) To require any person to furnish such information as it may request for the purpose of the proper administration of the Plan as a condition to receiving any benefit under the Plan; (b) To make and enforce such rules and regulations and prescribe the use of such forms as it deems necessary for the efficient administration of the Plan; (c) To interpret the Plan and to resolve ambiguities, inconsistencies and omissions; (d) To decide all questions concerning the Plan and any questions concerning the eligibility of any Employee to participate in the Plan; and (e) To determine the amount of benefits which will be payable to any person in accordance with the provisions of the Plan. 5.2 Agents In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel, who may be counsel to the Company. 5.3 Indemnity of Committees The Company shall indemnify and hold harmless members of the Committee and the Compensation Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except in the case of intentional misconduct. ARTICLE VI-CLAIMS PROCEDURE 6.1 Claim Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee, which shall respond in writing as soon as practicable, but no more than sixty-three (63) days after the end of the month the request is received. Payment of a claimed benefit shall also constitute a written response. 6.2 Denial of Claim If the claim or request is denied, the written notice of denial shall state: (a) The reasons for denial, with specific reference to the Plan provisions on which the denial is based. (b) A description of any additional material or information required and an explanation of why it is necessary. (c) An explanation of the Plan's claim review procedure. For the purposes of this Section 6.2, the failure by the Committee to deliver within the sixty-three (63) day period notice of a written denial of claim shall constitute a written response of denial, unless the failure to correspond was the result of clerical or administrative error. 6.3 Review of Claim Any person whose claim or request is denied or who has not received a response within sixty-three (63) days after the end of the month in which the request was received may request review by notice given in writing to the Compensation Committee. The claim or request shall be reviewed by the Compensation Committee who may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have a representative examine pertinent documents and submit issues and comments in writing. 6.4 Final Decision The decision on review shall normally be made within sixty (60) days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reason and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned. ARTICLE VII-MISCELLANEOUS 7.1 Unsecured General Creditor Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of Company. Any and all Company's assets shall be, and remain, the general, unpledged, unrestricted assets of Company. Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of Company to pay money in the future. 7.2 Obligations to Company If an Executive or the Executive's surviving Eligible Spouse becomes entitled to a benefit under the Plan and the Executive has outstanding any debt, obligation, or other liability representing an amount owing to the Company, then the Company may offset such amount owing to it or an affiliate against the amount of benefits otherwise distributable. The determination of the amount and duration of the offset shall be made by the Committee. 7.3 Not a Contract of Employment The terms and conditions of the Plan shall not be deemed to constitute a contract of employment between the Company and the Executive, and the Executive (or his or her surviving Eligible Spouse) shall have no rights against the Company except as may be otherwise provided specifically herein. Moreover, nothing in the Plan shall be deemed to give an Executive the right to be retained in the service of the Company or to interfere with the right of the Company to discipline or discharge him or her at any time. 7.4 Protective Provisions An Executive shall cooperate with the Company by furnishing any and all information requested by the Company in order to evaluate a claim or to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Company may deem necessary and taking such other action as may be requested by the Company. 7.5 Captions The captions of the articles, sections and paragraphs of the Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 7.6 Governing Law The provisions of the Plan shall be construed, administered, and enforced according to and governed by the laws (other than conflict of law provisions) of the state of Ohio, except to the extent such laws are superseded by ERISA. 7.7 Validity In case any provision of the Plan shall be illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts hereof, but the Plan shall be construed and enforced as if such illegal and invalid provision had never been included herein. 7.8 Mistaken Information If any information upon which an Executive's benefit under the Plan is misstated or otherwise mistaken, such benefit shall not be invalidated (unless upon the basis of the correct information the Executive would not be entitled to a benefit), but the amount of the benefit shall be adjusted to the proper amount and any overpayments shall be charged against future payments. 7.9 Taxes and Expenses Any taxes imposed on Plan benefits shall be the sole responsibility of the Executive or surviving Eligible Spouse. The Company shall deduct from Plan benefits any amounts required by applied law to be withheld. All Plan administration expenses incurred by the Company or Committee shall be borne by the Company. 7.10 Notice Any notice or filing required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail to any member of the Committee, or to the Statutory Agent of FirstEnergy Corp. Notice to the Committee may be given to any member of the Committee and if mailed shall be addressed to the principal executive offices of FirstEnergy Corp. Notice mailed to the Participant shall be sent to the address set out in the Participant's most recent Participation Agreement or such other address as is given to the Committee by notice. Notices shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. ARTICLE VIII-EFFECTIVE DATE, TERMINATION, AND AMENDMENT The effective date of the Plan shall be September 29, 1985. The effective date of participation of an Executive in this Plan shall be determined by the Chief Executive Officer. The Plan may be terminated at any time and amended from time to time by action of the Board or the Compensation Committee or by a writing executed on behalf of the Board or the Compensation Committee by the Company's duly authorized officers, provided that neither termination nor any amendment of the Plan may, without the written approval of a participating Executive or surviving Eligible Spouse, reduce or terminate any accrued benefit. ARTICLE IX-SUCCESSORS The provisions of this Plan shall bind and inure to the benefit of the Company and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Company, and successors of any such corporation or other business entity. IN WITNESS WHEREOF, and pursuant to approval of the Compensation Committee of the Board, on April 29, 1999, the Company has caused this instrument to be executed by its duly authorized officers effective as of January 1, 1999. FOR THE COMPANY By: Date ------------------------------------------------- ------------------ H. Peter Burg President and Chief Executive Officer of FirstEnergy Corp. Witness: Date ------------------------------------------- ------------------- J. A. Gill Sr. Vice President APPENDIX A 1 2 3 Participating Company Adoption Date Termination Date - ----------------------------------------------------------------------------- Ohio Edison Company September 29, 1985 Pennsylvania Power Company September 29, 1985 FirstEnergy Corp. January 1, 1999 Cleveland Electric Illuminating Company January 1, 1999 Toledo Edison Company January 1, 1999 FirstEnergy Nuclear Operating Company January 1, 1999 FirstEnergy Fuel Marketing Company January 1, 1999 ============================================================================== EX-10.5 6 FirstEnergy Executive Incentive Compensation Plan 2000 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. General Eligibility - ------------------- Employees in positions with a standard rate of $88,890 and who report to members of the FirstEnergy Senior Management Committee, regional presidents, consolidated plant managers, nuclear directors, and general office department heads are eligible to participate in this plan. Plan Components - --------------- The Plan consists of a Short-Term Incentive Program (STIP) for 2000, a Long- Term Incentive Program (LTIP) for the period 2000 - 2002, and a Stock Option Program. Target incentive opportunities for each program are shown in Attachment 1. Short-Term Incentive Program (STIP) ----------------------------------- Eligibility ----------- An employee hired into the executive group must perform the duties of his/her job for a minimum of 1000 regular hours during the year. Thus, new hires must be added during the first half of the year to be eligible for an annual award. Likewise, separation due to retirement, death or disability generally must occur during the second half of the year. 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 criterion. Executives must be actively employed as of December 31, 2000 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. Executives must receive or would have received a performance rating of Meets Expectations or above. Thus, an executive with a rating Does Not Meet Expectations is ineligible to receive an annual award. Also, an executive who voluntarily resigns or has been involuntarily separated for cause between December 31, 2000 and the date that any awards are paid is ineligible to receive and award. 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 for each business group. The weighting of Financial goals and Operational goals varies among executives depending upon their job level. Award Leverage - -------------- Each goal 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 2001. 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 and Customer Protection - ---------------------------------- Short-term incentive awards will not be paid unless all of the following shareowner and customer protection measures are met: . FirstEnergy common stock dividends paid during the plan year are greater than or equal to the previous year-end annualized rate; . Total earnings exceed the amount of dividends paid plus the maximum annual awards from all incentive plans; and . The rate freeze as contained in each operating company's rate stabilization and area development program remains in effect Discretionary Incentive - ----------------------- There may be instances where an executive has demonstrated extraordinary responsiveness to an unforeseen circumstance or has had a unique accomplishment of substantial importance which may 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. Long-Term Incentive Program (LTIP) ---------------------------------- Eligibility - ----------- Employees who are classified as an executive as of January 1, 2000 are eligible. An employee who is hired or promoted into the executive group during the initial year of the performance cycle will not be eligible for the LTIP until the following performance cycle. An executive must work at least one year in an eligible position during the three-year plan cycle to be eligible for an award. Thus, an executive who separates for any reason during 2000 will be ineligible to receive a long- term award from the 2000 program. An executive must be actively employed as of December 31, 2002, 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, 2000 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, 2000, each executive's target long-term award will be converted into hypothetical "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 1999. These shares are placed into a Performance Share Account for three years (2000 - 2002). During the 2000 - 2002 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 2002. The value may be adjusted upward or downward based upon the total shareholder return of FirstEnergy common stock relative to an energy services company index during this three-year period. If the total shareholder return ranking is below the 61st percentile, no long-term award will be paid. If the total shareholder return rating is in the top 15%, the award payout will be 150% of the account value. Award payouts for a ranking between the 60th and 15th percentile will be interpolated between 50% and 150%. 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. Attachment 2 is an illustration of the Long-Term Incentive Program award table. Award Payments - -------------- Awards for the 2000 - 2002 cycle will be paid in March 2003. If an executive meets the eligibility criteria and is no longer employed in an executive position, his/her original long-term 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. Stock Option Program -------------------- In 2000, 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. Specific details about the program and the number of stock options granted 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 Plan - --------------------------------- 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 Guarantee of Future Employment - --------------------------------- 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. No 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. EX-10.6 7 FirstEnergy Corp. ----------------- Executive and Directors Incentive Compensation Plan --------------------------------------------------- Restricted Stock Agreement -------------------------- Award No.: 1 Number of Shares Awarded: 20,000 shares Date of Grant: July 1, 1998 This Restricted Stock Agreement ("Agreement") is entered into as of July 1, 1998, between FirstEnergy Corp. ("FE") and Anthony J. Alexander ("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 the dates indicated in the following: Date Restrictions Expire Number of shares ------------------------ ---------------- July 1, 2002 5,000 July 1, 2003 5,000 July 1, 2004 5,000 July 1, 2005 5,000 b) The date of the Recipient's death; c) The date that the Recipient's employment is terminated due t 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 _____________. 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. 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. 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-12.1 8 EXHIBIT 12.1 Page 1 FIRSTENERGY CORP. CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ------------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $317,241 $315,170 $318,166 $ 441,396 $ 568,299 Interest and other charges, before reduction for amounts capitalized 273,719 255,572 299,606 608,618 585,648 Provision for income taxes 199,307 201,295 207,985 321,699 394,827 Interest element of rentals charged to income 111,534 114,093 142,363 283,869 279,519 -------- -------- -------- ---------- ---------- Earnings as defined $901,801 $886,130 $968,120 $1,655,582 $1,828,293 ======== ======== ======== ========== ========== FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest expense $266,514 $240,146 $284,180 $ 542,819 $ 509,169 Subsidiaries' preferred stock dividend requirements 7,205 15,426 15,426 65,299 76,479 Adjustments to subsidiaries' preferred stock dividends to state on a pre-income tax basis 2,956 2,910 2,918 43,370 44,829 Interest element of rentals charged to income 111,534 114,093 142,363 283,869 279,519 -------- -------- -------- ---------- ---------- Fixed charges as defined $388,209 $372,575 $444,887 $ 935,357 $ 909,996 ======== ======== ======== ========== ========== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES 2.32 2.38 2.18 1.77 2.01 ==== ==== ==== ==== ====
EX-13 9 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 generally accepted accounting principles and are consistent with other financial information appearing elsewhere in this report. Arthur Andersen LLP, independent public accountants, have expressed an 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 five 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 six meetings in 1999. Richard H. Marsh Vice President and Chief Financial Officer Harvey L. Wagner 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, 1999 and 1998, 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, 1999. 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 generally accepted auditing standards. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 11, 2000 FIRSTENERGY CORP. SELECTED FINANCIAL DATA
For the Years Ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Revenues $ 6,319,647 $ 5,874,906 $ 2,961,125 $2,521,788 $2,500,770 ------------------------------------------------------------- Income Before Extraordinary Item $ 568,299 $ 441,396 $ 305,774 $ 302,673 $ 294,747 ------------------------------------------------------------- Net Income $ 568,299 $ 410,874 $ 305,774 $ 302,673 $ 294,747 ------------------------------------------------------------- Earnings per Share of Common Stock: Before Extraordinary Item $2.50 $1.95 $1.94 $2.10 $2.05 After Extraordinary Item $2.50 $1.82 $1.94 $2.10 $2.05 ------------------------------------------------------------- Dividends Declared per Share of Common Stock $1.50 $1.50 $1.50 $1.50 $1.50 ------------------------------------------------------------- Total Assets $18,224,047 $18,192,177 $18,261,481 $9,218,623 $9,035,112 ------------------------------------------------------------- Capitalization at December 31: Common Stockholders' Equity $ 4,563,890 $ 4,449,158 $ 4,159,598 $2,503,359 $2,407,871 Preferred Stock: Not Subject to Mandatory Redemption 648,395 660,195 660,195 211,870 211,870 Subject to Mandatory Redemption 256,246 294,710 334,864 155,000 160,000 Long-Term Debt 6,001,264 6,352,359 6,969,835 2,712,760 2,786,256 ------------------------------------------------------------- Total Capitalization $11,469,795 $11,756,422 $12,124,492 $5,582,989 $5,565,997 =============================================================
PRICE RANGE OF COMMON STOCK FirstEnergy Corp.'s Common Stock is listed on the New York Stock Exchange and is traded on other registered exchanges.
1999 1998 - ------------------------------------------------------------------------ First Quarter High-Low 33-3/16 27-15/16 31-5/8 27-7/8 ---------------------------------------- Second Quarter High-Low 32-1/8 27-15/16 31-7/8 28-1/2 ---------------------------------------- Third Quarter High-Low 31-5/16 24-3/4 31-5/16 27-1/16 ---------------------------------------- Fourth Quarter High-Low 26-9/16 22-1/8 34-1/16 29-3/16 ---------------------------------------- Yearly High-Low 33-3/16 22-1/8 34-1/16 27-1/16 - ------------------------------------------------------------------------ Prices are based on reports published in The Wall Street Journal for New York Stock Exchange ----------------------- Transactions.
HOLDERS OF COMMON STOCK There were 181,806 and 180,679 holders of the Company's Common Stock of the 232,454,287 shares as of December 31, 1999 and 231,959,541 shares as of January 31, 2000, respectively. Information regarding retained earnings available for payment of cash dividends is given in Note 3A. FIRSTENERGY CORP. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations FirstEnergy Corp. was formed when the merger of Ohio Edison Company (OE) and Centerior Energy Corporation (Centerior) became effective on November 8, 1997. The merger was accounted for using purchase accounting under the guidelines of Accounting Principles Board Opinion No. 16, "Business Combinations." Under these guidelines, the results of operations for the combined entity are reported from the point of consummation forward. As a result, our financial statements for 1997 reflect 12 months of operations for OE and its wholly owned subsidiary, Pennsylvania Power Company (Penn), but include only 7 weeks (November 8, to December 31, 1997) for the former Centerior companies - The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE). Results for 1998 and 1999 include operations for the entire year for OE and Penn (OE companies), CEI and TE. During 1998 and 1999, we took additional steps to expand our portfolio of energy-related products and services by completing a number of acquisitions and forming a joint venture. During 1998, FirstEnergy Facilities Services Group, LLC (FE Facilities), a wholly owned subsidiary, acquired eight companies, which mainly provide heating, ventilating and air- conditioning (HVAC) services. FE Facilities made one additional acquisition in 1999, bringing its total number of acquisitions to 11 over the past three years. On June 8, 1998, we acquired MARBEL Energy Corporation (MARBEL), a fully integrated natural gas company. On September 30, 1999, MARBEL formed a joint venture with Range Resources Corporation that combines both companies' assets for the development of Appalachian Basin oil and natural gas properties and related gas-gathering and transportation systems. This joint venture is accounted for using the equity method of accounting with our proportionate share of earnings reflected in our consolidated financial results. During 1999, three additional retail gas acquisitions were added to FirstEnergy Trading Services, Inc. (FETS). All acquisitions in 1998 and 1999 were accounted for using purchase accounting and are included in our consolidated results from their respective acquisition dates. As Ohio approaches customer choice of energy suppliers in 2001, we continue to develop our unregulated retail sales strategy, in part through acquisitions, which expand the products and services we can offer customers. In addition, related changes to our sales and marketing activities were made during 1999 to further support our retail sales strategy. As a result, we increased our functional integration across organization lines to improve economies and efficiencies to better serve customers in unregulated markets. By taking advantage of the new markets made available by advancing deregulation, we now cover a 13-state market area in the northeastern portion of the U.S. This expanded market has yielded significant multi-year contracts for us in 1999. We also completed major information systems during 1999, which improve our capabilities while resolving Year 2000 concerns. Total revenues increased by $445 million in 1999 and $2.9 billion in 1998 compared to the prior year results. In 1999, the increased revenues resulted primarily from contributions from the Electric Utility Operating Companies' (EUOC) business segment and newly acquired businesses, which were partially offset by reduced revenues from the FETS business segment due to refocusing its activities to support our retail marketing activities. The EUOC currently represent the more traditional vertically integrated electric utility operations. In 1998, inclusion of a full 12 months of results for the former Centerior companies in the EUOC business segment compared to only 7 weeks in 1997 was the largest factor contributing to the change in electric sales, adding $2.2 billion. The sources of the increases in revenues during 1999 and 1998 are summarized in the following table.
Sources of Revenue Changes 1999 1998 - ---------------------------------------------------- (In millions) Electric sales $213.2 $2,204.7 Other electric utility revenues 3.1 115.0 - ---------------------------------------------------- Total EUOC 216.3 2,319.7 FETS (220.1) 367.6 New businesses acquired 341.5 220.0 Unregulated electric sales 54.0 6.5 Gain on sale of investment 53.0 -- - ---------------------------------------------------- Net Revenue Increase $444.7 $2,913.8 - ----------------------------------------------------
Electric Sales EUOC revenues increased by $216.3 million in 1999, compared to 1998, benefiting from increased kilowatt-hour sales, offset in part by lower unit prices. Residential, commercial and industrial customers all contributed to higher EUOC retail sales. Retail kilowatt-hour sales increased due to strong consumer-driven economic growth and, to a lesser extent, the weather. Over 6,500 new EUOC customers were added in 1999. Weather-induced electricity demand in the wholesale market and additional available internal generation combined to increase sales to wholesale customers. EUOC retail kilowatt-hour sales in 1998 increased substantially over 1997 due to the merger with the former Centerior companies. Excluding the impact of the merger, retail sales for the OE companies in 1998 were approximately the same as the previous year after setting a new record in 1997. Residential and commercial kilowatt-hour sales benefited from continued growth in the retail customer base, with over 11,000 new retail customers added in 1998 compared to 1997. The closure of an electric arc furnace by a large steel customer in the latter part of 1997 and a general decline in electricity demand by steel manufacturers due to intense foreign competition contributed to lower industrial sales in 1998, compared to the prior year. Changes in EUOC kilowatt-hour sales by customer class in 1999 and 1998 are summarized in the following table.
EUOC KWH Sales Changes 1999 1998* - -------------------------------------------- Residential 6.7% 1.7% Commercial 3.9% 3.5% Industrial 3.4% (3.6)% - -------------------------------------------- Total Retail 4.4% -- Wholesale 28.4% 8.9% - -------------------------------------------- Total Sales 6.6% 1.4% - -------------------------------------------- * Reflects OE companies only
Unregulated kilowatt-hour sales showed strong sales growth in 1999, with sales to commercial customers accounting for most of the increase. Revenues from commercial customers represented $53.1 million of the $60.5 million of 1999 revenues from unregulated markets. Over 12,000 new unregulated customers were served in 1999. Several major contracts were entered into in 1999, including one with Republic Technologies International, Inc. (RTI). On August 17, 1999, FirstEnergy Services Corporation (FSC), a wholly owned subsidiary, signed a Master Energy Services and Supply Agreement with RTI. They are expected to use more than $1 billion in energy and related services over the five-year contract period. FSC will manage: the supply and delivery of all of RTI's electricity and natural gas needs; RTI's HVAC requirements; and other energy-related services for RTI. Although unregulated kilowatt-hour sales comprised only 1% of total revenues in 1999, these sales increased substantially compared to 1998 and are expected to be a major source of electric sales growth in future years. Nonelectric Sales Following an initial expansion of its trading activities in 1998, FETS revenues decreased significantly in 1999, compared to the prior year because of refocusing its activities on supporting our retail marketing activities. Revenues from new business acquisitions increased significantly in both 1999 and 1998 due to acquisitions made by FE Facilities and FETS. In addition, we recognized a gain of $53 million from the sale of a partnership investment in the fourth quarter of 1999, which is reflected in other revenues. This one-time gain was offset by nonrecurring expenses recognized in the fourth quarter of 1999, as further described below. Operating Expenses Total expenses increased $255.5 million in 1999 compared to 1998 reflecting higher levels of other expenses for EUOC and facilities services activities, as well as additional depreciation and amortization. This increase in other expenses was partially offset by lower fuel and purchased power costs, as well as reduced expenses for FETS. In 1998, total expenses increased $2.4 billion from the previous year primarily due to the inclusion of a full 12 months of expenses for the former Centerior companies, compared to only 7 weeks of expenses in the 1997 results. Fuel and purchased power costs were $106.7 million lower in 1999, compared to 1998. The EUOC purchased power costs accounted for all of the reduction. Much of the improvement occurred in the second quarter due to the absence of unusual conditions experienced in 1998, which resulted in an additional $77.4 million of purchased power costs. Those costs were incurred during a period of record heat and humidity in late June 1998, which coincided with a regional power shortage resulting in high prices for purchased power. Unscheduled outages at several of our power plants at the same time required the EUOC to purchase significant amounts of power on the spot market. Although above normal temperatures were also experienced in 1999, the EUOC maintained a stronger capacity position compared to the previous year and better met customer demand from their own internal generation. In 1998, fuel and purchased power costs were up $497.5 million compared to 1997. Excluding the merger impact of the Centerior companies in 1998, fuel and purchased power costs for the OE companies increased $74.4 million for the reasons discussed above. Other expenses for the EUOC rose in 1999 compared to 1998 for several reasons. Refueling outages at Beaver Valley Unit 2 and the Perry Plant, as well as full ownership of those units and Beaver Valley Unit 1 following the Duquesne Light Company (Duquesne) asset swap in early December 1999 and nonrecurring swap-related liabilities assumed, increased our nuclear expenses. The EUOC incurred additional costs in 1999 related to improving the availability of their fossil generating units. Also contributing to the increase in other EUOC expenses in 1999 were higher customer, sales and marketing expenses resulting from marketing programs and information system costs; higher distribution expenses from storm damage, as well as line and meter maintenance; and a nonrecurring expense related to a change in employee vacation benefits. In 1998, other expenses for the EUOC increased from the previous year principally as a result of the Centerior merger. Excluding the former Centerior companies, 1998 nonnuclear costs decreased from the previous year due primarily to the absence of expenses related to a 1997 voluntary retirement program and estimated severance costs which increased other expenses for that year. Lower nonnuclear expenses in 1998 were partially offset by higher nuclear costs at the Beaver Valley Plant. With FETS activities changing in 1999 to support our retail marketing efforts, other expenses in this business segment decreased significantly from 1998. Also, FETS expenses were significantly lower in 1999 due to the absence of costs incurred in 1998 associated with credit losses and related replacement power costs resulting from the period of sharp price increases in the spot market for electricity in June 1998. The acquisitions in the facility services and natural gas businesses, as well as costs attributable to unregulated sales activity, combined to increase other expenses in both 1999 and 1998 from the previous years. Accelerated cost recovery in connection with the OE rate reduction plan was the primary factor contributing $160.6 million to the increase in depreciation and amortization in 1999, compared to the prior year. Excluding the effect of the former Centerior companies, depreciation and amortization in 1998 decreased $14.2 million from the prior year mainly due to the net effect of the OE and Penn rate plans. Interest Expense Interest expense decreased $33.7 million in 1999, from the prior year, because of long-term debt redemptions and refinancings. In 1998, interest expense increased, compared to 1997, due to the inclusion of the former Centerior companies. Excluding the impact of the merger, interest on long-term debt for the OE companies continued to trend downward due to refinancings and redemptions of long-term debt. Extraordinary Item The Pennsylvania Public Utility Commission's (PPUC) authorization of Penn's rate restructuring plan led to the discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation," to Penn's generation business in 1998. This resulted in a write-down of $30.5 million, or $.13 per common share, of its nuclear generating unit investment and the recognition of a portion of such investment -- recoverable through future customer rates -- as a regulatory asset. Net Income As a result of higher sales revenues, the absence of unusually high purchased power costs experienced in 1998 and lower interest costs, net income increased significantly in 1999 to $568.3 million, compared to $410.9 million in 1998 and $305.8 million in 1997. Basic and diluted earnings per share of common stock were $2.50 in 1999, compared to $1.82 in 1998 and $1.94 in 1997. Capital Resources and Liquidity We continue to pursue cost efficiencies to fund strategic investments while also strengthening our financial position. During 1999, our financing costs continued their downward trend. Net redemptions of long-term debt and preferred stock totaled $528.9 million, including $18.3 million of optional redemptions in 1999. In addition, we completed $359.6 million of refinancings. Combined, these actions are expected to generate annual savings of about $50 million. The average cost of long-term debt was reduced to 7.65% in 1999 from 8.02% at the end of 1997. As of December 31, 1999, our common equity as a percentage of capitalization increased to 40% from 34% at the end of 1997, following the merger with Centerior. We had approximately $111.8 million of cash and temporary investments and $417.8 million of short-term indebtedness on December 31, 1999. Our unused borrowing capability included $136.5 million under revolving lines of credit. At the end of 1999, the EUOC had the capability to issue $2.1 billion of additional first mortgage bonds on the basis of property additions and retired bonds. Based upon applicable earnings coverage tests and their respective charters, OE, Penn and TE could issue $1.6 billion of preferred stock (assuming no additional debt was issued). CEI has no restrictions on the issuance of preferred stock. Our cash requirements in 2000 for operating expenses, construction expenditures, scheduled debt maturities, preferred stock redemptions, and common stock repurchases are expected to be met without issuing new securities. During 1999, we reduced our total debt by approximately $300.0 million. We have cash requirements of approximately $2.8 billion for the 2000-2004 period to meet scheduled maturities of long-term debt and sinking fund requirements of preferred stock. Of that amount, approximately $494 million applies to 2000. During 1999, we repurchased and retired 4.6 million shares of our common stock at an average price of $28.08 per share. We have authority to repurchase up to 15 million shares of common stock. We also entered into an equity forward purchase contract, which enables us to purchase an additional 1.4 million shares in November 2000 at an average price of $24.22 per share. Our capital spending for the period 2000-2004 is expected to be about $3.0 billion (excluding nuclear fuel), of which approximately $650 million applies to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $497 million, of which about $159 million applies to 2000. During the same period, our nuclear fuel investments are expected to be reduced by approximately $480 million and $106 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments, net of trust cash receipts, of nearly $782 million for the 2000-2004 period, of which approximately $146 million relates to 2000. Two transactions were completed in 1999, which modified our portfolio of generation resources. On July 26, CEI completed its purchase of the remaining 20 percent interest in the Seneca pumped- storage hydroelectric generation plant from GPU, Inc. for $43 million. The purchase makes available 87 megawatts of additional capacity and provides CEI with full ownership of the plant. On December 3, the generating asset transfer with Duquesne was completed. Duquesne transferred 1,436 megawatts it owned at five generating plants to us in exchange for 1,328 megawatts at three plants owned by our EUOC. The transaction provides us with exclusive ownership and operating control of all generating assets which were formerly jointly owned and operated under the Central Area Power Coordination Group agreement. Additional generating capacity is under construction, and is expected to go into service in early June 2000 to supply electricity for peak demand periods, reducing our requirements for purchased power. In total, we will be adding 390 megawatts of gas-fired combustion turbines by the end of 2000 to meet this need. Another 150 megawatts of diesel generation will be available to us on a limited basis during the summer of 2000. We completed four acquisitions during 1999, which further expand energy-related products and services available to our customers. FE Facilities acquired one company having total annual revenues of approximately $14 million. Collectively, the FE Facilities companies now produce more than $500 million in annual revenues and have approximately 3,400 employees. In addition, FETS acquired three retail gas companies having combined annual revenues of $239 million and more than 43,000 customers. These three acquisitions further expanded our retail natural gas business in Ohio and surrounding states, bringing our total annual revenues in that business to approximately $500 million. MARBEL and Range Resources Corporation formed a joint venture, Great Lakes Energy Partners L.L.C., on September 30, 1999. This joint venture combined each company's Appalachian oil and natural gas properties and related gas gathering and transportation systems with the objective of lowering operating costs, and increasing natural gas market share in the Appalachian Basin. As exclusive marketing agent for the new joint venture, we continue to expand our network of gas assets to supply our retail customer base. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. As discussed in Note 2, 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 a corresponding change to the decommissioning liability, as described in Note 1.
Comparison of Carrying Value to Fair Value - ---------------------------------------------------------------------------------------------- There- Fair 2000 2001 2002 2003 2004 after Total Value - ---------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income $111 $ 60 $ 84 $ 97 $314 $1,370 $2,036 $2,022 Average interest rate 6.5% 7.0% 7.7% 7.7% 7.8 7.5% 7.5% - ------------------------------------------------------------------------------------------------ Liabilities - ------------------------------------------------------------------------------------------------ Long-term Debt: Fixed rate $456 $105 $724 $459 $591 $3,009 $5,344 $5,307 Average interest rate 7.1% 8.6% 7.9% 8.0% 7.7% 7.5% 7.6% Variable rate $190 $847 $1,037 $1,024 Average interest rate 7.5% 4.4% 5.0% Short-term Borrowings $418 $418 $ 418 Average interest rate 6.5% 6.5% - ------------------------------------------------------------------------------------------------ Preferred Stock $ 38 $ 85 $ 20 $ 2 $ 2 $137 $ 284 $ 280 Average dividend rate 8.9% 8.9% 8.9% 7.5% 7.5% 8.8% 8.8% - ------------------------------------------------------------------------------------------------
Market Risk - Commodity Prices We are exposed to market risk due to fluctuations in electricity, natural gas and oil 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 and, to a lesser extent, for trading purposes. A sensitivity analysis has been prepared to estimate our exposure to the market risk of our commodity position. A hypothetical 10 percent adverse shift in quoted market prices in the near term on both our trading and nontrading instruments would not have a material effect on our consolidated financial position, results of operations or cash flows as of or for the year ended December 31, 1999. Outlook We continue to face many competitive challenges as the electric utility industry undergoes significant changes, including changing regulation and the entrance of more energy suppliers into the marketplace. Retail wheeling, which began in 1999 in our Pennsylvania service area, allows retail customers to purchase electricity from alternative energy suppliers. Recent legislation provides for similar changes beginning in 2001 in Ohio. Our existing regulatory plans provide us with a solid foundation to position us to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level. The transition plan ultimately approved by the Public Utilities Commission of Ohio (PUCO) will supersede our current Ohio rate plans. OE's Rate Reduction and Economic Development Plan, approved by the PUCO in 1995, and FirstEnergy's Rate Reduction and Economic Development Plan for CEI and TE, approved in January 1997, provide interim rate credits to customers during the periods covered by the plans. The OE regulatory plan provides for accelerated capital recovery. The regulatory plan for CEI and TE includes a commitment to accelerate depreciation on the regulatory books. The CEI/TE plan does not provide for full recovery of nuclear operations; accordingly, CEI and TE ceased application of SFAS 71 for their nuclear operations when implementation of the FirstEnergy regulatory plan became probable. In July 1999, Ohio's new electric utility restructuring legislation, which will allow Ohio electric customers to select their generation suppliers beginning January 1, 2001, was signed into law. Among other things, the new law provides for a 5% reduction on the generation portion of residential customers' bills and the opportunity to recover transition costs, including regulatory assets, from January 1, 2001 through December 31, 2005. The period for the recovery of regulatory assets only can be extended up to December 31, 2010. The PUCO was authorized to determine the level of transition cost recovery, as well as the recovery period for the regulatory assets portion of those costs, in considering each Ohio electric utility's transition plan application. On behalf of our Ohio electric utility operating companies -- OE, CEI and TE, we refiled our transition plan on December 22, 1999. The plan was originally filed with the PUCO on October 4, 1999, but was refiled to conform to PUCO rules established on November 30, 1999. The new filing also included additional information on our plans to turn over control, and perhaps ownership, of our transmission assets to the Alliance Regional Transmission Organization (Alliance), which is discussed below. The transition plan itemizes, or unbundles, the current price of electricity into separate components - including generation, transmission, distribution and transition charges. As required by the PUCO's rules, our filing also included our proposals on corporate separation of our regulated and unregulated operations, operational and technical support changes needed to accommodate customer choice, an education program to inform customers of their options under the law, and how our transmission system will be operated to ensure access to all users. Under the plan, customers who remain with OE, CEI or TE as their generation provider will continue to receive savings under our rate plans, expected to total $759 million between 2000 and 2005. In addition, customers will save $358 million through reduced charges for taxes and a 5% reduction in the price of generation for residential customers beginning January 1, 2001. Customer prices are expected to be frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the 5% reduction in the price of generation for residential customers. The plan proposes recovery of generation-related transition costs of approximately $4.5 billion ($4.0 billion, net of deferred income taxes) over the market development period; transition costs related to regulatory assets aggregating approximately $4.2 billion ($2.9 billion, net of deferred income taxes) are expected to be recovered over the period of 2001 through early 2004 for OE; 2001 through 2007 for TE; and 2001 through 2010 for CEI. When the transition plan is approved by the PUCO, the application of SFAS 71 to OE's generation business and the nonnuclear generation businesses of CEI and TE will be discontinued. In the meantime, we will continue to bill and collect cost-based rates relating to CEI's and TE's nonnuclear operations and all of OE's operations through the end of 2000. If the transition plans ultimately approved by the PUCO for OE, CEI and TE do not provide adequate recovery of their nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on our results of operations and financial condition and those of our Ohio EUOC. The EUOC believe they will continue to bill and collect cost-based rates for their transmission and distribution services, which will remain regulated; accordingly, it is appropriate that the EUOC continue the application of SFAS 71 to those operations after December 31, 2000. For Penn, application of SFAS 71 was discontinued for the generation portion of its business in 1998 following PPUC approval of its restructuring plan. Under the plan, a phase-in period for customer choice began with 66% of Penn's customers able to select their energy supplier beginning January 2, 1999, and all remaining customers able to select their energy providers starting January 1, 2001. Penn is entitled to recover $236 million of stranded costs through a competitive transition charge that started in 1999 and ends in 2006. In the second half of 1999, we received notification of pending legal actions based on alleged violations of the Clean Air Act at our W. H. Sammis Plant involving the states of New York and Connecticut as well as the U.S. Department of Justice. The civil complaint filed by the U.S. Department of Justice requests installation of "best available control technology" as well as civil penalties of up to $27,500 per day. We believe the Sammis Plant is in full compliance with the Clean Air Act and the legal actions are without merit. However, we are unable to predict the outcome of this litigation. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. We expect the Sammis Plant to continue to operate while the matter is being decided. CEI and TE have been named as "potentially responsible parties" (PRPs) for three sites listed on the Superfund National Priorities List and are aware of their potential involvement in the cleanup of several other sites. Allegations that CEI and TE disposed of hazardous waste at these sites, and the amount 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. If CEI and TE were held liable for 100% of the cleanup costs of all sites, the ultimate liability could be as high as $340 million. However, we believe that the actual cleanup costs will be substantially lower than $340 million, that CEI's and TE's share of any cleanup costs will be substantially less than 100% and that most of the other PRPs are financially able to contribute their share. CEI and TE have accrued liabilities of $5.4 million as of December 31, 1999, based on estimates of the costs of cleanup and their proportionate responsibility for such costs. CEI and TE believe that the waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. On October 27, 1999, the Federal Energy Regulatory Commission (FERC) approved our plan to transfer our transmission assets to American Transmission Systems Inc. (ATSI), a wholly owned subsidiary. The PUCO approved the transfer in February 2000. PPUC and Securities and Exchange Commission regulatory approvals are also required. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent, regional transmission organization (RTO). We believe that such an entity better addresses the FERC's stated transmission objectives of non-discriminatory service, while providing for streamlined and cost- effective operation. In working toward that goal, we joined with four other companies - American Electric Power, Consumers Energy, Detroit Edison and Virginia Power - to form the Alliance RTO. On June 3, 1999, the Alliance submitted an application to the FERC to form an independent, for profit RTO. On December 15, 1999, the FERC issued an order conditionally approving the Alliance's application. Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. We have not completed quantifying the impacts of adopting SFAS 133 on our financial statements or determined the method of its adoption. However, SFAS 133 could increase volatility in earnings and other comprehensive income. We anticipate adopting the new statement on its amended effective date of January 1, 2001. Year 2000 Update Based on the results of our remediation and testing efforts, we filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission, PUCO and PPUC that as of June 30, 1999, our generation, transmission, and distribution systems were ready to serve customers in the year 2000. We have since experienced no failures or interruptions of service to our customers resulting from the Year 2000 issue, which was consistent with our expectations. We spent $84.9 million on Year 2000-related costs through December 31, 1999, which was slightly lower than previously estimated. Of this total, $68.3 million was capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $16.6 million was expensed as incurred. We do not believe there are any continuing Year 2000 issues to be addressed, nor any additional material Year 2000 expenditures. Forward-Looking Information This discussion includes forward-looking statements based on information currently available to management that are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes, and the availability and cost of capital and other similar factors. FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------ (In thousands, except per share amounts) REVENUES: Electric sales $5,192,876 $4,979,718 $2,774,996 Other-electric utilities 260,887 257,750 142,742 Facilities services 502,990 198,336 -- Trading services 190,634 410,728 43,145 Other 172,260 28,374 242 ---------- ---------- ---------- Total revenues 6,319,647 5,874,906 2,961,125 ---------- ---------- ---------- EXPENSES: Fuel and purchased power 876,986 983,735 486,267 Other expenses: Electric utilities 1,632,638 1,492,461 851,146 Facilities services 469,176 184,440 -- Trading services 196,474 517,001 44,032 Other 126,926 41,337 -- Provision for depreciation and amortization 937,976 758,865 474,679 General taxes 544,052 550,908 282,163 ---------- ---------- ---------- Total expenses 4,784,228 4,528,747 2,138,287 ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 1,535,419 1,346,159 822,838 ---------- ---------- ---------- NET INTEREST CHARGES: Interest expense 509,169 542,819 284,180 Allowance for borrowed funds used during construction and capitalized interest (13,355) (7,642) (3,469) Subsidiaries' preferred stock dividends 76,479 65,799 27,818 ---------- ---------- ---------- Net interest charges 572,293 600,976 308,529 ---------- ---------- ---------- INCOME TAXES 394,827 303,787 208,535 ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 568,299 441,396 305,774 EXTRAORDINARY ITEM (NET OF INCOME TAX BENEFIT OF $21,208,000) (Note 1) -- (30,522) -- ---------- ---------- ---------- NET INCOME $ 568,299 $ 410,874 $ 305,774 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 227,227 226,373 157,464 ========== ========== ========== BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK (Note 3C): Income before extraordinary item $2.50 $1.95 $1.94 Extraordinary item (Net of income taxes) (Note 1) -- (.13) -- ----- ----- ----- Net income $2.50 $1.82 $1.94 ===== ===== ===== 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
At December 31, 1999 1998 - ---------------------------------------------------------------------------------------- (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 111,788 $ 77,798 Receivables-- Customers (less accumulated provisions of $6,719,000 and $6,397,000, respectively, for uncollectible accounts) 322,687 239,183 Other (less accumulated provisions of $5,359,000 and $46,251,000, respectively, for uncollectible accounts) 445,242 322,186 Materials and supplies, at average cost-- Owned 154,834 145,926 Under consignment 99,231 110,109 Prepayments and other 167,894 171,931 ----------- ----------- 1,301,676 1,067,133 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: In service 14,645,131 14,961,664 Less--Accumulated provision for depreciation 5,919,170 6,012,761 ----------- ----------- 8,725,961 8,948,903 Construction work in progress 367,380 293,671 ----------- ----------- 9,093,341 9,242,574 ----------- ----------- INVESTMENTS: Capital trust investments (Note 2) 1,281,834 1,329,010 Letter of credit collateralization (Note 2) 277,763 277,763 Nuclear plant decommissioning trusts 543,694 358,371 Other 599,443 391,855 ----------- ----------- 2,702,734 2,356,999 ----------- ----------- DEFERRED CHARGES: Regulatory assets 2,543,427 2,887,437 Goodwill 2,129,902 2,167,968 Other 452,967 470,066 ----------- ----------- 5,126,296 5,525,471 ----------- ----------- $18,224,047 $18,192,177 =========== =========== LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES: Currently payable long-term debt and preferred stock $ 762,520 $ 876,470 Short-term borrowings (Note 4) 417,819 254,470 Accounts payable 360,379 247,353 Accrued taxes 409,724 401,688 Accrued interest 125,397 141,575 Other 301,572 255,158 ----------- ----------- 2,377,411 2,176,714 ----------- ----------- CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholders' equity 4,563,890 4,449,158 Preferred stock of consolidated subsidiaries-- Not subject to mandatory redemption 648,395 660,195 Subject to mandatory redemption 136,246 174,710 Ohio Edison obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Ohio Edison subordinated debentures 120,000 120,000 Long-term debt 6,001,264 6,352,359 ----------- ----------- 11,469,795 11,756,422 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 2,231,265 2,282,864 Accumulated deferred investment tax credits 269,083 286,154 Other postretirement benefits 498,184 463,642 Nuclear plant decommissioning costs 562,295 375,958 Other 816,014 850,423 ----------- ----------- 4,376,841 4,259,041 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 5) ----------- ----------- $18,224,047 $18,192,177 =========== =========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) COMMON STOCKHOLDERS' EQUITY: Common stock, $.10 par value - authorized 300,000,000 shares 232,454,287 and 237,069,087 shares outstanding, respectively $ 23,245 $ 23,707 Other paid-in capital 3,722,375 3,846,513 Accumulated other comprehensive income (Note 3D) (195) (439) Retained earnings (Note 3A) 945,241 718,409 Unallocated employee stock ownership plan common stock- 6,778,905 and 7,406,332 shares, respectively (Note 3B) (126,776) (139,032) ---------- ---------- Total common stockholders' equity 4,563,890 4,449,158 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ---------------- -------------------- 1999 1998 Per Share Aggregate ------ ------ --------- --------- PREFERRED STOCK OF CONSOLIDATED SUBSIDIARIES (Note 3E): Ohio Edison Company (OE) 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 3F): 8.45% 100,000 150,000 10,000 15,000 Redemption Within One Year (5,000) (5,000) --------- --------- ---------- ----------- 100,000 150,000 5,000 10,000 ========= ========= ---------- ----------- 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 7.64% -- 60,000 -- -- -- 6,000 7.75% 250,000 250,000 -- -- 25,000 25,000 8.00% -- 58,000 -- -- -- 5,800 --------- --------- -------- ---------- ----------- Total Not Subject to Mandatory Redemption 391,049 509,049 $ 14,614 39,105 50,905 ========= ========= ======== ---------- ----------- Subject to Mandatory Redemption (Note 3F): 7.625% 150,000 150,000 106.10 $ 15,915 15,000 15,000 ========= ========= ======== ---------- ----------- OE OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY OE SUBORDINATED DEBENTURES (Note 3G): Cumulative, $25 par value- Authorized 4,800,000 shares Subject to Mandatory Redemption: 9.00% 4,800,000 4,800,000 120,000 120,000 ========= ========= ---------- -----------
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd)
At December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) Number of Shares Optional Outstanding Redemption Price ---------------- -------------------- 1999 1998 Per Share Aggregate ------ ------ --------- --------- PREFERRED STOCK OF CONSOLIDATED SUBSIDIARIES (Cont'd) 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 --------- --------- -------- ---------- --------- Total Not Subject to Mandatory Redemption 1,624,000 1,624,000 $243,917 238,325 238,325 ========= ========= ======== ---------- --------- Subject to Mandatory Redemption: $ 7.35 Series C 90,000 100,000 101.00 $ 9,090 9,110 10,110 $88.00 Series E 3,000 6,000 1,000.00 3,000 3,000 6,000 $91.50 Series Q 21,430 32,144 1,000.00 21,430 21,430 32,144 $88.00 Series R 50,000 50,000 -- -- 55,000 55,000 $90.00 Series S 55,250 74,000 -- -- 61,170 79,920 --------- --------- -------- ---------- --------- 219,680 262,144 33,520 149,710 183,174 Redemption Within One Year (33,464) (33,464) --------- --------- -------- ---------- --------- Total Subject to Mandatory Redemption 219,680 262,144 $ 33,520 116,246 149,710 ========= ========= ======== ---------- --------- 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 --------- --------- -------- ---------- --------- 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 --------- --------- -------- ---------- --------- Total Not Subject to Mandatory Redemption 5,700,000 5,700,000 $216,140 210,000 210,000 ========= ========= ======== ---------- --------- Cumulative, $100 par value- Subject to Mandatory Redemption: $9.375 -- 16,900 $ -- -- 1,690 Redemption Within One Year -- (1,690) --------- --------- -------- ---------- --------- Total Subject to Mandatory Redemption -- 16,900 $ -- -- -- ========= ========= ======== ---------- ---------
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd)
LONG-TERM DEBT (Note 3H) (Interest rates reflect weighted average rates) (In thousands) - -------------------------------------------------------------------------------------------------------------------------------- FIRST MORTGAGE BONDS SECURED NOTES UNSECURED NOTES TOTAL - -------------------------------------------------------------------------------------------------------------------------------- At December 31, 1999 1998 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- ---- ---- Ohio Edison Co. - Due 1999-2004 7.81% $ 509,265 $ 659,265 7.57% $ 269,152 $ 203,062 5.40% $ 742,225 $566,500 Due 2005-2009 6.88% 80,000 80,000 7.65% 49,534 48,194 -- -- -- Due 2010-2014 -- -- -- -- -- -- -- -- -- Due 2015-2019 -- -- -- 6.89% 66,000 113,725 -- -- -- Due 2020-2024 7.99% 219,460 225,960 7.02% 129,942 317,943 -- -- -- Due 2025-2029 -- -- -- 5.75% 119,734 119,734 -- -- -- Due 2030-2034 -- -- -- 5.45% 14,800 14,800 -- -- -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Ohio Edison 808,725 965,225 649,162 817,458 742,225 566,500 $ 2,200,112 $ 2,349,183 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Cleveland Electric Illuminating Co. - Due 1999-2004 7.54% 295,000 295,000 7.64% 559,650 704,180 5.58% 27,700 -- Due 2005-2009 8.72% 425,000 425,000 7.29% 271,700 271,700 -- -- -- Due 2010-2014 -- -- -- 8.00% 78,700 78,700 -- -- -- Due 2015-2019 -- -- -- 6.74% 412,630 412,630 -- -- -- Due 2020-2024 9.00% 150,000 150,000 6.66% 264,160 291,860 -- -- -- Due 2025-2029 -- -- -- 7.59% 148,843 148,843 -- -- -- Due 2030-2034 -- -- -- 4.56% 104,895 104,895 -- -- -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Cleveland Electric 870,000 870,000 1,840,578 2,012,808 27,700 -- 2,738,278 2,882,808 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Toledo Edison Co. - Due 1999-2004 7.90% 179,925 265,325 7.84% 266,000 284,500 7.28% 226,100 138,750 Due 2005-2009 -- -- -- 7.13% 30,000 30,000 10.00% 150 150 Due 2010-2014 -- -- -- 4.98% -- 31,250 10.00% 700 700 Due 2015-2019 -- -- -- 8.00% 67,300 67,300 -- -- -- Due 2020-2024 -- -- -- 7.89% 210,600 266,700 -- -- -- Due 2025-2029 -- -- -- 5.90% 13,851 13,851 -- -- -- Due 2030-2034 -- -- -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Toledo Edison 179,925 265,325 587,751 693,601 226,950 139,600 994,626 1,098,526 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Pennsylvania Power Co. - Due 1999-2004 7.19% 79,370 79,857 6.45% 28,200 23,000 5.90% 5,200 -- Due 2005-2009 9.74% 4,870 4,870 -- -- -- -- -- -- Due 2010-2014 9.74% 4,870 4,870 5.40% 1,000 1,000 -- -- -- Due 2015-2019 9.74% 4,903 4,903 6.28% 45,325 45,325 -- -- -- Due 2020-2024 8.33% 33,750 33,750 6.68% 27,182 32,382 -- -- -- Due 2025-2029 -- -- -- 6.03% 47,972 47,972 -- -- -- Due 2030-2034 -- -- -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total-Penn Power 127,763 128,250 149,679 149,679 5,200 -- 282,642 277,929 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- OES Fuel -- -- 6.85% 81,260 79,524 -- -- -- 81,260 79,524 Bay Shore Power -- -- 6.72% 147,500 147,500 -- -- -- 147,500 147,500 MARBEL Energy Corp. -- -- 6.40% -- 12,418 8.00% 692 -- 692 12,418 Facilities Services Group -- -- 6.61% 14,782 10,237 7.29% 1,887 3,917 16,669 14,154 ---------- ---------- ---------- ---------- ---------- -------- ----------- ----------- Total $1,986,413 $2,228,800 $3,470,712 $3,923,225 $1,004,654 $710,017 6,461,779 6,862,042 ========== ========== ========== ========== ========== ======== ----------- ----------- Capital lease obligations 158,303 199,491 ----------- ----------- Net unamortized premium on debt 105,238 127,142 ----------- ----------- Long-term debt due within one year (724,056) (836,316) ----------- ----------- Total long-term debt 6,001,264 6,352,359 ----------- ----------- TOTAL CAPITALIZATION $11,469,795 $11,756,422 ================================================================================================================================= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Accumulated Other Unallocated Comprehensive Other Comprehensive ESOP Income- Number Par Paid-In Income- Retained Common Note 3D of Shares Value Capital Note 3D Earnings Stock ------------- ----------- ---------- ---------- ------------ --------- ----------- (Dollars in thousands) Balance, January 1, 1997 152,569,437 $1,373,125 $ 728,261 $(659) $ 557,642 $(155,010) Net income $305,774 305,774 Minimum liability for unfunded retirement benefits, net of $26,000 of income taxes 45 45 -------- Comprehensive income $305,819 ======== Centerior acquisition 77,637,704 (1,350,104) 2,907,387 Allocation of ESOP Shares 1,874 8,033 Cash dividends on common stock (216,770) - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 230,207,141 23,021 3,637,522 (614) 646,646 (146,977) Net income $410,874 410,874 Minimum liability for unfunded retirement benefits, net of $53,000 of income taxes 175 175 -------- Comprehensive income $411,049 ======== Business acquisitions 6,861,946 686 203,496 Allocation of ESOP Shares 5,495 7,945 Cash dividends on common stock (339,111) - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 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) ===========================================================================================================================
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, 1997 5,118,699 $211,870 5,200,000 $160,000 Centerior acquisition 7,324,000 448,325 319,408 201,243 Redemptions- 8.45% Series (50,000) (5,000) - ------------------------------------------------------------------------------------------------ Balance, December 31, 1997 12,442,699 660,195 5,469,408 356,243 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) $9.375 Series (16,650) (1,665) - ----------------------------------------------------------------------------------------------- Balance, December 31, 1998 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 ================================================================================================ 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, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 568,299 $ 410,874 $ 305,774 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization 937,976 758,865 474,679 Nuclear fuel and lease amortization 104,928 94,348 61,960 Other amortization, net (10,730) (13,007) (1,187) Deferred income taxes, net (45,054) (23,763) (29,093) Investment tax credits, net (19,661) (22,070) (16,252) Allowance for equity funds used during construction -- -- (201) Extraordinary item -- 51,730 -- Receivables (203,567) 35,515 21,846 Materials and supplies 19,631 (14,235) (18,909) Accounts payable 82,578 (73,205) 57,087 Other 53,906 (49,727) 733 ---------- ---------- ---------- Net cash provided from operating activities 1,488,306 1,155,325 856,437 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Common stock -- 204,182 1,558,237 Long-term debt 364,832 499,975 89,773 Ohio Schools Council prepayment program -- 116,598 -- Short-term borrowings, net 163,327 -- -- Redemptions and Repayments- Common stock 130,133 -- -- Preferred stock 52,159 21,379 5,000 Long-term debt 847,006 804,780 335,909 Short-term borrowings, net -- 48,354 47,251 Common Stock Dividend Payments 341,467 339,111 237,848 ----------- ---------- ---------- Net cash provided from (used for) financing activities (842,606) (392,869) 1,022,002 ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Centerior acquisition -- -- 1,582,459 Property additions 624,901 652,852 203,839 Cash investments (41,213) 47,804 8,934 Other 28,022 82,239 62,237 ----------- ---------- ---------- Net cash used for investing activities 611,710 782,895 1,857,469 ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 33,990 (20,439) 20,970 Cash and cash equivalents at beginning of period* 77,798 98,237 77,267 ----------- ---------- ---------- Cash and cash equivalents at end of year $ 111,788 $ 77,798 $ 98,237 =========== ========== ========== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year- Interest (net of amounts capitalized) $ 520,072 $ 536,064 $ 281,670 Income taxes $ 441,067 $ 326,268 $ 265,615 * 1997 beginning balance includes Centerior cash and cash equivalents as of the November 8, 1997 acquisition date. 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, 1999 1998 1997 - ------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property $ 276,227 $ 292,503 $ 137,816 State gross receipts 220,117 217,633 118,390 Social security and unemployment 37,019 27,363 16,551 Other 10,689 13,409 9,406 ---------- ---------- ---------- Total general taxes $ 544,052 $ 550,908 $ 282,163 ========== ========== ========== PROVISION FOR INCOME TAXES: Currently payable- Federal $ 433,872 $ 313,960 $ 235,728 State 25,670 14,452 18,152 ---------- ---------- ---------- 459,542 328,412 253,880 ---------- ---------- ---------- Deferred, net- Federal (36,021) (14,259) (23,204) State (9,033) (9,504) (5,889) ---------- ---------- ---------- (45,054) (23,763) (29,093) ---------- ---------- ---------- Investment tax credit amortization (19,661) (22,070) (16,252) ---------- ---------- ---------- Total provision for income taxes $ 394,827 $ 282,579 $ 208,535 ========== ========== ========== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes $ 963,126 $ 693,453 $ 514,309 ========== ========== ========== Federal income tax expense at statutory rate $ 337,094 $ 242,709 $ 180,008 Increases (reductions) in taxes resulting from- Amortization of investment tax credits (19,661) (22,070) (16,252) State income taxes, net of federal income tax benefit 10,814 3,216 7,971 Amortization of tax regulatory assets 23,908 28,915 30,735 Amortization of goodwill 19,341 17,868 2,685 Preferred stock dividends 22,988 19,250 5,956 Other, net 343 (7,309) (2,568) ---------- ---------- ---------- Total provision for income taxes $ 394,827 $ 282,579 $ 208,535 ========== ========== ========== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences $1,878,904 $1,938,735 $2,091,207 Deferred nuclear expense 421,837 436,601 454,902 Customer receivables for future income taxes 159,577 159,526 262,428 Competitive transition charge 115,277 135,730 -- Deferred sale and leaseback costs (129,775) (61,506) (121,974) Unamortized investment tax credits (96,036) (102,085) (116,593) Unused alternative minimum tax credits (101,185) (190,781) (243,039) Other (17,334) (33,356) (22,626) ---------- ---------- ---------- Net deferred income tax liability $2,231,265 $2,282,864 $2,304,305 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Other Pension Benefits Postretirement Benefits ---------------- --------------------- - 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1 $1,500.1 $1,327.5 $ 601.3 $ 534.1 Service cost 28.3 25.0 9.3 7.5 Interest cost 102.0 92.5 40.7 37.6 Plan amendments -- 44.3 -- 40.1 Actuarial loss (gain) (155.6) 101.6 (17.6) 10.7 Net increase from asset swap 14.8 -- 12.5 -- Benefits paid (95.5) (90.8) (37.8) (28.7) - --------------------------------------------------------------------------------------------------- Benefit obligation as of December 31 1,394.1 1,500.1 608.4 601.3 - --------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1 1,683.0 1,542.5 3.9 2.8 Actual return on plan assets 220.0 231.3 0.6 0.7 Company contribution -- -- 0.4 0.4 Benefits paid (95.5) (90.8) -- -- - --------------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,807.5 1,683.0 4.9 3.9 - --------------------------------------------------------------------------------------------------- Funded status of plan 413.4 182.9 (603.5) (597.4) Unrecognized actuarial loss (gain) (303.5) (110.8) 24.9 30.6 Unrecognized prior service cost 57.3 63.0 24.1 27.4 Unrecognized net transition obligation (asset) (10.1) (18.0) 120.1 129.3 - --------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 157.1 $ 117.1 $(434.4) $(410.1) ==================================================================================================== Assumptions used as of December 31: Discount rate 7.75% 7.00% 7.75% 7.00% 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, 1999 were computed as follows: Other Pension Benefits Postretirement Benefits ---------------------------- ----------------------- 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ (In millions) Service cost $ 28.3 $ 25.0 $ 15.2 $ 9.3 $ 7.5 $ 4.6 Interest cost 102.0 92.5 55.9 40.7 37.6 20.4 Expected return on plan assets (168.1) (152.7) (99.7) (0.4) (0.3) (0.2) Amortization of transition obligation (asset) (7.9) (8.0) (8.0) 9.2 9.2 8.2 Amortization of prior service cost 5.7 2.3 2.1 3.3 (0.8) 0.3 Recognized net actuarial loss (gain) -- (2.6) (0.9) -- -- -- Voluntary early retirement program expense -- -- 54.5 -- -- 1.9 - ------------------------------------------------------------------------------------------------------------- Net benefit cost $ (40.0) $ (43.5) $ 19.1 $62.1 $53.2 $35.2 =============================================================================================================
The health care trend rate assumption is 5.3% in 2000, 5.2% in 2001 and 5.0% for 2002 and 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 $4.5 million and the postretirement benefit obligation by $72.0 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.5 million and the postretirement benefit obligation by $58.2 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 December 31, 1999 and 1998, cash and cash equivalents included $83 million and $26 million, respectively, to be used for the redemption of long-term debt in the first quarter of 2000 and in 1999, respectively. The Companies reflect temporary cash investments at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $36.2 million, $61.8 million and $3.0 million for the years 1999, 1998 and 1997, respectively. Commercial paper transactions of OES Fuel, Incorporated (OES Fuel) (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 long-term debt on the Consolidated Balance Sheets (see Note 3H). All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles 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:
1999 1998 - -------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------- (In millions) Long-term debt $6,381 $6,331 $6,783 $7,247 Preferred stock $ 295 $ 280 $ 335 $ 340 Investments other than cash and cash equivalents: Debt securities -Maturity (5-10 years) $ 475 $ 476 $ 481 $ 520 -Maturity (more than 10 years) 1,068 1,013 1,109 1,139 Equity securities 17 17 17 17 All other 852 874 520 533 - -------------------------------------------------------------------- $2,412 $2,380 $2,127 $2,209 ====================================================================
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 a corresponding change to the decommissioning liability. The debt and equity securities referred to above are in the held-to-maturity category. The Companies have no securities held for trading purposes. Effective December 31, 1998, the Company 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 Issue 98-10, "Accounting for Energy Trading and Risk Management Activities," with gains and losses recognized currently in the Consolidated Statements of Income. The contracts that were marked to market are included in the Consolidated Balance Sheets as Deferred Charges and Deferred Credits at their fair values. The impact on the consolidated financial statements was immaterial. 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 being recovered from customers under the Companies' respective regulatory plans. Based on those regulatory plans, at this time, the Companies are continuing to bill and collect cost- based rates relating to all of OE's operations, CEI's and TE's nonnuclear operations, and Penn's nongeneration operations and they continue the application of SFAS 71 to those respective operations. OE and Penn recognized additional cost recovery of $257 million, $50 million and $39 million in 1999, 1998 and 1997, respectively, as additional regulatory asset amortization in accordance with their regulatory plans. FirstEnergy's regulatory plan does not provide for full recovery of CEI's and TE's nuclear operations. As a result, in October 1997, CEI and TE discontinued application of SFAS 71 for their nuclear operations and decreased their regulatory assets of customer receivables for future income taxes related to the nuclear assets by $794 million. The PUCO indicated that it will endeavor to issue its order related to the Company's transition plan by mid-2000. The application of SFAS 71 to OE's generation business and the nonnuclear generation businesses of CEI and TE will be discontinued at that time. If the transition plans ultimately approved by the PUCO for OE, CEI and TE do not provide adequate recovery of their nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on the results of operations and financial condition for the Company, OE, CEI and TE. The Companies will continue to bill and collect cost-based rates for their transmission and distribution services, which will remain regulated; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those respective operations after December 31, 2000. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: 1999 1998 - ------------------------------------------------------------------- (In millions) Nuclear unit expenses $1,123.0 $1,164.8 Customer receivables for future income taxes 444.3 444.0 Rate stabilization program deferrals 420.1 440.1 Sale and leaseback costs 17.8 218.7 Competitive transition charge 280.4 331.0 Loss on reacquired debt 173.9 183.5 Employee postretirement benefit costs 24.8 28.9 DOE decommissioning and decontamination costs 29.5 32.9 Other 29.6 43.5 - -------------------------------------------------------------------- Total $2,543.4 $2,887.4 ==================================================================== 2. LEASES: The Companies lease certain generating facilities, nuclear fuel, 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 end 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 (OES Finance), 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. Nuclear fuel is currently financed for CEI and TE through leases with a special-purpose corporation. As of December 31, 1999, $116 million of nuclear fuel was financed under a lease financing arrangement totaling $145 million ($30 million of intermediate-term notes and $115 million from bank credit arrangements). The notes mature in August 2000 and the bank credit arrangements expire in September 2000. Lease rates are based on intermediate- term note rates, bank rates and commercial paper rates. 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, 1999, are summarized as follows:
1999 1998 1997 - ----------------------------------------------------------- (In millions) Operating leases Interest element $208.6 $201.2 $149.9 Other 110.3 147.8 45.2 Capital leases Interest element 17.5 17.6 6.1 Other 76.1 66.3 6.0 - ---------------------------------------------------------- Total rentals $412.5 $432.9 $207.2 ==========================================================
The future minimum lease payments as of December 31, 1999, are:
Operating Leases ----------------------------- Capital Lease Capital Leases Payments Trusts Net - ------------------------------------------------------------------------------------ (In millions) 2000 $ 75.4 $ 296.5 $ 150.6 $ 145.9 2001 45.2 307.5 146.1 161.4 2002 29.7 312.7 169.5 143.2 2003 16.0 326.6 176.5 150.1 2004 12.1 291.8 110.7 181.1 Years thereafter 71.6 3,645.8 1,364.3 2,281.5 - ----------------------------------------------------------------------------------- Total minimum lease payments 250.0 $5,180.9 $2,117.7 $3,063.2 Executory costs 26.9 ======== ======== ======== - -------------------------------------------- Net minimum lease payments 223.1 Interest portion 64.8 - -------------------------------------------- Present value of net minimum lease payments 158.3 Less current portion 55.2 - -------------------------------------------- Noncurrent portion $103.1 ============================================
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. 3. CAPITALIZATION: (A) RETAINED EARNINGS- There are no restrictions on retained earnings for payment of cash dividends on the Company's common stock. (B) EMPLOYEE STOCK OWNERSHIP PLAN- The Companies fund the matching contribution for their 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 through market purchases; the shares were converted into the Company's common stock in connection with the merger. 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 1999, 1998 and 1997, 627,427 shares, 423,206 shares and 429,515 shares, respectively, were allocated to employees with the corresponding expense recognized based on the shares allocated method. The fair value of 6,778,905 shares unallocated as of December 31, 1999, was approximately $153.8 million. Total ESOP-related compensation expense was calculated as follows:
1999 1998 1997 - ---------------------------------------------------------------- (In millions) Base compensation $18.3 $13.5 $ 9.9 Dividends on common stock held by the ESOP and used to service debt (4.5) (3.9) (3.4) - ----------------------------------------------------------------- Net expense $13.8 $ 9.6 $ 6.5 ==================================================================
(C) STOCK COMPENSATION PLANS- Under the Centerior Equity Compensation Plan (Centerior Plan) adopted in 1994, common stock options were granted to management employees. Upon consummation of the merger, outstanding options became exercisable for the Company's common stock with option prices and the number of shares adjusted to reflect the merger conversion ratio. All options under the Centerior Plan expire on or before February 25, 2007. On April 30, 1998, the Company adopted the Executive and Director Incentive Compensation Plan (FE Plan). The FE Plan permits awards to be made to key employees in the form of restricted stock, stock options, stock appreciation rights, performance shares or cash. Common stock granted under the FE Plan may not exceed 7.5 million shares. No stock appreciation rights or performance shares have been issued under the FE Plan. A total of 20,000 shares of restricted stock were granted in 1998, with a per share market price of $30.78. Restrictions on the restricted stock lapse in 25% annual increments beginning in the fourth year from date of grant. Dividends on the 1998 grant are not restricted. An additional 8,000 shares of restricted stock were granted in 1999, in five separate awards with a weighted average market price per share of $30.89 and weighted average cliff vesting period of 5.8 years. Dividends on the 1999 grants are being restricted. Options were granted in 1998 and 1999, and are exercisable after four years from the date of grant with some acceleration of vesting possible based on performance. Stock option activity for the converted Centerior Plan stock options and FE Plan stock options was as follows:
Number of Weighted Average Stock Option Activity Options Exercise Price - ------------------------------------------------------------------- Balance at December 31, 1996 -- $ -- Options granted (at merger) 743,086 23.85 Options exercised 222,023 22.13 Options forfeited 3,675 22.75 Balance at December 31, 1997 517,388 24.59 (517,388 options exercisable) Options granted 189,491 29.82 Options exercised 335,058 24.67 Options forfeited 7,535 29.82 Balance at December 31, 1998 364,286 27.13 (182,330 options exercisable) Options granted 1,811,658 24.90 Options exercised 22,575 21.42 Balance at December 31, 1999 2,153,369 25.32 (159,755 options exercisable) - ----------------------------------------------------------------
As of December 31, 1999, the weighted average remaining contractual life of outstanding stock options was 6.2 years. Under the Executive Deferred Compensation Plan, adopted January 1, 1999, 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, 1999, there were 61,465.81 stock units outstanding. The Company continues to apply APB Opinion 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:
1999 1998 1997 - ------------------------------------------------------------- Valuation assumptions: Expected option term (years) 6.4 10 8 Expected volatility 20.03% 15.50% 16.00% Expected dividend yield 5.97% 5.68% 5.80% Risk-free interest rate 5.97% 5.65% 5.94% Fair value per option $3.42 $3.25 $2.92 - --------------------------------------------------------------
The pro forma effects of applying fair value accounting to the Company's stock options would be to reduce net income and earnings per share. The following table summarizes the pro forma effect.
1999 1998 - ------------------------------------------ Net Income (000) As Reported $568,299 $410,874 Pro Forma $567,876 $410,839 Earnings Per Share of Common Stock - Basic and Diluted As Reported $2.50 $1.82 Pro Forma $2.50 $1.82 - -------------------------------------------
(D) COMPREHENSIVE INCOME- In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Consolidated Statements of Common Stockholders' Equity. 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. (E) PREFERRED AND PREFERENCE STOCK- Penn's 7.75% series of preferred stock has a restriction which prevents early redemption prior to July 2003. OE's 8.45% series of preferred stock has no optional redemption provision. CEI's $88.00 Series R preferred stock is not redeemable before December 2001 and its $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. Preference stock authorized for the Companies are 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. (F) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Annual sinking fund provisions for the Companies' preferred stock are as follows:
Redemption Price Per Series Shares Share Date Beginning - ------------------------------------------------------------------ OE 8.45% 50,000 $ 100 (i) CEI $ 7.35 C 10,000 100 (i) 88.00 E 3,000 1,000 (i) 91.50 Q 10,714 1,000 (i) 90.00 S 18,750 1,000 (i) 88.00 R 50,000 1,000 December 1 2001 Penn 7.625% 7,500 100 October 1 2002 - ------------------------------------------------------------------ (i) Sinking fund provisions are in effect.
Annual sinking fund requirements for the next five years are $38 million in 2000, $85 million in 2001, $19 million in 2002, $2 million in 2003 and $2 million in 2004. A liability of $19 million was included in the net assets acquired from CEI and TE for preferred dividends declared attributable to the post-merger period. Accordingly, no accruals for CEI and TE preferred dividends are included in the Company's Consolidated Statement of Income for the period November 8, 1997 through December 31, 1997. (G) OHIO EDISON OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY OHIO EDISON SUBORDINATED DEBENTURES- Ohio Edison Financing Trust, a wholly owned subsidiary of OE, has issued $120 million of 9% Cumulative Trust Preferred Capital Securities. OE 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 OE beginning December 31, 2000, 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. OE'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 OE of payments due on the Preferred Securities. (H) 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, 1999, OE's, TE's and Penn's annual sinking and improvement fund requirements for all bonds issued under the mortgage amounts to $31 million. OE, TE and Penn expect to deposit funds in 2000 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) --------------------------- 2000 $668.8 2001 375.7 2002 945.8 2003 459.0 2004 833.3 --------------------------- The Companies' obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $397.3 million. To the extent that drawings are made under those letters of credit to pay principal of, or interest on, the pollution control revenue bonds, OE, Penn and/or CEI are entitled to a credit against their obligation to repay those bonds. The Companies pay annual fees of 0.43% to 1.10% of the amounts of the letters of credit to the issuing banks and are obligated to reimburse the banks for any drawings thereunder. OE had unsecured borrowings of $190 million at December 31, 1999, supported by 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 2). 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 $180.5 million long-term bank credit agreement which expires March 31, 2001. Accordingly, the commercial paper and loans are reflected as long-term debt on the Consolidated Balance Sheets. 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 at December 31, 1999, consisted of $257.8 million of bank borrowings and $160.0 million of OES Capital, Incorporated (OES Capital) 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 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. The Companies have various credit facilities with domestic banks that provide for borrowings of up to $205 million 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, the Companies are required to pay annual commitment fees that vary from 0.125% to 0.50%. These lines expire at various times during 2000. The weighted average interest rates on short-term borrowings outstanding at December 31, 1999 and 1998, were 6.51% and 5.67%, respectively. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Companies' current forecasts reflect expenditures of approximately $3.0 billion for property additions and improvements from 2000- 2004, of which approximately $650 million is applicable to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $497 million, of which approximately $159 million applies to 2000. During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $480 million and $106 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 the Company's common stock over a three-year period beginning in 1999. Repurchases are made on the open market, at prevailing prices, and are funded primarily through the use of operating cash flows. During 1999, the Company repurchased and retired 4.6 million shares of its common stock at an average price of $28.08 per share. The Company also entered into a forward contract with Credit Suisse First Boston Corporation for the purchase of 1.4 million shares of the Company's common stock at an average price of $24.22 per share to be settled on November 3, 2000. The contract may be settled through gross physical settlement, net share settlement or net cash settlement at the Company's election. 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 $1.43 billion of insurance coverage for replacement power costs. Under these policies, the Companies can be assessed a maximum of approximately $44 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. The Companies estimate additional capital expenditures for environmental compliance of approximately $292 million, which is included in the construction forecast provided under "Capital Expenditures" for 2000 through 2004. The Companies are in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower- sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. NOx reductions are being achieved through combustion controls and generating more electricity from lower-emitting plants. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In May 1999, the U.S. Court of Appeals for the D.C. Circuit issued a stay which delays implementation of EPA's NOx Transport Rule until the Court has ruled on the merits of various appeals. Under the NOx Transport Rule, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA contemplating an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Companies' Ohio and Pennsylvania plants, by May 2003, in the event implementation of the NOx Transport Rule is delayed. New Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. The Companies continue to evaluate their compliance plans and other compliance options. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30- day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards back to the EPA finding constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. The Companies cannot predict the EPA's action in response to the Court's remand order. The cost of compliance with these regulations, if they are reinstated, may be substantial and depends on the manner in which they are ultimately implemented, if at all, by the states in which the Companies operate affected facilities. In September 1999, FirstEnergy received, and subsequently in October 1999, OE and Penn received, a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. In November 1999, OE and Penn received a citizen suit notification letter from the Connecticut Attorney General's office alleging Clean Air Act violations at the Sammis Plant. On November 3, 1999, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 32 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor- owned utilities, which included a complaint against OE and Penn in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. Although unable to predict the outcome of this litigation, the Company 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. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. CEI and TE have been named as "potentially responsible parties" (PRPs) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Allegations of disposal of hazardous substances at historical sites and the liability involved, are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. CEI and TE have accrued liabilities totaling $5.4 million as of December 31, 1999, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. CEI and TE believe that waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. 6. SEGMENT INFORMATION: The Company's primary segment is its Electric Utility Operating Companies which includes four regulated electric utility operating companies that provide electric service in Ohio and Pennsylvania. Its other material business segment is FETS which markets and trades electricity in nonregulated markets. Financial data for these business segments and products and services are as shown on the following page: Segment Financial Information - -----------------------------
Electric FE Trading All Reconciling Utilities Services Other Eliminations Totals --------- ---------- ------- ------------ -------- (In millions) 1999 ---- External revenues $ 5,421 $191 $ 708 $ -- $ 6,320 Intersegment revenues 32 60 102 (194) -- Total revenues 5,453 251 810 (194) 6,320 Depreciation and amortization 913 -- 25 -- 938 Net interest charges 549 6 66 (49) 572 Income taxes 377 (5) 23 -- 395 Net income/Earnings on common stock 545 (8) 35 (4) 568 Total assets 17,105 181 1,864 (926) 18,224 Property additions 417 -- 130 -- 547 Acquisitions -- 25 53 -- 78 1998 ---- External revenues $ 5,215 $411 $ 249 $ -- $ 5,875 Intersegment revenues 32 26 97 (155) -- Total revenues 5,247 437 346 (155) 5,875 Depreciation and amortization 748 -- 11 -- 759 Net interest charges 590 2 69 (60) 601 Income taxes 320 (35) (2) -- 283 Extraordinary item: Pennsylvania restructuring (31) -- -- -- (31) Net income/Earnings on common stock 478 (52) 1 (16) 411 Total assets 18,316 54 1,742 (1,920) 18,192 Property additions 304 -- 64 -- 368 Acquisitions -- -- 285 -- 285 1997 ---- External revenues $ 2,844 $ 43 $ 74 $ -- $ 2,961 Intersegment revenues 33 -- 106 (139) -- Total revenues 2,877 43 180 (139) 2,961 Depreciation and amortization 470 -- 5 -- 475 Net interest charges 300 -- 60 (51) 309 Income taxes 206 -- 3 -- 209 Net income/Earnings on common stock 335 (1) 4 (32) 306 Total assets 18,700 32 1,209 (1,680) 18,261 Property additions 166 -- 38 -- 204 Acquisitions -- -- 1,582 -- 1,582
Products and Services - ---------------------
Oil & Gas Energy Related Electricity Sales and Sales and Year Sales Production Services ---- ----------- ---------- --------------- (In millions) 1999 $5,253 $203 $503 1998 4,980 26 198 1997 2,775 -- --
March 31, June 30, September 30, December 31, Three Months Ended 1999 1999 1999 1999 - ------------------------------------------------------------------------------------ (In millions, except per share amounts) Revenues $1,417.4 $1,523.9 $1,732.4 $1,645.9 Expenses 1,041.7 1,149.8 1,291.0 1,301.7 - ------------------------------------------------------------------------------------ Income Before Interest and Income Taxes 375.7 374.1 441.4 344.2 Net Interest Charges 146.1 147.4 141.3 137.5 Income Taxes 92.9 101.4 114.3 86.2 - ------------------------------------------------------------------------------------ Net Income $ 136.7 $ 125.3 $ 185.8 $ 120.5 ===================================================================================== Earnings per Share of Common Stock $ .60 $ .55 $ .82 $ .53 ===================================================================================== March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - ------------------------------------------------------------------------------------ (In millions, except per share amounts) Revenues $1,367.1 $1,464.0 $1,722.0 $1,321.8 Expenses 1,016.8 1,197.1 1,294.0 1,020.8 - ------------------------------------------------------------------------------------ Income Before Interest and Income Taxes 350.3 266.9 428.0 301.0 Net Interest Charges 143.6 154.7 153.3 149.4 Income Taxes 83.0 52.2 111.7 56.9 - ------------------------------------------------------------------------------------ Income Before Extraordinary Item 123.7 60.0 163.0 94.7 Extraordinary Item (Net of Income Taxes) (Note 1) -- (30.5) -- -- - ------------------------------------------------------------------------------------ Net Income $ 123.7 $ 29.5 $ 163.0 $ 94.7 =======================================================================-============= Earnings per Share of Common Stock Before Extraordinary Item $ .56 $ .27 $ .71 $ .41 Extraordinary Item (Net of Income Taxes) (Note 1) -- (.14) -- -- - ------------------------------------------------------------------------------------ Earnings per Share of Common Stock $ .56 $ .13 $ .71 $ .41 =====================================================================================
8. PRO FORMA COMBINED CONDENSED FIRSTENERGY STATEMENT OF INCOME (UNAUDITED): The Company was formed on November 8, 1997 by the merger of OE and Centerior. The merger was accounted for as a purchase of Centerior's net assets with 77,637,704 shares of FirstEnergy Common Stock through the conversion of each outstanding Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid in cash). Based on an imputed value of $20.125 per share, the purchase price was approximately $1.582 billion, which also included approximately $20 million of merger related costs. Goodwill of approximately $2.0 billion was recognized (to be amortized on a straight-line basis over forty years), which represented the excess of the purchase price over Centerior's net assets after fair value adjustments. Accumulated amortization of goodwill was approximately $109 million as of December 31, 1999. The merger purchase accounting adjustments, which were recorded in the records of Centerior's direct subsidiaries, included recognizing estimated severance and other compensation liabilities ($80 million). The amount charged against the liability in 1998 relating to the costs of involuntary employee separation was $41 million. In addition, the liability was reduced to approximately $9 million as of December 31, 1998 to represent potential costs associated with the separation of 493 CEI employees. The liability adjustment was offset by a corresponding reduction to goodwill recognized in connection with the Centerior acquisition. The following pro forma statement of income of FirstEnergy gives effect to the OE/Centerior merger as if it had been consummated on January 1, 1997, with the purchase accounting adjustments actually recognized in the business combination.
Year Ended December 31, 1997 - ------------------------------------------------------------ (In millions, except per share amounts) Revenues $5,206 Expenses 3,800 - ------------------------------------------------------------ Income Before Interest and Income Taxes 1,406 Net Interest Charges 643 Income Taxes 336 - ------------------------------------------------------------ Net Income $ 427 ============================================================ Earnings per Share of Common Stock $ 1.92 ============================================================
Pro forma adjustments reflected above include: (1) adjusting CEI and TE nuclear generating units to fair value based upon independent appraisals and estimated discounted future cash flows based on management's estimate of cost recovery; (2) goodwill recognized representing the excess of the purchase price over Centerior's adjusted net assets; (3) elimination of revenue and expense transactions between OE and Centerior; (4) amortization of the fair value adjustment for long-term debt; and (5) adjustments for estimated tax effects on the above adjustments. EX-21 10 EXHIBIT 21 FIRSTENERGY CORP. LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1999 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 Trading Services, Inc. - Incorporated in Delaware FirstEnergy Facilities Services Group, Inc. - Incorporated in Ohio FirstEnergy Securities Transfer Company - Incorporated in Ohio FirstEnergy Services 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 Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 1999, is not included in the printed document. EX-23 11 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. 333-40065, No. 333-48587, No. 333-48651, No. 333-58279, No. 333- 65409 and No. 333-75985. ARTHUR ANDERSEN LLP Cleveland, Ohio March 29, 2000 EX-27 12
UT This schedule contains summary financial information extracted from the related Form 10-K financial statements for FirstEnergy Corp. and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's, except earnings per share.) 0001031296 FIRSTENERGY CORP. 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 DEC-31-1999 1 PER-BOOK 9,093,341 2,702,734 1,301,676 5,126,296 0 18,224,047 23,245 3,595,404 945,241 4,563,890 256,246 648,395 6,001,264 257,845 0 159,974 668,837 38,464 0 55,219 5,573,913 18,224,047 6,319,647 394,827 4,784,228 5,179,055 1,140,592 0 1,140,592 572,293 568,299 0 0 341,467 477,059 1,488,306 2.50 2.50
EX-3.1 13 Extract From the Annual Action of the Stockholder of Ohio Edison Company dated September 27, 1999 --------------- RESOLVED: The sole shareholder amends the Code of Regulations of the Company to read as follows: Article 10 is amended by deleting the second paragraph of such Article. Article 11 is amended by changing the minimum number of Directors from "thirteen" to "three." --------------- I, Edward J. Udovich, Assistant Corporate Secretary of Ohio Edison Company do hereby certify that the foregoing is a true and correct copy of resolutions duly adopted by the Board of Directors of Ohio Edison Company, and that said resolutions have not since been rescinded but are still in full force and effect Executed as of this 23rd day of February 2000. ----------------------------- Assistant Corporate Secretary EX-4.1 14 - --------------------------------------------------------------------------- OHIO EDISON COMPANY with THE BANK OF NEW YORK, As Trustee ------------------------- Seventy-first Supplemental Indenture Providing among other things for First Mortgage Bonds Pledge Series of 1999 due 2000 ------------ Dated as of September 29, 1999 - ------------------------------------------------------------------------- SUPPLEMENTAL INDENTURE, dated as of September 29, 1999 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 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; and 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, consisting of $90,000,000 in principal amount to be designated as "First Mortgage Bonds Pledge Series of 1999 due 2000" (hereinafter sometimes referred to as the "bonds of Third Pledge Series"), the bonds of which series are to bear interest from the Initial Interest Accrual Date (as defined in the form of bond hereinbelow set forth) at the rate of 12% per annum, are to mature March 1, 2000, and are to be substantially in the following form: [Form of Bond of Third Pledge Series] This Bond is not transferable except to a successor 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 Mortgage referred to herein. OHIO EDISON COMPANY First Mortgage Bond Pledge Series of 1999 due 2000 Due March 1, 2000 $ No. Ohio Edison Company, a corporation of the State of Ohio (hereinafter called the Company), for value received, hereby promises to pay to , 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 March 1, 2000 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 of twelve per centum per annum on March 1, 2000. 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 interest on, the Company's Mortgage Bonds 12% Series of 1999 due 2000 (the "General Mortgage Bonds") issued under the Company's General Mortgage Indenture and Deed of Trust to The Bank of New York, as Trustee, dated as of January 1, 1998, shall, to the extent thereof, be deemed to satisfy and discharge the obligation of the Company, if any, to make a payment of principal 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 Mortgage 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 Secretary or an Assistant Secretary, by his signature or a facsimile thereof. Dated: Ohio Edison Company, By: --------------------- Title: Attest: - ---------------------------- Title: [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. The Bank of New York, as Trustee, By: ------------------------ Authorized Officer [Form of Bond of Third Pledge Series] [Reverse] OHIO EDISON COMPANY First Mortgage Bond Pledge Series of 1999 due 2000 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 Mortgage 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, as amended and supplemented by indentures supplemental thereto, to which Indenture as so amended and supplemented (herein referred to as the "Mortgage") 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. Bonds of this series are not redeemable at the option of the Company prior to their maturity. 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. 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 Mortgage to provide (a) that the Mortgage, 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 Mortgage, 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 Mortgage 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 Mortgage, upon the occurrence of a completed default as in the Mortgage 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 Mortgage. 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 Mortgage. Notwithstanding any provision of the Mortgage, (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 third pledge series] 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 Third Pledge Series 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 Third Pledge Series 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 witnessth: 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, 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 Third Pledge Series shall mature on March 1, 2000, and shall be designated as the Company's "First Mortgage Bonds Pledge Series of 1999 due 2000." The bonds of Third Pledge Series shall bear interest from the Initial Interest Accrual Date (as defined in the form of the bond hereinabove set forth) at the rate of twelve per centum per annum. Principal and interest on the bonds of Third Pledge Series 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 Third Pledge Series 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 Third Pledge Series to the Trustee for authentication shall be conclusive evidence that its serial number has been duly approved by the Company. The bonds of Third Pledge Series shall not be redeemable at the option of the Company prior to their maturity. SECTION 2. Bonds of Third Pledge Series shall be deemed to be paid and no longer outstanding under the Indenture to the extent that General Mortgage Bonds (as defined in the form of bonds hereinabove set forth) 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. SECTION 3. Bonds of Third Pledge Series 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 Third Pledge Series 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 Second Pledge Series, 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 filling 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 Third Pledge Series, 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. 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: -------------------------------- Richard H. Marsh, Vice President [Seal] Attest: ------------------------------------ Nancy C. Ashcom, Corporate Secretary Signed, Sealed and Acknowledged on behalf of Ohio Edison Company in the presence of: - -------------------------------- Richard L. Anthony - -------------------------------- Nancy L. Chancey The Bank of New York By: ---------------------------- Mary Lewicki, Vice President [Seal] Attest: ---------------------------------- Michele Russo, Assistant Treasurer 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 29th day of September, 1999, personally appeared before me, a Notary Public in and for the said County and State aforesaid, Richard H. Marsh 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 29th day of September, 1999. ------------------------------------ Susie M. Hoisten, Notary Public Residence - Summit County State Wide Jurisdiction, Ohio My Commission Expires Nov. 19, 2001 [SEAL] STATE OF OHIO ) :ss.: COUNTY OF SUMMIT ) On the 29th day of September, 1999, before me personally came Richard H. Marsh, to me known, who, being by me duly sworn, did dispose and say that he resides at 1126 Woodhaven Boulevard, Fairlawn, Ohio 44333; 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 State Wide Jurisdiction, Ohio My Commission Expires Nov. 19, 2001 [SEAL] STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 29th day of September, 1999, personally appeared before me, a Notary Public in and for the said County and State aforesaid, Mary Lewicki and Michele Russo, 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 29th day of September, 1999. -------------------------------- William J. Cassels Notary Public, State of New York No.: 0ICA5027729 Qualified in Bronx County Certificate Filed in New York County Commission Expires May 16, 2000 [SEAL] STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 29th day of September, 1999, before me personally came Mary Lewicki, to me known, who, being by me duly sworn, did dispose and say that she resides at [address] ; 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.: 0ICA5027729 Qualified in Bronx County Certificate Filed in New York County Commission Expires May 16, 2000 [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 Postal Zip Code: 10286 The Bank of New York By: ---------------------------------- Michele Russo, Assistant Treasurer EX-12.2 15 EXHIBIT 12.2 Page 1 OHIO EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, -------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $317,241 $315,170 $293,194 $301,320 $297,689 Interest and other charges, before reduction for amounts capitalized 273,719 255,572 250,920 235,317 225,358 Provision for income taxes 199,307 201,295 187,805 191,261 191,835 Interest element of rentals charged to income (a) 111,534 114,093 117,409 115,310 113,804 -------- -------- -------- -------- -------- Earnings as defined $901,801 $886,130 $849,328 $843,208 $828,686 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest on long-term debt $243,570 $211,935 $204,285 $184,915 $178,217 Other interest expense 22,944 28,211 31,209 34,976 31,971 Subsidiaries' preferred stock dividend requirements 7,205 15,426 15,426 15,426 15,170 Adjustments to subsidiaries' preferred stock dividends to state on a pre-income tax basis 2,956 2,910 2,918 2,892 2,770 Interest element of rentals charged to income (a) 111,534 114,093 117,409 115,310 113,804 -------- -------- -------- -------- -------- Fixed charges as defined $388,209 $372,575 $371,247 $353,519 $341,932 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (b) 2.32 2.38 2.29 2.39 2.42 ==== ==== ==== ==== ==== - ----------------------- (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 $6,315,000, $5,093,000, $3,828,000 and $2,209,000 for each of the four 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 AND PREFERENCE STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS)
Year Ended December 31, ------------------------------------------------ 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $317,241 $315,170 $293,194 $301,320 $297,689 Interest and other charges, before reduction for amounts capitalized 273,719 255,572 250,920 235,317 225,358 Provision for income taxes 199,307 201,295 187,805 191,261 191,835 Interest element of rentals charged to income (a) 111,534 114,093 117,409 115,310 113,804 -------- -------- -------- -------- -------- Earnings as defined $901,801 $886,130 $849,328 $843,208 $828,686 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS(PRE-INCOME TAX BASIS): Interest on long-term debt $243,570 $211,935 $204,285 $184,915 $178,217 Other interest expense 22,944 28,211 31,209 34,976 31,971 Preferred and preference stock dividend requirements 29,699 27,923 27,817 27,395 26,717 Adjustments to preferred and preference stock dividends to state on a pre-income tax basis 16,745 10,542 10,503 10,140 9,859 Interest element of rentals charged to income (a) 111,534 114,093 117,409 115,310 113,804 -------- -------- -------- -------- -------- Fixed charges as defined plus preferred and preference stock dividend requirements (pre-income tax basis) $424,492 $392,704 $391,223 $372,736 $360,568 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) (b) 2.12 2.26 2.17 2.26 2.30 ==== ==== ==== ==== ==== - -------------------- (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 $6,315,000, $5,093,000, $3,828,000 and $2,209,000 for each of the four years ended December 31, 1998, respectively. The guarantee and related coal supply contract debt expired December 31, 1999.
EX-13.1 16 OHIO EDISON COMPANY SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------- (In thousands) Operating Revenues $2,686,949 $2,519,662 $2,473,582 $2,469,785 $2,465,846 ------------------------------------------------------------------ Operating Income $ 473,042 $ 486,920 $ 488,568 $ 530,069 $ 566,618 ------------------------------------------------------------------ Income Before Extraordinary Item $ 297,689 $ 301,320 $ 293,194 $ 315,170 $ 317,241 ------------------------------------------------------------------ Net Income $ 297,689 $ 270,798 $ 293,194 $ 315,170 $ 317,241 ------------------------------------------------------------------ Earnings on Common Stock $ 286,142 $ 258,828 $ 280,802 $ 302,673 $ 294,747 ------------------------------------------------------------------ Total Assets $8,700,746 $8,923,826 $9,158,141 $9,218,623 $9,035,112 ------------------------------------------------------------------ Capitalization at December 31: Common Stockholder's Equity $2,624,460 $2,681,873 $2,724,319 $2,503,359 $2,407,871 Preferred Stock: Not Subject to Mandatory Redemption 200,070 211,870 211,870 211,870 211,870 Subject to Mandatory Redemption 140,000 145,000 150,000 155,000 160,000 Long-Term Debt 2,175,812 2,215,042 2,569,802 2,712,760 2,786,256 ------------------------------------------------------------------ Total Capitalization $5,140,342 $5,253,785 $5,655,991 $5,582,989 $5,565,997 ------------------------------------------------------------------ Capitalization Ratios: Common Stockholder's Equity 51.1% 51.0% 48.2% 44.8% 43.3% Preferred Stock: Not Subject to Mandatory Redemption 3.9 4.0 3.7 3.8 3.8 Subject to Mandatory Redemption 2.7 2.8 2.7 2.8 2.9 Long-Term Debt 42.3 42.2 45.4 48.6 50.0 ------------------------------------------------------------------ Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ------------------------------------------------------------------ Kilowatt-Hour Sales (Millions): Residential 9,483 8,773 8,631 8,704 8,546 Commercial 8,238 7,590 7,335 7,246 7,151 Industrial 11,310 10,803 11,202 11,089 10,513 Other 151 150 150 147 146 ------------------------------------------------------------------ Total Retail 29,182 27,316 27,318 27,186 26,356 Total Wholesale 6,881 5,706 5,241 7,076 6,920 ------------------------------------------------------------------ Total 36,063 33,022 32,559 34,262 33,276 ------------------------------------------------------------------ Customers Served: Residential 1,016,793 1,004,552 995,605 988,179 978,118 Commercial 115,581 113,820 111,189 113,795 111,978 Industrial 4,627 4,598 4,568 4,590 4,268 Other 1,539 1,476 1,415 1,331 1,308 ------------------------------------------------------------------ Total 1,138,540 1,124,446 1,112,777 1,107,895 1,095,672 ------------------------------------------------------------------ Number of Employees 2,734 2,832 4,215 4,273 4,812
OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Operating revenues increased by $167.3 million in 1999 following a $46.1 million increase in 1998. This represents the fifth consecutive year of record operating revenues. The sources of the increases in operating revenues during 1999 and 1998 are summarized in the following table.
Sources of Revenue Changes 1999 1998 - ------------------------------------------------------------ (In millions) Change in retail kilowatt-hour sales 151.3 (0.1) Change in average retail price $(36.3) $27.0 Increase in wholesale sales 54.6 13.3 Other (2.3) 5.9 - ------------------------------------------------------------- Net Increase in Operating Revenues $167.3 $46.1 =============================================================
Electric Sales Operating revenues increased in 1999 from 1998 as a result of kilowatt-hour sales growth in both the retail and wholesale markets. Increases in sales to residential, commercial and industrial customers produced the higher retail sales. Strong consumer-driven economic growth and, to a lesser extent, the weather contributed to the increased retail sales. Weather-induced electricity demand in the wholesale market and additional available internal generation combined to increase sales to wholesale customers. After setting a new record in 1997, total retail kilowatt-hour sales in 1998 were about the same as 1997. Residential and commercial sales benefited from continued growth in the retail customer base. The closure of an electric arc furnace by a large steel customer in the latter part of 1997 and a general decline in electricity demand by steel manufacturers due to intense foreign competition contributed to the lower industrial sales in 1998, compared to the prior year. Changes in kilowatt-hour sales by customer class in 1999 and 1998 are summarized in the following table.
Changes in KWH Sales 1999 1998 - ----------------------------------------------------- Residential 8.1% 1.7% Commercial 8.6% 3.5% Industrial 4.7% (3.6%) - ------------------------------------------------------ Total Retail 6.8% -- Wholesale 20.6% 8.9% - ------------------------------------------------------ Total Sales 9.2% 1.4% - ------------------------------------------------------
Operating Expenses and Taxes Total operating expense and taxes increased $181.2 million in 1999, compared to 1998, primarily due to additional depreciation and amortization. Higher operation and maintenance costs also contributed to the increase. In 1998, total operating expenses and taxes increased $47.7 million due primarily to unusually high purchased power costs. The increase in operation and maintenance costs in 1999 from 1998 occurred despite a reduction in fuel and purchased power costs, which were $35.9 million lower than the previous year. Purchased power costs accounted for all of the reduction in 1999. Much of the decrease in purchased power costs occurred in the second quarter of 1999 due to the absence of unusual conditions experienced in 1998. Those costs were incurred during a period of record heat and humidity in late June 1998, which coincided with a regional power shortage resulting in high prices for purchased power. Unscheduled outages at Beaver Valley Units 1 and 2 at the same time required us to purchase significant amounts of power on the spot market. Although above normal temperatures were also experienced in 1999, we maintained a stronger capacity position compared to the previous year and better met customer demand from our own internal generation. In 1998, fuel and purchased power increased $74.4 million from 1997 for the reasons discussed above. Nuclear operating costs increased in 1999, compared to 1998, for several reasons. Refueling outages at Beaver Valley Unit 2 and the Perry Plant, as well as increased ownership of the Beaver Valley Plant following the Duquesne Light Company (Duquesne) asset swap in early December 1999 (including nonrecurring swap-related liabilities assumed) increased 1999 nuclear operating expenses compared to 1998. Nuclear operating costs increased in 1998 reflecting higher costs at the Beaver Valley Plant. Other operating costs also rose in 1999 from the prior year primarily due to higher customer and sales expenses including expenditures for energy marketing programs, information system requirements and other customer-related costs, as well as higher distribution costs from storm repairs and overhead line maintenance. Offsetting a portion of the increase in other operating costs were lower nonnuclear production costs from the Sammis generating plant. Other operating costs decreased in 1998 from the previous year due principally to the absence of expenses related to a 1997 voluntary retirement program and estimated severance costs which increased other operating costs for that year. Accelerated cost recovery in connection with our rate plan was the primary factor contributing $160.6 million of the increase in depreciation and amortization in 1999, compared to the prior year. In 1998, depreciation and amortization decreased $14.2 million from 1997 primarily due to the net effect of the Ohio Edison Company (OE) and Pennsylvania Power Company (Penn) rate plans. In 1998, general taxes increased from the prior year in part because of gross receipts taxes on increased operating revenues. Net Interest Charges Net interest charges continued to trend downward in 1999 and 1998 primarily due to redemptions and refinancings of long-term debt. Extraordinary Item The Pennsylvania Public Utility Commission's (PPUC) authorization of Penn's rate restructuring plan led to the discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation," to Penn's generation business in 1998. This resulted in an after-tax write-down in 1998 of $30.5 million of its nuclear generating unit investment and the recognition of a portion of such investment -- recoverable through future customer rates -- as a regulatory asset. Earnings on Common Stock Earnings on common stock increased to $286.1 million in 1999 from $258.8 million in 1998. Results for 1999 were favorably affected by higher sales revenues, the absence of the 1998 extraordinary charge and unusually high purchased power costs experienced in 1998 and lower interest costs that were principally offset by an increase in depreciation and amortization expense. The decrease to $258.8 million experienced in 1998 from $280.8 million in 1997 was due in large part to the extraordinary charge in 1998 resulting from the discontinued application of SFAS 71 to Penn's generation business discussed above. Capital Resources and Liquidity With the July 1999 passage of legislation in Ohio allowing retail customers to purchase electricity from alternative energy suppliers beginning January 2001, the arrival of new participants in the Ohio electricity market is expected in the near future. We continue to take steps designed to enhance our competitive position while seeking additional efficiencies. 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 5.34 in 1994 to 6.89 in 1999, which enhances our financial flexibility. Over the same period, our charter ratio, a measure of our ability to issue preferred stock, improved from 2.11 to 2.62 and our common stockholder's equity as a percentage of capitalization rose from approximately 40% at the end of 1994 to 51% at the end of 1999. Net redemptions of long-term debt and preferred stock totaled $245.3 million, including $18.3 million of optional redemptions in 1999. In addition, we completed $240.9 million of refinancings. Over the last five years, we have reduced the average cost of long-term debt from 8.17% in 1994 to 7.22% at the end of 1999. We had about $87.2 million of cash and temporary investments and $358.3 million of short-term indebtedness as of December 31, 1999. Our unused borrowing capability included $76.5 million under revolving lines of credit and a $7.0 million bank facility that provides for borrowings on a short-term basis at the bank's discretion. At the end of 1999, we had the capability to issue $1.1 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 $1.3 billion of preferred stock (assuming no additional debt were issued). Our cash requirements in 2000 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without issuing new securities. During 1999, we reduced our total debt by approximately $125 million. We have cash requirements of approximately $1.2 billion for the 2000-2004 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $206 million relates to 2000. Our capital spending for the period 2000-2004 is expected to be about $1.0 billion (excluding nuclear fuel), of which approximately $251 million applies to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $218 million, of which about $65 million relates to 2000. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $215 million and $46 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments, net of PNBV Capital Trust cash receipts, of approximately $358 million for the 2000-2004 period, of which approximately $71 million relates to 2000. On December 3, 1999, we completed the exchange of generating assets between Duquesne and FirstEnergy, which increased FirstEnergy's portfolio of generation resources. Duquesne transferred 1,436 megawatts at five generating plants in exchange for 1,328 megawatts at three plants owned by FirstEnergy operating companies. In the exchange, we received all of Duquesne's ownership interest in the Beaver Valley Plant, and an additional interest in the Bruce Mansfield Plant while providing Duquesne with our ownership interest in the New Castle and Niles generating plants. At the end of 1999, Penn transferred its interest in Penn Power Energy, Inc., a wholly owned subsidiary selling energy in Pennsylvania's unregulated generation market, to FirstEnergy Services Corp., an affiliated company. For FirstEnergy, the transaction centralized unregulated electricity sales and marketing activities in one entity. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. 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 a corresponding change to the decommissioning liability, as described in Note 1. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.
Comparison of Carrying Value to Fair Value - -------------------------------------------------------------------------------------------------------- There- Fair 2000 2001 2002 2003 2004 after Total Value - -------------------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income $ 17 $ 23 $ 26 $ 30 $305 $511 $ 912 $ 922 Average interest rate 7.3% 7.6% 7.8% 7.9% 7.8% 7.8% 7.8% - --------------------------------------------------------------------------------------------------------- Liabilities - --------------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate $201 $ 17 $327 $246 $ 95 $839 $1.725 $1,710 Average interest rate 7.0% 8.0% 7.8% 8.2% 7.3% 7.1% 7.4% Variable rate $190 $568 $ 758 $ 749 Average interest rate 7.5% 4.3% 5.1% Short-term Borrowings $358 $ 358 $ 358 Average interest rate 6.3% 6.3% - --------------------------------------------------------------------------------------------------------- Preferred Stock $ 5 $ 5 $ 1 $ 1 $ 1 $132 $ 145 $ 142 Average dividend rate 8.5% 8.5% 7.6% 7.6% 7.6% 8.9% 8.8% - ---------------------------------------------------------------------------------------------------------
Outlook We continue to face many competitive challenges as the electric utility industry undergoes significant changes, including changing regulation and the entrance of more energy suppliers into the marketplace. Retail wheeling, which began in 1999 in our Pennsylvania service area, allows retail customers to purchase electricity from alternative energy suppliers. Recent legislation provides for similar changes beginning in 2001 in Ohio. Our existing Ohio regulatory plan provides us with a solid foundation to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level. Our Rate Reduction and Economic Development Plan, approved by the PUCO in 1995, provides for accelerated capital recovery and interim rate credits to customers during the period covered by the plan. The transition plan ultimately approved by the Public Utilities Commission of Ohio (PUCO) will supersede our current Ohio rate plan; however, rate reductions under the existing regulatory plan will continue. In July 1999, Ohio's new electric utility restructuring legislation, which will allow Ohio electric customers to select their generation suppliers beginning January 1, 2001, was signed into law. Among other things, the new law provides for a 5% reduction on the generation portion of residential customers' bills and the opportunity to recover transition costs, including regulatory assets, from January 1, 2001 through December 31, 2005. The period for the recovery of regulatory assets only can be extended up to December 31, 2010. The PUCO was authorized to determine the level of transition cost recovery, as well as the recovery period for the regulatory assets portion of those costs, in considering each Ohio electric utility's transition plan application. FirstEnergy refiled a transition plan on our behalf, as well as for its other Ohio electric utility operating companies -- The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE) -- on December 22, 1999. The plan was originally filed with the PUCO on October 4, 1999, but was refiled to conform to PUCO rules established on November 30, 1999. The new filing also included additional information on our plan to turn over control, and perhaps ownership, of our transmission assets to the Alliance Regional Transmission Organization (Alliance), which is discussed below. The transition plan itemizes, or unbundles, the current price of electricity into separate components -- including generation, transmission, distribution and transition charges. As required by the PUCO's rules, FirstEnergy's filing also included proposals on corporate separation of regulated and unregulated operations, operational and technical support changes needed to accommodate customer choice, an education program to inform customers of their options under the law, and how our transmission system will be operated to ensure access to all users. Under our transition plan, customers who remain with us as their generation provider will continue to receive savings under our rate plan, expected to total $422 million between 2000 and 2005. In addition, FirstEnergy's Ohio utility customers will save $358 million through reduced charges for taxes and a 5% reduction in the price of generation for residential customers beginning January 1, 2001. Customer prices are expected to be frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the 5% reduction in the price of generation for residential customers. The plan proposes recovery of generation-related transition costs of approximately $1.8 billion ($1.6 billion, net of deferred income taxes) over the market development period; transition costs related to regulatory assets aggregating approximately $1.5 billion ($1.0 billion, net of deferred income taxes) are expected to be recovered over the period 2001 through 2004. When the transition plan is approved by the PUCO, the application of SFAS 71 to our Ohio generation business will be discontinued. In the meantime, we will continue to bill and collect cost-based rates in Ohio through the end of 2000. If the transition plan ultimately approved by the PUCO does not provide adequate recovery of our nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on our results of operations and financial condition. We believe that we will continue to bill and collect cost-based rates for our transmission and distribution services, which will remain regulated; accordingly, it is appropriate that we continue the application of SFAS 71 to those operations after December 31, 2000. For Penn, application of SFAS 71 was discontinued for the generation portion of its business in 1998 following PPUC approval of its restructuring plan. Under the plan, a phase-in period for customer choice began with 66% of Penn's customers able to select their energy supplier beginning January 2, 1999, and all remaining customers able to select their energy providers starting January 1, 2001. Penn is entitled to recover $236 million of stranded costs through a competitive transition charge that started in 1999 and ends in 2006. In the second half of 1999, we received notification of pending legal actions based on alleged violations of the Clean Air Act at our Sammis Plant involving the states of New York and Connecticut, as well as the U.S. Department of Justice. The civil complaint filed by the U.S. Department of Justice requests installation of "best available control technology" as well as civil penalties of up to $27,500 per day. We believe the Sammis Plant is in full compliance with the Clean Air Act and the legal actions to be without merit. However, we are unable to predict the outcome of this litigation. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. We expect the Sammis Plant to continue to operate while the matter is being decided. On October 27, 1999, the Federal Energy Regulatory Commission (FERC) approved FirstEnergy's plan to transfer our transmission assets and those of CEI and TE to American Transmission Systems Inc. (ATSI). The PUCO approved the transfer in February 2000. PPUC and Securities and Exchange Commission regulatory approvals are also required. The new FirstEnergy subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent, regional transmission organization (RTO). In working toward that goal, FirstEnergy joined with four other companies -- American Electric Power, Consumers Energy, Detroit Edison and Virginia Power -- to form the Alliance RTO. On June 3, 1999, the Alliance submitted an application to FERC to form an independent, for profit RTO. On December 15, 1999, FERC issued an order conditionally approving the Alliance's application. Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. We have not completed quantifying the impacts of adopting SFAS 133 on our financial statements or determined the method of its adoption. However, SFAS 133 could increase volatility in earnings and other comprehensive income. We anticipate adopting the new statement on its amended effective date of January 1, 2001. Year 2000 Update Based on the results of our remediation and testing efforts, we filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission, PUCO and PPUC that as of June 30, 1999, our generation, transmission, and distribution systems were ready to serve customers in the year 2000. We have since experienced no failures or interruptions of service to our customers resulting from the Year 2000 issue, which was consistent with our expectations. We spent $41.4 million on Year 2000 related costs through December 31, 1999, which was slightly lower than previously estimated. Of this total, $32.9 million was capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $8.5 million was expensed as incurred. We do not believe there are any continuing Year 2000 issues to be addressed, nor any additional material Year 2000 expenditures. Forward-Looking Information This discussion includes forward-looking statements based on information currently available to management that are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes, and the availability and cost of capital and other similar factors. OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------ (In thousands) OPERATING REVENUES $2,686,949 $2,519,662 $2,473,582 ---------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 475,792 511,645 437,223 Nuclear operating costs 312,289 279,917 267,681 Other operating costs 432,476 411,985 446,778 ---------- ---------- ---------- Total operation and maintenance expenses 1,220,557 1,203,547 1,151,682 Provision for depreciation and amortization 582,197 411,979 426,205 General taxes 240,281 242,524 234,964 Income taxes 170,872 174,692 172,163 ---------- ---------- ---------- Total operating expenses and taxes 2,213,907 2,032,742 1,985,014 ---------- ---------- ---------- OPERATING INCOME 473,042 486,920 488,568 OTHER INCOME 45,846 47,621 52,847 ---------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 518,888 534,541 541,415 ---------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 178,217 184,915 204,285 Allowance for borrowed funds used during construction and capitalized interest (4,159) (2,096) (2,699) Other interest expense 31,971 34,976 31,209 Subsidiaries' preferred stock dividend requirements 15,170 15,426 15,426 ---------- ---------- ---------- Net interest charges 221,199 233,221 248,221 ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 297,689 301,320 293,194 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 1) -- (30,522) -- ---------- ---------- ---------- NET INCOME 297,689 270,798 293,194 PREFERRED STOCK DIVIDEND REQUIREMENTS 11,547 11,970 12,392 ---------- ---------- ---------- EARNINGS ON COMMON STOCK $ 286,142 $ 258,828 $ 280,802 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS
At December 31, 1999 1998 - ------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service $8,118,783 $8,158,763 Less-Accumulated provision for depreciation 3,713,781 3,610,155 ---------- ---------- 4,405,002 4,548,608 ---------- ---------- Construction work in progress- Electric plant 205,671 174,418 Nuclear Fuel 10,059 17,003 ---------- ---------- 215,730 191,421 ---------- ---------- 4,620,732 4,740,029 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust (Note 2) 469,124 475,087 Letter of credit collateralization (Note 2) 277,763 277,763 Nuclear plant decommissioning trusts 236,903 130,572 Other (Note 3B) 425,872 407,839 ---------- ---------- 1,409,662 1,291,261 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 87,175 33,213 Receivables- Customers (less accumulated provisions of $6,452,000 and $6,397,000, respectively, for uncollectible accounts) 278,484 215,257 Associated companies 221,653 229,854 Other (less accumulated provision of $1,000,000 for uncollectible accounts in 1999) 36,281 47,684 Materials and supplies, at average cost- Owned 69,119 76,756 Under consignment 55,278 48,341 Prepayments and other 73,682 78,618 ---------- ---------- 821,672 729,723 ---------- ---------- DEFERRED CHARGES: Regulatory assets 1,618,319 1,913,808 Property taxes 100,906 101,360 Unamortized sale and leaseback costs 85,100 90,098 Other 44,355 57,547 ---------- ---------- 1,848,680 2,162,813 ---------- ---------- $8,700,746 $8,923,826 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholder's equity $2,624,460 $2,681,873 Preferred stock- Not subject to mandatory redemption 160,965 160,965 Subject to mandatory redemption 5,000 10,000 Preferred stock of consolidated subsidiary- Not subject to mandatory redemption 39,105 50,905 Subject to mandatory redemption 15,000 15,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company subordinated debentures 120,000 120,000 Long-term debt 2,175,812 2,215,042 ---------- ---------- 5,140,342 5,253,785 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 422,838 528,792 Short-term borrowings (Note 4)- Associated companies 35,583 88,732 Other 322,713 249,451 Accounts payable 114,102 99,659 Accrued taxes 207,362 188,295 Accrued interest 37,572 45,221 Other 94,967 114,162 ---------- ---------- 1,235,137 1,314,312 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,468,478 1,601,887 Accumulated deferred investment tax credits 143,336 154,538 Nuclear plant decommissioning costs 239,695 132,349 Other postretirement benefits 148,421 136,856 Other 325,337 330,099 ---------- ---------- 2,325,267 2,355,729 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) ---------- ---------- $8,700,746 $8,923,826 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, $9 par value, authorized 175,000,000 shares-100 shares outstanding $ 1 $ 1 Other paid-in capital 2,098,728 2,098,728 Retained earnings (Note 3A) 525,731 583,144 ---------- ---------- Total common stockholder's equity 2,624,460 2,681,873 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ----------------------- ----------------------- 1999 1998 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% 100,000 150,000 10,000 15,000 Redemption Within One Year (5,000) (5,000) --------- --------- ---------- ---------- Total Subject to Mandatory Redemption 100,000 150,000 5,000 10,000 ========= ========= ---------- ---------- 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 7.64% -- 60,000 -- -- -- 6,000 7.75% 250,000 250,000 -- -- 25,000 25,000 8.00% -- 58,000 -- -- -- 5,800 --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption 391,049 509,049 $ 14,614 39,105 50,905 ========= ========= ======== ---------- ---------- Subject to Mandatory Redemption (Note 3E): 7.625% 150,000 150,000 106.10 $ 15,915 15,000 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 4,800,000 120,000 120,000 ========= ========= ---------- ----------
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
At December 31, 1999 1998 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT (Note 3G): First mortgage bonds: Ohio Edison Company- Pennsylvania Power Company- 6.875% due 1999 -- 150,000 9.740% due 2000-2019 19,513 20,000 6.375% due 2000 80,000 80,000 7.500% due 2003 40,000 40,000 7.375% due 2002 120,000 120,000 6.375% due 2004 20,500 20,500 7.500% due 2002 34,265 34,265 6.625% due 2004 14,000 14,000 8.250% due 2002 125,000 125,000 8.500% due 2022 27,250 27,250 8.625% due 2003 150,000 150,000 7.625% due 2023 6,500 6,500 6.875% due 2005 80,000 80,000 ------- ------- 8.750% due 2022 50,960 50,960 7.625% due 2023 75,000 75,000 7.875% due 2023 93,500 100,000 ------- ------- Total first mortgage bonds. 808,725 965,225 127,763 128,250 936,488 1,093,475 ------- ------- ------- ------- ---------- ---------- Secured notes: Ohio Edison Company- Pennsylvania Power Company- 7.450% due 2000 47,725 47,725 6.080% due 2000 23,000 23,000 8.100% due 2000 30,000 30,000 8.100% due 2000 5,200 5,200 7.930% due 2002 28,386 39,936 5.400% due 2013 1,000 1,000 7.680% due 2005 200,000 200,000 5.400% due 2017 10,600 10,600 6.750% due 2015 40,000 40,000 7.150% due 2017 17,925 17,925 7.100% due 2018 26,000 26,000 5.900% due 2018 16,800 16,800 7.050% due 2020 60,000 60,000 7.150% due 2021 14,482 14,482 7.000% due 2021 69,500 69,500 6.150% due 2023 12,700 12,700 7.150% due 2021 443 443 * 5.450% due 2027 10,300 10,300 7.625% due 2023 -- 50,000 6.450% due 2027 14,500 14,500 7.750% due 2024 -- 108,000 5.375% due 2028 1,734 1,734 5.375% due 2028 13,522 13,522 5.450% due 2028 6,950 6,950 5.625% due 2029 50,000 50,000 6.000% due 2028 14,250 14,250 5.950% due 2029 56,212 56,212 5.950% due 2029 238 238 5.450% due 2033 14,800 14,800 ------- ------- Limited Partnerships- 7.59% weighted average interest rate due 2000-2007 12,574 11,320 ------- ------- 649,162 817,458 149,679 149,679 798,841 967,137 ------- ------- ------- ------- ---------- ---------- OES Fuel- 6.85% weighted average interest rate 81,260 79,524 ---------- ---------- Total secured notes 880,101 1,046,661 ---------- ---------- Unsecured notes: Ohio Edison Company- Pennsylvania Power Company- *5.963% due 1999 -- 115,000 *5.900% due 2033 5,200 -- *6.025% due 1999 -- 85,000 ------- ------- *6.088% due 1999 -- 50,000 *7.300% due 2002 140,000 -- *8.113% due 2002 50,000 -- *4.300% due 2012 50,000 50,000 *3.950% due 2014 50,000 50,000 *2.950% due 2015 50,000 50,000 *5.800% due 2016 47,725 -- *4.200% due 2018 57,100 57,100 *3.750% due 2018 56,000 56,000 *3.100% due 2032 53,400 53,400 *4.250% due 2033 50,000 -- *4.650% due 2033 108,000 -- *5.400% due 2033 30,000 -- ------- ------- Total unsecured notes 742,225 566,500 5,200 -- 747,425 566,500 ------- ------- ------- ------- ---------- ---------- Capital lease obligations (Note 2) 33,852 36,891 ---------- ---------- Net unamortized discount on debt (4,216) (4,693) ---------- ---------- Long-term debt due within one year (417,838) (523,792) ---------- ---------- Total long-term debt 2,175,812 2,215,042 ---------- ---------- TOTAL CAPITALIZATION $5,140,342 $5,253,785 ========== ========== * Denotes variable rate issue with December 31, 1999 interest rate shown for only December 31, 1999 balances and December 31, 1998 interest rate shown for only December 31, 1998 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
Accumulated Other Unallocated Comprehensive Other Comprehensive ESOP Income Number Par Paid-In Income Retained Common (Note 3C) of Shares Value Capital (Note 3C) Earnings Stock ------------- --------- ----- -------- ------------- -------- ----------- (Dollars in thousands) Balance, January 1, 1997 152,569,437 $1,373,125 $ 728,261 $(659) $ 557,642 $(155,010) Net income $293,194 293,194 Minimum liability for unfunded retirement benefits, net of $26,000 of income taxes 44 44 -------- Comprehensive income $293,238 ======== FirstEnergy merger (152,569,337) (1,373,124) 1,373,124 146,977 Allocation of ESOP shares 1,874 8,033 Cash dividends on preferred stock (12,392) Cash dividends on common stock (216,770) - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 100 1 2,103,259 (615) 621,674 -- Net income $270,798 270,798 Transfer of minimum liability for unfunded retirement benefits to parent 615 615 -------- Comprehensive income $271,413 ======== Transfer of ESOP premium to parent (4,531) Cash dividends on preferred stock (11,952) Cash dividends on common stock (297,376) - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 100 1 2,098,728 -- 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 $ 1 $2,098,728 $ -- $ 525,731 $ -- ================================================================================================================================
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, 1997 5,118,699 $211,870 5,200,000 $160,000 Redemptions- 8.45% Series (50,000) (5,000) - --------------------------------------------------------------------------------- Balance, December 31, 1997 5,118,699 211,870 5,150,000 155,000 Redemptions- 8.45% Series (50,000) (5,000) - --------------------------------------------------------------------------------- Balance, December 31, 1998 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 =================================================================================== 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, 1999 1998 1997 - ----------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $297,689 $270,798 $293,194 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization 582,197 411,979 426,205 Nuclear fuel and lease amortization 45,850 35,086 49,251 Deferred income taxes, net (120,149) (55,817) (36,741) Investment tax credits, net (13,793) (14,290) (15,031) Extraordinary item -- 51,730 -- Receivables (43,623) (144,549) (23,887) Materials and supplies 18,257 (1,627) (10,557) Accounts payable 14,443 (8,455) 32,531 Other 14,442 64,552 21,755 -------- -------- -------- Net cash provided from operating activities 795,313 609,407 736,720 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 242,601 117,265 89,773 Short-term borrowings, net 20,113 35,954 -- Redemptions and Repayments- Preferred stock 17,005 5,000 5,000 Long-term debt 396,410 225,241 292,409 Short-term borrowings, net -- -- 47,251 Dividend Payments- Common stock 347,003 297,746 237,848 Preferred stock 11,512 11,865 12,559 -------- -------- -------- Net cash used for financing activities 509,216 386,633 505,294 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 237,199 186,139 179,328 Other (5,064) 8,102 52,671 -------- -------- -------- Net cash used for investing activities 232,135 194,241 231,999 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 53,962 28,533 (573) Cash and cash equivalents at beginning of year 33,213 4,680 5,253 -------- -------- -------- Cash and cash equivalents at end of year $ 87,175 $ 33,213 $ 4,680 ======== ======== ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year- Interest (net of amounts capitalized) $203,749 $201,064 $212,987 ======== ======== ======== Income taxes $308,052 $219,226 $228,399 ======== ======== ======== 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, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property $ 111,222 $ 116,868 $ 114,111 State gross receipts 106,926 104,175 99,262 Social security and unemployment 14,432 12,701 14,113 Other 7,701 8,780 7,478 ---------- ---------- ---------- Total general taxes $ 240,281 $ 242,524 $ 234,964 ========== ========== ========== PROVISION FOR INCOME TAXES: Currently payable- Federal $ 307,462 $ 229,164 $ 225,529 State 18,315 14,732 17,784 ---------- ---------- ---------- 325,777 243,896 243,313 ---------- ---------- ---------- Deferred, net- Federal (113,347) (50,310) (30,791) State (6,802) (5,507) (5,950) ---------- ---------- ---------- (120,149) (55,817) (36,741) ---------- ---------- ---------- Investment tax credit amortization (13,793) (14,290) (15,031) ---------- ---------- ---------- Total provision for income taxes $ 191,835 $ 173,789 $ 191,541 ========== ========== ========== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating income $ 170,872 $ 174,692 $ 172,163 Other income 20,963 20,305 19,378 Extraordinary item -- (21,208) -- ---------- ---------- ---------- Total provision for income taxes $ 191,835 $ 173,789 $ 191,541 ========== ========== ========== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes $ 489,524 $ 444,587 $ 484,735 ========== ========== ========== Federal income tax expense at statutory rate $ 171,333 $ 155,605 $ 169,657 Increases (reductions) in taxes resulting from- Amortization of investment tax credits (13,793) (14,290) (15,031) State income taxes, net of federal income tax benefit 7,483 5,996 7,692 Amortization of tax regulatory assets 24,950 29,961 30,642 Other, net 1,862 (3,483) (1,419) ---------- ---------- ---------- Total provision for income taxes $ 191,835 $ 173,789 $ 191,541 ========== ========== ========== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences $ 847,479 $ 880,645 $1,019,952 Allowance for equity funds used during construction 152,846 169,780 210,136 Deferred nuclear expense 229,366 237,602 252,946 Competitive transition charge 115,277 135,730 -- Customer receivables for future income taxes 163,500 164,618 204,643 Deferred sale and leaseback costs (26,966) 45,521 47,796 Unamortized investment tax credits (51,521) (55,495) (67,208) Other 38,497 23,486 30,089 ---------- ---------- ---------- Net deferred income tax liability $1,468,478 $1,601,887 $1,698,354 ========== ========== ========== 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 became a wholly owned subsidiary of FirstEnergy Corp. (FirstEnergy) on November 8, 1997. FirstEnergy was formed on that date by the merger of the Company and Centerior Energy Corporation (Centerior). FirstEnergy holds directly all of the issued and outstanding common shares of the Company and all of the issued and outstanding common shares of Centerior's former direct subsidiaries, which include, among others, The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE). 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 generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. 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 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, 1999 or 1998, with respect to any particular segment of the Companies' customers. REGULATORY PLANS- The PUCO approved the Company's Rate Reduction and Economic Development Plan in 1995. This regulatory plan was to maintain current base electric rates for the Company through December 31, 2005. At the end of the regulatory plan period, the Company's base rates were to be reduced by $300 million (approximately 20 percent below current levels). The plan also revised the Company's fuel cost recovery method. The Company formerly recovered fuel-related costs not otherwise included in base rates from retail customers through separate energy rates. In accordance with the regulatory plan, the Company's fuel rates will be frozen through the regulatory plan period, subject to limited periodic adjustments. As part of the Company's regulatory plan, transition rate credits were implemented for customers, which are expected to reduce operating revenues for the Company by approximately $600 million. In July 1999, Ohio's new electric utility restructuring legislation which will allow Ohio electric customers to select their generation suppliers beginning January 1, 2001, was signed into law. Among other things, the new law provides for a five percent reduction on the generation portion of residential customers' bills and the opportunity to recover transition costs, including regulatory assets, from January 1, 2001 through December 31, 2005. The period for the recovery of regulatory assets only can be extended up to December 31, 2010. The PUCO was authorized to determine the level of transition cost recovery, as well as the recovery period for the regulatory assets portion of those costs, in considering each Ohio electric utility's transition plan application. FirstEnergy, on behalf of its Ohio electric utility operating companies - the Company, CEI and TE - on December 22, 1999 refiled its transition plan under Ohio's new electric utility restructuring law. The plan was originally filed with the PUCO on October 4, 1999, but was refiled to conform to PUCO rules established on November 30, 1999. The new filing also included additional information on FirstEnergy's plans to turn over control, and perhaps ownership, of its transmission assets to the Alliance Regional Transmission Organization. The PUCO indicated that it will endeavor to issue its order in FirstEnergy's case within 275 days of the initial October filing date. The transition plan itemizes, or unbundles, 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 filing also included its proposals on corporate separation of its regulated and unregulated operations, operational and technical support changes needed to accommodate customer choice, an education program to inform customers of their options under the new law, and how FirstEnergy's transmission system will be operated to ensure access to all users. Under the plan, customers who remain with the Company as their generation provider will continue to receive savings under the Company's rate plans, expected to total $422 million between 2000 and 2005. In addition, FirstEnergy's Ohio utility customers will save $358 million through reduced charges for taxes and a five percent reduction in the price of generation for residential customers beginning January 1, 2001. Customer prices are expected to be frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the five percent reduction in the price of generation for residential customers. The plan proposes recovery of the Company's generation-related transition costs of approximately $1.8 billion ($1.6 billion, net of deferred income taxes) over the market development period; its transition costs related to regulatory assets aggregating approximately $1.5 billion ($1.0 billion, net of deferred income taxes) will be recovered over the period of 2001 through 2004. In June 1998, the PPUC authorized a rate restructuring plan for Penn, which essentially resulted in the deregulation of Penn's generation business as of June 30, 1998. Penn 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, Penn 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 a CTC over a seven-year transition period; the remaining net amount of $78 million was written off. The charge of $51.7 million ($30.5 million after income taxes) for discontinuing the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to Penn's generation business was recorded as a 1998 extraordinary item on the Consolidated Statement of Income. Penn's net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued and Penn's total assets as of December 31, 1999 were $76 million and $1.016 billion, respectively. All of the Companies' regulatory assets are being recovered under provisions of the regulatory plans. In addition, the PUCO has authorized the Company to recognize additional capital recovery related to its generating assets (which is reflected as additional depreciation expense) and additional amortization of regulatory assets during the 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 regulatory plans were not in effect. These additional amounts are being recovered through current rates. As of December 31, 1999, the Companies' cumulative additional capital recovery and regulatory asset amortization amounted to $1.048 billion (including Penn's impairment discussed above and CTC recovery). UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction, (except for Penn's 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 OE's electric plant was approximately 3.0% in 1999, 1998 and 1997. The annual composite rate for Penn's electric plant was approximately 2.5% in 1999 and 3.0% in 1998 and 1997. In addition to the straight-line depreciation recognized in 1999, 1998 and 1997, the Companies recognized additional capital recovery of $95 million, $141 million (excluding Penn's impairment) and $172 million, respectively, as additional depreciation expense in accordance with their regulatory plans. Such additional charges in the accumulated provision for depreciation were $517 million and $422 million as of December 31, 1999 and 1998, respectively. Annual depreciation expense includes approximately $9.4 million for future decommissioning costs applicable to the Companies' ownership and leasehold interests in three nuclear generating units. The Companies' future decommissioning costs reflect the increase in Penn's ownership interest related to the asset transfer with Duquesne Light Company (Duquesne) discussed below in "Common Ownership of Generating Facilities." The Companies' share of the future obligation to decommission these units is approximately $777 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 begins. The Companies have recovered approximately $92 million for decommissioning through their electric rates from customers through December 31, 1999. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Companies expect that additional amount to be recoverable from their customers. The Companies have approximately $236.9 million invested in external decommissioning trust funds as of December 31, 1999. This includes additions to the trust funds and the corresponding liability of $89 million as a result of the asset transfer. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Companies have also recognized an estimated liability of approximately $18.7 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. The Financial Accounting Standards Board (FASB) issued a proposed accounting standard for nuclear decommissioning costs in 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could increase; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) income from the external decommissioning trusts could be reported as investment income. The FASB subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in the first quarter of 2000. COMMON OWNERSHIP OF GENERATING FACILITIES- The Companies, together with the other FirstEnergy utilities, CEI and TE, and Duquesne constituted the Central Area Power Coordination Group (CAPCO). The CAPCO companies formerly owned and/or leased, 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. On March 26, 1999, FirstEnergy completed its agreements with Duquesne to exchange certain generating assets. All regulatory approvals were received by October 1999. In December 1999, Duquesne transferred 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Companies and CEI. As part of this exchange, the Companies transferred their 246-megawatt Niles Plant and 339-megawatt New Castle Plant to Duquesne. The Companies acquired Duquesne's ownership interest in the Beaver Valley Station and acquired, with CEI, Duquesne's ownership interest in the Bruce Mansfield Plant. The agreements for the exchange of assets, which was structured as a like-kind exchange for tax purposes, provides FirstEnergy's utility operating companies with exclusive ownership and operating control of all CAPCO generating units. The three FirstEnergy plants transferred are being sold by Duquesne to a wholly owned subsidiary of Orion Power Holdings, Inc. (Orion). The Companies and CEI will continue to operate those plants until the assets are transferred to the new owners. Duquesne funded decommissioning costs equal to its percentage interest in the three nuclear generating units that were transferred to FirstEnergy. The Duquesne asset transfer to the Orion subsidiary could take place by the middle of 2000. Under the agreements, Duquesne was no longer a participant in the CAPCO arrangements after the exchange. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 1999 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 $ 307.4 $ 134.9 $ 6.7 68.80% Bruce Mansfield #1, #2 and #3 1,010.7 538.0 19.7 67.18% Beaver Valley #1 and #2 1,665.6 653.2 22.8 77.81% Perry 1,281.7 853.1 8.7 35.24% - -------------------------------------------------------------------------------- Total $4,265.4 $2,179.2 $57.9 ================================================================================
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. The Companies' electric rates include amounts for the future disposal of spent nuclear fuel based upon the formula used to compute payments to the DOE. 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. Since November 8, 1997, 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. In 1998, the Companies' pension plans and the Centerior pension plan were merged into the FirstEnergy pension 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, 1999. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. 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 FirstEnergy plans in 1999 and 1998 on the Consolidated Balance Sheets as of December 31 (which includes the Companies' share of the FirstEnergy 1999 plans' net prepaid pension cost and accrued other postretirement benefits cost of $194.8 million and $145.7 million, respectively, and the Companies' share of the FirstEnergy 1998 plans' net prepaid pension cost and accrued other postretirement benefits cost of $175.9 million and $132.8 million, respectively):
Other Pension Benefits Postretirement Benefits -------------------- ----------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1 $1,500.1 $1,327.5 $ 601.3 $ 534.1 Service cost 28.3 25.0 9.3 7.5 Interest cost 102.0 92.5 40.7 37.6 Plan amendments -- 44.3 -- 40.1 Actuarial loss (gain) (155.6) 101.6 (17.6) 10.7 Net increase from asset swap 14.8 -- 12.5 -- Benefits paid (95.5) (90.8) (37.8) (28.7) - ----------------------------------------------------------------------------------------------- Benefit obligation as of December 31 1,394.1 1,500.1 608.4 601.3 - ----------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1 1,683.0 1,542.5 3.9 2.8 Actual return on plan assets 220.0 231.3 0.6 0.7 Company contribution -- -- 0.4 0.4 Benefits paid (95.5) (90.8) -- -- - ----------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,807.5 1,683.0 4.9 3.9 - ----------------------------------------------------------------------------------------------- Funded status of plan 413.4 182.9 (603.5) (597.4) Unrecognized actuarial loss (gain) (303.5) (110.8) 24.9 30.6 Unrecognized prior service cost 57.3 63.0 24.1 27.4 Unrecognized net transition obligation (asset) (10.1) (18.0) 120.1 129.3 - ----------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 157.1 $ 117.1 $(434.4) $(410.1) =============================================================================================== Assumptions used as of December 31: Discount rate 7.75% 7.00% 7.75% 7.00% 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, 1999 (FirstEnergy plans in 1999 and 1998 and the Companies' plans in 1997) were computed as follows:
Other Pension Benefits Postretirement Benefits --------------------- ---------------------- 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- (In millions) Service cost $ 28.3 $ 25.0 $ 12.9 $ 9.3 $ 7.5 $ 4.1 Interest cost 102.0 92.5 49.8 40.7 37.6 17.6 Expected return on plan assets (168.1) (152.7) (91.9) (0.4) (0.3) (0.2) Amortization of transition obligation (asset) (7.9) (8.0) (8.0) 9.2 9.2 8.2 Amortization of prior service cost 5.7 2.3 2.1 3.3 (0.8) 0.3 Recognized net actuarial loss (gain) -- (2.6) (0.9) -- -- -- Voluntary early retirement program expense -- -- 31.5 -- -- 1.9 - ------------------------------------------------------------------------------------------------------- Net benefit cost $ (40.0) $ (43.5) $ (4.5) $62.1 $53.2 $31.9 ======================================================================================================= Companies' share of total plan costs $ (16.9) $ (39.7) $ (4.5) $25.5 $31.2 $31.9 - -------------------------------------------------------------------------------------------------------
The FirstEnergy plan's health care trend rate assumption is 5.3% in 2000, 5.2% in 2001 and 5.0% for 2002 and 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 $4.5 million and the postretirement benefit obligation by $72.0 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.5 million and the postretirement benefit obligation by $58.2 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues and operating expenses include amounts for affiliated transactions with CEI and TE since the November 8, 1997 merger date. The Companies' transactions with CEI and TE from the merger date were primarily for electric sales. The amounts related to CEI and TE were $27.7 million and $18.1 million, respectively, for 1999, $17.8 million and $12.7 million, respectively, for 1998 and $4.3 million and $0.4 million, respectively, for the November 8-December 31, 1997 period. FirstEnergy provided support services at cost to the Companies and other affiliated companies. FirstEnergy billed the Companies $118.2 million and $114.2 million in 1999 and 1998, respectively. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets. At December 31, 1999 and 1998, cash and cash equivalents included $83 million and $16 million, respectively, to be used for the redemption of long-term debt in the first quarter of 2000 and in 1999, respectively. The Companies reflect temporary cash investments at cost, which approximates their market value. Noncash financing and investing activities included capital lease transactions amounting to $1.4 million, $1.6 million and $3.0 million for the years 1999, 1998 and 1997, respectively. Commercial paper transactions of OES Fuel, Incorporated (OES Fuel) (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 long-term debt on the Consolidated Balance Sheets (see Note 3G). All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles 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:
1999 1998 - -------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------- (In millions) Long-term debt $2,483 $2,459 $2,627 $2,775 Preferred stock $ 145 $ 142 $ 150 $ 155 Investments other than cash and cash equivalents: Debt securities -Maturity (5-10 years) $ 475 $ 476 $ 481 $ 520 -Maturity (more than 10 years) 258 267 258 305 Equity securities 14 14 14 14 All other 301 311 170 179 - -------------------------------------------------------------------- $1,048 $1,068 $ 923 $1,018 ====================================================================
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 a corresponding change to the decommissioning liability. The other debt and equity securities referred to above are in the held-to-maturity category. 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 being recovered from customers under the Companies' respective regulatory plans. Based on those regulatory plans, at this time, the Companies are continuing to bill and collect cost- based rates relating to all of the Company's operations and Penn's nongeneration operations and they continue the application of SFAS 71 to those respective operations. The Companies also recognized additional cost recovery of $257 million, $50 million and $39 million in 1999, 1998 and 1997, respectively, as additional regulatory asset amortization in accordance with their regulatory plans. The PUCO indicated that it will endeavor to issue its order related to FirstEnergy's transition plan by mid-2000. The application of SFAS 71 to the Company's generation business will be discontinued at that time. If the transition plan ultimately approved by the PUCO for the Company does not provide adequate recovery of its nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on the results of operations and financial condition for the Company. The Companies will continue to bill and collect cost-based rates for their transmission and distribution services, which will remain regulated; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those respective operations after December 31, 2000. Regulatory assets on the Consolidated Balance Sheets are comprised of the following:
1999 1998 - ------------------------------------------------------------------------ (In millions) Nuclear unit expenses $ 643.0 $ 666.7 Customer receivables for future income taxes 455.3 458.3 Competitive transition charge 280.4 331.0 Sale and leaseback costs 120.5 318.4 Loss on reacquired debt 79.7 81.9 Employee postretirement benefit costs 24.8 28.9 DOE decommissioning and decontamination costs 10.7 12.2 Other 3.9 16.4 - ----------------------------------------------------------------------- Total $1,618.3 $1,913.8 =======================================================================
2. LEASES The Companies lease certain generating facilities, certain transmission 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 (OES Finance), 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, 1999, are summarized as follows:
1999 1998 1997 - -------------------------------------------------------- (In millions) Operating leases Interest element $108.5 $110.0 $111.3 Other 34.4 28.9 23.2 Capital leases Interest element 5.3 5.3 6.1 Other 4.4 4.8 6.0 - -------------------------------------------------------- Total rentals $152.6 $149.0 $146.6 ======================================================== The future minimum lease payments as of December 31, 1999, are:
Operating Leases ----------------------------- Capital Lease PNBV Capital Leases Payments Trust Net - -------------------------------------------------------------------- (In millions) 2000 $ 10.4 $ 125.1 $ 54.6 $ 70.5 2001 9.7 127.7 59.5 68.2 2002 8.8 125.2 61.0 64.2 2003 8.6 137.4 62.6 74.8 2004 8.4 138.3 58.3 80.0 Years thereafter 62.6 1,704.9 530.9 1,174.0 - -------------------------------------------------------------------- Total minimum lease payments 108.5 $2,358.6 $826.9 $1,531.7 Executory costs 26.9 ======== ====== ======== - ------------------------------------- Net minimum lease payments 81.6 Interest portion 47.7 - ------------------------------------- Present value of net minimum lease payments 33.9 Less current portion 3.3 - ------------------------------------- Noncurrent portion $ 30.6 =====================================
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 $460.9 million at December 31, 1999. (B) EMPLOYEE STOCK OWNERSHIP PLAN- The Companies were funding the matching contribution for their 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 the Company and acquired 10,654,114 shares of the Company's common stock through market purchases; the shares were converted into FirstEnergy's common stock in connection with the OE-Centerior merger. The ESOP loan is included in Other Property and Investments on the Consolidated Balance Sheets as of December 31, 1999 and 1998 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. In 1997, 429,515 shares were allocated to the Companies' employees with the corresponding expense recognized based on the shares allocated method. Total ESOP-related compensation expense reflected on the 1997 Consolidated Statement of Income was calculated as follows:
- ----------------------------------------- 1997 - ----------------------------------------- (In millions) Base compensation $ 9.9 Dividends on common stock held by the ESOP and used to service debt (3.4) - ----------------------------------------- Net expense $ 6.5 =========================================
(C) COMPREHENSIVE INCOME- In 1998, the Companies adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Consolidated Statements of Common Stockholder's Equity. Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholder's equity except dividends to stockholders. (D) PREFERRED AND PREFERENCE STOCK- Penn's 7.75% series of preferred stock has a restriction which prevents early redemption prior to July 2003. The Company's 8.45% series of preferred stock has no optional redemption provision. All other preferred stock may be redeemed by the Companies in whole, or in part, with 30-60 days' notice. The Company has 8 million authorized and unissued shares of preference stock having no par value. (E) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- The Company's 8.45% series of preferred stock has an annual sinking fund requirement for 50,000 shares. 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 $5 million in each year 2000-2001 and $1 million in each year 2002-2004. (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 beginning December 31, 2000, 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, 1999, 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 2000 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) - -------------------- 2000 $414.5 2001 281.4 2002 516.8 2003 246.3 2004 255.6 - --------------------
The Companies' obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $349.3 million. To the extent that drawings are made under those letters of credit to pay principal of, or interest on, the pollution control revenue bonds, the Companies are entitled to a credit against their obligation to repay those bonds. The Companies pay annual fees of 0.43% to 0.75% 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 had unsecured borrowings of $190 million at December 31, 1999, supported by a $250 million long-term revolving credit facility agreement which expires November 18, 2002. The Company must pay an annual facility 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 $180.5 million long-term bank credit agreement which expires March 31, 2001. Accordingly, the commercial paper and loans are reflected as long-term debt on the Consolidated Balance Sheets. 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 at December 31, 1999, consisted of $162.7 million of bank borrowings and $160.0 million of OES Capital, Incorporated (OES Capital) 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. At December 31, 1999, the Company also had total short-term borrowings of $35.6 million from its affiliates. The Company has lines of credit with domestic banks that provide for borrowings of up to $55 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 0.125% to 0.20%. These lines expire at various times during 2000. The weighted average interest rates on short- term borrowings outstanding at December 31, 1999 and 1998, were 6.27% and 5.61%, respectively. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Companies' current forecasts reflect expenditures of approximately $1 billion for property additions and improvements from 2000- 2004, of which approximately $251 million is applicable to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $218 million, of which approximately $65 million applies to 2000. During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $215 million and $46 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 present 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 $706.3 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 $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 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. The Companies estimate additional capital expenditures for environmental compliance of approximately $175 million, which is included in the construction forecast provided under "Capital Expenditures" for 2000 through 2004. The Companies are in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower- sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. NOx reductions are being achieved through combustion controls and generating more electricity from lower-emitting plants. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In May 1999, the U.S. Court of Appeals for the D.C. Circuit issued a stay which delays implementation of EPA's NOx Transport Rule until the Court has ruled on the merits of various appeals. Under the NOx Transport Rule, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA contemplating an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Companies' Ohio and Pennsylvania plants, by May 2003 in the event implementation of the NOx Transport Rule is delayed. New Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. FirstEnergy continues to evaluate its compliance plans and other compliance options. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30- day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards back to the EPA finding constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. The Companies cannot predict the EPA's action in response to the Court's remand order. The cost of compliance with these regulations, if they are reinstated, may be substantial and depends on the manner in which they are ultimately implemented, if at all, by the states in which the Companies operate affected facilities. In September 1999, FirstEnergy received, and subsequently in October 1999, the Companies received a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. In November 1999, the Companies received a citizen suit notification letter from the Connecticut Attorney General's office alleging Clean Air Act violations at the Sammis Plant. On November 3, 1999, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 32 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor-owned utilities, which included a complaint against the 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. The Companies believe the Sammis Plant is in full compliance with the Clean Air Act and the NOV and complaint are without merit. However, the Companies are unable to predict the outcome of this litigation. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 1999 and 1998.
March 31, June 30, September 30, December 31, Three Months Ended 1999 1999 1999 1999 - ----------------------------------------------------------------------------------------- (In millions) Operating Revenues $633.1 $646.7 $770.5 $636.6 Operating Expenses and Taxes 498.1 532.7 650.2 532.8 - --------------------------------------------------------------------------------------- Operating Income 135.0 114.0 120.3 103.8 Other Income 9.3 13.1 10.2 13.2 Net Interest Charges 56.5 58.4 53.9 52.5 - --------------------------------------------------------------------------------------- Net Income $ 87.8 $ 68.7 $ 76.6 $ 64.5 ======================================================================================= Earnings on Common Stock $ 84.9 $ 65.8 $ 73.7 $ 61.7 =======================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - ----------------------------------------------------------------------------------------- (In millions) Operating Revenues $597.8 $618.5 $696.2 $607.0 Operating Expenses and Taxes 486.7 524.9 555.5 465.5 - --------------------------------------------------------------------------------------- Operating Income 111.1 93.6 140.7 141.5 Other Income 12.5 11.8 12.6 10.7 Net Interest Charges 59.3 59.1 58.6 56.2 - --------------------------------------------------------------------------------------- Income Before Extraordinary Item 64.3 46.3 94.7 96.0 Extraordinary Item (Net of Income Taxes) (Note 1) -- (30.5) -- -- - --------------------------------------------------------------------------------------- Net Income $ 64.3 $ 15.8 $ 94.7 $ 96.0 ======================================================================================= Earnings on Common Stock $ 61.3 $ 12.8 $ 91.7 $ 93.0 =======================================================================================
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, 1999 and 1998, 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, 1999. 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 generally accepted auditing standards. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 11, 2000 EX-21.1 17 EXHIBIT 21.1 OHIO EDISON COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1999 Pennsylvania Power Company - Incorporated in Pennsylvania OES Fuel, Incorporated - Incorporated in Ohio OES Ventures, Incorporated - Incorporated in Ohio OES Capital, Incorporated - Incorporated in Ohio 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, 1999, is not included in the printed document. EX-23.1 18 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, 2000 EX-27.1 19
UT This schedule contains summary financial information extracted from the related Form 10-K financial statements for Ohio Edison Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's.) Income tax expense includes $20,963,000 related to other income. 0000073960 OHIO EDISON COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 DEC-31-1999 1 PER-BOOK 4,620,732 1,409,662 821,672 1,848,680 0 8,700,746 1 2,098,728 525,731 2,624,460 140,000 200,070 2,175,812 198,322 0 159,974 414,544 5,000 0 3,294 2,779,270 8,700,746 2,686,949 191,835 2,043,035 2,213,907 473,042 45,846 518,888 221,199 297,689 11,547 286,142 347,003 184,707 791,901 0 0
EX-4.2 20 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY TO THE CHASE MANHATTAN BANK, as Trustee Eighty-first Supplemental Indenture Dated as of September 29, 1999 Eighty-first Supplemental Indenture, dated as of September 29, 1999, made by and between THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and existing under the laws of the State of Ohio (the "Company"), and THE CHASE MANHATTAN BANK (successor by merger to The Chase Manhattan Bank (National Association), which in turn was successor to Morgan Guaranty Trust Company of New York, formerly Guaranty Trust Company of New York), a corporation organized and existing under the laws of the State of New York (the "Trustee"), as Trustee under the Mortgage and Deed of Trust dated July 1, 1940, hereinafter mentioned: RECITALS In order to secure first mortgage bonds of the Company ("Bonds"), the Company has heretofore executed and delivered to the Trustee the Mortgage and Deed of Trust dated July 1, 1940 (the "1940 Mortgage") and eighty supplemental indentures thereto ("Supplemental Indentures"); and The 1940 Mortgage, as supplemented and modified by said Supplemental Indentures and by this Eighty-first Supplemental Indenture, will be hereinafter collectively referred to as the "Indenture" and this Eighty- first Supplemental Indenture will be hereinafter referred to as "this Supplemental Indenture"; and In the Nineteenth Supplemental Indenture, dated November 23, 1976 (the "Nineteenth Supplemental Indenture"), the Company reserved the right, without any vote, consent or other action by holders of Bonds of any series established or created in the Nineteenth Supplemental Indenture or any subsequent supplemental indenture, to amend and modify, in the manner specified therein, certain provisions of the Indenture (the "Affected Provisions"), and the Company has determined to exercise that right as to certain of the Affected Provisions without prejudice to its right to amend and modify the balance of the Affected Provisions at a later date; and The Company, in the exercise of the powers and authority conferred upon and reserved to it under the provisions of the Indenture, and pursuant to appropriate resolutions of its Board of Directors, has duly resolved and determined to make, execute and deliver to the Trustee this Supplemental Indenture in the form hereof for the purposes herein provided; and All conditions and requirements necessary to make this Supplemental Indenture a valid, binding and legal instrument have been done, performed and fulfilled and the execution and delivery hereof have been in all respects duly authorized. NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: ARTICLE I CONFIRMATION OF 1940 MORTGAGE AND SUPPLEMENTAL INDENTURES ------------------------------------ The 1940 Mortgage (as modified in Article V of the Supplemental Indenture dated December 1, 1947, Article V of the Supplemental Indenture dated May 1, 1954, Article V of the Supplemental Indenture dated March 1, 1958, Article V of the Supplemental Indenture dated January 15, 1969, Article III of the Supplemental Indenture dated November 23, 1976 and Article III of the Supplemental Indenture dated April 15, 1985) and the Supplemental Indentures dated July 1, 1940, August 18, 1944, December 1, 1947, September 1, 1950, June 1, 1951, May 1, 1954, March 1, 1958, April 1, 1959, December 20, 1967, January 15, 1969, November 1, 1969, June 1, 1970, November 15, 1970, May 1, 1974, April 15, 1975, April 16, 1975, May 28, 1975, February 1, 1976, November 23, 1976, July 26, 1977, September 27, 1977, May 1, 1978, September 1, 1979, April 1, 1980, April 15, 1980, May 28, 1980, June 9, 1980, December 1, 1980, July 28, 1981, August 1, 1981, March 1, 1982, July 15, 1982, September 1, 1982, November 1, 1982, November 15, 1982, May 24, 1983, May 1, 1984, May 23, 1984, June 27, 1984, September 4, 1984, November 14, 1984, November 15, 1984, April 15, 1985, May 28, 1985, August 1, 1985, September 1, 1985, November 1, 1985, April 15, 1986, May 14, 1986, May 15, 1986, February 25, 1987, October 15, 1987, February 24, 1988, September 15, 1988, May 15, 1989, June 13, 1989, October 15, 1989, January 1, 1990, June 1, 1990, August 1, 1990, May 1, 1991, May 1, 1992, July 31, 1992, January 1, 1993, February 1, 1993, May 20, 1993, June 1, 1993, September 15, 1994, May 1, 1995, May 2, 1995, June 1, 1995, July 15, 1995, August 1, 1995, June 15, 1997, August 1, 1997, October 15, 1997, June 1, 1998, October 1, 1998, October 1, 1998, and April 1, 1999, respectively, are hereby in all respects confirmed. ARTICLE II AMENDMENT AND MODIFICATION OF INDENTURE --------------------------------------- Section 2.01 Pursuant to the right conferred upon and reserved to it under Section 2 of Article III of Nineteenth Supplemental Indenture, the Company, without any vote, consent or other action by holders of Bonds of any series established or created in the Nineteenth Supplemental Indenture or any subsequent supplemental indenture (all Bonds created in any supplemental indenture prior to the Nineteenth Supplemental Indenture being no longer outstanding), hereby adds a definition of "Nuclear Fuel" in, and amends and modifies the definition of "Property Additions" in, Article I of the Indenture, as follows: "Nuclear Fuel: The term `Nuclear Fuel' shall mean (a) any substance, material or fuel element, including nuclear fuel and associated means (and any similar or analogous substance or device), whether or not classified as fuel and whether or not chargeable to operating expenses, comprising or intended to comprise, or formerly comprising, the core, or other part, of a nuclear reactor or any similar or analogous device, (b) any substance, material or fuel element, including nuclear fuel and associated means (and any similar or analogous substance or device) while in the process of fabrication or preparation and special nuclear or other materials held for use in such fabrication or preparation, (c) any substance, material or fuel element formerly comprising such nuclear fuel and associated means (or any similar or analogous substance or device) and which are undergoing or have undergone, reprocessing and (b) uranium, thorium, plutonium and any other substance or material from time to time used or selected for use by the Company as fuel material, or as potential fuel material, in a nuclear reactor or any similar or analogous device." "Property Additions: The term `property additions' shall mean any new or additional property, real or personal (including separate and distinct units, plants, systems and properties), located within, or subject to the laws of, the United States of America or Canada, and improvements, extensions or additions (including in these terms equipment and appliances installed as a part of the fixed property of the Company) to or about the plants or properties of the Company purchased, constructed or otherwise acquired by the Company after June 30, 1940, and in every case used or useful in the business of generating, manufacturing, developing, producing, creating, transmitting, transporting, distributing or supplying any kind or form of matter, electricity, energy, radiation, light, refrigeration, heat, water, steam, gas or fuel, including, without limitation of the general import of the foregoing, electricity or gas for light, heat, refrigeration, power, or any other purposes or water for drinking, power, heat, refrigeration or any other purposes or steam for heat, power, refrigeration or any other purposes, and in every case properly chargeable to fixed property accounts under the regulations, rules and orders, if any, with respect to such matters, in force at the time, of The Public Utilities Commission of Ohio or other public body or authority having jurisdiction or supervisory authority over the accounts of the Company, or, if there are no such regulations, rules and orders, in the opinion of the signers of a certificate of the nature required by Section 5(a) of Article III or Section 1(b) of Article VIII." " `Property additions' as so defined, without limitation of the general import of such term, shall include property and interests and rights therein in any one or more of the following categories: (a) subject to Article XII, property acquired by the Company or by a successor corporation as a result of any consolidation or merger to which the Company or any successor corporation may be a party; (b) permanent improvements, extensions or additions to or about the properties of the Company in the process of construction or partially completed, insofar as actually constructed or completed; (c) property purchased, constructed or otherwise acquired to replace property retired; (d) easements, rights-of-way and leases over any privately or publicly owned real, personal or mixed property or highway property for towers, poles, wires, cables, conduits or mains or for generating plant or transmission line or distribution line purposes and rights, permits, licenses, franchises or any other forms of permission to use or appropriate water or to overflow any such property by the erection of dams or otherwise or to maintain generating, transmission or distribution facilities or appliances or dams or other similar structures on any such property and generating, transmission and distribution facilities and appliances and dams and other similar structures maintained by the Company on any such property, provided that, in the opinion of counsel, such easements, rights-of-way or leases, or rights, permits, licenses, franchises or other forms of permission, as the case may be, shall run for an unlimited or indeterminate or indefinite period of time or for a period of time extending beyond the date of maturity of all Bonds then outstanding under this Indenture and all additional Bonds applied for at the particular time in question or the Company has power under eminent domain or similar statutes to condemn and acquire, adjacent thereto or in lieu thereof, such easements, rights-of-way or leases, rights, permits, licenses, franchises or other forms of permission sufficient for its purposes; (e) any structures and any other property, including, but not limited to, towers, poles, wires, cables, conduits, mains, dams and other similar structures and generating, transmission and distribution facilities and appliances located on, over, under or in any privately or publicly owned real, personal or mixed property or highway property pursuant to any easement, right-of-way or or right, permit, license, franchise or any other form of permission, whether or not such easement, right-of-way or lease or right, permit, license, franchise or other form of permission runs for an unlimited or indeterminate or indefinite period of time extending beyond the date of maturity of all Bonds then outstanding under this Indenture or then being applied for, provided that in the opinion of counsel, the Company has the right to remove any such property additions which are so located on any such property prior to or upon the termination of such easement, right-of-way or lease or right, permit, license, franchise or other form of permission without compensation or other remuneration to anyone and free of any lien prior or equal to the lien of the Indenture, except permitted liens; (f) generating, transmission or distribution facilities or appliances or dams or other similar structures located or constructed on, over, under or in public highways or other public property, provided that the Company shall, in the opinion of counsel, have the lawful right under rights, permits, licenses, franchises or other forms of permission granted by a governmental body having jurisdiction in the premises or by the law of the State in which such property is located to maintain and operate such property additions for an unlimited, indeterminate or indefinite period of time or for the period, if any, specified in such right, permit, license, franchise or other form of permission or law and that the terms of such right, permit, license, franchise or other form of permission or law do not contain any provisions giving to any public authority the right to take over such property additions without the payment of fair consideration therefor; (g) provided that the Company shall have acquired good title to the artificially filled land extending beyond the natural shore line of Lake Erie in front of the land owned by the Company described in this Indenture as Parcels Nos. 1 to 18, inclusive, of the kind described in Subdivision (e) (1) of Section 5 of Article III or shall have acquired the right to occupy said land as described in Subdivision (e) (4) of said Section 5, permanent improvements, extensions or additions to or about the plant and property of the Company located on the site of said artificially filled land (but only those constructed or installed after June 30, 1940), provided, however, that until the Company shall have delivered to the Trustee an opinion of counsel of the nature required by Subdivision (e) (1) of Section 5 of Article III with respect to good title to such artificially filled land, the aggregate amount with respect to any such improvements, extensions or additions which shall be deemed to be property additions and which may be made the basis of authentication and delivery of any additional Bonds or the withdrawal or reduction of cash under any of the provisions of this Indenture shall not exceed Fourteen Million Two Hundred Fifty Thousand Dollars ($14,250,000). The foregoing provisions shall not, however, limit the use of any such improvements, extensions or additions for the purpose of Subdivision (g) of the definition of net bondable value of property additions not subject to an unfunded prior lien; and (h) space satellites, space stations and other analogous facilities whether or not in the Earth's atmosphere and whether or not subject to the laws of the United States of America." " `Property additions' as so defined shall not include: (aa) good will or going concern value as such, separate and distinct from the property operated thereunder or in connection therewith or incident thereto; (bb) any contracts or operating agreements or franchises or governmental permits, granted or acquired, as such, separate and distinct from the property operated thereunder or in connection therewith or incident thereto; (cc) any shares of stock or certificates or evidences of interest therein, or any bonds, notes or other evidences of indebtedness or certificates of interest therein or any other securities; (dd) any materials, merchandise, appliances or supplies acquired for the purpose of resale or leasing to its customers in the ordinary course and conduct of the business of the Company, or any materials or supplies held for consumption in operation or held in advance of use thereof for fixed capital purposes; (ee) easements, rights-of-way and leases and rights, permits, licenses, franchises and other forms of permission with respect to publicly or privately owned real, personal or mixed property or highway property and additions installed by the Company on any such property pursuant thereto, except as permitted in Subdivisions (d), (e) and (f) of this definition; or (ff) any natural gas wells or natural gas leases or natural gas transportation lines (other than natural gas transportation lines for the purpose of supplying fuel to the Company's plants) or other works or property used primarily and principally in the production of natural gas or its transportation up to the point of connection with any distribution system." Section 2.02 Pursuant to the right conferred upon and reserved to it under Section 3 of Article III of Nineteenth Supplemental Indenture, the Company, without any vote, consent or other action by holders of Bonds of any series established or created in the Nineteenth Supplemental Indenture or any subsequent supplemental indenture (all Bonds created in any supplemental indenture prior to the Nineteenth Supplemental Indenture being no longer outstanding), hereby amends and modifies clauses (2) and (3) of Subdivision (e) of Section 5 of Article III of the Indenture to read as follows: "(2) If such property additions (i) include any easements, rights-of-way or leases over any privately or publicly owned real, personal or mixed property or highway property for towers, poles, wires, cables, conduits or mains or for generating plant or transmission line or distribution line purposes or rights, permits, licenses, franchises or any other forms of permission to use or appropriate water or to overflow any such property by the erection of dams or otherwise or to maintain generating, transmission or distribution facilities or appliances or dams or other similar structures on any such property or generating, transmission or distribution facilities or appliances or dams or other similar structures maintained by the Company on any such property, the Company is entitled to such easements, rights-of-way or leases or such rights, permits, licenses, franchises or other forms of permission, as the case may be, for an unlimited or indeterminate or indefinite period of time or for a period extending beyond the date of maturity of the additional Bonds applied for and also beyond the date of maturity of all Bonds then outstanding under this Indenture or the Company has power under eminent domain or similar statutes to condemn and acquire, adjacent thereto or in lieu thereof, such easements, rights-of-way or leases or rights, permits, licenses, franchises or other forms of permission sufficient for its purposes, or (ii) include any structures or any other property, including, but not limited to, towers, poles, wires, cables, conduits, mains, dams or other similar structures or generating, transmission or distribution facilities or appliances located on, over, under or in any privately or publicly owned real, personal or mixed property or highway property pursuant to any easement, right-of-way or lease or right, permit, license, franchise or any other form of permission whether or not such easement, right-of-way or lease or right, permit, license, franchise or other form of permission, runs for an unlimited or indeterminate or indefinite period of time extending beyond the date of maturity of all Bonds then outstanding under this Indenture or then being applied for, the Company has the right to remove any such property additions which are so located on any such property prior to or upon the termination of such easement, right-of-way or lease or right, permit, license, franchise or any other form of permission without compensation or other remuneration to anyone and free of any lien prior or equal to the lien of the Indenture, except permitted liens; (3) If such property additions include any generating, transmission or distribution facilities or appliances or dams or other similar structures located or constructed on, over or under public highways or other public property, the Company has the lawful right under rights, permits, licenses, franchises or other forms of permission granted by a governmental body having jurisdiction in the premises or by the law of the State in which such property is located to maintain and operate such property additions for an unlimited, indeterminate or indefinite period of time or for the period, if any, specified in such right, permit, license, franchise or other form of permission or law and that the terms of such right, permit, license, franchise or other form of permission or law do not contain any provisions giving to any public authority the right to take over such property additions without the payment of fair consideration therefor;". Section 2.03 Pursuant to the right conferred upon and reserved to it under Section 5 of Article III of Nineteenth Supplemental Indenture, the Company, without any vote, consent or other action by holders of Bonds of any series established or created in the Nineteenth Supplemental Indenture or any subsequent supplemental indenture (all Bonds created in any supplemental indenture prior to the Nineteenth Supplemental Indenture being no longer outstanding), hereby amends and modifies the definition of the term "permitted liens" contained in Article I of the Indenture by inserting the following as a new paragraph at the end of such definition: "The term `permitted liens' shall also mean and include as of any particular time any controls, liens, restrictions, regulations, easements, exceptions or reservations of any governmental authority to the extent applicable to Nuclear Fuel.". Section 2.04 Pursuant to the right conferred upon and reserved to it under Section 6 of Article III of Nineteenth Supplemental Indenture, the Company, without any vote, consent or other action by holders of Bonds of any series established or created in the Nineteenth Supplemental Indenture or any subsequent supplemental indenture (all Bonds created in any supplemental indenture prior to the Nineteenth Supplemental Indenture being no longer outstanding), hereby amends and modifies Subdivision (a) of Section 2 of Article VII of the Indenture by adding the words "or Nuclear Fuel" after the words "or equipment" each time such words appear in said Subdivision (a). ARTICLE III THE TRUSTEE ----------- Section 3.01 The Trustee hereby accepts the trusts hereby declared and provided upon the terms and conditions in the Indenture set forth and upon the terms and conditions set forth in this Article III. Section 3.02 The Trustee shall not be responsible in any manner whatsoever 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 contained herein, all of which recitals are made by the Company solely. In general, each and every term and condition contained in Article XIII of the 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. ARTICLE IV MISCELLANEOUS PROVISIONS ------------------------ This Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument. EXECUTION IN WITNESS WHEREOF, said The Cleveland Electric Illuminating Company has caused this Supplemental Indenture to be executed on its behalf by its President or one of its Vice Presidents and its corporate seal to be hereto affixed and said seal and this Supplemental Indenture to be attested by its Corporate Secretary or an Assistant Secretary, and said The Chase Manhattan Bank, in evidence of its acceptance of the trust hereby created, has caused this Supplemental Indenture to be executed on its behalf by one of its Vice Presidents or one of its Corporate Trust Officers, and its corporate seal to be hereto affixed and said seal and this Supplemental Indenture to be attested by one of its Assistant Secretaries, all as of the day and year first above written. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY By: --------------------------------------- Richard H. Marsh, Vice President Attest: - ------------------------------------ Nancy C. Ashcom, Corporate Secretary Signed, sealed and acknowledged by The Cleveland Electric Illuminating Company in the presence of - ----------------------------------- Edward J. Udovich - ----------------------------------- Nancy L. Chancey THE CHASE MANHATTAN BANK, AS TRUSTEE By: --------------------------------- James P. Freeman, Vice President Attest: - ------------------------------------- R. Lorenzen, Senior Trust Officer Signed, sealed and acknowledged by The Chase Manhattan Bank in the presence of - -------------------------------------- William Keenan - -------------------------------------- Donna Fitzsimmons As witnesses STATE OF OHIO COUNTY OF SUMMIT On this 29th day of September, 1999, 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 Cleveland Electric Illuminating 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 the free act and deed of said corporation. -------------------------------------- Notary Public Susie M. Hoisten Residence - Summit County State Wide Jurisdiction, Ohio My Commission expires November 19, 2001 STATE OF NEW YORK COUNTY OF NEW YORK On this ___ day of _____, 1999, before me personally appeared James P. Freeman and R. Lorenzen, to me personally known, who being by me severally duly sworn, did say that they are a Vice President and a Senior Trust Officer, 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 corporation by authority of its Board of Directors; and said officers severally acknowledged said instrument to the free act and deed of said corporation. ------------------------- Notary Public Emily Fayan This instrument prepared by: FirstEnergy Corp., 76 South Main Street, Akron, Ohio 44308. EX-4.3 21 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY TO THE CHASE MANHATTAN BANK (successor to Morgan Guaranty Trust Company of New York, formerly Guaranty Trust Company of New York) As Trustee under The Cleveland Electric Illuminating Company's Mortgage and Deed of Trust, Dated July 1, 1940 ------------- Eighty-second Supplemental Indenture DATED AS OF JANUARY 15, 2000 First Mortgage Bonds, 2000 Collateral Series A Eighty-second Supplemental Indenture, dated as of January 15, 2000, made by and between THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and existing under the laws of the State of Ohio (the "Company"), and THE CHASE MANHATTAN BANK (successor to MORGAN GUARANTY TRUST COMPANY OF NEW YORK), a corporation organized and existing under the laws of the State of New York (the "Trustee"), as Trustee under the Mortgage and Deed of Trust dated July 1, 1940, hereinafter mentioned: RECITALS In order to secure First Mortgage Bonds of the Company ("Bonds"), the Company has heretofore executed and delivered to the Trustee the Mortgage and Deed of Trust dated July 1, 1940 (the "1940 Mortgage") and 81 Supplemental Indentures thereto ("Supplemental Indentures"); and The 1940 Mortgage, as supplemented and modified by said Supplemental Indentures and by this Eighty-second Supplemental Indenture, will be hereinafter collectively referred to as the "Indenture" and this Eighty- second Supplemental Indenture will be hereinafter referred to as "this Supplemental Indenture"; and The Indenture provides among other things that the Company, from time to time, in addition to the Bonds authorized to be executed, authenticated and delivered pursuant to other provisions therein, may execute and deliver additional Bonds to the Trustee and the Trustee shall thereupon authenticate and deliver such Bonds to or upon the order of the Company; and The Company has determined to create pursuant to the provisions of the Indenture a new series of Bonds designated as "First Mortgage Bonds, 2000 Collateral Series A" (the "Bonds of 2000 Collateral Series A"), with the denominations, rates of interest, dates of maturity, redemption provisions and other provisions and agreements in respect thereof as in this Supplemental Indenture set forth; and The Bonds of 2000 Collateral Series A are to be delivered to the Revolver Agent Bank (hereinafter defined) to (i) provide for the payment of the Company's obligations to make payments to any person under the Amended and Restated Guaranty of the Company and The Toledo Edison Company dated November 4, 1999 (such guaranty, as amended from time to time herein called the "Guaranty"), in favor of the Lenders party to the Second Amended and Restated Credit Agreement dated as of November 4, 1999 among FirstEnergy Corp. (the "Borrower") and Citibank, N.A., as Administrative Agent, the other banks named therein and Salomon Smith Barney Inc., as Arranger, (such credit agreement, as amended from time to time, herein called the "Revolving Credit Agreement") and (ii) to provide to such persons the benefits of the security provided for the Bonds of 2000 Collateral Series A. As used herein, the term "Lenders" shall refer collectively to all banks which are parties to the Revolving Credit Agreement and the term "Revolver Agent Bank" shall refer to the bank designated in the Revolving Credit Agreement as the party responsible for holding the Bonds of 2000 Collateral Series A as agent for the benefit of the Lenders. The Company, in the exercise of the powers and authority conferred upon and reserved to it under the provisions of the Indenture, and pursuant to appropriate resolutions of the Board of Directors, has duly resolved and determined to make, execute and deliver to the Trustee this Supplemental Indenture in the form hereof for the purposes herein provided; and All conditions and requirements necessary to make this Supplemental Indenture a valid, binding and legal instrument have been done, performed and fulfilled and the execution and delivery hereof have been in all respects duly authorized. Now, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That The Cleveland Electric Illuminating Company, in consideration of the premises and of the mutual covenants herein contained and of the sum of One Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing and delivery of these presents and for other valuable considerations, the receipt whereof is hereby acknowledged, hereby covenants and agrees to and with the Trustee and its successors in the Trust under the Indenture, for the benefit of those who shall hold the Bonds and coupons, if any, issued and to be issued thereunder and under this Supplemental Indenture as hereinafter provided, as follows: ARTICLE I CONFIRMATION OF 1940 MORTGAGE AND SUPPLEMENTAL INDENTURES The 1940 Mortgage (as modified in Article V of the Supplemental Indenture dated December 1, 1947, Article V of the Supplemental Indenture dated May 1, 1954, Article V of the Supplemental Indenture dated March 1, 1958, Article V of the Supplemental Indenture dated January 15, 1969, Article III of the Supplemental Indenture dated November 23, 1976, Article III of the Supplemental Indenture dated April 15, 1985 and Article II of the Supplemental Indenture dated as of June 30, 1999) and the Supplemental Indentures dated July 1, 1940, August 18, 1944, December 1, 1947, September 1, 1950, June 1, 1951, May 1, 1954, March 1, 1958, April 1, 1959, December 20, 1967, January 15, 1969, November 1, 1969, June 1, 1970, November 15, 1970, May 1, 1974, April 15, 1975, April 16, 1975, May 28, 1975, February 1, 1976, November 23, 1976, July 26, 1977, September 27, 1977, May 1, 1978, September 1, 1979, April 1, 1980, April 15, 1980, May 28, 1980, June 9, 1980, December 1, 1980, July 28, 1981, August 1, 1981, March 1, 1982, July 15, 1982, September 1, 1982, November 1, 1982, November 15, 1982, May 24, 1983, May 1, 1984, May 23, 1984, June 27, 1984, September 4, 1984, November 14, 1984, November 15, 1984, April 15, 1985, May 28, 1985, August 1, 1985, September 1, 1985, November 1, 1985, April 15, 1986, May 14, 1986, May 15, 1986, February 25, 1987, October 15, 1987, February 24, 1988, September 15, 1988, May 15, 1989, June 13, 1989, October 15, 1989, January 1, 1990, June 1, 1990, August 1, 1990, May 1, 1991, May 1, 1992, July 31, 1992, January 1, 1993, February 1, 1993, May 20, 1993, June 1, 1993, September 15, 1994, May 1, 1995, May 2, 1995, June 1, 1995, July 15, 1995, August 1, 1995, June 15, 1997, August 1, 1997, October 15, 1997, June 1, 1998, October 1, 1998, October 1, 1998, April 1, 1999 and June 30, 1999, respectively, are hereby in all respects confirmed. ARTICLE II CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2000 COLLATERAL SERIES A SECTION 1. The Company hereby creates a new series of Bonds to be issued under and secured by the Indenture and to be designated as "First Mortgage Bonds, 2000 Collateral Series A" of the Company and hereinabove and hereinafter called the "Bonds of 2000 Collateral Series A". The Bonds of 2000 Collateral Series A shall be limited to an aggregate principal amount of $10,000,000 but the aggregate principal amount thereof outstanding at any time shall not exceed such lesser amount as is equal to 40% of the aggregate amount from time to time of the Lenders' Commitments (as defined in the Revolving Credit Agreement) in excess of $125,000,000. The Bonds of 2000 Collateral Series A shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture. SECTION 2. The Bonds of 2000 Collateral Series A shall be dated the date of authentication, shall be payable in whole or in installments on such date or dates as the Company has any obligations under the Guaranty to make any payment to the Lenders, but not later than June 1, 2006, 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 Collateral Series A to equal 40% of the amount of interest and fees payable on such interest payment date under the Revolving Credit Agreement with respect to borrowings or Commitments thereunder in excess of $125,000,000. Such interest shall be payable on the same dates as interest or fees are payable from time to time pursuant to the Revolving Credit Agreement (each such date herein called an "interest payment date"), until the maturity of the Bonds of 2000 Collateral Series A, or, in the case the Revolver Agent Bank shall demand redemption of any such Bonds, until the redemption date, 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 and fees payable from time to time under the Revolving Credit Agreement, the basis on which such interest and fees are computed and the dates on which such interest and fees are payable are set forth in the Revolving Credit Agreement. Except as hereinafter provided, each Bond of 2000 Collateral Series A 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. SECTION 3. The Bonds of 2000 Collateral Series A shall be payable as to principal and interest at the same place or places as payments are required to be made by the Company under the Guaranty; and both 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 Collateral Series A shall be issued only as one fully registered Bond in the denomination of $10,000,000. SECTION 5. In the manner and subject to the limitations provided in the Indenture, Bonds of 2000 Collateral Series A may be transferred only to a successor to the Revolver Agent Bank under the Revolving Credit Agreement, without charge, except for any tax or taxes or other governmental charges incident to such transfer or exchange, at the agency of the Company in the Borough of Manhattan, The City of New York. SECTION 6. The Bonds of 2000 Collateral Series A shall be registered in the name of the Revolver Agent Bank. SECTION 7. Any payment made in respect of the Company's obligations under the Guaranty or by the Borrower under the Revolving Credit Agreement shall be deemed a payment in respect of the Bonds of 2000 Collateral Series A, but such payment shall not reduce the principal amount of the Bonds of 2000 Collateral Series A unless the aggregate amount of the Lenders' Commitments in excess of $125,000,000 is irrevocably reduced concurrently with such payment. In the event that all of the Company's obligations under the Guaranty and the obligations of the Borrower under the Revolving Credit Agreement have been discharged, the Bonds of 2000 Collateral Series A shall be deemed to be paid in full. SECTION 8. The Bonds of 2000 Collateral Series A shall be redeemable only to the extent provided in this Article II, subject to the provisions contained in the form of Bond of 2000 Collateral Series A. SECTION 9. The Bonds of 2000 Collateral Series A shall be redeemed by the Company in whole 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 and all other amounts payable by the Company under the Guaranty, but only if the Trustee shall receive a written demand from the Revolver Agent Bank for redemption of all Bonds of 2000 Collateral Series A held by the Revolver Agent Bank stating that an "Event of Default" under the Revolving Credit Agreement has occurred and is continuing and that payment of the principal amount outstanding under the Revolving Credit Agreement, all interest thereon and all other amounts payable thereunder are immediately due and payable and demanding payment thereof; provided, however, that the Bonds of 2000 Collateral Series A shall not be redeemed in the event that prior to the date of such redemption the Trustee shall have received a certificate of the Revolver Agent Bank (a) stating that there has been a waiver of such Event of Default or (b) withdrawing said written demand. The redemption of the Bonds of 2000 Collateral Series A shall be made forthwith upon receipt of such demand by the Company from the Majority Banks (as defined in the Revolving Credit Agreement), the Revolver Agent Bank on behalf of the Majority Banks, or the Trustee. SECTION 10. The form of the fully registered Bonds of 2000 Collateral Series A and of the Trustee's certificate of authentication thereon, shall be substantially as follows: [Form of Fully Registered Bond of 2000 Collateral Series A] This bond is not transferable except to a successor Agent Bank under the second amended and restated credit agreement dated as of November 4, 1999 among FirstEnergy Corp. (the "Borrower"), Citibank, N.A., as administrative agent, the banks named therein and Salomon Smith Barney Inc., as Arranger, *such credit agreement, as amended from time to time, the "Revolving Credit Agreement"). The Cleveland Electric Illuminating Company Incorporated under the laws of the State of Ohio First Mortgage Bond, 2000 Collateral Series A No. $ The Cleveland Electric Illuminating Company, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company", which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the sum of Ten Million Dollars ($10,000,000) or such lesser principal amount as is equal to 40% of the aggregate amount from time to time of the Lenders' Commitments (as defined in the Revolving Credit Agreement) in excess of $125,000,000, in whole or in installments on such date or dates as the Company has any obligation to make payments under the Amended and Restated Guaranty of the Company and The Toledo Edison Company dated November 4, 1999 (the "Guaranty"), in favor of the Lenders (as defined in the Revolving Credit Agreement), but not later than June 1, 2006, in any coin or currency of the United States of America which at the time of payment is 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 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 such interest payment date on the Bonds of 2000 Collateral Series A (hereinafter defined) to equal 40% of the amount of interest and fees payable on such interest payment date under the Revolving Credit Agreement with respect to borrowings or Commitments thereunder in excess of $125,000,000. Such interest shall be payable on the same dates as interest or fees are payable from time to time pursuant to the Revolving Credit Agreement (each such date herein called an "interest payment date"), until the maturity of this Bond, or, if the Agent Bank shall demand redemption of this Bond, until the redemption date, 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 said Indenture. The amount of interest and fees payable from time to time under the Revolving Credit Agreement, the basis on which such interest and fees are computed and the dates on which such interest and fees are payable are set forth in the Revolving Credit Agreement. 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 duly authorized Bonds of the Company (herein called the "Bonds"), all issued and to be issued under and equally secured by a Mortgage and Deed of Trust dated July 1, 1940, executed by the Company to Guaranty Trust Company of New York as Trustee under which The Chase Manhattan Bank is successor trustee (herein called the "Trustee"), and all indentures supplemental thereto (said Mortgage as so supplemented herein called the "Indenture") to which reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the registered owner or owners of the Bonds and of the Trustee in respect thereof and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. This Bond is the only Bond of a series designated as the First Mortgage Bonds, 2000 Collateral Series A (herein called the "Bonds of 2000 Collateral Series A") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $10,000,000 but the aggregate principal amount hereof outstanding at any time shall not exceed such lesser amount as is equal to 40% of the aggregate amount of the Lenders' Commitments in excess of $125,000,000 and is issued under and secured by the Indenture and described in the Eighty-second Supplemental Indenture dated as of January 15, 2000, between the Company and the Trustee (herein called the "Supplemental Indenture"). The Bonds of 2000 Collateral Series A have been issued by the Company to the Agent Bank (i) to provide for the payment of the Company's obligations to make payments to any person under the Guaranty, and (ii) to provide to such persons the benefits of the security provided for the Bonds of 2000 Collateral Series A. As used herein, the term "Agent Bank" shall refer to the bank designated in the Revolving Credit Agreement as the party responsible for holding the Bonds of 2000 Collateral Series A as agent for the benefit of the Lenders. The Bonds of 2000 Collateral Series A have been delivered to the Agent Bank as agent for the benefit of the Lenders. Any payment made in respect of the Company's obligations under the Guaranty or by the Borrower under the Revolving Credit Agreement shall be deemed a payment in respect of the Bonds of 2000 Collateral Series A, but such payment shall not reduce the principal amount of the Bonds of 2000 Collateral Series A unless the aggregate amount of the Lenders' Commitments in excess of $125,000,000 is irrevocably reduced concurrently with such payment. In the event that all of the Company's obligations under the Guaranty and the obligations of the Borrower under the Revolving Credit Agreement have been discharged, this Bond shall be deemed to have been paid in full and shall be surrendered to the Trustee for cancellation. The Bonds of 2000 Collateral Series A are subject to redemption prior to maturity at the demand of the Agent Bank as provided in Section 9 of Article II of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed and any accrued and unpaid interest and all other amounts payable by the Company under the Guaranty. To the extent permitted by and as provided in the Indenture, modifications or alterations of the Indenture, or of any indenture supplemental thereto, and of the rights and obligations of the Company and of the holders of the Bonds and coupons may be made with the consent of the Company by an affirmative vote of not less than 60% in principal amount of the Bonds entitled to vote then outstanding, at a meeting of Bondholders called and held as provided in the Indenture, and, in case one or more but less than all of the series of Bonds then outstanding under the Indenture are so affected, by an affirmative vote of not less than 60% in principal amount of the Bonds of any series entitled to vote then outstanding and affected by such modification or alteration; provided, however, that no such modification or alteration shall be made which will affect the terms of payment of the principal of or premium, if any, or interest on this Bond. Pursuant to the Nineteenth Supplemental Indenture dated November 23, 1976 between the Company and the Trustee, the Company has reserved the right to modify the Indenture to except and exclude nuclear fuel (to the extent, if any, not otherwise excepted and excluded) from the lien and operation thereof without any vote, consent or other action by the holders of Bonds. If an event of default, as defined in the Indenture, shall occur, the principal of all the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. No recourse shall be had for the payment of the principal of or the interest or premium, if any, on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such 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 otherwise, all such liability, whether at common law, in equity, by any constitution or statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the Trustee under the Indenture, or a successor trustee thereto under the Indenture, shall have signed the form of certificate of authentication endorsed hereon. In Witness Whereof, The Cleveland Electric Illuminating Company has caused this Bond to be signed in its name by its President or a Vice President and its corporate seal to be hereto affixed and attested by its Secretary or an Assistant Secretary. Dated: THE CLEVELAND ELECTRIC ILLUMINATING COMPANY By: -------------------------------- Vice President ATTEST: By: --------------------- Secretary [Form of Trustee's Certificate of Authentication] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. THE CHASE MANHATTAN BANK Trustee By: ----------------------------- Authorized Officer [End of Form of Fully Registered Bond of 2000 Collateral Series A] ARTICLE III THE TRUSTEE SECTION 1. The Trustee hereby accepts the trusts hereby declared and provided upon the terms and conditions in the Indenture set forth and upon the terms and conditions set forth in this Article III. SECTION 2. The Trustee shall not be responsible in any manner whatsoever 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 contained herein, all of which recitals are made by the Company solely. In general, each and every term and condition contained in Article XIII of the 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. SECTION 3. For purposes of this Supplemental Indenture (a) the Trustee may conclusively rely and shall be protected in acting upon the written demand from, or certificate of, the Revolver Agent Bank or any officers' 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 XIII of the Indenture and (b) a written demand from, or certificate of, the Revolver Agent Bank shall mean a written demand or certificate executed by the president, any vice president or any authorized officer of the Revolver Agent Bank. ARTICLE IV MISCELLANEOUS PROVISIONS This Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument. EXECUTION IN WITNESS WHEREOF, said The Cleveland Electric Illuminating Company has caused this Supplemental Indenture to be executed on its behalf by its President or one of its Vice Presidents and its corporate seal to be hereto affixed and said seal and this Supplemental Indenture to be attested by its Secretary or an Assistant Secretary, and said The Chase Manhattan Bank, in evidence of its acceptance of the trust hereby created, has caused this Supplemental Indenture to be executed on its behalf by one of its Vice Presidents or one of its Trust Officers and its corporate seal to be hereto affixed and said seal and this Supplemental Indenture to be attested by one of its Assistant Trust Officers or Assistant Secretaries, all as of the day and year first above written. The Cleveland Electric Illuminating Company By: ---------------------------- Vice President Attest: -------------------- Corporate Secretary Signed, sealed and acknowledged by The Cleveland Electric Illuminating Company in the presence of - -------------------------- - -------------------------- As witnesses The Chase Manhattan Bank By: --------------------------- Attest: ---------------------------- Signed, sealed and acknowledged by The Chase Manhattan Bank In the presence of - ----------------------------- - ----------------------------- As witnesses State of Ohio ) ) ss.: County of Summit ) On this day of January, 2000, before me personally appeared [________] and Nancy C. Ashcom to me personally known, who being by me severally duly sworn, did say that they are a Vice President and Corporate Secretary, respectively, of The Cleveland Electric Illuminating 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. - -------------------------------- Notary Public, State of Ohio State of New York ) ) ss.: County of New York ) On this day of November, 1999, before me personally appeared [________] and [________] to me personally known, who being by me severally duly sworn, did say that they are a [_____________] and [_____________], 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 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. --------------------------------- Notary Public Notary Public, State of New York This Instrument Prepared by FirstEnergy Corp., 76 South Main Street, Akron, Ohio 44308 EX-12.3 22 EXHIBIT 12.3 Page 1 CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ------------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $183,719 $116,553 $114,481 $164,891 $194,089 Interest and other charges, before reduction for amounts capitalized 251,793 244,789 248,429 232,727 211,960 Provision for income taxes 95,561 69,120 92,969 110,611 123,869 Interest element of rentals charged to income (a) 79,642 79,503 69,086 68,314 66,680 -------- -------- -------- -------- -------- Earnings as defined $610,715 $509,965 $524,965 $576,543 $596,598 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest expense $251,793 $244,789 $248,429 $232,727 $211,960 Interest element of rentals charged to income (a) 79,642 79,503 69,086 68,314 66,680 -------- -------- -------- -------- -------- Fixed charges as defined $331,435 $324,292 $317,515 $301,041 $278,640 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES 1.84 1.57 1.65 1.92 2.14 ==== ==== ==== ==== ==== - ------------------------ (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, ------------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $183,719 $116,553 $114,481 $164,891 $194,089 Interest and other charges, before reduction for amounts capitalized 95,561 69,120 92,969 110,611 123,869 Provision for income taxes 251,793 244,789 248,429 232,727 211,960 Interest element of rentals charged to income (a) 79,642 79,503 69,086 68,314 66,680 -------- -------- -------- -------- --------- Earnings as defined $610,715 $509,965 $524,965 $576,543 $596,598 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS): Interest expense $251,793 $244,789 $248,429 $232,727 $211,960 Preferred stock dividend requirements 42,444 38,743 45,029 24,794 33,524 Adjustments to preferred stock dividends to state on a pre-income tax basis 22,077 22,976 36,568 16,632 21,395 Interest element of rentals charged to income (a) 79,642 79,503 69,086 68,314 66,680 -------- -------- -------- -------- --------- Fixed charges as defined plus preferred stock dividend requirements (pre-income tax basis) $395,956 $386,011 $399,112 $342,467 $333,559 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) 1.54 1.32 1.32 1.68 1.79 ==== ==== ==== ==== ==== - ---------------------------- (a) Includes the interest component of Bruce Mansfield sale and leaseback rentals, leased nuclear fuel in the reactor, and other miscellaneous rentals.
EX-13.2 23 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY SELECTED FINANCIAL DATA
Nov. 8- Jan. 1- 1999 1998 Dec. 31, 1997 Nov. 7, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) | GENERAL FINANCIAL INFORMATION: | | Operating Revenues $1,864,954 $1,795,997 $ 254,892 | $1,537,459 $1,798,850 $1,768,737 ========== ========== ========== | ========== ========== ========== Operating Income $ 394,766 $ 382,523 $ 50,431 | $ 315,777 $ 367,509 $ 397,899 ========== ========== ========== | ========== ========== ========== Income Before Extraordinary Item $ 194,089 $ 164,891 $ 19,290 | $ 95,191 $ 116,553 $ 183,719 ========== ========== ========== | ========== ========== ========== Net Income (Loss) $ 194,089 $ 164,891 $ 19,290 | $ (229,247) $ 116,553 $ 183,719 ========== ========== ========== | ========== ========== ========== Earnings (Loss) on Common Stock $ 160,565 $ 140,097 $ 19,290 | $ (274,276) $ 77,810 $ 141,275 ========== ========== ========== | ========== ========== ========== Total Assets $6,208,761 $6,318,183 $6,440,284 | $6,962,297 $7,222,416 ========== ========== ========== | ========== ========== | CAPITALIZATION: | Common Stockholder's Equity $ 966,616 $1,008,238 $ 950,904 | $1,044,283 $1,126,762 Preferred Stock- | Not Subject to Mandatory Redemption 238,325 238,325 238,325 | 238,325 240,871 Subject to Mandatory Redemption 116,246 149,710 183,174 | 186,118 215,420 Long-Term Debt 2,682,795 2,888,202 3,189,590 | 2,523,030 2,759,492 ---------- ---------- ---------- | ---------- ---------- Total Capitalization $4,003,982 $4,284,475 $4,561,993 | $3,991,756 $4,342,545 ========== ========== ========== | ========== ========== | CAPITALIZATION RATIOS: | Common Stockholder's Equity 24.1% 23.5% 20.9%| 26.2% 25.9% Preferred Stock- | Not Subject to Mandatory Redemption 6.0 5.6 5.2 | 6.0 5.6 Subject to Mandatory Redemption 2.9 3.5 4.0 | 4.6 5.0 Long-Term Debt 67.0 67.4 69.9 | 63.2 63.5 ----- ----- ----- | ----- ----- Total Capitalization 100.0% 100.0% 100.0%| 100.0% 100.0% ===== ===== ===== | ===== ===== | KILOWATT-HOUR SALES (Millions): | Residential 5,278 4,949 790 | 4,062 4,958 5,063 Commercial 6,509 6,353 893 | 4,990 5,908 5,946 Industrial 8,069 8,024 1,285 | 6,710 7,977 7,994 Other 166 165 89 | 476 522 550 ------ ------ ----- | ------ ------ ------ Total Retail 20,022 19,491 3,057 | 16,238 19,365 19,553 Total Wholesale 2,607 1,275 575 | 2,408 2,155 1,694 ------ ------ ----- | ------ ------ ------ Total 22,629 20,766 3,632 | 18,646 21,520 21,247 ====== ====== ===== | ====== ====== ====== | CUSTOMERS SERVED: | Residential 667,954 668,470 671,265 | 663,130 669,725 Commercial 69,954 68,896 74,751 | 70,886 72,259 Industrial 5,090 5,336 6,515 | 6,545 6,649 Other 223 221 278 | 446 442 ------- ------- ------- | ------- ------- Total 743,221 742,923 752,809 | 741,007 749,075 ======= ======= ======= | ======= ======= | Number of Employees 1,694 1,798 3,162 | 3,282 3,636
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Financial results reflect the application of purchase accounting to the merger of our former parent company, Centerior Energy Corporation (Centerior), and Ohio Edison Company (OE)on November 8, 1997. This accounting resulted in fair value adjustments which were "pushed down" or reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date, including our financial statements. As a result, we recorded purchase accounting fair value adjustments to: (1) revalue our nuclear generating units to fair value, (2) adjust long-term debt to fair value, (3) adjust our retirement and severance benefit liabilities, and (4) record goodwill. Accordingly, the post-merger financial statements reflect a new basis of accounting, and separate financial statements are presented for the pre-merger and post-merger periods. For the remainder of this discussion (including categories substantially unaffected by the merger or with no significant pre-merger or post-merger accounting events), we have combined the 1997 pre-merger and post-merger periods and have compared the total to 1998. Operating revenues increased by $69.0 million in 1999 following a $13.0 million increase in 1998. The sources of increases in operating revenues during 1999 and 1998, as compared to the prior year, are summarized in the following table.
Sources of Revenue Changes 1999 1998 - ------------------------------------------------------------- (In millions) Increase in retail kilowatt-hour sales $46.1 $ 12.7 Change in average retail price (1.5) 5.9 Change in wholesale sales 15.2 (15.7) Other 9.2 0.7 - ------------------------------------------------------------- Net Increase in Operating Revenues $69.0 $ 3.6 ==============================================================
Electric Sales Operating revenues increased in 1999 from 1998 as a result of kilowatt-hour sales growth in both retail and wholesale markets. Increases in sales to residential, commercial and industrial customers produced the higher retail sales. Strong consumer-driven economic growth, and to a lesser extent the weather, contributed to the increased retail sales. Weather-induced electricity demand in the wholesale market and additional available internal generation combined to more than double sales to wholesale customers in 1999 compared to 1998. After setting a new record in 1997, total kilowatt-hour sales were down in 1998 from the previous year. The decrease was due to a decrease in sales to wholesale customers. Several generating unit outages (described below) reduced energy available for sale to the wholesale market. Retail sales increased in 1998, compared to 1997, with higher kilowatt-hour sales to residential and commercial customers and sales to industrial customers nearly unchanged.
Changes in KWH Sales 1999 1998 - ----------------------------------------------- Residential 6.6% 1.5% Commercial 2.5% 0.3% Industrial 0.6% -- - ----------------------------------------------- Total Retail 2.7% 0.5% Wholesale 104.5% (57.5%) - ----------------------------------------------- Total Sales 9.0% (7.3%) - -----------------------------------------------
Operating Expenses and Taxes Total operating expense and taxes increased $56.7 million in 1999 compared to 1998. The increase resulted primarily from an increase in operation and maintenance expenses from higher nuclear operating costs and other operating costs, which were partially offset by lower fuel and purchased power. The comparison of 1998 to 1997 includes various merger- related differences, which are discussed below. The increase in operation and maintenance costs in 1999 from 1998 occurred despite a reduction in fuel and purchased power costs, which were $26.5 million lower than the previous year. Purchased power costs accounted for almost all of the reduction. Much of the decrease in purchased power costs occurred in the second quarter of 1999 due to the absence of unusual conditions experienced in 1998. Those costs were incurred during a period of record heat and humidity in late June 1998, which coincided with a regional power shortage resulting in high prices for purchased power. Unscheduled outages at Beaver Valley Unit 2, the Davis-Besse Plant and Avon Lake Unit 9 required us to purchase significant quantities of power on the spot market during that period. Although above normal temperatures were also experienced in 1999, we maintained a stronger capacity position compared to the previous year and better met customer demand from our own internal generation. In 1998, fuel and purchased power increased $14.3 million from 1997 for the reasons discussed above. Nuclear operating costs increased in 1999 from the prior year primarily due to expenses associated with the refueling outages at Beaver Valley Unit 2 and the Perry Plant. Reduced nuclear operating costs in 1998 resulted from lower costs at the Perry Plant which were partially offset by higher costs at the Beaver Valley and Davis-Besse plants. Other operating costs increased in 1999 from 1998 due to higher customer and sales expenses including expenditures for energy marketing programs, information system requirements and other customer-related costs. In 1998, other operating costs were lower partially due to the absence of a 1997 pre-merger charge for estimated severance costs. Lower depreciable asset balances, resulting from the purchase accounting adjustment, reduced depreciation and amortization in 1998 and the 1997 post-merger period. These reductions were partially offset by the amortization of goodwill recognized with the application of purchase accounting. In 1999, general taxes decreased from the prior year as a result of an adjustment made to real estate taxes resulting from new Pennsylvania legislation and a favorable outcome to an Ohio tax settlement affecting personal property taxes. Other Income (Expense) Interest income on trust notes acquired in connection with the Bruce Mansfield Plant lease refinancing (see Note 2), which began in June 1997, increased other income in 1998 and the 1997 post-merger period. In the pre-merger period of 1997, merger-related expenses partially offset the interest income on trust notes. Net Interest Charges Net interest charges decreased in 1999 from the preceding year primarily due to redemptions and refinancings of long-term debt. In 1998, net interest charges decreased principally due to the amortization of premiums associated with the revaluation of long-term debt in connection with the merger, which also contributed to the decrease in interest charges in the post-merger period of 1997. In the pre-merger period of 1997, interest charges were higher because interest on new secured notes and short-term borrowings for the Bruce Mansfield Plant lease refinancing exceeded the expense reduction from the redemption and refinancing of debt securities. Extraordinary Item The pre-merger period of 1997 includes an after-tax write-off of $324.4 million in regulatory assets attributable to nuclear operations resulting from the discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation" which is discussed in Note 1 - Regulatory Assets. Preferred Stock Dividend Requirements Preferred stock dividend requirements reported in 1999 were higher due to a reduction in 1998 resulting from the declaration of $9 million of preferred dividends as of the 1997 merger date, for dividends attributable to 1998 (see Note 3c). Earnings on Common Stock Earnings on common stock increased to $160.6 million in 1999 from $140.1 million in 1998. Results in 1999 were favorably affected by higher sales revenues, the absence of unusually high purchased power costs experienced in 1998, reduced general taxes and lower interest costs. Pre- merger earnings on common stock in 1997 include an extraordinary item resulting from the write-off of certain regulatory assets. Excluding this write-off, pre-merger earnings on common stock were $50.2 million. For the seven-week post-merger period, earnings on common stock were $19.3 million. Capital Resources and Liquidity With the July 1999 passage of legislation in Ohio allowing retail customers to purchase electricity from alternative energy suppliers beginning January 2001, the arrival of new participants in the Ohio electricity market is expected in the near future. We continue to take steps designed to enhance our competitive position while seeking additional efficiencies. Through economic refinancings and redemptions, we continued to reduce the cost of debt and preferred stock, and improve our financial position in 1999. Net redemptions of long-term debt and preferred stock totaled $178.0 million in 1999 and we refinanced $27.7 million of long-term debt. During 1999, we reduced our total debt by approximately $150 million. Our common stockholder's equity percentage of capitalization increased to 24% at December 31, 1999 from 21% at the end of 1997. The merger resulted in improved credit ratings in 1997, which have lowered the cost of new borrowings. The following table summarizes changes in credit ratings resulting from the merger: Credit Ratings Before and After Merger
Pre-Merger Post-Merger - ---------------------------------------------------------------------------- Standard Moody's Standard Moody's & Poor's Investors & Poor's Investors Corporation Service, Inc. Corporation Service, Inc. - ---------------------------------------------------------------------------- First mortgage bonds BB Ba2 BB+ Ba1 Subordinated debt B+ Ba3 BB- Ba3 Preferred stock B b2 BB- b1 - ---------------------------------------------------------------------------- Through economic refinancings and redemptions of higher cost debt we have reduced the average cost of outstanding debt from 8.96% in 1994 to 7.92% in 1999. Long-term debt redemptions and refinancings completed in 1999 are expected to generate annual savings of about $13 million. Our cash requirements in 2000 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing additional securities. We have cash requirements of approximately $988.6 million for the 2000-2004 period to meet scheduled maturities of long- term debt and preferred stock. Of that amount, approximately $208.5 million relates to 2000. We had about $0.4 million of cash and temporary investments and $103.5 million of short-term indebtedness to associated companies on December 31, 1999. Under our first mortgage indenture, as of December 31, 1999, we would have been permitted to issue up to $615 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 capital spending for the period 2000-2004 is expected to be about $529 million (excluding nuclear fuel), of which approximately $112 million applies to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $166 million, of which about $56 million relates to 2000. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $158 million and $36 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments net of trust cash receipts of approximately $61 million for the 2000-2004 period, of which approximately $6 million relates to 2000. We recover the cost of nuclear fuel consumed and operating leases through our electric rates. Two transactions were completed in 1999, which modified our portfolio of generation resources in 1999. On July 26, 1999, we completed our purchase of the remaining 20 percent interest in the Seneca pumped storage hydroelectric generation plant from GPU, Inc. for $43 million. The purchase makes available 87 megawatts of additional capacity and provides us with full ownership of the plant. On December 3, 1999, we completed the exchange of generating assets between Duquesne Light Company (Duquesne) and FirstEnergy. Duquesne transferred 1,436 megawatts at five generating plants in exchange for 1,328 megawatts at three plants owned by FirstEnergy operating companies. In the exchange, we received all of Duquesne's ownership interest in the Perry Plant, Sammis Unit 7, Eastlake Unit 5, and an additional interest in the Bruce Mansfield Plant while providing Duquesne with our ownership interest in the Avon Lake Plant. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. 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 a corresponding change to the decommissioning liability, as described in Note 1. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.
Comparison of Carrying Value to Fair Value - -------------------------------------------------------------------------------------------------------- There- Fair 2000 2001 2002 2003 2004 after Total Value - -------------------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income $ 24 $ 15 $ 38 $ 48 $ -- $442 $ 567 $ 552 Average interest rate 7.6% 7.8% 7.7% 7.6% 8.1% 7.3% 7.4% - --------------------------------------------------------------------------------------------------------- Liabilities - --------------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate $175 $ 57 $228 $115 $280 $1,695 $2,550 $2,524 Average interest rate 7.2% 8.6% 7.7% 7.4% 7.7% 7.7% 7.7% Variable rate $ 188 $ 188 $ 187 Average interest rate 4.4% 4.4% Short-term Borrowings $103 $ 103 $ 103 Average interest rate 6.4% 6.4% - --------------------------------------------------------------------------------------------------------- Preferred Stock $ 33 $ 81 $ 19 $ 1 $ 1 $ 4 $ 139 $ 139 Average dividend rate 9.0% 8.9% 8.9% 7.4% 7.4% 7.4% 8.8% - ---------------------------------------------------------------------------------------------------------
Outlook We continue to face many competitive challenges as the electric utility industry undergoes significant changes, including changing regulation and the entrance of more energy suppliers into the marketplace. Recent legislation allows retail customers in Ohio to purchase electricity from alternative energy suppliers beginning in 2001. Our existing regulatory plan provides us with a solid foundation to position us to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level. The transition plan ultimately approved by the Public Utilities Commission of Ohio (PUCO) will supersede our current Ohio rate plan. FirstEnergy's Rate Reduction and Economic Development Plan, approved in January 1997, provides interim rate credits to our customers during the periods covered by the plan. Our regulatory plan includes a commitment to accelerate depreciation on our regulatory books by recording an additional $1.34 billion of depreciation over the plan period ending in 2005. The plan does not provide for full recovery of nuclear operations; accordingly, we ceased application of SFAS 71 for our nuclear operations when implementation of the FirstEnergy regulatory plan became probable in October 1997. In July 1999, Ohio's new electric utility restructuring legislation, which will allow Ohio electric customers to select their generation suppliers beginning January 1, 2001, was signed into law. Among other things, the new law provides for a 5% reduction on the generation portion of residential customers' bills and the opportunity to recover transition costs, including regulatory assets, from January 1, 2001 through December 31, 2005. The period for the recovery of regulatory assets only can be extended up to December 31, 2010. The PUCO was authorized to determine the level of transition cost recovery, as well as the recovery period for the regulatory assets portion of those costs, in considering each Ohio electric utility's transition plan application. FirstEnergy filed a transition plan on our behalf as well as for its other Ohio electric utility operating companies - OE and The Toledo Edison Company (TE) -- on December 22, 1999. The plan was originally filed with the PUCO on October 4, 1999, but was refiled to conform to PUCO rules established on November 30, 1999. The new filing also included additional information on our plan to turn over control, and perhaps ownership, of our transmission assets to the Alliance Regional Transmission Organization (Alliance), which is discussed below. The transition plan itemizes, or unbundles, the current price of electricity into separate components -- including generation, transmission, distribution and transition charges. As required by the PUCO's rules, FirstEnergy's filing also included proposals on corporate separation of regulated and unregulated operations, operational and technical support changes needed to accommodate customer choice, an education program to inform customers of their options under the law, and how our transmission system will be operated to ensure access to all users. Under our transition plan, customers who remain with us as their generation provider will continue to receive savings under our rate plan, expected to total $241.2 million between 2000 and 2005. In addition, FirstEnergy's Ohio utility customers will save $358 million through reduced charges for taxes and a 5% reduction in the price of generation for residential customers beginning January 1, 2001. Customers' prices are expected to be frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the 5% reduction in the price of generation for residential customers. The plan proposes recovery of generation-related transition costs of approximately $1.9 billion ($1.6 billion, net of deferred income taxes) over the market development period; transition costs related to regulatory assets aggregating approximately $1.9 billion ($1.4 billion, net of deferred income taxes) are expected to be recovered over the period of 2001 through 2010. When the transition plan is approved by the PUCO, the application of SFAS 71 to our nonnuclear generation business will be discontinued. In the meantime, we will continue to bill and collect cost-based rates related to that business through the end of 2000. If the transition plan ultimately approved by the PUCO does not provide adequate recovery of our nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on our results of operations and financial condition. We believe that we will continue to bill and collect cost-based rates for our transmission and distribution services, which will remain regulated; accordingly, it is appropriate that we continue the application of SFAS 71 to those operations after December 31, 2000. We have been named as a "potentially responsible party" (PRP) for three sites listed on the Superfund National Priorities List and are aware of our potential involvement in the cleanup of several other sites. Allegations that we disposed of hazardous waste at these sites, and the amount 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. If we were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $239 million. However, we believe that the actual cleanup costs will be substantially less than 100% and that most of the other parties involved are financially able to contribute their share. We have accrued a $4.7 million liability as of December 31, 1999, based on estimates of the costs of cleanup and our proportionate responsibility for such costs. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition, cash flows or results of operations. On October 27, 1999, the Federal Energy Regulatory Commission (FERC) approved FirstEnergy's plan to transfer our transmission assets and those of OE, TE and Pennsylvania Power Company to American Transmission Systems Inc. (ATSI). We subsequently received approval from the PUCO in February 2000. Regulatory approval is also required from the Securities and Exchange Commission. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent, regional transmission organization (RTO). In working toward that goal, FirstEnergy joined with four other companies -- American Electric Power, Consumers Energy, Detroit Edison and Virginia Power -- to form the Alliance RTO. On June 3, 1999, the Alliance submitted an application to FERC to form an independent, for profit RTO. On December 15, 1999, FERC issued an order conditionally approving the Alliance's application. Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. We have not completed quantifying the impacts of adopting SFAS 133 on our financial statements or determined the method of its adoption. However, SFAS 133 could increase volatility in earnings and other comprehensive income. We anticipate adopting the new statement on its amended effective date of January 1, 2001. Year 2000 Update Based on the results of our remediation and testing efforts, we filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission and PUCO that as of June 30, 1999, our generation, transmission, and distribution systems were ready to serve customers in the year 2000. We have since experienced no failures or interruptions of service to our customers resulting from the Year 2000 issue, which was consistent with our expectations. We spent $28.5 million on Year 2000 related costs through December 31, 1999, which was slightly lower than previously estimated. Of this total, $23.1 million was capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $5.4 million was expensed as incurred. We do not believe there are any continuing Year 2000 issues to be addressed, nor any additional material Year 2000 expenditures. Forward-Looking Information This discussion includes forward-looking statements based on information currently available to management that are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes, and the availability and cost of capital and other similar factors. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, ---------------------- Nov. 8- Jan. 1- 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - ---------------------------------------------------------------------------------------------------- (In thousands) | | | OPERATING REVENUES $1,864,954 $1,795,997 $254,892 | $1,537,459 | OPERATING EXPENSES AND TAXES: | Fuel and purchased power 409,282 435,752 53,239 | 368,243 Nuclear operating costs 138,686 97,914 16,791 | 85,207 Other operating costs 368,103 335,621 57,852 | 286,384 ---------- ---------- -------- | ---------- Total operation and maintenance expenses 916,071 869,287 127,882 | 739,834 Provision for depreciation and | amortization 231,225 234,348 33,438 | 211,827 General taxes 211,636 221,077 33,912 | 194,400 Income taxes 111,256 88,762 9,229 | 75,621 ---------- ---------- -------- | ---------- Total operating expenses and taxes 1,470,188 1,413,474 204,461 | 1,221,682 ---------- ---------- -------- | ---------- OPERATING INCOME 394,766 382,523 50,431 | 315,777 | OTHER INCOME (EXPENSE) 9,141 11,772 3,643 | (10,921) ---------- ---------- -------- | ---------- | INCOME BEFORE NET INTEREST CHARGES 403,907 394,295 54,074 | 304,856 ---------- ---------- -------- | ---------- | NET INTEREST CHARGES: | Interest on long-term debt 211,842 234,795 35,300 | 197,323 Allowance for borrowed funds used during | construction (1,755) (2,079) (631) | (1,928) Other interest expense (credit) (269) (3,312) 115 | 14,270 ---------- ---------- -------- | ---------- Net interest charges 209,818 229,404 34,784 | 209,665 ---------- ---------- -------- | ---------- | INCOME BEFORE EXTRAORDINARY ITEM 194,089 164,891 19,290 | 95,191 | EXTRAORDINARY ITEM (NET OF INCOME | TAXES) (Note 1) -- -- -- | (324,438) ---------- ---------- -------- | ---------- NET INCOME (LOSS) 194,089 164,891 19,290 | (229,247) | PREFERRED STOCK DIVIDEND | REQUIREMENTS 33,524 24,794 -- | 45,029 ---------- ---------- -------- | ---------- | EARNINGS (LOSS) ON COMMON STOCK $ 160,565 $ 140,097 $ 19,290 | $ (274,276) ========== ========== ======== | ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS
At December 31, 1999 1998 - ---------------------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service $4,479,098 $4,648,725 Less-Accumulated provision for depreciation 1,498,798 1,631,974 ---------- ---------- 2,980,300 3,016,751 ---------- ---------- Construction work in progress- Electric plant 55,002 42,428 Nuclear fuel 408 14,864 ---------- ---------- 55,410 57,292 ---------- ---------- 3,035,710 3,074,043 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust (Note 2) 517,256 543,161 Nuclear plant decommissioning trusts 183,291 125,050 Other 20,708 21,059 ---------- ---------- 721,255 689,270 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 376 19,526 Receivables- Customers 17,010 16,588 Associated companies 18,318 15,636 Other (less accumulated provisions of $1,000,000 and $491,000, respectively, for uncollectible accounts) 171,274 142,834 Notes receivable from associated companies -- 53,509 Materials and supplies, at average cost- Owned 39,294 38,213 Under consignment 23,721 43,620 Prepayments and other 56,447 58,342 ---------- ---------- 326,440 388,268 ---------- ---------- DEFERRED CHARGES: Regulatory assets 539,824 555,925 Goodwill 1,440,283 1,471,563 Property taxes 132,643 126,464 Other 12,606 12,650 ---------- ---------- 2,125,356 2,166,602 ---------- ---------- $6,208,761 $6,318,183 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholder's equity $ 966,616 $1,008,238 Preferred stock- Not subject to mandatory redemption 238,325 238,325 Subject to mandatory redemption 116,246 149,710 Long-term debt 2,682,795 2,888,202 ---------- ---------- 4,003,982 4,284,475 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 240,684 208,050 Accounts payable- Associated companies 85,950 47,680 Other 50,570 62,315 Notes payable to associated companies 103,471 80,618 Accrued taxes 177,006 192,359 Accrued interest 60,740 66,685 Other 83,292 64,199 ---------- ---------- 801,713 721,906 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 567,478 524,285 Accumulated deferred investment tax credits 86,999 90,946 Nuclear plant decommissioning costs 192,484 134,243 Pensions and other postretirement benefits 220,731 217,719 Other 335,374 344,609 ---------- ---------- 1,403,066 1,311,802 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) ---------- ---------- $6,208,761 $6,318,183 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------- (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) 34,654 76,276 ---------- ---------- Total common stockholder's equity 966,616 1,008,238 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ---------------- -------------------- 1999 1998 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 --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption 1,624,000 1,624,000 $243,917 238,325 238,325 ========= ========= ======== ---------- ---------- Subject to Mandatory Redemption (Note 3D): $ 7.35 Series C 90,000 100,000 101.00 $ 9,090 9,110 10,110 $88.00 Series E 3,000 6,000 1,000.00 3,000 3,000 6,000 $91.50 Series Q 21,430 32,144 1,000.00 21,430 21,430 32,144 $88.00 Series R 50,000 50,000 -- -- 55,000 55,000 $90.00 Series S 55,250 74,000 -- -- 61,170 79,920 Redemption Within One Year (33,464) (33,464) --------- --------- -------- ---------- ---------- Total Subject to Mandatory Redemption 219,680 262,144 $ 33,520 116,246 149,710 ========= ========= ======== ---------- ---------- LONG-TERM DEBT (Note 3E): 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 -- ---------- ----------
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
At December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT (Cont.): Secured notes: 7.250% due 1999 -- 12,000 7.670% due 1999 -- 3,000 7.770% due 1999 -- 17,000 7.850% due 1999 -- 25,000 8.290% due 1999 -- 10,000 9.250% due 1999 -- 52,500 9.300% due 1999 -- 25,000 7.000% due 2000-2009 1,850 1,880 7.190% due 2000 175,000 175,000 7.420% due 2001 10,000 10,000 8.540% due 2001 3,000 3,000 8.550% due 2001 5,000 5,000 8.560% due 2001 3,500 3,500 8.680% due 2001 15,000 15,000 9.050% due 2001 5,000 5,000 9.200% due 2001 15,000 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 * 3.715% due 2015 39,835 39,835 7.880% due 2017 300,000 300,000 * 3.679% due 2018 72,795 72,795 * 5.350% 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 73,800 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 4.400% due 2030 23,255 23,255 4.600% due 2030 81,640 81,640 ---------- ---------- Total secured notes 1,840,578 2,012,808 ---------- ---------- Capital lease obligations (Note 2) 79,204 94,568 ---------- ---------- Net unamortized premium on debt 72,533 85,412 ---------- ---------- Long-term debt due within one year (207,220) (174,586) ---------- ---------- Total long-term debt 2,682,795 2,888,202 ---------- ---------- TOTAL CAPITALIZATION $4,003,982 $4,284,475 ========== ========== * Denotes variable rate issue with December 31, 1999 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 Other Retained Income (Loss) Number Carrying Paid-In Earnings (Note 3B) of Shares Value Capital (Deficit) ------------- ---------- ---------- -------- --------- (Dollars in thousands) Balance, January 1, 1997 79,590,689 $1,241,287 $ 79,454 $(276,458) Net (loss) $(229,247) (229,247) ========= Equity contributions from parent 4,500 Carrying value adjustments for preferred stock redemptions 25 Cash dividends on preferred stock (35,848) Cash dividends on common stock (123,602) Other, primarily preferred stock redemption expenses (232) ___________________________________________________________________________________________________________________ Purchase accounting fair value adjustment (309,698) (83,954) 665,387 Net income $ 19,290 19,290 ========= - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 79,590,689 931,614 -- 19,290 Purchase accounting fair value adjustment 348 Net income $ 164,891 164,891 ========= Cash dividends on preferred stock (21,947) Cash dividends on common stock (85,958) - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 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 ===================================================================================================================
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, 1997 1,624,000 $238,325 459,572 $215,626 Redemptions- $ 7.35 Series C (10,000) (1,000) $88.00 Series E (3,000) (3,000) $9.125 Series N (150,000) (14,794) $91.50 Series Q (10,714) (10,714) _________________________________________________________________________________________________ Purchase accounting fair value adjustment- $ 7.35 Series C 110 $88.00 Series R 5,000 $90.00 Series S 6,660 - ------------------------------------------------------------------------------------------------- Balance, December 31, 1997 1,624,000 238,325 285,858 197,888 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) - ------------------------------------------------------------------------------------------------- Balance, December 31, 1998 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 ================================================================================================= 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, -------------------- Nov. 8- Jan. 1- 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - --------------------------------------------------------------------------------------------------------------- (In thousands) | | CASH FLOWS FROM OPERATING ACTIVITIES: | Net Income (Loss) $ 194,089 $ 164,891 $ 19,290 | $ (229,247) Adjustments to reconcile net income (loss) | to net cash from operating activities: | Provision for depreciation and amortization 231,225 234,348 33,438 | 211,827 Nuclear fuel and lease amortization 33,912 35,361 7,393 | 42,577 Other amortization (10,730) (12,677) -- | -- Deferred income taxes, net 33,060 13,031 6,263 | (126,693) Investment tax credits, net (3,947) (5,185) (822) | (6,670) Allowance for equity funds used during | construction -- -- (140) | (1,647) Extraordinary item -- -- -- | 499,135 Receivables (31,544) (38,527) 51,213 | (3,974) Materials and supplies 18,818 (8,933) (3,922) | 6,363 Accounts payable 26,525 (10,481) (777) | (7,938) Other (11,283) (22,772) 18,839 | (2,566) --------- --------- -------- | ---------- Net cash provided from operating activities 480,125 349,056 130,775 | 381,167 --------- --------- -------- | ---------- CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing- | Long-term debt 26,355 232,919 -- | 1,176,781 Ohio Schools Council prepayment program -- 116,598 -- | -- Short-term borrowings, net 22,853 23,816 703 | -- Redemptions and Repayments- | Preferred stock 33,464 14,714 -- | 29,714 Long-term debt 214,405 488,610 43,500 | 701,843 Short-term borrowings, net -- -- -- | 55,519 Dividend Payments- | Common stock 198,974 85,958 34,785 | 88,816 Preferred stock 33,524 34,841 7,191 | 29,311 --------- --------- -------- | ---------- Net cash provided from (used for) financing | activities (431,159) (250,790) (84,773) | 271,578 --------- --------- -------- | ---------- | CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions 122,194 72,130 17,943 | 104,230 Loans to associated companies -- 53,509 -- | -- Loan payments from associated companies (53,509) -- -- | -- Capital trust investments (25,905) (31,923) 16,248 | 558,836 Other 25,336 18,799 (4,288) | 2,276 --------- --------- -------- | ---------- Net cash used for investing activities 68,116 112,515 29,903 | 665,342 --------- --------- -------- | ---------- Net increase (decrease) in cash and cash equivalents (19,150) (14,249) 16,099 | (12,597) Cash and cash equivalents at beginning of period 19,526 33,775 17,676 | 30,273 --------- --------- -------- | ---------- Cash and cash equivalents at end of period $ 376 $ 19,526 $ 33,775 | $ 17,676 ========= ========= ======== | ========== | SUPPLEMENTAL CASH FLOWS INFORMATION: | Cash Paid During the Period- | Interest (net of amounts capitalized) $ 221,360 $ 239,950 $ 35,598 | $ 188,044 ========= ========= ======== | ========== Income taxes $ 92,555 $ 100,107 $ 9,000 | $ 26,300 ========= ========= ======== | ========== 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, ------------------- Nov. 8- Jan. 1- 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - ----------------------------------------------------------------------------------------------------------------- (In thousands) | | GENERAL TAXES: | Real and personal property $ 120,725 $ 130,642 $ 17,707 | $ 114,393 State gross receipts 78,197 78,344 13,302 | 65,966 Social security and unemployment 10,941 9,029 1,548 | 6,296 Other 1,773 3,062 1,355 | 7,745 --------- --------- -------- | --------- Total general taxes $ 211,636 $ 221,077 $ 33,912 | $ 194,400 ========= ========= ======== | ========= | PROVISION FOR INCOME TAXES: | Currently payable- | Federal $ 92,627 $ 90,690 $ 6,969 | $ 37,605 State * 2,129 2,158 159 | -- --------- --------- -------- | --------- 94,756 92,848 7,128 | 37,605 --------- --------- -------- | --------- Deferred, net- | Federal 33,369 12,981 6,183 | (126,693) State * (309) 50 80 | -- --------- --------- -------- | --------- 33,060 13,031 6,263 | (126,693) --------- --------- -------- | --------- Investment tax credit amortization (3,947) (5,185) (822) | (6,670) --------- --------- -------- | --------- Total provision for income taxes $ 123,869 $ 100,694 $ 12,569 | $ (95,758) ========= ========= ======== | ========= INCOME STATEMENT CLASSIFICATION | OF PROVISION FOR INCOME TAXES: | Operating income $ 111,256 $ 88,762 $ 9,229 | $ 75,621 Other income 12,613 11,932 3,340 | 3,318 Extraordinary item -- -- -- | (174,697) --------- --------- -------- | --------- Total provision for income taxes $ 123,869 $ 100,694 $ 12,569 | $ (95,758) ========= ========= ======== | ========= | RECONCILIATION OF FEDERAL INCOME TAX | EXPENSE AT STATUTORY RATE TO TOTAL | PROVISION FOR INCOME TAXES: | Book income before provision for income taxes $ 317,958 $ 265,585 $ 31,859 | $(325,005) ========= ========= ======== | ========= Federal income tax expense at statutory rate $ 111,285 $ 92,955 $ 11,151 | $(113,752) Increases (reductions) in taxes resulting from- | Amortization of investment tax credits (3,947) (5,185) (822) | (6,670) Depreciation -- -- -- | 14,780 Amortization of tax regulatory assets 693 693 238 | -- Amortization of goodwill 13,282 13,447 2,015 | -- Other, net 2,556 (1,216) (13) | 9,884 --------- --------- -------- | --------- Total provision for income taxes $ 123,869 $ 100,694 $ 12,569 | $ (95,758) ========= ========= ======== | ========= | ACCUMULATED DEFERRED INCOME TAXES AT | DECEMBER 31: | Property basis differences $ 663,294 $ 672,283 $676,853 | Deferred nuclear expense 128,008 132,818 133,281 | Deferred sale and leaseback costs (106,611) (113,884) (118,611) | Unamortized investment tax credits (38,172) (40,241) (42,743) | Unused alternative minimum tax credits (71,130) (124,459) (133,442) | Other (7,911) (2,232) (18,901) | --------- --------- -------- | Net deferred income tax liability $ 567,478 $ 524,285 $496,437 | ========= ========= ======== | * For the period prior to November 8, 1997, state income taxes are included in the General Taxes section above. These amounts are not material and no restatement was made. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Utility Accumulated Construction Ownership/ Plant Provision for Work in Leasehold Generating Units in Service Depreciation Progress Interest - ---------------------------------------------------------------------- (In millions) W. H. Sammis Unit 7 $ 196.7 $114.5 $ 0.7 31.20% Bruce Mansfield Units 1, 2 and 3 75.0 30.2 7.2 20.42% Beaver Valley Unit 2 343.2 33.3 4.1 24.47% Davis-Besse 206.6 2.9 4.3 51.38% Perry 632.2 91.2 8.2 44.85% - -------------------------------------------------------------------- Total $1,453.7 $272.1 $24.5 ==================================================================== 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. The Company acquired the remaining 20% share of the Seneca pumped- storage unit in 1999 from a non-CAPCO Company. NUCLEAR FUEL- The Company leases its nuclear fuel and pays for the fuel as it is consumed (see Note 2). The Company amortizes the cost of nuclear fuel based on the rate of consumption. The Company's electric rates include amounts for the future disposal of spent nuclear fuel based upon the payments to the DOE. 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. Alternative minimum tax credits of $71 million, which may be carried forward indefinitely, are available to reduce future federal income taxes. Since the Company became a wholly owned subsidiary of FirstEnergy on November 8, 1997, 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- Centerior had sponsored jointly with the Company, TE and Centerior Service Company (Service Company) a noncontributory pension plan (Centerior Pension Plan) which covered all employee groups. Upon retirement, employees receive a monthly pension generally based on the length of service and compensation. In 1998, the Centerior Pension Plan was merged into the FirstEnergy pension plan. In connection with the OE-Centerior merger, the Company recorded fair value purchase accounting adjustments to recognize the net gain, prior service cost, and net transition asset (obligation) associated with the pension and postretirement benefit plans. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the FirstEnergy plans in 1999 and 1998 and amounts recognized on the Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ------------------ ----------------------- 1999 1998 1999 1998 - ---------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1 $1,500.1 $1,327.5 $ 601.3 $ 534.1 Service cost 28.3 25.0 9.3 7.5 Interest cost 102.0 92.5 40.7 37.6 Plan amendments -- 44.3 -- 40.1 Actuarial loss (gain) (155.6) 101.6 (17.6) 10.7 Net increase from asset swap 14.8 -- 12.5 -- Benefits paid (95.5) (90.8) (37.8) (28.7) - ---------------------------------------------------------------------- Benefit obligation as of December 31 1,394.1 1,500.1 608.4 601.3 - ---------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1 1,683.0 1,542.5 3.9 2.8 Actual return on plan assets 220.0 231.3 0.6 0.7 Company contribution -- -- 0.4 0.4 Benefits paid (95.5) (90.8) -- -- - ---------------------------------------------------------------------- Fair value of plan assets as of December 31 1,807.5 1,683.0 4.9 3.9 - ---------------------------------------------------------------------- Funded status of plan 413.4 182.9 (603.5) (597.4) Unrecognized actuarial loss (gain) (303.5) (110.8) 24.9 30.6 Unrecognized prior service cost 57.3 63.0 24.1 27.4 Unrecognized net tran- sition obligation (asset) (10.1) (18.0) 120.1 129.3 - ---------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 157.1 $ 117.1 $(434.4) $(410.1) ====================================================================== Assumptions used as of December 31: Discount rate 7.75% 7.00% 7.75% 7.00% 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%
The Consolidated Balance Sheet classification of Pensions and Other Postretirement Benefits at December 31, 1999 and 1998 includes the Company's share of the net pension liability of $39.9 million and $47.7 million, respectively; and the Company's share of the accrued postretirement benefit liability of $179.0 million and $170.0 million, respectively. Net pension and other postretirement benefit costs for the three years ended December 31, 1999 (FirstEnergy plans in 1999 and 1998 and Centerior plans in 1997) were computed as follows:
Pension Benefits Other Postretirement Benefits ---------------------------- ------------------------------ 1997 1997 ---------------- ---------------- Nov. 8- Jan. 1- Nov. 8- Jan. 1- 1999 1998 Dec. 31 Nov. 7 1999 1998 Dec. 31 Nov. 7 - ------------------------------------------------------------------------------------------------------------- | (In millions) | | | Service cost $ 28.3 $ 25.0 $ 2.3 | $ 11.1 $ 9.3 $ 7.5 $0.5 | $ 1.8 Interest cost 102.0 92.5 6.1 | 25.4 40.7 37.6 2.8 | 13.5 Expected return on plan assets (168.1) (152.7) (7.7) | (38.0) (0.4) (0.3) -- | -- Amortization of transition | | obligation (asset) (7.9) (8.0) -- | (3.0) 9.2 9.2 -- | 6.4 Amortization of prior service cost 5.7 2.3 -- | 1.1 3.3 (0.8) -- | -- Recognized net actuarial loss (gain) -- (2.6) -- | (0.5) -- -- -- | (0.9) Voluntary early retirement program | | expense -- -- 23.0 | 4.8 -- -- -- | -- - ------------------------------------------------------------------------------------------------------------ Net benefit cost $ (40.0) $(43.5) $23.7 | $ 0.9 $62.1 $53.2 $3.3 | $20.8 =================================================================|==================================|======= Company's share of total plan costs $ (14.4) $( 2.7) $16.5 | $ (2.5) $22.0 $14.5 $2.6 | $11.4 - ------------------------------------------------------------------------------------------------------------
The FirstEnergy plan's health care trend rate assumption is 5.3% in 2000, 5.2% in 2001 and 5.0% for 2002 and 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 $4.5 million and the postretirement benefit obligation by $72.0 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.5 million and the postretirement benefit obligation by $58.2 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and interest charges include amounts for transactions with affiliated companies in the ordinary course of business operations. The Company's transactions with TE and the other FirstEnergy operating subsidiaries (OE and Penn) from the November 8, 1997 merger date are primarily for firm power, interchange power, transmission line rentals and jointly owned power plant operations and construction (see Note 7). Beginning in May 1996, Centerior Funding began serving as the transferor in connection with the accounts receivable securitization for the Company and TE. The Company is buying 150 megawatts of TE's Beaver Valley Unit 2 leased capacity entitlement. Purchased power expense for this transaction was $104.3 million, $98.5 million, $16.8 million and $87.4 million in 1999, in 1998, the November 8-December 31, 1997 period and the January 1-November 7, 1997 period, respectively. This purchase is expected to continue through the end of the lease period. (See Note 2.) FirstEnergy and, prior to 1999, the Service Company (formerly a wholly owned subsidiary of Centerior and now a wholly owned subsidiary of FirstEnergy) provided support services at cost to the Company and other affiliated companies. FirstEnergy billed the Company $109.1 million in 1999 and the Service Company billed the Company $80.6 million, $34.1 million and $130.8 million in 1998, the November 8-December 31, 1997 period and the January 1-November 7, 1997 period, respectively, for such services. Fuel and purchased power expenses on the Consolidated Statements of Income include the cost of power purchased from TE of $106.1 million, $104.7 million, $17.7 million and $98.5 million in 1999, 1998, the November 8-December 31, 1997 period and the January 1-November 7, 1997 period, 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 December 31, 1998, cash and cash equivalents included $6 million to be used for the redemption of long-term debt in 1999. The Company reflects temporary cash investments at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $26.2 million, $32.3 million, $3.2 million and $12.9 million in 1999, 1998, the November 8-December 31, 1997 period and the January 1-November 7, 1997 period, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles 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:
1999 1998 - --------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - --------------------------------------------------------------------- (In millions) Long-term debt $2,738 $2,711 $2,883 $3,120 Preferred stock $ 150 $ 139 $ 183 $ 184 Investments other than cash and cash equivalents: Debt securities - (Maturing in more than 10 years) $ 517 $ 476 $ 543 $ 533 All other 193 200 135 136 - --------------------------------------------------------------------- $ 710 $ 676 $ 678 $ 669 ======================================================================
The carrying value of long-term debt and preferred stock subject to mandatory redemption were adjusted to fair value in connection with the OE- Centerior merger and 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 a corresponding change to the decommissioning liability. The debt securities referred to above are in the held-to-maturity category. 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 related to nonnuclear operations are being recovered from customers under the Company's regulatory plan. Based on the regulatory plan, at this time, the Company is continuing to bill and collect cost-based rates relating to nonnuclear operations and continues the application of SFAS 71 to those operations. The PUCO indicated that it will endeavor to issue its order related to FirstEnergy's transition plan by mid- 2000. The application of SFAS 71 to the Company's nonnuclear generation businesses will be discontinued at that time. If the transition plan ultimately approved by the PUCO for the Company does not provide adequate recovery of its nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on the results of operations and financial condition for the Company. The Company will continue 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 respective operations after December 31, 2000. The Company discontinued the application of SFAS 71 for its nuclear operations in October 1997 when implementation of the regulatory plan became probable. The regulatory plan does not provide for full recovery of the Company's nuclear operations. In accordance with SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of SFAS 71," the Company was required to remove from its balance sheet all regulatory assets and liabilities related to the portion of its business for which SFAS 71 was discontinued and to assess all other assets for impairment. Regulatory assets attributable to nuclear operations of $499.1 million ($324.4 million after taxes) were written off as an extraordinary item in October 1997. The regulatory assets attributable to nuclear operations written off represent the net amounts due from customers for future federal income taxes when the taxes become payable, which, under the regulatory plan, are no longer recoverable from customers. The remainder of the Company's business continues to comply with the provisions of SFAS 71. All remaining regulatory assets of the Company continue to be recovered through rates applicable to the nonnuclear portion of the Company's business. For financial reporting purposes, the net book value of the nuclear generating units was not impaired as a result of the regulatory plan. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following:
1999 1998 - --------------------------------------------------------------------- (In millions) Nuclear unit expenses $287.1 $298.0 Customer receivables for future income taxes 23.0 13.0 Rate stabilization program deferrals 263.9 276.0 Sale and leaseback costs (136.4) (140.9) Loss on reacquired debt 75.9 81.6 Other 26.3 28.2 - ---------------------------------------------------------------------- Total $539.8 $555.9 ======================================================================
2. LEASES: The Company leases certain generating facilities, nuclear fuel, certain transmission 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, 1999 were approximately $1.8 billion.) Nuclear fuel is currently financed for the Company and TE through leases with a special-purpose corporation. As of December 31, 1999, $116 million of nuclear fuel ($72 million for the Company) was financed under a lease financing arrangement totaling $145 million ($30 million of intermediate-term notes and $115 million from bank credit arrangements). The notes mature in August 2000 and the bank credit arrangements expire in September 2000. Lease rates are based on intermediate-term note rates, bank rates and commercial paper rates. 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, 1999 and are summarized as follows:
Nov. 8 - Jan. 1 - 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - ---------------------------------------------------------------------- (In millions) | | Operating leases | Interest element $ 38.6 $ 32.4 $10.6 | $ 56.0 Other 30.7 74.4 8.4 | 18.3 Capital leases | Interest element 6.9 7.0 1.5 | 8.5 Other 41.3 36.1 7.5 | 43.4 - -------------------------------------------------------|------------- Total rentals $117.5 $149.9 $28.0 | $126.2 =====================================================================
The future minimum lease payments as of December 31, 1999 are:
Operating Leases ------------------------- Capital Lease Capital Leases Payments Trust Net - ----------------------------------------------------------------- (In millions) 2000 $40.4 $ 66.6 $ 60.5 $ 6.1 2001 21.4 71.7 50.2 21.5 2002 13.6 76.4 70.6 5.8 2003 5.0 77.5 77.9 (0.4) 2004 2.8 55.7 28.1 27.6 Years thereafter 8.6 720.5 536.2 184.3 - ---------------------------------------------------------------- Total minimum lease payments 91.8 $1,068.4 $823.5 $244.9 Interest portion 12.6 ======== ====== ====== - ------------------------------------ Present value of net minimum lease payments 79.2 Less current portion 32.2 - ------------------------------------ Noncurrent portion $47.0 ====================================
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 in 2000, 2004 and 2007 to a trust as security for the issuance of a like principal amount of secured notes due in 2000, 2004 and 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 merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 8, 1997 merger date. (B) COMPREHENSIVE INCOME- In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Consolidated Statements of Common Stockholder's Equity. Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholder's equity except dividends to stockholders. Net income and comprehensive income are the same for each period presented. (C) PREFERRED AND PREFERENCE STOCK- The Company's $88.00 Series R preferred stock is not redeemable before December 2001 and its $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 1999. The Company has 3 million authorized and unissued shares of preference stock having no par value A liability of $14 million was included in the Company's net assets as of the merger date for preferred dividends declared attributable to the post-merger period. Accordingly, no accrual for preferred stock dividend requirements was included on the Company's November 8, 1997 to December 31, 1997 Consolidated Statement of Income. This liability was subsequently reduced to zero in 1998. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Annual sinking fund provisions for preferred stock are as follows:
Redemption Price Per Series Shares Share Date Beginning - ----------------------------------------------------------------- $ 7.35 C 10,000 $ 100 (i) 88.00 E 3,000 1,000 (i) 91.50 Q 10,714 1,000 (i) 90.00 S 18,750 1,000 (i) 88.00 R 50,000 1,000 December 1 2001 - ---------------------------------------------------------------- (i) Sinking fund provisions are in effect.
Annual sinking fund requirements for the next five years are $33.5 million in 2000, $80.5 million in 2001, $18.0 million in 2002 and $1.0 million in each year 2003 and 2004. (E) 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) - -------------------------- 2000 $175.0 2001 56.5 2002 228.0 2003 115.0 2004 307.7 - ---------------------------
The Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. One pollution control revenue bond is entitled to the benefit of an irrevocable bank letter of credit of $48.1 million. To the extent that drawings are made under this letter of credit to pay principal of, or interest on, the pollution control revenue bond, the Company is entitled to a credit against its obligation to repay this bond. The Company pays an annual fee of 1.1% 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: FirstEnergy has a $150 million revolving credit facility that expires in November 2000. FirstEnergy may borrow under the facility and could transfer any of its borrowed funds to the Company and TE, with all borrowings jointly and severally guaranteed by the Company and TE. The credit agreement is secured with first mortgage bonds of the Company and TE in the proportion of 40% and 60%, respectively. The credit agreement also provides the participating banks with a subordinate mortgage security interest in the properties of the Company and TE. The banks' fee is 0.50% per annum payable quarterly in addition to interest on any borrowings. (FirstEnergy had $90 million of borrowings under the facility at December 31, 1999.) Also, the Company may borrow from its affiliates on a short-term basis. At December 31, 1999, the Company had total short-term borrowings of $103.5 million from its affiliates with a weighted average interest rate of approximately 6.4%. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $529 million for property additions and improvements from 2000- 2004, of which approximately $112 million is applicable to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $166 million, of which approximately $56 million applies to 2000. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $158 million and $36 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 present 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 $442.7 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 $13.1 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. The Company estimates additional capital expenditures for environmental compliance of approximately $84 million, which is included in the construction forecast provided under "Capital Expenditures" for 2000 through 2004. The Company is in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. NOx reductions are being achieved through combustion controls and generating more electricity from lower-emitting plants. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Company's Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In May 1999, the U.S. Court of Appeals for the D.C. Circuit issued a stay which delays implementation of EPA's NOx Transport Rule until the Court has ruled on the merits of various appeals. Under the NOx Transport Rule, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA contemplating an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Company's Ohio and Pennsylvania plants, by May 2003 in the event implementation of the NOx Transport Rule is delayed. New Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. FirstEnergy continues to evaluate its compliance plans and other compliance options. The Company is 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 Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards back to the EPA finding constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. The Company cannot predict the EPA's action in response to the Court's remand order. The cost of compliance with these regulations, if they are reinstated, may be substantial and depends on the manner in which they are ultimately implemented, if at all, by the states in which the Company operates affected facilities. 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 $4.8 million as of December 31, 1999, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. The Company believes that waste disposal costs will not have a material adverse effect on its financial condition, cash flows or results of operations. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 1999 and 1998.
March 31, June 30, September 30, December 31, Three Months Ended 1999 1999 1999 1999 - ---------------------------------------------------------------------------- (In millions) Operating Revenues $418.8 $481.9 $534.5 $429.7 Operating Expenses and Taxes 337.3 375.3 395.6 362.0 - ---------------------------------------------------------------------------- Operating Income 81.5 106.6 138.9 67.7 Other Income (Expense) 6.5 (1.2) 1.3 2.7 Net Interest Charges 53.1 52.8 52.2 51.8 - ---------------------------------------------------------------------------- Net Income $ 34.9 $ 52.6 $ 88.0 $ 18.6 ============================================================================ Earnings on Common Stock $ 26.4 $ 44.1 $ 79.7 $ 10.4 ============================================================================
March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - ---------------------------------------------------------------------------- (In millions) Operating Revenues $415.0 $474.6 $514.6 $391.8 Operating Expenses and Taxes 324.3 377.8 389.5 321.9 - ---------------------------------------------------------------------------- Operating Income 90.7 96.8 125.1 69.9 Other Income (Expense) 7.6 (3.5) 6.2 1.4 Net Interest Charges 58.7 58.5 56.3 55.9 - ---------------------------------------------------------------------------- Net Income $ 39.6 $ 34.8 $ 75.0 $ 15.4 ============================================================================ Earnings on Common Stock $ 38.6 $ 27.4 $ 66.5 $ 7.6 ============================================================================
7. PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (UNAUDITED): FirstEnergy was formed on November 8, 1997 by the merger of OE and Centerior. The merger was accounted for as a purchase of Centerior's net assets with 77,637,704 shares of FirstEnergy Common Stock through the conversion of each outstanding Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid in cash). Based on an imputed value of $20.125 per share, the purchase price was approximately $1.582 billion, which also included approximately $20 million of merger related costs. Goodwill of approximately $2.0 billion was recognized (to be amortized on a straight-line basis over forty years), which represented the excess of the purchase price over Centerior's net assets after fair value adjustments. Accumulated amortization of goodwill was approximately $82 million as of December 31, 1999. The merger purchase accounting adjustments included recognizing estimated severance and other compensation liabilities ($56 million). The amount charged against the liability in 1998 relating to the costs of involuntary employee separation was $30 million. The liability was subsequently reduced to approximately $9 million as of December 31, 1998 to represent potential costs associated with the separation of 493 Company employees. The liability adjustment was offset by a corresponding reduction to goodwill recognized in connection with the Centerior acquisition. The following pro forma statement of income for the Company gives effect to the OE-Centerior merger as if it had been consummated on January 1, 1996, with the purchase accounting adjustments actually recognized in the business combination.
Year Ended December 31, 1997 - ----------------------------------------------- (In millions) Operating Revenues $1,783 Operating Expenses and Taxes 1,418 ------ Operating Income 365 Other Income 15 Net Interest Charges 232 ------ Net Income $ 148 ==============================================
Pro forma adjustments reflected above include: (1) adjusting the Company's nuclear generating units to fair value based upon independent appraisals and estimated discounted future cash flows based on management's estimate of cost recovery; (2) the effect of discontinuing SFAS 71 for the Company's nuclear operations; (3) amortization of the fair value adjustment for long-term debt; (4) goodwill recognized representing the excess of the Company's portion of the purchase price over the Company's adjusted net assets; (5) the elimination of merger costs; and (6) adjustments for estimated tax effects of the above adjustments. 8. TERMINATION OF PROPOSED MERGER OF TE INTO THE COMPANY: In March 1994, Centerior announced a plan to merge TE into the Company. All regulatory approvals were granted (with the exception of the Nuclear Regulatory Commission (NRC) as that application was withdrawn at the NRC's request pending the decision whether to complete this merger). In addition, the preferred shareholders of TE approved the merger and the preferred shareholders of the Company approved the authorization of additional shares of preferred stock. However, the management of FirstEnergy and the Company have decided not to complete the proposed merger. Report of Independent Public Accountants To the Stockholders and Board Directors of The Cleveland 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 subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for the years ended December 31, 1999 and 1998, the period from January 1, 1997 to November 7, 1997 (pre-merger), and the period from November 8, 1997 to December 31, 1997 (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 audits. We conducted our audits in accordance with generally accepted auditing standards. 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 subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998, the period from January 1, 1997 to November 7, 1997 (pre- merger), and the period from November 8, 1997 to December 31, 1997 (post- merger), in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 11, 2000 EX-21.2 24 EXHIBIT 21.2 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1999 Centerior Funding Corporation - Incorporated in Ohio Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 1999, is not included in the printed document. EX-23.2 25 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 and No. 333- 72891. ARTHUR ANDERSEN LLP Cleveland, Ohio March 29, 2000 EX-27.2 26
UT This schedule contains summary financial information extracted from the related Form 10-K financial statements for The Cleveland Electric Illuminating Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's). Income tax expense includes $12,613,000 related to other income. 0000020947 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 DEC-31-1999 1 PER-BOOK 3,035,710 721,255 326,440 2,125,356 0 6,208,761 931,962 0 34,654 966,616 116,246 238,325 2,682,795 103,471 0 0 175,030 33,464 0 32,190 1,860,624 6,208,761 1,864,954 123,869 1,358,932 1,470,188 394,766 9,141 403,907 209,818 194,089 33,524 160,565 198,974 204,702 480,125 0 0
EX-4.4 27 ====================================================== THE TOLEDO EDISON COMPANY TO THE CHASE MANHATTAN BANK, Trustee. -------------- Forty-ninth Supplemental Indenture Dated as of January 15, 2000 -------------- (Supplemental to Indenture dated as of April 1, 1947) -------------- First Mortgage Bonds, Collateral Series E ======================================================== Forty-ninth Supplemental Indenture, dated as of January 15, 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, being the initial series of bonds issued under the Original Indenture; 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, have not been 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 Trustee 38 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 1 Supplemental Indenture dated as follows: Forty-eighth June 1, 1998 supplementary to Original Indenture (the Original Indenture, all the aforementioned Supplemental Indentures, this Forty-ninth Supplemental Indenture and any other indentures supplemental to the Original Indenture are herein collectively called the "Indenture" and this Forty-ninth 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, Collateral Series E (hereinafter called the "Collateral Series E Bonds") 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 Collateral Series E Bonds are to be issued by the Company and delivered to the Revolver Agent Bank (hereinafter defined) to (i) provide for the payment of the Company's obligations to make payments to any person under the Amended and Restated Guaranty dated November 4, 1999 of the Company and The Cleveland Electric Illuminating Company (such guaranty, as amended from time to time, herein called the "Guaranty"), in favor of the Lenders party to the Second Amended and Restated Credit Agreement dated as of November 4, 1999 among FirstEnergy Corp. (the "Borrower") and Citibank, N.A., as Administrative Agent, the other banks named therein and Salomon Smith Barney Inc., as Arranger (such credit agreement, as amended from time to time, herein called the "Revolving Credit Agreement"), and (ii) to provide to such persons the benefits of the security provided for the Collateral Series E Bonds. As used herein, the term "Lenders" shall refer collectively to all banks which are parties to the Revolving Credit Agreement and the term "Revolver Agent Bank" shall refer to the bank designated in the Revolving Credit Agreement as the party responsible for holding the Collateral Series E Bonds as agent for the benefit of the Lenders. The text of the Collateral Series E Bonds is to be substantially in the form following: [Form of Fully Registered Collateral Series E Bond) This bond is not transferable except to a successor agent bank under the second amended and restated credit agreement dated as of November 4, 1999 among First Energy Corp. (the "Borrower") and Citibank, N.A., as administrative agent, the banks named therein and Salomon Smith Barney Inc., as Arranger (such credit agreement as amended from time to time, the "Revolving Credit Agreement"). The Toledo Edison Company First Mortgage Bond, Collateral Series E 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 Fifteen Million Dollars ($15,000,000) or such lesser principal amount as is equal to 60% of the aggregate amount from time to time of the Lenders' Commitments (as defined in the Revolving Credit Agreement) in excess of $125,000,000, in whole or in installments on such date or dates as the Company has any obligation to make payments under the Amended and Restated Guaranty of the Company and The Cleveland Electric Illuminating Company dated November 4, 1999 (the "Guaranty") in favor of the Lenders (as defined in the Revolving Credit Agreement), but not later than June 1, 2006, at the same place or places as payments are required to be made by the Company under the Guaranty, 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, and to pay interest on the unpaid principal amount hereof in like coin or currency to the registered owner hereof at said place or places 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 60% of the amount of interest and fees payable on such interest payment date under the Revolving Credit Agreement with respect to borrowings or Commitments thereunder in excess of $125,000,000. Such interest shall be payable on the same dates as interest or fees are payable from time to time pursuant to the Revolving Credit Agreement (each such date herein called an "interest payment date"), until maturity of this Bond, or, if the Agent Bank shall demand redemption of this Bond, until the redemption date, 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 and fees payable from time to time under the Revolving Credit Agreement, the basis on which such interest and fees are computed and the dates on which such interest and fees are payable are set forth in the Revolving Credit Agreement. 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 Forty-ninth Supplemental Indenture dated as of January 15, 2000 (the Original Indenture and said indentures supplemental thereto herein collectively called the "Indenture" and said Forty-ninth 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 the only Bond of a series of Bonds designated as the First Mortgage Bonds, Collateral Series E, of the Company (herein called "Bonds of this Series") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $15,000,000 but the aggregate principal amount hereof outstanding at any time shall not exceed such lesser amount as is equal to 60% of the amount of the Lenders' Commitments in excess of $125,000,000 and is issued under and secured by the Supplemental Indenture. The Bonds of this Series have been issued by the Company to the Agent Bank to (i) provide for the payment of the Company's obligations to make payments to any person under the Guaranty, and (ii) to provide to such persons the benefits of the security provided for the Bonds of this Series. As used herein, the term "Agent Bank" shall refer to the bank designated in the Revolving Credit Agreement as the party responsible for holding the Bonds of this Series as agent for the benefit of the Lenders. The Bonds of this Series have been delivered to the Agent Bank as agent for the benefit of the Lenders. Any payment made in respect of the Company's obligations under the Guaranty or by the Borrower under the Revolving Credit Agreement with respect to Commitments or borrowings under the Revolving Credit Agreement in excess of $125,000,000 shall be deemed a payment in respect of the Bonds of this Series, but such payment shall not reduce the principal amount of the Bonds of this Series unless the aggregate amount of the Lenders' Commitments in excess of $125,000,000 is irrevocably reduced concurrently with such payment. In the event that all of the Company's obligations under the Guaranty and the obligations of the Borrower under the Revolving Credit Agreement have been discharged, this Bond shall be deemed to have been paid in full and shall be surrendered to the Trustee for cancellation. The Bonds of this Series are subject to redemption prior to maturity as provided in Section 9 of Article I of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed and any accrued and unpaid interest and all other amounts payable by the Company under the Guaranty with respect to Commitments or borrowings under the Revolving Credit Agreement in excess of $125,000,000. 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 Secretary or an Assistant Secretary. Dated THE TOLEDO EDISON COMPANY By ----------------------------- Vice President. Attest: - ---------------------------- 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 By ------------------------------- Authorized Officer. [End of Form of Collateral Series E Bond] 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 Collateral Series E Bonds, 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 COLLATERAL SERIES E BONDS 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, Collateral Series E" (such bonds herein referred to as the "Collateral Series E Bonds"). The Collateral Series E Bonds shall be limited to an aggregate principal amount of $15,000,000 but the aggregate principal amount thereof outstanding at any time shall not exceed such lesser amount as is equal to 60% of the aggregate amount of the Lenders' Commitments (as defined in the Revolving Credit Agreement) in excess of $125,000,000. The Collateral Series E Bonds shall be substantially in the form hereinbefore recited. SECTION 2. The principal of all Collateral Series E Bonds shall be payable in whole or in installments on such date or dates as the Company has any obligations under the Guaranty to make any payment to the Lenders, but not later than June 1, 2006, 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 Collateral Series E Bonds to equal 60% of the amount of interest and fees payable on such interest payment date under the Revolving Credit Agreement with respect to borrowings or Commitments thereunder in excess of $125,000,000. Such interest shall be payable on the same dates as interest or fees are payable from time to time pursuant to the Revolving Credit Agreement (each such date herein called an "interest payment date"), until the maturity of the Collateral Series E Bonds, or, in the case the Revolver Agent Bank shall demand redemption of any such Bonds, until the redemption date, 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 and fees payable from time to time under the Revolving Credit Agreement, the basis on which such interest and fees are computed and the dates on which such interest and fees are payable are set forth in the Revolving Credit Agreement. Except as hereinafter provided, each Collateral Series E Bonds shall bear interest from the later of the date of initial authentication of such Bond or the most recent date to which interest has been paid until the principal of such Bond is paid. SECTION 3. The Collateral Series E Bonds shall be payable as to principal and interest at the same place or places as payments are required to be made by the Company under the Guaranty; and both 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 Collateral Series E Bonds shall be issued only as one fully registered Bond in the denomination of $15,000,000. SECTION 5. Collateral Series E Bonds shall be transferable only to a successor Revolver Agent Bank under the Revolving Credit Agreement in the manner and upon the terms set forth in Section 2.05 of the Original Indenture, but notwithstanding the provisions of Section 2.08 of the Original Indenture, no charge shall be made upon any transfer or exchange of Collateral Series E Bonds other than for any tax or taxes or other governmental charge required to be paid by the Company. SECTION 6. The Collateral Series E Bonds shall be registered in the name of the Revolver Agent Bank. SECTION 7. Any payment made in respect of the Company's obligations under the Guaranty or by the Borrower under the Revolving Credit Agreement with respect to Commitments or borrowings under the Revolving Credit Agreement in excess of $125,000,000 shall be deemed a payment in respect of the Collateral Series E Bonds but such payment shall not reduce the principal amount of the Collateral Series E Bonds unless the aggregate amount of the Lenders' Commitments in excess of $125,000,000 is irrevocably reduced concurrently with such payment. In the event that all of the Company's obligations under the Guaranty and the obligations of the Borrower under the Revolving Credit Agreement have been discharged, the Collateral Series E Bonds shall be deemed to be paid in full. SECTION 8. The Collateral Series E Bonds 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 9. The Collateral Series E Bonds shall be redeemed by the Company in whole 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, but only if the Trustee shall receive a written demand from the Revolver Agent Bank for redemption of all Collateral Series E Bonds held by the Revolver Agent Bank stating that an "Event of Default" under the Revolving Credit Agreement has occurred and is continuing and that payment of the principal amount outstanding under the Revolving Credit Agreement, all interest thereon and all other amounts payable thereunder are immediately due and payable and demanding payment thereof; provided, however, that the Collateral Series E Bonds shall not be redeemed in the event that prior to the date of such redemption the Trustee shall have received a certificate of the Revolver Agent Bank (a) stating that there has been a waiver of such Event of Default, or (b) withdrawing said written demand. The redemption of the Collateral Series E Bonds shall be made forthwith upon receipt of such demand by the Company from the Majority Banks (as defined in the Revolving Credit Agreement), the Revolver Agent Bank on behalf of the Majority Banks, or the Trustee. 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. 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 Secretary or an Assistant 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 for and in its behalf, all as of the day and year first above written. THE TOLEDO EDISON COMPANY By ---------------------------- Vice President Attest: ------------------------------- Corporate Secretary Signed, sealed and acknowledged on behalf of THE TOLEDO EDISON COMPANY in the presence of - ------------------------------------- - ------------------------------------- As witnesses THE CHASE MANHATTAN BANK,AS TRUSTEE By -------------------------------- Attest: ------------------------ Signed, sealed and acknowledged on behalf of THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATED) in the presence of - ----------------------------- - ----------------------------- As witnesses STATE OF OHIO ) ) SS.: COUNTY OF SUMMIT ) On this day of January, 2000, before me personally appeared [________] 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. ------------------------------------------- Notary Public STATE OF NEW YORK ) ) SS.: COUNTY OF NEW YORK ) On this day of January, 2000, before me personally appeared [________] and [________] to me personally known, who being by me severally duly sworn, did say that they are a [_________________] and a [_________________], 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 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] This instrument prepared by FirstEnergy Corp., 76 South Main Street, Akron, Ohio 44308 EX-12.4 28 EXHIBIT 12.4 Page 1 THE TOLEDO EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ------------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $96,762 $57,289 $49,385 $106,582 $99,945 Interest and other charges, before reduction for amounts capitalized 112,344 97,329 98,423 88,263 78,496 Provision for income taxes 43,828 31,501 39,703 72,696 56,821 Interest element of rentals charged to income (a) 110,977 109,935 102,795 100,245 98,445 -------- -------- -------- -------- -------- Earnings as defined $363,911 $296,054 $290,306 $367,786 $333,707 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest expense $112,344 $97,329 $98,423 $88,263 $78,496 Interest element of rentals charged to income (a) 110,977 109,935 102,795 100,245 98,445 -------- -------- -------- -------- -------- Fixed charges as defined $223,321 $207,264 $201,218 $188,508 $176,941 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES 1.63 1.43 1.44 1.95 1.89 ==== ==== ==== ==== ==== - --------------------- (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, ------------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $96,762 $57,289 $49,385 $106,582 $99,945 Interest and other charges, before reduction for amounts capitalized 43,828 31,501 39,703 72,696 56,821 Provision for income taxes 112,344 97,329 98,423 88,263 78,496 Interest element of rentals charged to income (a) 110,977 109,935 102,795 100,245 98,445 -------- -------- -------- -------- -------- Earnings as defined $363,911 $296,054 $290,306 $367,786 $333,707 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS): Interest expense $112,344 $ 97,329 $ 98,423 $ 88,263 $ 78,496 Preferred stock dividend requirements 18,252 16,926 19,435 13,609 16,238 Adjustments to preferred stock dividends to state on a pre-income tax basis 8,266 9,307 15,783 8,335 10,363 Interest element of rentals charged to income (a) 110,977 109,935 102,795 100,245 98,445 -------- -------- -------- -------- -------- Fixed charges as defined plus preferred stock dividend requirements (pre-income tax basis) $249,839 $233,497 $236,436 $210,452 $203,542 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) 1.46 1.27 1.23 1.75 1.64 ==== ==== ==== ==== ==== - ------------------------ (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-13.3 29 THE TOLEDO EDISON COMPANY SELECTED FINANCIAL DATA
Nov. 8- Jan. 1- 1999 1998 Dec. 31, 1997 Nov. 7, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- (Dollars in thousands) GENERAL FINANCIAL INFORMATION: | | Operating Revenues $ 921,159 $ 957,037 $ 122,669 | $ 772,707 $ 897,259 $ 873,675 ========== ========== ========== | ========== ========== ========== Operating Income $ 163,772 $ 180,261 $ 19,055 | $ 123,282 $ 156,815 $ 188,068 ========== ========== ========== | ========== ========== ========== Income Before Extraordinary Item $ 99,945 $ 106,582 $ 7,616 | $ 41,769 $ 57,289 $ 96,762 ========== ========== ========== | ========== ========== ========== Net Income (Loss) $ 99,945 $ 106,582 $ 7,616 | $ (150,132) $ 57,289 $ 96,762 ========== ========== ========== | ========== ========== ========== Earnings (Loss) on Common Stock $ 83,707 $ 92,972 $ 7,616 | $ (169,567) $ 40,363 $ 78,510 ========== ========== ========== | ========== ========== ========== Total Assets $2,666,928 $2,768,765 $2,758,152 | $3,428,175 $3,532,714 ========== ========== ========== | ========== ========== | CAPITALIZATION: | Common Stockholder's Equity $ 551,704 $ 575,692 $ 531,650 | $ 803,237 $ 762,877 Preferred Stock- | Not Subject to Mandatory | Redemption 210,000 210,000 210,000 | 210,000 210,000 Subject to Mandatory Redemption -- -- 1,690 | 3,355 5,020 Long-Term Debt 981,029 1,083,666 1,210,190 | 1,051,517 1,119,294 ---------- ---------- ---------- | ---------- ---------- Total Capitalization $1,742,733 $1,869,358 $1,953,530 | $2,068,109 $2,097,191 ========== ========== ========== | ========== ========== | CAPITALIZATION RATIOS: | Common Stockholder's Equity 31.7% 30.8% 27.2% | 38.8% 36.4% Preferred Stock- | Not Subject to Mandatory | Redemption 12.0 11.2 10.8 | 10.2 10.0 Subject to Mandatory Redemption -- -- 0.1 | 0.2 0.2 Long-Term Debt 56.3 58.0 61.9 | 50.8 53.4 ----- ----- ----- | ----- ----- Total Capitalization 100.0% 100.0% 100.0% | 100.0% 100.0% ===== ===== ===== | ===== ===== | KILOWATT-HOUR SALES (Millions): | Residential 2,127 2,252 355 | 1,718 2,145 2,164 Commercial 2,236 2,425 284 | 1,498 1,790 1,748 Industrial 5,449 5,317 847 | 4,003 4,301 4,174 Other 54 63 79 | 413 488 500 ------ ------ ----- | ----- ------ ------ Total Retail 9,866 10,057 1,565 | 7,632 8,724 8,586 Total Wholesale 2,409 1,617 435 | 2,218 2,330 2,563 ------ ------ ----- | ----- ------ ------ Total 12,275 11,674 2,000 | 9,850 11,054 11,149 ====== ====== ===== | ===== ====== ====== | CUSTOMERS SERVED: | Residential 266,900 265,237 262,501 | 261,541 260,007 Commercial 32,481 31,982 29,367 | 27,411 26,508 Industrial 1,937 1,954 1,835 | 1,839 1,846 Other 398 359 347 | 2,136 2,119 ------- ------- ------- | ------- ------- Total 301,716 299,532 294,050 | 292,927 290,480 ======= ======= ======= | ======= ======= | Number of Employees 977 997 1,532 | 1,643 1,809
THE TOLEDO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Financial results reflect the application of purchase accounting to the merger of our former parent company, Centerior Energy Corporation (Centerior), and Ohio Edison Company on November 8, 1997. This accounting resulted in fair value adjustments which were "pushed down" or reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date, including our financial statements. As a result, we recorded purchase accounting fair value adjustments to: (1) revalue our nuclear generating units to fair value, (2) adjust long-term debt to fair value, (3) adjust our retirement and severance benefit liabilities, and (4) record goodwill. Accordingly, the post-merger financial statements reflect a new basis of accounting, and separate financial statements are presented for the pre-merger and post-merger periods. For the remainder of this discussion (including categories substantially unaffected by the merger or with no significant pre-merger or post-merger accounting events), we have combined the 1997 pre-merger and post-merger periods and have compared the total to 1998. Operating revenues decreased by $35.9 million in 1999 following a $61.7 million increase in 1998. The sources of changes in operating revenues during 1999 and 1998, as compared to the prior year, are summarized in the following table.
Sources of Revenue Changes 1999 1998 - ---------------------------------------------------------- (In millions) Change in retail kilowatt-hour sales $(14.8) $68.2 Decrease in average retail price (20.7) (8.8) Change in wholesale sales 2.0 (6.6) Other (2.4) 8.9 - ----------------------------------------------------------- Change in Operating Revenues $(35.9) $61.7 ===========================================================
Electric Sales After achieving record levels in 1998, operating revenues decreased in 1999. Lower average retail prices and reduced kilowatt-hour sales contributed to the decline. Kilowatt-hour sales to residential and commercial customers were both lower in 1999, compared to 1998, with sales to industrial customers increasing over the previous year. Despite the lower retail sales in 1999, total sales increased as a result of a strong increase in sales to the wholesale market resulting from weather-induced demand and available internal generation. However, the increase in wholesale revenues did not fully offset the decrease in retail revenues resulting from lower retail kilowatt-hour sales and the impact from lower unit prices experienced in 1999. In 1998, retail kilowatt-hour sales increased in all customer groups compared to 1997. Retail sales benefited from moderate growth in the customer base. Expanded production at the North Star BHP Steel (North Star) facility was a major contributor to the increase in industrial kilowatt-hour sales. The decrease in wholesale sales in 1998, compared to 1997, was primarily related to generating unit outages (described below) which reduced energy available for sale to the wholesale market. Changes in kilowatt-hour sales by customer class in 1999 and 1998 are summarized in the following table.
Changes in KWH Sales 1999 1998 - ----------------------------------------------- Residential (5.6%) 8.6% Commercial (7.8%) 9.5% Industrial 2.5% 9.6% - ----------------------------------------------- Total Retail (1.9%) 9.4% Wholesale 49.0% (39.1%) Total Sales 5.1% (1.5)% - -----------------------------------------------
Operating Expenses and Taxes Total operating expenses and taxes decreased $19.4 million in 1999, compared to 1998, and increased $23.7 million in 1998 from the preceding year. Fuel and purchased power were the primary factors contributing to the change in both years. The comparison of 1998 to 1997 also included various merger-related differences, which are discussed below. Purchased power costs accounted for all of the reduction in fuel and purchased power in 1999. Much of the improvement in purchased power costs occurred in the second quarter of 1999 due to the absence of unusual conditions experienced in 1998. Those costs were incurred during a period of record heat and humidity in late June 1998, which coincided with a regional power shortage resulting in high prices for purchased power. During this period, unscheduled outages at Beaver Valley Unit 2 and the Davis-Besse Plant required us to purchase significant quantities of power on the spot market. Although above normal temperatures were also experienced in 1999, we maintained a stronger capacity position compared to the previous year and better met customer demand from our own internal generation. In 1998, fuel and purchased power increased $21.3 million from 1997 for the reasons discussed above. Nuclear operating costs increased in 1999 from the prior year primarily due to expenses associated with the refueling outages at Beaver Valley Unit 2 and the Perry Plant. Reduced nuclear operating costs in 1998 resulted from lower costs at the Perry Plant which were partially offset by higher costs at the Beaver Valley and Davis-Besse plants. Other operating costs increased in 1999 from 1998 principally due to higher customer and sales expenses including expenditures for energy marketing programs, information system requirements and other customer-related costs. Lower depreciable asset balances, resulting from the purchase accounting adjustment, reduced depreciation and amortization in 1998 and the 1997 post-merger period. These reductions were partially offset by the amortization of goodwill recognized with the application of purchase accounting. Other Income Interest income on trust notes acquired in connection with the Bruce Mansfield Plant lease refinancing (see Note 2), which began in June 1997, increased other income in 1998 and the 1997 post-merger period. In the pre-merger period of 1997, interest income on the trust notes was substantially offset by merger-related expenses. Net Interest Charges Net interest charges decreased in 1999 from the preceding year primarily due to redemptions and refinancings of long-term debt. In 1998, net interest charges decreased principally due to the amortization of net premiums associated with the revaluation of long-term debt in connection with the merger, which also contributed to the decrease in interest charges in the post-merger period of 1997. In the pre-merger period of 1997, interest charges were higher because interest on new secured notes and short-term borrowings from the Bruce Mansfield Plant lease financing exceeded the expense reduction from the redemption and refinancing of debt securities. Extraordinary Item The pre-merger period of 1997 includes an after-tax write-off of $191.9 million in regulatory assets attributable to nuclear operations resulting from the discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation" which is discussed in Note 1 - Regulatory Assets. Preferred Stock Dividend Requirements Preferred stock dividend requirements in 1999 were increased and in 1998 were reduced due to the declaration of $3 million of preferred dividends as of the 1997 merger date for dividends attributable to 1998 (see Note 3c). Earnings on Common Stock Although purchased power costs and interest costs decreased in 1999, the lower sales revenues and increased nuclear and other operating costs more than offset these reduced costs which resulted in lower earnings on common stock in 1999 compared to 1998. Earnings on common stock decreased to $83.7 million in 1999 from $93.0 million in 1998. Pre-merger earnings on common stock in 1997 include an October 1997 write-off of certain regulatory assets. Excluding this write-off, pre-merger earnings on common stock were $22.3 million. For the seven-week post-merger period, earnings on common stock were $7.6 million. Capital Resources and Liquidity With the July 1999 passage of legislation in Ohio allowing retail customers to purchase electricity from alternative energy suppliers beginning January 2001, the arrival of new participants in the Ohio electricity market is expected in the near future. We continue to take steps designed to enhance our competitive position while seeking additional efficiencies. Through economic refinancings and redemptions, we continued to reduce the cost of debt and preferred stock, and improve our financial position in 1999. Net redemptions of long-term debt and preferred stock totaled $105.6 million in 1999, and we refinanced $91.0 million of long-term debt. During 1999, we reduced our total debt by approximately $102 million. Our common stockholder's equity percentage of capitalization increased to 32% at December 31, 1999 from 27% at the end of 1997. The merger resulted in improved credit ratings in 1997, which lowered the cost of new borrowings. The following table summarizes changes in credit ratings resulting from the merger: Credit Ratings Before and After Merger
Pre-Merger Post-Merger - ---------------------------------------------------------------------------- Standard Moody's Standard Moody's & Poor's Investors & Poor's Investors Corporation Service, Inc. Corporation Service, Inc. - ----------------------------------------------------------------------------- First mortgage bonds BB Ba2 BB+ Ba1 Subordinated debt B+ B1 BB- Ba3 Preferred stock B b2 BB- b1 - -----------------------------------------------------------------------------
Through economic refinancings and redemptions of higher cost debt, we have reduced the average cost of outstanding debt from 9.48% in 1994 to 8.01% in 1999. Long-term debt redemptions and refinancings completed in 1999 are expected to generate annual savings of about $9 million. Our cash requirements in 2000 for operating expenses, construction expenditures, preferred stock redemptions and scheduled debt maturities are expected to be met without issuing additional securities. We have cash requirements of approximately $581.1 million for the 2000-2004 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $76.0 million relates to 2000. We had about $8.2 million of cash and temporary investments and $33.9 million of indebtedness to associated companies as of December 31, 1999. Under our first mortgage indenture, as of December 31, 1999, we would have been permitted to issue up to $367.4 million of additional first mortgage bonds on the basis of bondable property additions and retired bonds. Based on our earnings coverage test and our charter, we could issue $250.3 million of preferred stock (assuming no additional debt was issued). Our capital spending for the period 2000-2004 is expected to be about $259 million (excluding nuclear fuel), of which approximately $97 million relates to 2000. Investments in additional nuclear fuel during the 2000-2004 period are estimated to be approximately $113 million, of which about $39 million applies to 2000. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $106 million and $23 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments, net of trust cash receipts, of approximately $363 million for the 2000-2004 period of which approximately $69 million relates to 2000. We recover the cost of nuclear fuel consumed and operating leases through our electric rates. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. 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 a corresponding change to the decommissioning liability, as described in Note 1. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.
Comparison of Carrying Value to Fair Value - ------------------------------------------------------------------------- There- Fair 2000 2001 2002 2003 2004 after Total Value - ------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income $ 15 $ 17 $ 20 $ 19 $ 9 $243 $323 $315 Average interest rate 7.6% 7.6% 7.6% 7.6% 7.6% 7.2% 7.3% - ------------------------------------------------------------------------- Liabilities - ------------------------------------------------------------------------- Long-term Debt: Fixed rate $ 76 $ 29 $164 $ 96 $215 $324 $904 $914 Average interest rate 7.3% 9.2% 8.6% 7.9% 7.8% 7.8% 8.0% Variable rate $ 91 $ 91 $ 88 Average interest rate 5.2% 5.2% Short-term Borrowings $ 34 $ 34 $ 34 Average interest rate 6.5% 6.5% - -------------------------------------------------------------------------
Outlook We continue to face many competitive challenges as the electric utility industry undergoes significant changes, including changing regulation and the entrance of more energy suppliers into the marketplace. Recent legislation allows retail customers in Ohio to purchase electricity from alternative energy suppliers beginning in 2001. Our existing regulatory plan provides us with a solid foundation to position us to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level. The transition plan ultimately approved by the Public Utilities Commission of Ohio (PUCO) will supersede our current Ohio rate plan. FirstEnergy's Rate Reduction and Economic Development Plan, approved in January 1997, provides interim rate credits to our customers during the periods covered by the plan. Our regulatory plan includes a commitment to accelerate depreciation on our regulatory books by recording an additional $660 million of depreciation over the plan period ending 2005. The plan does not provide for full recovery of nuclear operations; accordingly, we ceased application of SFAS 71 for our nuclear operations when implementation of the FirstEnergy regulatory plan became probable in October 1997. In July 1999, Ohio's new electric utility restructuring legislation, which will allow Ohio electric customers to select their generation suppliers beginning January 1, 2001, was signed into law. Among other things, the new law provides for a 5% reduction on the generation portion of residential customers' bills and the opportunity to recover transition costs, including regulatory assets, from January 1, 2001 through December 31, 2005. The period for the recovery of regulatory assets only can be extended up to December 31, 2010. The PUCO was authorized to determine the level of transition cost recovery, as well as the recovery period for the regulatory assets portion of those costs, in considering each Ohio electric utility's transition plan application. FirstEnergy filed a transition plan on our behalf as well as for its other Ohio electric utility operating companies -- Ohio Edison Company (OE) and The Cleveland Electric Illuminating Company (CEI) -- on December 22, 1999. The plan was originally filed with the PUCO on October 4, 1999, but was refiled to conform to PUCO rules established on November 30, 1999. The new filing also included additional information on our plan to turn over control, and perhaps ownership, of our transmission assets to the Alliance Regional Transmission Organization (Alliance), which is discussed below. The transition plan itemizes, or unbundles, the current price of electricity into separate components -- including generation, transmission, distribution and transition charges. As required by the PUCO's rules, FirstEnergy's filing also included proposals on corporate separation of regulated and unregulated operations, operational and technical support changes needed to accommodate customer choice, an education program to inform customers of their options under the law, and how our transmission system will be operated to ensure access to all users. Under our transition plan, customers who remain with us as their generation provider will continue to receive savings under our rate plan, expected to total $96.3 million between 2000 and 2005. In addition, FirstEnergy's Ohio utility customers will save $358 million through reduced charges for taxes and a 5% reduction in the price of generation for residential customers beginning January 1, 2001. Customers' prices are expected to be frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the 5% reduction in the price of generation for residential customers. The plan proposes recovery of generation-related transition costs of approximately $859 million ($764 million, net of deferred income taxes) over the market development period; transition costs related to regulatory assets aggregating approximately $842 million ($573 million, net of deferred income taxes) are expected to recovered over the period of 2001 through 2007. When the transition plan is approved by the PUCO, the application of SFAS 71 to our nonnuclear generation business will be discontinued. In the meantime, we will continue to bill and collect cost-based rates related to that business through the end of 2000. If the transition plan ultimately approved by the PUCO does not provide adequate recovery of our nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on our results of operations and financial condition. We believe that we will continue to bill and collect cost-based rates for our transmission and distribution services, which will remain regulated; accordingly, it is appropriate that we continue the application of SFAS 71 to those operations after December 31, 2000. We have been named as a "potentially responsible party" (PRP) for three sites listed on the Superfund National Priorities List and are aware of our potential involvement in the cleanup of several other sites. Allegations that we disposed of hazardous waste at these sites, and the amount 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. If we were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $101 million. However, we believe that the actual cleanup costs will be substantially less than 100% and that most of the other parties involved are financially able to contribute their share. We have accrued a $627,000 liability as of December 31, 1999, based on estimates of the costs of cleanup and our proportionate responsibility for such costs. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition, cash flows or results of operations. On October 27, 1999, the Federal Energy Regulatory Commission (FERC) approved FirstEnergy's plan to transfer our transmission assets and those of OE, CEI and Pennsylvania Power Company to American Transmission Systems Inc. (ATSI). We subsequently received approval from the PUCO in February 2000. Regulatory approval is also required from the Securities and Exchange Commission. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent, regional transmission organization (RTO). In working toward that goal, FirstEnergy joined with four other companies -- American Electric Power, Consumers Energy, Detroit Edison and Virginia Power -- to form the Alliance RTO. On June 3, 1999, the Alliance submitted an application to FERC to form an independent, for profit RTO. On December 15, 1999, FERC issued an order conditionally approving the Alliance's application. Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. We have not completed quantifying the impacts of adopting SFAS 133 on our financial statements or determined the method of its adoption. However, SFAS 133 could increase volatility in earnings and other comprehensive income. We anticipate adopting the new statement on its amended effective date of January 1, 2001. Year 2000 Update Based on the results of our remediation and testing efforts, we filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission, and PUCO that as of June 30, 1999, our generation, transmission, and distribution systems were ready to serve customers in the year 2000. We have since experienced no failures or interruptions of service to our customers resulting from the Year 2000 issue, which was consistent with our expectations. We spent $15.0 million on Year 2000 related costs through December 31, 1999, which was slightly lower than previously estimated. Of this total, $12.3 million was capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $2.7 million was expensed as incurred. We do not believe there are any continuing Year 2000 issues to be addressed, nor any additional material Year 2000 expenditures. Forward-Looking Information This discussion includes forward-looking statements based on information currently available to management that are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes, and the availability and cost of capital and other similar factors. THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, ------------------- Nov. 8- Jan. 1- 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - ------------------------------------------------------------------------------------------------------------ (In thousands)| | OPERATING REVENUES (1) $921,159 $957,037 $122,669 | $ 772,707 -------- -------- -------- | --------- OPERATING EXPENSES AND TAXES: | Fuel and purchased power 169,153 202,239 22,926 | 158,027 Nuclear operating costs 175,015 160,080 29,372 | 138,559 Other operating costs 171,427 166,935 20,608 | 145,174 -------- -------- -------- | --------- Total operation and maintenance expenses 515,595 529,254 72,906 | 441,760 Provision for depreciation and amortization 103,725 106,433 14,860 | 98,986 General taxes 87,862 86,661 13,126 | 77,426 Income taxes 50,205 54,428 2,722 | 31,253 -------- -------- -------- | -------- Total operating expenses and taxes 757,387 776,776 103,614 | 649,425 -------- -------- -------- | -------- | OPERATING INCOME 163,772 180,261 19,055 | 123,282 | OTHER INCOME 12,744 12,225 2,153 | 2,153 -------- -------- -------- | ------- | INCOME BEFORE NET INTEREST CHARGES 176,516 192,486 21,208 | 125,435 -------- -------- -------- | ------- | NET INTEREST CHARGES: | Interest on long-term debt 82,204 88,364 13,689 | 74,264 Allowance for borrowed funds used during | construction (1,443) (1,273) (138) | (259) Other interest expense (credit) (4,190) (1,187) 41 | 9,661 -------- -------- -------- | -------- Net interest charges 76,571 85,904 13,592 | 83,666 -------- -------- -------- | -------- | INCOME BEFORE EXTRAORDINARY ITEM 99,945 106,582 7,616 | 41,769 | EXTRAORDINARY ITEM (NET OF INCOME | TAXES) (Note 1) -- -- -- | (191,901) -------- -------- -------- | -------- | NET INCOME (LOSS) 99,945 106,582 7,616 | (150,132) | PREFERRED STOCK DIVIDEND | REQUIREMENTS 16,238 13,610 -- | 19,435 -------- -------- -------- | --------- EARNINGS (LOSS) ON COMMON STOCK $ 83,707 $ 92,972 $ 7,616 | $(169,567) ======== ======== ======== | ========= (1) Includes electric sales to associated companies of $123.3 million, $123.6 million, $17.7 million and $98.5 million in 1999, 1998, the November 8 - December 31, 1997 period and the January 1-November 7, 1997 period, respectively. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS
At December 31, 1999 1998 - --------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service $1,776,534 $1,757,364 Less-Accumulated provision for depreciation 670,866 626,942 ---------- ---------- 1,105,668 1,130,422 ---------- ---------- Construction work in progress- Electric plant 95,854 26,603 Nuclear fuel 386 11,191 ---------- ---------- 96,240 37,794 ---------- ---------- 1,201,908 1,168,216 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust (Note 2) 295,454 310,762 Nuclear plant decommissioning trusts 123,500 102,749 Other 4,678 3,656 ---------- ---------- 423,632 417,167 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 312 4,140 Receivables- Customers 12,965 7,338 Associated companies 40,998 30,006 Other (less accumulated provision of $100,000 for uncollectible accounts in 1998) 9,827 31,688 Notes receivable from associated companies 7,863 101,236 Materials and supplies, at average cost- Owned 23,243 25,745 Under consignment 20,232 18,148 Prepayments and other 25,931 25,647 ---------- ---------- 141,371 243,948 ---------- ---------- DEFERRED CHARGES: Regulatory assets 385,284 417,704 Goodwill 465,169 474,593 Property taxes 43,448 42,842 Other 6,116 4,295 ---------- ---------- 900,017 939,434 ---------- ---------- $2,666,928 $2,768,765 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholder's equity $ 551,704 $ 575,692 Preferred stock- Not subject to mandatory redemption 210,000 210,000 Long-term debt 981,029 1,083,666 ---------- ---------- 1,742,733 1,869,358 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 95,765 130,426 Accounts payable- Associated companies 20,537 34,260 Other 27,100 34,275 Notes payable to associated companies 33,876 -- Accrued taxes 57,742 62,288 Accrued interest 21,961 24,965 Other 60,414 39,639 ---------- ---------- 317,395 325,853 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 172,236 151,321 Accumulated deferred investment tax credits 38,748 40,670 Nuclear plant decommissioning costs 130,116 109,366 Pensions and other postretirement benefits 122,986 122,314 Other 142,714 149,883 ---------- ---------- 606,800 573,554 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) ---------- ---------- $2,666,928 $2,768,765 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- (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) 27,475 51,463 ---------- ---------- Total common stockholder's equity 551,704 575,692 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ---------------- ------------------- 1999 1998 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 --------- --------- -------- ---------- ---------- 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 --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption 5,700,000 5,700,000 $216,140 210,000 210,000 ========= ========= ======== ---------- ---------- Cumulative, $100 par value- Subject to Mandatory Redemption (Note 3D): $9.375 -- 16,900 $ -- -- 1,690 Redemption Within One Year -- (1,690) --------- --------- -------- ---------- ---------- Total Subject to Mandatory Redemption -- 16,900 $ -- -- -- ========= ========= ======== ---------- ---------- LONG-TERM DEBT (Note 3E): First mortgage bonds: 7.250% due 1999 -- 85,000 8.000% due 2000-2003 34,925 35,325 7.875% due 2004 145,000 145,000 ---------- ---------- Total first mortgage bonds 179,925 265,325 ---------- ---------- Unsecured notes and debentures: 5.750% due 2000-2003 -- 3,600 10.000% due 2000-2010 1,000 1,000 8.700% due 2002 135,000 135,000 * 4.850% due 2030 34,850 -- * 5.100% due 2033 5,700 -- * 5.250% due 2033 31,600 -- * 5.580% due 2033 18,800 -- ---------- ---------- Total unsecured notes and debentures 226,950 139,600 ---------- ----------
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
At December 31 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ (In thousands) LONG-TERM DEBT (Cont.): Secured notes: 7.720% due 1999 -- 15,000 8.470% due 1999 -- 3,500 7.190% due 2000 45,000 45,000 7.380% due 2000 14,000 14,000 7.460% due 2000 16,500 16,500 7.500% due 2000 100 100 8.500% due 2001 8,000 8,000 9.500% due 2001 21,000 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 * 3.050% due 2011 -- 31,250 8.000% due 2019 67,300 67,300 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 7.400% due 2022 30,900 30,900 6.875% due 2023 20,200 20,200 7.550% due 2023 -- 37,300 8.000% due 2023 30,500 49,300 6.100% due 2027 10,100 10,100 5.375% due 2028 3,751 3,751 ---------- ---------- Total secured notes 587,751 693,601 ---------- ---------- Capital lease obligations (Note 2) 45,247 67,453 ---------- ---------- Net unamortized premium on debt 36,921 46,423 ---------- ---------- Long-term debt due within one year (95,765) (128,736) ---------- ---------- Total long-term debt 981,029 1,083,666 ---------- ---------- TOTAL CAPITALIZATION $1,742,733 $1,869,358 ========== ========== * Denotes variable rate issue with December 31, 1999 interest rate shown for only December 31, 1999 balances and December 31, 1998 interest rate shown for only December 31, 1998 balances. 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
Comprehensive Other Income (Loss) Number Par Paid-In Retained (Note 3B) of Shares Value Capital Earnings ------------- --------- ----- ------- -------- (Dollars in Thousands) Balance, January 1, 1997 39,133,887 $195,687 $ 602,113 $ 5,437 Net loss $(150,132) (150,132) ========= Cash dividends on preferred stock (20,973) ___________________________________________________________________________________________________________ Purchase accounting fair value adjustment (17) (273,749) 165,668 Net income $ 7,616 7,616 ========= - --------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 39,133,887 195,670 328,364 7,616 Purchase accounting fair value adjustment 195 Net income $ 106,582 106,582 ========= Cash dividends on preferred stock (12,252) Cash dividends on common stock (50,483) - --------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 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 ==========================================================================================================
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, 1997 5,700,000 $210,000 50,200 $ 5,020 Redemptions- $100 par $9.375 (16,650) (1,665) _____________________________________________________________________________________________________ Balance, December 31, 1997 5,700,000 210,000 33,550 3,355 Redemptions- $100 par $9.375 (16,650) (1,665) - ----------------------------------------------------------------------------------------------------- Balance, December 31, 1998 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 -- $ -- ===================================================================================================== 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, ------------------- Nov. 8- Jan. 1- 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - --------------------------------------------------------------------------------------------------------------------------- (In thousands) | | CASH FLOWS FROM OPERATING ACTIVITIES: | Net Income (Loss) $ 99,945 $ 106,582 $ 7,616 | $(150,132) Adjustments to reconcile net income (loss) to net | cash from operating activities: | Provision for depreciation and amortization 103,725 106,433 14,860 | 98,986 Nuclear fuel and lease amortization 25,166 24,071 5,316 | 30,354 Deferred income taxes, net 27,551 38,840 1,386 | (121,002) Investment tax credits, net (1,922) (2,595) (400) | (3,601) Allowance for equity funds used during construction -- -- (61) | (776) Extraordinary item -- -- -- | 295,233 Receivables 5,242 (32,169) 1,923 | 317 Materials and supplies 418 (2,463) (4,430) | 6,543 Accounts payable (20,898) 4,559 (12,989) | 18,679 Other 1,427 19,172 (29,443) | 55,233 --------- -------- -------- | -------- Net cash provided from (used for) operating activities 240,654 262,430 (16,222) | 229,834 --------- -------- -------- | -------- | CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing- | Long-term debt 89,330 3,629 -- | 149,804 Short-term borrowings, net 33,876 -- -- | -- Redemptions and Repayments- | Preferred stock 1,690 1,665 -- | 1,665 Long-term debt 226,695 90,929 -- | 85,419 Dividend Payments- | Common stock 106,351 50,483 -- | -- Preferred stock 16,238 16,378 4,156 | 12,589 --------- -------- -------- | -------- Net cash provided from (used for) financing | activities (227,768) (155,826) (4,156) | 50,131 --------- -------- -------- | -------- CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions 107,338 45,870 6,568 | 36,680 Loans to associated companies -- 60,434 -- | -- Loan payments from associated companies (93,373) -- (15,297) | (25,718) Capital trust investments (15,308) (2,111) (7,314) | 320,187 Other 18,057 20,441 (6,585) | 10,350 --------- --------- -------- | --------- Net cash used for (provided from) investing activities 16,714 124,634 (22,628) | 341,499 --------- --------- -------- | --------- Net increase (decrease) in cash and cash equivalents (3,828) (18,030) 2,250 | (61,534) Cash and cash equivalents at beginning of period 4,140 22,170 19,920 | 81,454 --------- --------- -------- | --------- Cash and cash equivalents at end of period $ 312 $ 4,140 $ 22,170 | $ 19,920 ========= ========= ======== | ========= SUPPLEMENTAL CASH FLOWS INFORMATION: | Cash Paid During the Period- | Interest (net of amounts capitalized) $ 84,538 $ 93,828 $ 16,652 | $ 72,757 ========= ========= ======== | ========= Income taxes $ 40,461 $ 6,935 $ 28,000 | $ 25,300 ========= ========= ======== | ========= 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, -------------------- Nov. 8- Jan. 1- 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - ------------------------------------------------------------------------------------------------------------------ (In thousands) | | GENERAL TAXES: | Real and personal property $ 44,280 $ 44,993 $ 5,998 | $ 40,495 State gross receipts 35,706 35,114 5,826 | 28,590 Social security and unemployment 6,801 5,065 818 | 4,444 Other 1,075 1,489 484 | 3,897 -------- -------- --------- | --------- Total general taxes $ 87,862 $ 86,661 $ 13,126 | $ 77,426 ======== ======== ========= | ========= PROVISION FOR INCOME TAXES: | Currently payable- | Federal $ 29,728 $ 22,767 $ 2,859 | $ 55,192 State* 1,489 1,954 209 | -- -------- -------- --------- | --------- 31,217 24,721 3,068 | 55,192 -------- -------- --------- | --------- Deferred, net- | Federal 27,745 38,851 1,404 | (121,002) State* (194) (11) (18) | -- -------- -------- --------- | --------- 27,551 38,840 1,386 | (121,002) -------- -------- --------- | --------- Investment tax credit amortization (1,922) (2,595) (400) | (3,601) -------- -------- --------- | --------- Total provision for income taxes $ 56,846 $ 60,966 $ 4,054 | $ (69,411) ======== ======== ========= | ========= INCOME STATEMENT CLASSIFICATION | OF PROVISION FOR INCOME TAXES: | Operating income $ 50,205 $ 54,428 $ 2,722 | $ 31,253 Other income 6,641 6,538 1,332 | 2,667 Extraordinary item -- -- -- | (103,331) -------- -------- --------- | --------- Total provision for income taxes $ 56,846 $ 60,966 $ 4,054 | $ (69,411) ======== ======== ========= | ========= RECONCILIATION OF FEDERAL INCOME TAX | EXPENSE AT STATUTORY RATE TO TOTAL | PROVISION FOR INCOME TAXES: | Book income before provision for income taxes $156,791 $167,548 $ 11,670 | $(219,543) ======== ======== ========= | ========= Federal income tax expense at statutory rate $ 54,877 $ 58,642 $ 4,085 | $ (76,840) Increases (reductions) in taxes resulting from- | Amortization of investment tax credits (1,922) (2,595) (400) | (3,601) Depreciation -- -- -- | 3,428 Amortization of tax regulatory assets (1,735) (1,739) (145) | -- Amortization of goodwill 4,280 4,421 670 | -- Other, net 1,346 2,237 (156) | 7,602 -------- -------- --------- | --------- Total provision for income taxes $ 56,846 $ 60,966 $ 4,054 | $ (69,411) ======== ======== ========= | ========= ACCUMULATED DEFERRED INCOME TAXES | AT DECEMBER 31: | Property basis differences $195,326 $195,948 $ 190,636 | Deferred nuclear expense 76,449 79,355 83,052 | Deferred sale and leaseback costs (21,443) (20,623) (17,431) | Unamortized investment tax credits (18,324) (19,515) (20,960) | Unused alternative minimum tax credits (30,055) (66,322) (108,156) | Other (29,717) (17,522) (22,598) | -------- -------- --------- | Net deferred income tax liability $172,236 $151,321 $ 104,543 | ======== ======== ========= | * For the period prior to November 8, 1997, state income taxes are included in the General Taxes section above. These amounts are not material and no restatement was made. 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). Prior to the merger in November 1997 (see Note 7), the Company and CEI were the principal operating subsidiaries of Centerior Energy Corporation (Centerior). The merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles, and the applicable effects were reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date. Accordingly, the post-merger financial statements reflect a new basis of accounting and pre-merger period and post-merger period financial results (separated by a heavy black line) are presented. 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 generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. 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 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, 1999 or 1998, with respect to any particular segment of the Company's customers. The Company and CEI sell on a daily basis substantially all of their retail customer accounts receivable to Centerior Funding Corporation (Centerior Funding), a wholly owned subsidiary of CEI, under an asset-backed securitization agreement which expires in 2001. In July 1996, Centerior funding completed a public sale of $150 million of receivables-backed investor certificates in a transaction that qualified for sale accounting treatment. REGULATORY PLAN- FirstEnergy's Rate Reduction and Economic Development Plan for the Company was approved in January 1997, to be effective upon consummation of the merger. The regulatory plan was to maintain current base electric rates for the Company through December 31, 2005. At the end of the regulatory plan period, the Company's base rates were to be reduced by $93 million (approximately 15 percent below current levels). The regulatory plan also revised the Company's fuel cost recovery method. The Company formerly recovered fuel-related costs not otherwise included in base rates from retail customers through a separate energy rate. In accordance with the regulatory plan, the Company's fuel rate would be frozen through the regulatory plan period, subject to limited periodic adjustments. As part of the regulatory plan, transition rate credits were implemented for customers, which are expected to reduce operating revenues for the Company by approximately $111 million during the regulatory plan period. In July 1999, Ohio's new electric utility restructuring legislation which will allow Ohio electric customers to select their generation suppliers beginning January 1, 2001, was signed into law. Among other things, the new law provides for a five percent reduction on the generation portion of residential customers' bills and the opportunity to recover transition costs, including regulatory assets, from January 1, 2001 through December 31, 2005. The period for the recovery of regulatory assets only can be extended up to December 31, 2010. The PUCO was authorized to determine the level of transition cost recovery, as well as the recovery period for the regulatory assets portion of those costs, in considering each Ohio electric utility's transition plan application. FirstEnergy, on behalf of its Ohio electric utility operating companies - the Company, CEI and Ohio Edison Company (OE) - on December 22, 1999 refiled its transition plan under Ohio's new electric utility restructuring law. The plan was originally filed with the PUCO on October 4, 1999, but was refiled to conform to PUCO rules established on November 30, 1999. The new filing also included additional information on FirstEnergy's plans to turn over control, and perhaps ownership, of its transmission assets to the Alliance Regional Transmission Organization. The PUCO indicated that it will endeavor to issue its order in FirstEnergy's case within 275 days of the initial October filing date. The transition plan itemizes, or unbundles, 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 filing also included its proposals on corporate separation of its regulated and unregulated operations, operational and technical support changes needed to accommodate customer choice, an education program to inform customers of their options under the new law, and how FirstEnergy's transmission system will be operated to ensure access to all users. Under the plan, customers who remain with the Company as their generation provider will continue to receive savings under the Company's rate plans, expected to total $96 million between 2000 and 2005. In addition, FirstEnergy's Ohio utility customers will save $358 million through reduced charges for taxes and a five percent reduction in the price of generation for residential customers beginning January 1, 2001. Customer prices are expected to be frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the five percent reduction in the price of generation for residential customers. The plan proposes recovery of the Company's generation-related transition costs of approximately $859 million ($764 million, net of deferred income taxes) over the market development period; its transition costs related to regulatory assets aggregating approximately $842 million ($573 million, net of deferred income taxes) will be recovered over the period of 2001 through 2007. All of the Company's regulatory assets related to its nonnuclear operations are being recovered under provisions of the regulatory plan (see "Regulatory Assets"). The Company recognized a fair value purchase accounting adjustment to reduce nuclear plant by $842 million in connection with the FirstEnergy merger (see Note 7); that fair value adjustment recognized for financial reporting purposes will ultimately satisfy the $647 million asset reduction commitment contained in the regulatory plan. For regulatory purposes, the Company will recognize the $647 million of accelerated amortization over the regulatory plan period. 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 the Company's nuclear operations. The Company's net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $530 million as of December 31, 1999. 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 in 1997), 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 3.4% (reflecting the nuclear asset fair value adjustment discussed above) in 1999 and 1998 and 2.6% in the post-merger period in 1997. Annual depreciation expense includes approximately $9.8 million for future decommissioning costs applicable to the Company's ownership interests in three nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $422 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 $101 million for decommissioning through its electric rates from customers through December 31, 1999. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Company expects that additional amount to be recoverable from its customers. The Company has approximately $123.5 million invested in external decommissioning trust funds as of December 31, 1999. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Company has also recognized an estimated liability of approximately $7.7 million at December 31, 1999 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. The Financial Accounting Standards Board (FASB) issued a proposed accounting standard for nuclear decommissioning costs in 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could increase; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) income from the external decommissioning trusts could be reported as investment income. The FASB subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in the first quarter of 2000. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company, CEI, Duquesne Light Company (Duquesne), OE and its wholly owned subsidiary, Pennsylvania Power Company (Penn), constituted the Central Area Power Coordination Group (CAPCO). The CAPCO companies formerly owned and/or leased, 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. On March 26, 1999, FirstEnergy completed its agreements with Duquesne to exchange certain generating assets. All regulatory approvals were received by October 1999. In December 1999, Duquesne transferred 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by CEI, OE and Penn. Under the agreements, Duquesne was no longer a participant in the CAPCO arrangements after the exchange. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 1999 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 $ 40.6 $12.6 $ 4.4 18.61% Beaver Valley Unit 2 58.2 5.7 3.2 19.91% Davis-Besse 212.1 15.7 4.4 48.62% Perry 332.7 26.0 4.9 19.91% - ------------------------------------------------------------------------ Total $643.6 $60.0 $16.9 ========================================================================
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- The Company leases its nuclear fuel and pays for the fuel as it is consumed (see Note 2). The Company amortizes the cost of nuclear fuel based on the rate of consumption. The Company's electric rates include amounts for the future disposal of spent nuclear fuel based upon the payments to the DOE. 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. Alternative minimum tax credits of $30 million, which may be carried forward indefinitely, are available to reduce future federal income taxes. Since the Company became a wholly owned subsidiary of FirstEnergy on November 8, 1997, 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- Centerior had sponsored jointly with the Company, CEI and Centerior Service Company (Service Company) a noncontributory pension plan (Centerior Pension Plan) which covered all employee groups. Upon retirement, employees receive a monthly pension generally based on the length of service and compensation. In 1998, the Centerior Pension Plan was merged into the FirstEnergy pension plan. In connection with the OE-Centerior merger, the Company recorded fair value purchase accounting adjustments to recognize the net gain, prior service cost, and net transition asset (obligation) associated with the pension and postretirement benefit plans. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the FirstEnergy plans in 1999 and 1998 and amounts recognized on the Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits -------------------- ----------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------ (In millions) Change in benefit obligation: Benefit obligation as of January 1 $1,500.1 $1,327.5 $ 601.3 $ 534.1 Service cost 28.3 25.0 9.3 7.5 Interest cost 102.0 92.5 40.7 37.6 Plan amendments -- 44.3 -- 40.1 Actuarial loss (gain) (155.6) 101.6 (17.6) 10.7 Net increase from asset swap 14.8 -- 12.5 -- Benefits paid (95.5) (90.8) (37.8) (28.7) - ------------------------------------------------------------------------- Benefit obligation as of December 31 1,394.1 1,500.1 608.4 601.3 - ------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1 1,683.0 1,542.5 3.9 2.8 Actual return on plan assets 220.0 231.3 0.6 0.7 Company contribution -- -- 0.4 0.4 Benefits paid (95.5) (90.8) -- -- - ------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,807.5 1,683.0 4.9 3.9 - ------------------------------------------------------------------------- Funded status of plan 413.4 182.9 (603.5) (597.4) Unrecognized actuarial loss (gain) (303.5) (110.8) 24.9 30.6 Unrecognized prior service cost 57.3 63.0 24.1 27.4 Unrecognized net transition obligation (asset) (10.1) (18.0) 120.1 129.3 - ------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 157.1 $ 117.1 $(434.4) $(410.1) ========================================================================= Assumptions used as of December 31: Discount rate 7.75% 7.00% 7.75% 7.00% 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%
The Consolidated Balance Sheet classification of Pensions and Other Postretirement Benefits at December 31, 1999 and 1998 includes the Company's share of the net pension liability of $11.8 million and $17.3 million, respectively; and the Company's share of the accrued postretirement benefit liability of $110.2 million and $105.0 million, respectively. Net pension and other postretirement benefit costs for the three years ended December 31, 1999 (FirstEnergy plans in 1999 and 1998 and Centerior plans in 1997) were computed as follows:
Pension Benefits Other Postretirement Benefits ------------------------------- ----------------------------- 1997 1997 ----------------- ------------------- Nov. 8- Jan. 1- Nov. 8- Jan. 1- 1999 1998 Dec. 31 Nov. 7 1999 1998 Dec. 31 Nov. 7 - -------------------------------------------------------------------------------------------------------- | (In millions) | | | Service cost $ 28.3 $ 25.0 $ 2.3 | $ 11.1 $ 9.3 $ 7.5 $0.5 | $ 1.8 Interest cost 102.0 92.5 6.1 | 25.4 40.7 37.6 2.8 | 13.5 Expected return on plan assets (168.1) (152.7) (7.7) | (38.0) (0.4) (0.3) -- | -- Amortization of transition | | obligation (asset) (7.9) (8.0) -- | (3.0) 9.2 9.2 -- | 6.4 Amortization of prior service cost 5.7 2.3 -- | 1.1 3.3 (0.8) -- | -- Recognized net actuarial loss (gain) -- (2.6) -- | (0.5) -- -- -- | (0.9) Voluntary early retirement | | program expense -- -- 23.0 | 4.8 -- -- -- | -- - ----------------------------------------------------------------|-------------------------------------- Net benefit cost $(40.0) $(43.5) $23.7 | $ 0.9 $62.1 $53.2 $3.3 | $20.8 ================================================================|==============================|======= Company's share of total plan | | costs $ (8.3) $ (1.1) $ 5.7 | $ 3.5 $12.6 $ 7.5 $1.5 | $ 8.9 - -------------------------------------------------------------------------------------------------------
The FirstEnergy plan's health care trend rate assumption is 5.3% in 2000, 5.2% in 2001 and 5.0% for 2002 and 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 $4.5 million and the postretirement benefit obligation by $72.0 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.5 million and the postretirement benefit obligation by $58.2 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and interest charges include amounts for transactions with affiliated companies in the ordinary course of business operations. The Company's transactions with CEI and the other FirstEnergy operating subsidiaries (OE and Penn) from the November 8, 1997 merger date are primarily for firm power, interchange power, transmission line rentals and jointly owned power plant operations and construction (see Note 7). Beginning in May 1996, Centerior Funding began serving as the transferor in connection with the accounts receivable securitization for the Company and CEI. The Company is selling 150 megawatts of its Beaver Valley Unit 2 leased capacity entitlement to CEI. Operating revenues for this transaction were $104.3 million, $98.5 million, $16.8 million and $87.4 million in 1999, in 1998, the November 8-December 31, 1997 period and the January 1-November 7, 1997 period, respectively. This sale is expected to continue through the end of the lease period. (See Note 2.) FirstEnergy and, prior to 1999, the Service Company (formerly a wholly owned subsidiary of Centerior and now a wholly owned subsidiary of FirstEnergy) provided support services at cost to the Company and other affiliated companies. FirstEnergy billed the Company $59.4 million in 1999 and the Service Company billed the Company $39.0 million, $13.9 million and $51.5 million in 1998, the November 8-December 31, 1997 period and the January 1-November 7, 1997 period, respectively, for such services. 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 December 31, 1998, cash and cash equivalents included $4 million to be used for the redemption of long-term debt in 1999. The Company reflects temporary cash investments at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $8.5 million, $27.9 million, $2.7 million and $11.7 million in 1999, 1998, the November 8-December 31, 1997 period and the January 1-November 7, 1997 period, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles 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:
1999 1998 - -------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------- (In millions) Long-term debt $995 $1,002 $1,098 $1,174 Preferred stock $ -- $ -- $ 2 $ 2 Investments other than cash and cash equivalents: Debt securities - (Maturing in more than 10 years) $293 $ 270 $ 308 $ 301 Equity securities 3 3 3 3 All other 124 128 103 105 - -------------------------------------------------------------------------- $420 $ 401 $ 414 $ 409 ==========================================================================
The carrying value of long-term debt was adjusted to fair value in connection with the OE-Centerior merger and 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 a corresponding change to the decommissioning liability. The other debt and equity securities referred to above are in the held-to-maturity category. 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 related to nonnuclear operations are being recovered from customers under the Company's regulatory plan. Based on the regulatory plan, at this time, the Company is continuing to bill and collect cost-based rates relating to nonnuclear operations and continues the application of SFAS 71 to those operations. The PUCO indicated that it will endeavor to issue its order related to FirstEnergy's transition plan by mid- 2000. The application of SFAS 71 to the Company's nonnuclear generation businesses will be discontinued at that time. If the transition plan ultimately approved by the PUCO for the Company does not provide adequate recovery of its nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on the results of operations and financial condition for the Company. The Company will continue 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 respective operations after December 31, 2000. The Company discontinued the application of SFAS 71 for its nuclear operations in October 1997 when implementation of the regulatory plan became probable. The regulatory plan does not provide for full recovery of the Company's nuclear operations. In accordance with SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of SFAS 71," the Company was required to remove from its balance sheet all regulatory assets and liabilities related to the portion of its business for which SFAS 71 was discontinued and to assess all other assets for impairment. Regulatory assets attributable to nuclear operations of $295.2 million ($191.9 million after taxes) were written off as an extraordinary item in October 1997. The regulatory assets attributable to nuclear operations written off represent the net amounts due from customers for future federal income taxes when the taxes become payable, which, under the regulatory plan, are no longer recoverable from customers. The remainder of the Company's business continues to comply with the provisions of SFAS 71. All remaining regulatory assets of the Company continue to be recovered through rates applicable for the nonnuclear portion of the Company's business. For financial reporting purposes, the net book value of the nuclear generating units was not impaired as a result of the regulatory plan. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following:
1999 1998 - --------------------------------------------------------------- (In millions) Nuclear unit expenses $192.8 $200.1 Rate stabilization program deferrals 156.2 164.1 Sale and leaseback costs 33.7 41.3 Loss on reacquired debt 18.3 20.0 Other (15.7) (7.8) - ----------------------------------------------------------------- Total $385.3 $417.7 =================================================================
2. LEASES: The Company leases certain generating facilities, nuclear fuel, certain transmission 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, 1999 were approximately $1.1 billion.) Nuclear fuel is currently financed for the Company and CEI through leases with a special-purpose corporation. As of December 31, 1999, $116 million of nuclear fuel ($44 million for the Company) was financed under a lease financing arrangement totaling $145 million ($30 million of intermediate-term notes and $115 million from bank credit arrangements). The notes mature in August 2000 and the bank credit arrangements expire in September 2000. Lease rates are based on intermediate-term note rates, bank rates and commercial paper rates. 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, 1999 are summarized as follows:
Nov. 8 - Jan. 1 - 1999 1998 Dec. 31, 1997 Nov. 7, 1997 - ------------------------------------------------------------------------ (In millions) Operating leases Interest element $ 61.4 $ 59.2 $28.0 $ 57.4 Other 45.3 44.9 13.5 23.1 Capital leases Interest element 5.3 4.9 1.0 6.0 Other 30.4 25.1 5.3 30.4 - ---------------------------------------------------------------------- Total rentals $142.4 $134.1 $47.8 $116.9 ======================================================================
The future minimum lease payments as of December 31, 1999 are:
Operating Leases ---------------------------- Capital Lease Capital Leases Payments Trust Net - -------------------------------------------------------------------- (In millions) 2000 $24.6 $ 104.8 $ 35.4 $ 69.4 2001 14.0 108.0 36.4 71.6 2002 7.3 111.0 37.9 73.1 2003 2.4 111.7 36.0 75.7 2004 0.9 97.9 24.3 73.6 Years thereafter 0.4 1,220.5 297.2 923.3 - -------------------------------------------------------------------- Total minimum lease payments 49.6 $1,753.9 $467.2 $1,286.7 Interest portion 4.4 ======== ====== ======== - ------------------------------------- Present value of net minimum lease payments 45.2 Less current portion 19.7 - ------------------------------------ Noncurrent portion $ 25.5 ====================================
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 in 2000, 2004 and 2007 to a trust as security for the issuance of a like principal amount of secured notes due in 2000, 2004 and 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 reduce lease costs related to that transaction. 3. CAPITALIZATION: (A) RETAINED EARNINGS- The Company has a provision in its mortgage applicable to $34.925 million of its 8.00% First Mortgage Bonds due 2003 that requires common stock dividends to be paid out of its total balance of retained earnings. The merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 8, 1997 merger date. (B) COMPREHENSIVE INCOME- In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Consolidated Statements of Common Stockholder's Equity. Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholder's equity except dividends to stockholders. Net income and comprehensive income are the same for each period presented. (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 fluctuate based on prevailing interest rates and market conditions. The dividend rates for these issues averaged 7.00% and 7.13%, respectively, in 1999. The Company has 5 million authorized and unissued shares of preference stock with a $25 par value. A liability of $5 million was included in the Company's net assets as of the merger date for preferred dividends declared attributable to the post-merger period. Accordingly, no accrual for preferred stock dividend requirements was included on the Company's November 8, 1997 to December 31, 1997 Consolidated Statement of Income. This liability was subsequently reduced to zero in 1998. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- All preferred stock subject to mandatory redemption outstanding as of December 31, 1998 was redeemed during 1999. (E) 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, 1999, 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 2000 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) -------------------- 2000 $ 76.0 2001 35.1 2002 196.0 2003 96.2 2004 268.7 --------------------
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: FirstEnergy has a $150 million revolving credit facility that expires in November 2000. FirstEnergy may borrow under the facility and could transfer any of its borrowed funds to the Company and CEI, with all borrowings jointly and severally guaranteed by the Company and CEI. The credit agreement is secured with first mortgage bonds of the Company and CEI in the proportion of 60% and 40%, respectively. The credit agreement also provides the participating banks with a subordinate mortgage security interest in the properties of the Company and CEI. The banks' fee is 0.50% per annum payable quarterly in addition to interest on any borrowings. (FirstEnergy had $90 million of borrowings under the facility at December 31, 1999.) Also, the Company may borrow from its affiliates on a short-term basis. At December 31, 1999, the Company had total short-term borrowings of $33.9 million from its affiliates with a weighted average interest rate of approximately 6.5%. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $259 million for property additions and improvements from 2000-2004, of which approximately $97 million is applicable to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $113 million, of which approximately $39 million applies to 2000. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $106 million and $23 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 present 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 $276.4 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 $8.8 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. The Company estimates additional capital expenditures for environmental compliance of approximately $33 million, which is included in the construction forecast provided under "Capital Expenditures" for 2000 through 2004. The Company is in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower- sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. NOx reductions are being achieved through combustion controls and generating more electricity from lower-emitting plants. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Company's Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In May 1999, the U.S. Court of Appeals for the D.C. Circuit issued a stay which delays implementation of EPA's NOx Transport Rule until the Court has ruled on the merits of various appeals. Under the NOx Transport Rule, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA contemplating an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Company's Ohio and Pennsylvania plants, by May 2003 in the event implementation of the NOx Transport Rule is delayed. New Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. FirstEnergy continues to evaluate its compliance plans and other compliance options. The Company is 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 Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards back to the EPA finding constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. The Company cannot predict the EPA's action in response to the Court's remand order. The cost of compliance with these regulations, if they are reinstated, may be substantial and depends on the manner in which they are ultimately implemented, if at all, by the states in which the Company operates affected facilities. 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 $0.6 million as of December 31, 1999, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. The Company believes that waste disposal costs will not have a material adverse effect on its financial condition, cash flows or results of operations. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 1999 and 1998.
March 31, June 30, September 30, December 31, Three Months Ended 1999 1999 1999 1999 - ------------------------------------------------------------------------------- (In millions) Operating Revenues $224.3 $235.2 $233.7 $228.0 Operating Expenses and Taxes 175.6 195.7 191.0 195.2 Operating Income 48.7 39.5 42.7 32.8 Other Income 2.9 3.2 2.8 3.7 Net Interest Charges 19.5 19.5 19.2 18.2 - ----------------------------------------------------------------------------- Net Income $ 32.1 $ 23.2 $ 26.3 $ 18.3 ============================================================================= Earnings on Common Stock $ 28.1 $ 19.1 $ 22.3 $ 14.2 ============================================================================= March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - ------------------------------------------------------------------------------- (In millions) Operating Revenues $221.1 $239.7 $253.3 $243.0 Operating Expenses and Taxes 169.1 201.9 202.1 203.7 Operating Income 52.0 37.8 51.2 39.3 Other Income 3.8 3.1 2.7 2.6 Net Interest Charges 21.8 21.8 21.2 21.1 - ---------------------------------------------------------------------------- Net Income $ 34.0 $ 19.1 $ 32.7 $ 20.8 ============================================================================ Earnings on Common Stock $ 32.6 $ 15.0 $ 28.5 $ 16.9 ============================================================================
7. PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (UNAUDITED): FirstEnergy was formed on November 8, 1997 by the merger of OE and Centerior. The merger was accounted for as a purchase of Centerior's net assets with 77,637,704 shares of FirstEnergy Common Stock through the conversion of each outstanding Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid in cash). Based on an imputed value of $20.125 per share, the purchase price was approximately $1.582 billion, which also included approximately $20 million of merger related costs. Goodwill of approximately $2.0 billion was recognized (to be amortized on a straight-line basis over forty years), which represented the excess of the purchase price over Centerior's net assets after fair value adjustments. Accumulated amortization of goodwill was approximately $27 million as of December 31, 1999. The merger purchase accounting adjustments included recognizing estimated severance and other compensation liabilities ($24 million). The amount charged against the liability in 1998 relating to the costs of involuntary employee separation was $11 million. The liability was subsequently reduced to zero as of December 31, 1998. The liability adjustment was offset by a corresponding reduction to goodwill recognized in connection with the Centerior acquisition. The following pro forma statement of income for the Company gives effect to the OE-Centerior merger as if it had been consummated on January 1, 1996, with the purchase accounting adjustments actually recognized in the business combination.
Year Ended December 31, 1997 - ----------------------------------------------- (In millions) Operating Revenues $895 Operating Expenses and Taxes 742 ---- Operating Income 153 Other Income 10 Net Interest Charges 91 ---- Net Income $ 72 ==============================================
Pro forma adjustments reflected above include: (1) adjusting the Company's nuclear generating units to fair value based upon independent appraisals and estimated discounted future cash flows based on management's estimate of cost recovery; (2) the effect of discontinuing SFAS 71 for the Company's nuclear operations; (3) amortization of the fair value adjustment for long-term debt; (4) goodwill recognized representing the excess of the Company's portion of the purchase price over the Company's adjusted net assets; (5) the elimination of merger costs; and (6) adjustments for estimated tax effects of the above adjustments. 8. TERMINATION OF PROPOSED MERGER OF THE COMPANY INTO CEI: In March 1994, Centerior announced a plan to merge the Company into CEI. All regulatory approvals were granted (with the exception of the Nuclear Regulatory Commission (NRC) as that application was withdrawn at the NRC's request pending the decision whether to complete this merger). In addition, the preferred shareholders of the Company approved the merger and the preferred shareholders of CEI approved the authorization of additional shares of preferred stock. However, the management of FirstEnergy and the Company have decided not to complete the proposed merger. 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, 1999 and 1998, and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for the years ended December 31, 1999 and 1998, the period from January 1, 1997 to November 7, 1997 (pre-merger), and the period from November 8, 1997 to December 31, 1997 (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 audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998, the period from January 1, 1997 to November 7, 1997 (pre-merger), and the period from November 8, 1997 to December 31, 1997 (post-merger), in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 11, 2000 EX-21.3 30 EXHIBIT 21.3 THE TOLEDO EDISON COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1999 The Toledo Edison Capital Corporation Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 1999, is not included in the printed document. EX-27.3 31
UT This schedule contains summary financial information extracted from the related Form 10-K financial statements for The Toledo Edison Company and is qualified in its entirety by refrence to such financial statements. (Amounts in 1,000's.) Income tax expense includes $6,641,000 related to other income. 0000352049 THE TOLEDO EDISON COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 DEC-31-1999 1 PER-BOOK 1,201,908 423,632 141,371 900,017 0 2,666,928 195,670 328,559 27,475 551,704 0 210,000 981,029 33,876 0 0 76,030 0 0 19,735 794,554 2,666,928 921,159 56,846 707,182 757,387 163,772 12,744 176,516 76,571 99,945 16,238 83,707 106,351 76,563 240,654 0 0
EX-3.3 32 Extract From the Annual Action of the Stockholder of Pennsylvania Power Company September 27, 1999 ---------------- RESOLVED: The sole shareholder amends the By-Laws of the Company to read as follows: Article V, Section 1 is amended by changing the minimum number of Directors from "thirteen" to "three" and removing the requirement that one-third of the directors be residents of the Commonwealth of Pennsylvania. Article VIII, Section 1 is amended to include an Executive Vice President and General Counsel as an executive officer and to change all references to "Comptroller" to "Controller." Article XI is amended to include the "Executive Vice President" with "Vice Presidents" throughout the Article. Article XIII is amended to change all references to "Comptroller" to "Controller." Article XV is amended to change all references to "Assistant Comptroller" to "Assistant Controller." ---------------- I, Edward J. Udovich, Assistant Corporate Secretary of Pennsylvania Power Company, do hereby certify that the foregoing is a true and correct copy of resolutions duly adopted by the Board of Directors of Pennsylvania Power Company, and that said resolutions have not since been rescinded but is still in full force and effect. Executed as of this 23rd day of February 2000. ----------------------------- Assistant Corporate Secretary EX-4.5 33 - ---------------------------------------------------------------------------- PENNSYLVANIA POWER COMPANY to CITIBANK, N.A., As Trustee --------------- Forty-seventh Supplemental Indenture Providing among other things for FIRST MORTGAGE BONDS 12% Series of 1999 Due 2000 ------------------- Dated as of September 29, 1999 ============================================================================ FORTY-SEVENTH SUPPLEMENTAL INDENTURE, dated as of September 29, 1999, 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 New Castle, Lawrence County, Pennsylvania (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 and as of June 1, 1998 (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-seventh 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 a series of bonds under the Indenture to be designated as "First Mortgage Bonds, 12% Series of 1999 due 2000" (hereinafter sometimes referred to as the "46th Series"), the bonds of which series are to bear interest at the annual rate designated in the title thereof and are to mature on March 1, 2000; And Whereas each of the bonds of the 46th Series and the Trustee's Authentication Certificate thereon are to be substantially in the following form, to-wit: FORM OF BOND OF THE 46th SERIES [FACE] Pennsylvania Power Company First Mortgage Bond, 12% Series of 1999 due 2000 $ 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, 2000, and to pay the registered holder hereof interest on said sum from the date hereof, at the rate, until the principal hereof shall have become due and payable, of twelve per centum per annum, payable on March 1, 2000. 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, 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 interest so payable date will, subject to certain exceptions provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this bond is registered at the close of business on the record date, which shall be February 15, 2000. 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 Secretary or one of its Assistant Secretaries by his or her signature or a facsimile thereof. Dated, Pennsylvania Power Company By: -------------------------- President Attest: - ------------------------- 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 46th SERIES [REVERSE] Pennsylvania Power Company First Mortgage Bond, 12% Series of 1999 due 2000 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 of 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 not redeemable prior to maturity. 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 premium, if any, 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 $1.00. 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 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] 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 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 of the sum of One Dollar duly paid by the Trustee to the Company, and of other good and valuable considerations, the receipt whereof 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 $57,938,287 principal amount of bonds of the 46th 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 12% Series of 1999 due 2000, each of which shall also bear the descriptive title "First Mortgage Bond" (said bonds being sometimes herein referred to as the "bonds of the 46th Series"), and the form thereof shall be substantially as hereinbefore set forth. Bonds of the 46th Series shall mature on March 1, 2000, and may be issued only as registered bonds without coupons in denominations of $1,000 and, if higher, any multiple of $1.00 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 46th 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 46th Series shall bear interest at the rate, until the principal thereof shall have become due and payable, of twelve per centum per annum payable on March 1, 2000. The principal of and the 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. Except as provided in this Section 1, bonds of the 46th Series shall be dated and bear interest as provided in Section 2.03 of the Indenture. The bonds of the 46th Series shall not be redeemable prior to their maturity. The person in whose name any bond of the 46th Series is registered at the close of business on February 15, 2000 shall be entitled to receive the interest payable on March 1, 2000 notwithstanding the cancellation of such registered bond upon any transfer or exchange thereof subsequent to February 15, 2000 and prior to March 1, 2000. Section 2. 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 46th Series shall be outstanding under the Indenture. Section 3. The Company covenants and agrees that the provisions of Section 3 of the Nineteenth Supplemental Indenture dated as of January 14, 1982, which are to remain in effect so long as any bonds of the Twentieth Series shall be outstanding under the Indenture, shall remain in full force and effect so long as any bonds of the 46th Series shall be outstanding under the Indenture. Section 4. 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 5. 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 6. 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 7. 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 Richard H. Marsh 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 Patrick DeFelice 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 Secretary or an Assistant 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 Corporate Secretary 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: ------------------------------ Richard H. Marsh Vice President ATTEST: By: ---------------------- Nancy C. Ashcom Corporate Secretary [Seal] Signed, sealed and delivered by Pennsylvania Power Company in the presence of: - ----------------------------- - ----------------------------- Citibank, N.A. as Trustee as aforesaid By: ---------------------- Patrick 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 29th day of September, 1999 before me, the undersigned, a Notary Public in said County of Summit, State of Ohio, personally appeared Nancy C. Ashcom, 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 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 Richard H. Marsh 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 29th day of September, 1999. [SEAL] ------------------------- State of Ohio ) ) ss.: County of Summit ) I HEREBY CERTIFY THAT on this 29th day of September, 1999, before me, the subscriber, a Notary Public in and for the State and County aforesaid, personally appeared Richard H. Marsh, 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] ------------------------ State of Ohio ) ) ss.: County of Summit ) On the 29th day of September, 1999, before me, personally came Richard H. Marsh to me known, who, being by me duly sworn, did depose and say that he resides at ________________; 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] ----------------------- State of New York ) ) ss.: County of New York ) BE IT REMEMBERED that, on the ______ day of September, 1999 before me, the undersigned, a Notary Public in said County of New York, State of New York, personally appeared __________, 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 an 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 ___ day of September, 1999. [SEAL] -------------------------- State of New York ) ) ss.: County of New York ) I HEREBY CERTIFY that on this ___ day of September, 1999, 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 ___ day of September, 1999 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 Borough of Manhattan City, County and State of New York 10043 Citibank, N.A. By: -------------------------- Patrick DeFelice Vice President EX-4.6 34 ========================================================================= PENNSYLVANIA POWER COMPANY to CITIBANK, N.A., As Trustee --------------- Forty-eighth Supplemental Indenture Providing among other things for AN AMENDMENT OF THE INDENTURE ----------------- Dated as of November 15, 1999 ============================================================================= FORTY-EIGHTH SUPPLEMENTAL INDENTURE, dated as of November 15, 1999, 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 and as of September 29, 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-eighth 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 that the Company and the Trustee may, from time to time and at any time, enter into indentures supplemental thereto in order to change, alter, modify, vary or eliminate any of the terms, provisions, restrictions or condition thereof; Now Therefore, in consideration of the premises, and of the sum of One Dollar duly paid by the Trustee to the Company, and of other good and valuable considerations, the receipt whereof is hereby acknowledged, and for the purpose of modifying the provisions of the Indenture insofar as they prevent the Company from acquiring certain property from Duquesne Light Company. Section 1. The Indenture is hereby modified by excepting the Company's acquisition from Duquesne Light Company's of any undivided interest in the Beaver Valley Power Station, located in Shippingport, Pennsylvania, from the provisions of Section 7.05 thereof and by excluding the prior lien bonds relating to such undivided interest from the provisions of Section 7.14 thereof; and the Company hereby assigns and pledges to the Trustee the Company's contractual rights to have Duquesne Light Company satisfy and discharge all prior lien bonds relating to any interest in said Beaver Valley Power Station that the Company acquires from Duquesne Light Company. Section 2. 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 3. 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 4. 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 5. 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 Richard H. Marsh 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 Patrick DeFelice 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 Secretary or an Assistant 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 Corporate Secretary 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: -------------------------- Richard H. Marsh Vice President ATTEST: By: --------------------------- Edward J. Udovich Assistant Corporate Secretary [Seal] Signed, sealed and delivered by Pennsylvania Power Company in the presence of: - ----------------------------- - ----------------------------- Citibank, N.A. as Trustee as aforesaid By: ---------------------- P. DeFelice Vice President ATTEST: - --------------------------- Senior Trust Officer [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 ____ day of November, 1999 before me, the undersigned, a Notary Public in said County of Summit, State of Ohio, personally appeared Edward J. Udovich, 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 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 Richard H. Marsh 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 ____ day of November, 1999. [SEAL] -------------------- State of Ohio ) ) ss.: County of Summit ) I HEREBY CERTIFY THAT on this ____ day of November, 1999, before me, the subscriber, a Notary Public in and for the State and County aforesaid, personally appeared Richard H. Marsh, 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] --------------------- State of Ohio ) ) ss.: County of Summit ) On the ____ day of November, 1999, before me, personally came Richard H. Marsh to me known, who, being by me duly sworn, did depose and say that he resides at ________________; 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] ---------------------- State of New York ) ) ss.: County of New York ) BE IT REMEMBERED that, on the ____ day of November, 1999 before me, the undersigned, a Notary Public in said County of New York, State of New York, personally appeared __________, 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 Senior Trust Officer 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 ___ day of November, 1999. [SEAL] ---------------------- State of New York ) ) ss.: County of New York ) I HEREBY CERTIFY that on this ___ day of November, 1999, 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 ___ day of November, 1999 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 Borough of Manhattan City, County and State of New York 10043 Citibank, N.A. By: ----------------------------- P. DeFelice Vice President EX-12.5 35 EXHIBIT 12.5 Page 1 PENNSYLVANIA POWER COMPANY RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $ 38,930 $ 40,587 $31,472 $39,748 $12,648 Interest before reduction for amounts capitalized 31,350 27,889 22,438 21,073 21,317 Provision for income taxes 32,591 33,421 26,658 32,504 18,834 Interest element of rentals charged to income (a) 1,865 1,868 1,750 1,920 1,887 -------- -------- ------- ------- ------- Earnings as defined $104,736 $103,765 $82,318 $95,245 $54,686 ======== ======== ======= ======= ======= FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest on long-term debt $ 28,937 $ 25,715 $20,458 $19,255 $19,268 Interest on nuclear fuel obligations 407 219 276 28 90 Other interest expense 2,006 1,955 1,704 1,789 1,959 Interest element of rentals charged to income (a) 1,865 1,868 1,750 1,920 1,887 -------- -------- ------- ------- ------- Fixed charges as defined $ 33,215 $ 29,757 $24,188 $22,992 $23,204 ======== ======== ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES (b) 3.15 3.49 3.40 4.14 2.36 ==== ==== ==== ==== ==== - ------------------------- (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 $795,000, $642,000, $483,000 and $273,000 for each of the four 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, ------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $ 38,930 $ 40,587 $31,472 $39,748 $12,648 Interest before reduction for amounts capitalized 31,350 27,889 22,438 21,073 21,317 Provision for income taxes 32,591 33,421 26,658 32,504 18,834 Interest element of rentals charged to income (a) 1,865 1,868 1,750 1,920 1,887 -------- -------- ------- ------- ------- Earnings as defined $104,736 $103,765 $82,318 $95,245 $54,686 ======== ======= ======= ======= ======= FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS): Interest on long-term debt $ 28,937 $ 25,715 $20,458 $19,255 $19,268 Interest on nuclear fuel obligations 407 219 276 28 90 Other interest expense 2,006 1,955 1,704 1,789 1,959 Preferred stock dividend requirements 4,775 4,626 4,626 4,626 4,370 Adjustment to preferred stock dividends to state on a pre-income tax basis 3,939 3,751 3,859 3,726 6,403 Interest element of rentals charged to income (a) 1,865 1,868 1,750 1,920 1,887 -------- -------- ------- ------- -------- Fixed charges as defined plus preferred stock dividend requirements (pre-income tax basis) $ 41,929 $ 38,134 $32,673 $31,344 $33,977 ======== ======== ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) (b) 2.50 2.72 2.52 3.04 1.61 ==== ==== ==== ==== ==== - ------------------------- (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 $795,000, $642,000, $483,000 and $273,000 for each of the four years ended December 31, 1998, respectively. The guarantee and related coal supply contract debt expired December 31, 1999.
EX-13.4 36 PENNSYLVANIA POWER COMPANY SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in thousands) Operating Revenues $ 329,234 $323,756 $ 323,381 $ 322,625 $ 314,642 ========== ======== ========== ========== ========== Operating Income $ 32,063 $ 58,041 $ 50,736 $ 62,329 $ 67,317 ========== ======== ========== ========== ========== Income Before Extraordinary Item $ 12,648 $ 39,748 $ 31,472 $ 40,587 $ 38,930 ========== ======== ========== ========== ========== Net Income $ 12,648 $ 9,226 $ 31,472 $ 40,587 $ 38,930 ========== ======== ========== ========== ========== Earnings on Common Stock $ 8,278 $ 4,600 $ 26,846 $ 35,961 $ 34,155 ========== ======== ========== ========== ========== Total Assets $1,015,616 $977,772 $1,034,457 $1,074,578 $1,151,990 ========== ======== ========== ========== ========== CAPITALIZATION: Common Stockholder's Equity $ 199,608 $275,281 $ 291,977 $ 286,504 $ 271,920 Preferred Stock- Not Subject to Mandatory Redemption 39,105 50,905 50,905 50,905 50,905 Subject to Mandatory Redemption 15,000 15,000 15,000 15,000 15,000 Long-Term Debt 274,821 287,689 289,305 310,996 338,670 ---------- -------- ---------- ---------- ---------- Total Capitalization $ 528,534 $628,875 $ 647,187 $ 663,405 $ 676,495 ========== ======== ========== ========== ========== CAPITALIZATION RATIOS: Common Stockholder's Equity 37.8% 43.8% 45.1% 43.2% 40.2% Preferred Stock- Not Subject to Mandatory Redemption 7.4 8.1 7.9 7.7 7.5 Subject to Mandatory Redemption 2.8 2.4 2.3 2.2 2.2 Long-Term Debt 52.0 45.7 44.7 46.9 50.1 ----- ----- ----- ----- ----- Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== TRANSMISSION AND DISTRIBUTION KILOWATT-HOUR SALES (Millions): Residential 1,325 1,278 1,238 1,254 1,195 Commercial 1,105 1,069 1,013 996 938 Industrial 1,495 1,439 1,659 1,693 1,558 Other 6 6 6 6 6 ----- ----- ----- ----- ----- Total Retail 3,931 3,792 3,916 3,949 3,697 Total Wholesale 1,118 964 901 1,106 1,080 ----- ----- ----- ----- ----- Total 5,049 4,756 4,817 5,055 4,777 ===== ===== ===== ===== ===== CUSTOMERS SERVED: Residential 117,440 124,304 129,316 127,936 126,480 Commercial 16,307 16,924 16,738 16,531 16,317 Industrial 175 206 241 225 223 Other 87 86 97 99 97 ------- ------- ------- ------- ------- Total 134,009 141,520 146,392 144,791 143,117 ======= ======= ======= ======= ======= Generating Capability: Coal 41.4% 72.1% 72.1% 72.1% 72.1% Oil 1.5 3.0 3.0 3.0 3.0 Nuclear 57.1 24.9 24.9 24.9 24.9 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== SOURCES OF ELECTRIC GENERATION: Coal 61.1% 76.9% 73.8% 67.6% 65.6% Nuclear 38.9 23.1 26.2 32.4 34.4 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== NUMBER OF EMPLOYEES 895 888 997 1,015 1,220 === === === ===== =====
PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Electric Sales Operating revenues increased $5.5 million in 1999 from 1998 due primarily to higher kilowatt-hour sales to wholesale customers. In 1999, approximately 5% of our retail customers selected an alternative energy supplier, which slightly decreased our operating revenues from retail customers. Although we did not provide the generation of power to these customers, we continue to provide the transmission and distribution of this power through our system. As a result of increased service area demand, the kilowatt-hour sales through our system increased to each of our retail customer groups. Sales to residential, commercial and industrial customers increased by 3.7%, 3.4% and 3.9%, respectively. Available internal generation aided sales to wholesale customers which increased by $5.6 million in 1999 compared to 1998. In 1998, residential and commercial kilowatt-hour sales increased 3.3% and 7.5%, respectively, but were more than offset by a 13.4% decrease in industrial sales volume. Closure of an electric arc furnace at Caparo Steel Company in August 1997 and a general decline in electricity demand by steel manufacturers due to intense foreign competition contributed to lower industrial kilowatt-hour sales in 1998. Operating Expenses and Taxes Total operating expenses and taxes increased $31.5 million in 1999 from 1998. The increase resulted from higher operation and maintenance expenses in all major categories. In 1998, operating expenses and taxes decreased $6.9 million reflecting lower operation and maintenance expenses, as well as reduced depreciation and amortization expense. Fuel and purchased power increased in 1999 from the prior year. The Duquesne Light Company (Duquesne) asset swap resulted in one-time costs of $6.8 million recorded as fuel expenses in 1999, which contributed to our higher fuel and purchased power costs. In 1998, most of the increase in fuel and purchased power occurred in the second quarter and resulted from a combination of factors. Record heat and humidity in late June 1998, coincided with a regional power shortage which resulted in high prices for purchased power. Due in part to an unscheduled outage at Beaver Valley Unit 1, we purchased significant amounts of power from the spot market during that period resulting in higher purchased power costs. Nuclear operating costs increased in 1999 from the prior year due to a refueling outage at the Perry Plant and increased ownership of the Beaver Valley Plant following the asset swap in early December 1999. Nuclear costs were lower in 1998, compared to 1997, due primarily to lower refueling outage cost levels. Other operating costs also increased in 1999 from the prior year principally due to higher customer and sales expenses including expenditures for energy marketing programs, information system requirements and an increase in employee benefit expense as well as higher distribution costs from storm repair and overhead line maintenance. The absence of costs related to a 1997 voluntary retirement program and a charge for uncollectible customer accounts in 1997 contributed to the reduction in other operating costs in 1998. Depreciation and amortization expense increased by $2.9 million in 1999 compared to the prior year. Amortization of regulatory assets related to our rate restructuring plan, which began in 1999, more than offset the lower depreciation expense resulting from reduced nuclear investments following an extraordinary charge in June 1998 as discussed below. As a result of the nuclear investment write-down, depreciation and amortization declined in 1998 as compared to 1997. General taxes increased in 1999 from the prior year principally due to increased state gross receipts taxes resulting from additional taxable receipts and an adjustment to real estate taxes resulting from new Pennsylvania legislation. Extraordinary Item The Pennsylvania Public Utility Commission's (PPUC) authorization of our rate restructuring plan led to the discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation," to our generation business in 1998. This resulted in an after-tax write-down in 1998 of $30.5 million of our nuclear generation unit investment and the recognition of a portion of such investment -- recoverable through future customer rates -- as a regulatory asset. Earnings on Common Stock Earnings on common stock increased to $8.3 million in 1999 from $4.6 million in 1998. The increase was primarily due to the absence of the extraordinary charge recognized in 1998, which was substantially offset by increased operating expenses in 1999. The loss of a small portion of our retail customers resulting from alternative energy suppliers also held back our revenue growth. The asset swap with Duquesne resulted in one-time costs and additional nuclear expenses related to increased ownership of the Beaver Valley Plant in 1999. The decrease in earnings on common stock to $4.6 million in 1998 from $26.8 million in 1997 was due primarily to the extraordinary charge in 1998. Capital Resources and Liquidity We had about $21.1 million of cash and temporary investments and no short-term indebtedness as of December 31, 1999. Also we had a $2 million bank facility that provides for borrowings on a short-term basis at the bank's discretion. At the end of 1999, we had the capability to issue $114 million of additional first mortgage bonds on the basis of property additions and retired bonds. Based on our earnings test under our charter, we could not issue any additional preferred stock at year end. Our cash requirements in 2000 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing new securities. We have cash requirements of approximately $110 million for the 2000-2004 period to meet scheduled maturities of long-term debt. Of that amount, approximately $29 million relates to 2000. Our capital spending for the period 2000-2004 is expected to be about $234 million (excluding nuclear fuel), of which approximately $38 million applies to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $90 million, of which about $24 million relates to 2000. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $86 million and $18 million, respectively, as the nuclear fuel is consumed. On December 3, 1999, we completed the exchange of generating assets between Duquesne and FirstEnergy, which increased FirstEnergy's portfolio of generation resources. Duquesne transferred 1,436 megawatts at five generating plants in exchange for 1,328 megawatts at three plants owned by FirstEnergy operating companies. In the exchange, we received all of Duquesne's ownership interest in the Beaver Valley Plant, and an additional interest in the Bruce Mansfield Plant while providing Duquesne with our ownership interest in the New Castle Plant. At the end of 1999, we transferred our interest in Penn Power Energy, Inc., a wholly owned subsidiary selling energy in Pennsylvania's unregulated generation market, to FirstEnergy Services Corp., an affiliated company. For FirstEnergy, the transaction centralized unregulated electricity sales and marketing activities in one entity. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. Changes in the market value of our nuclear decommissioning trust funds are recognized by making a corresponding change to the decommissioning liability, as described in Note 1. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions. Comparison of Carrying Value to Fair Value - ---------------------------------------------------------------------------- There- Fair 2000 2001 2002 2003 2004 after Total Value - ---------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income $ 73 $ 73 $ 73 Average interest rate 5.2% 5.2% - ---------------------------------------------------------------------------- Liabilities - ---------------------------------------------------------------------------- Long-term Debt: Fixed rate $ 29 $ 1 $ 1 $ 41 $ 35 $160 $267 $264 Average interest rate 6.6% 9.7% 9.7% 7.6% 6.6% 7.0% 7.0% Variable rate $ 16 $ 16 $ 15 Average interest rate 5.6% 5.6% - ---------------------------------------------------------------------------- Preferred Stock $ 1 $ 1 $ 13 $ 15 $ 14 Average dividend rate 7.6% 7.6% 7.6% 7.6% - ---------------------------------------------------------------------------- Outlook We continue to face many competitive challenges as the electric utility industry undergoes significant changes, including changing regulation and the entrance of more energy suppliers into the marketplace. The increased ownership interests in the Beaver Valley Plant and the Bruce Mansfield Plant resulting from the Duquesne asset swap will result in increased operating cost pressures in the future. Application of SFAS 71 was discontinued for the generation portion of our business in 1998 following PPUC approval of our restructuring plan. Under the plan, a phase-in period for customer choice began with 66% of our customers able to select their energy supplier that began on January 2, 1999, with all remaining customers able to select their energy providers starting January 1, 2001. We are entitled to recover $236 million of stranded costs through a competitive transition charge that started in 1999 and ends in 2006. In the second half of 1999, we received notification of pending legal actions based on alleged violations of the Clean Air Act at our Sammis Plant involving the states of New York and Connecticut, as well as the U.S. Department of Justice. The civil complaint filed by the U.S. Department of Justice requests installation of "best available control technology" as well as civil penalties of up to $27,500 per day. We believe the Sammis Plant is in full compliance with the Clean Air Act and the legal actions to be without merit. However, we are unable to predict the outcome of this litigation. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. We expect the Sammis Plant to continue to operate while the matter is being decided. On October 27, 1999, the Federal Energy Regulatory Commission (FERC) approved FirstEnergy's plan to transfer our transmission assets and those of OE, The Cleveland Electric Illuminating Company and The Toledo Edison Company to American Transmission Systems Inc. (ATSI). PPUC and Securities and Exchange Commission regulatory approvals are also required. The new FirstEnergy subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent, regional transmission organization (RTO). In working toward that goal, FirstEnergy joined with four other companies -- American Electric Power, Consumers Energy, Detroit Edison and Virginia Power -- to form the Alliance RTO. On June 3, 1999, the Alliance submitted an application to FERC to form an independent, for profit RTO. On December 15, 1999, FERC issued an order conditionally approving the Alliance's application. Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. We have not completed quantifying the impacts of adopting SFAS 133 on our financial statements or determined the method of its adoption. However, SFAS 133 could increase volatility in earnings and other comprehensive income. We anticipate adopting the new statement on its amended effective date of January 1, 2001. Year 2000 Update Based on the results of our remediation and testing efforts, we filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission and PPUC that as of June 30, 1999, our generation, transmission, and distribution systems were ready to serve customers in the year 2000. We have since experienced no failures or interruptions of service to our customers resulting from the Year 2000 issue, which was consistent with our expectations. We spent $4.6 million on Year 2000 related costs through December 31, 1999, which was slightly lower than previously estimated. Of this total, $3.4 million was capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $1.2 million was expensed as incurred. We do not believe there are any continuing Year 2000 issues to be addressed, nor any additional material Year 2000 expenditures. Forward-Looking Information This discussion includes forward-looking statements based on information currently available to management that are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes, and the availability and cost of capital and other similar factors. PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME
For the Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------- (In thousands) OPERATING REVENUES $329,234 $323,756 $323,381 -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 87,128 76,801 67,345 Nuclear operating costs 36,915 22,968 26,220 Other operating costs 65,079 52,348 66,518 -------- -------- -------- Total operation and maintenance expenses 189,122 152,117 160,083 Provision for depreciation and amortization 62,182 59,264 64,628 General taxes 28,110 22,540 22,379 Income taxes 17,757 31,794 25,555 -------- -------- -------- Total operating expenses and taxes 297,171 265,715 272,645 -------- -------- -------- OPERATING INCOME 32,063 58,041 50,736 OTHER INCOME 1,438 2,485 2,760 -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 33,501 60,526 53,496 -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt 19,268 19,255 20,458 Interest on nuclear fuel obligations 90 28 276 Allowance for borrowed funds used during construction (464) (294) (414) Other interest expense 1,959 1,789 1,704 -------- -------- -------- Net interest charges 20,853 20,778 22,024 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 12,648 39,748 31,472 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 1) -- (30,522) -- -------- -------- -------- NET INCOME 12,648 9,226 31,472 PREFERRED STOCK DIVIDEND REQUIREMENTS 4,370 4,626 4,626 -------- -------- -------- EARNINGS ON COMMON STOCK $ 8,278 $ 4,600 $ 26,846 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY BALANCE SHEETS
At December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service $ 646,186 $686,771 Less-Accumulated provision for depreciation 237,893 291,188 ---------- -------- 408,293 395,583 ---------- -------- Construction work in progress- Electric plant 18,558 17,187 Nuclear fuel 6,540 508 ---------- -------- 25,098 17,695 ---------- -------- 433,391 413,278 ---------- -------- OTHER PROPERTY AND INVESTMENTS: Nuclear plant decommissioning trusts (Note 1) 104,775 13,722 Other 19,784 15,455 ---------- -------- 124,559 29,177 ---------- -------- CURRENT ASSETS: Cash and cash equivalents 5,670 7,485 Notes receivable from parent company (Note 4) 15,423 50,000 Receivables- Customers (less accumulated provisions of $3,537,000 and $3,599,000, respectively, for uncollectible accounts) 34,568 34,737 Associated companies 38,565 34,430 Other 8,896 12,472 Materials and supplies, at average cost 32,483 15,515 Prepayments 2,208 2,657 ---------- -------- 137,813 157,296 ---------- -------- DEFERRED CHARGES: Regulatory assets 314,593 371,027 Other 5,260 6,994 ---------- -------- 319,853 378,021 ---------- -------- $1,015,616 $977,772 ========== ======== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Statements of Capitalization): Common stockholder's equity $ 199,608 $275,281 Preferred stock- Not subject to mandatory redemption 39,105 50,905 Subject to mandatory redemption 15,000 15,000 Long-term debt- Associated companies 18,007 6,617 Other 256,814 281,072 ---------- -------- 528,534 628,875 ---------- -------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 13,504 5,557 Other 29,521 984 Accounts payable- Associated companies 26,220 9,676 Other 28,903 23,156 Accrued taxes 21,863 12,849 Accrued interest 6,592 6,519 Other 16,506 17,046 ---------- -------- 143,109 75,787 ---------- -------- DEFERRED CREDITS: Accumulated deferred income taxes 182,702 212,427 Accumulated deferred investment tax credits 7,266 7,787 Nuclear plant decommissioning costs 107,816 14,948 Other 46,189 37,948 ---------- -------- 343,973 273,110 ---------- -------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) ---------- -------- $1,015,616 $977,772 ========== ======== The accompanying Notes to Financial Statements are an integral part of these balance sheets.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CAPITALIZATION
At December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- (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) 11,218 86,891 -------- -------- Total common stockholder's equity 199,608 275,281 -------- -------- Number of Shares Optional Outstanding Redemption Price ---------------- ------------------- 1999 1998 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 7.64% -- 60,000 -- -- -- 6,000 7.75% 250,000 250,000 -- -- 25,000 25,000 8.00% -- 58,000 -- -- -- 5,800 ------- ------- ------- -------- -------- Total not subject to mandatory redemption 391,049 509,049 $14,614 39,105 50,905 ======= ======= ======= -------- -------- Subject to Mandatory Redemption (Note 3D): 7.625% 150,000 150,000 106.10 $15,915 15,000 15,000 ======= ======= ======= -------- -------- LONG-TERM DEBT (Note 3E): First mortgage bonds- 9.740% due 2000-2019 19,513 20,000 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 127,763 128,250 -------- -------- Secured notes- 6.080% due 2000 23,000 23,000 8.100% due 2000 5,200 5,200 5.400% due 2013 1,000 1,000 5.400% due 2017 10,600 10,600 7.150% due 2017 17,925 17,925 5.900% due 2018 16,800 16,800 7.150% due 2021 14,482 14,482 6.150% due 2023 12,700 12,700 * 5.450% 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 149,679 149,679 -------- -------- Unsecured notes- * 5.900% due 2033 5,200 -- -------- -------- Other obligations- Nuclear fuel 31,511 12,174 Capital leases (Note 2) 4,160 4,635 -------- -------- Total other obligations 35,671 16,809 -------- -------- Net unamortized discount on debt (467) (508) -------- -------- Long-term debt due within one year (43,025) (6,541) -------- -------- Total long-term debt 274,821 287,689 -------- -------- TOTAL CAPITALIZATION $528,534 $628,875 ======== ======== *Denotes variable rate issue with December 31, 1999 interest rate shown. The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Accumulated Other Comprehensive Other Comprehensive Income Number Par Paid-In Income Retained (Note 3B) of Shares Value Capital (Note 3B) Earnings ------------- --------- ----- ------- ------------- -------- (Dollars in thousands) Balance, January 1, 1997 6,290,000 $188,700 $(310) $(103) $ 98,217 Net income $31,472 31,472 Minimum liability for unfunded retirement benefits, net of $9,000 of income taxes 13 13 ------- Comprehensive income $31,485 ======= Cash dividends on common stock (21,386) Cash dividends on preferred stock (4,626) - ---------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 6,290,000 188,700 (310) (90) 103,677 Net income $ 9,226 9,226 Transfer of minimum liability for unfunded retirement benefits to FirstEnergy 90 90 ------- Comprehensive income $ 9,316 ======= Cash dividends on common stock (21,386) Cash dividends on preferred stock (4,626) - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 6,290,000 188,700 (310) -- 86,891 Net income $12,648 12,648 ======= Transfer of Penn Power Energy to FirstEnergy Services Corp. 3,302 Cash dividends on common stock (87,362) Cash dividends on preferred stock (4,056) Premium on redemption of preferred stock (205) - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 6,290,000 $188,700 $(310) $ -- $ 11,218 ========================================================================================================================
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, 1997 509,049 $50,905 150,000 $15,000 - ------------------------------------------------------------------------------ Balance, December 31, 1997 509,049 50,905 150,000 15,000 - ------------------------------------------------------------------------------ Balance, December 31, 1998 509,049 50,905 150,000 15,000 - ------------------------------------------------------------------------------ Redemptions- 7.64% Series (60,000) (6,000) 8.00% Series (58,000) (5,800) - ------------------------------------------------------------------------------ Balance, December 31, 1999 391,049 $39,105 150,000 $15,000 ============================================================================== 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, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,648 $ 9,226 $31,472 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization 62,182 59,264 64,628 Nuclear fuel and lease amortization 8,423 5,418 7,172 Other amortization, net -- (330) (1,187) Deferred income taxes, net (16,207) (20,007) (6,631) Investment tax credits, net (3,111) (2,289) (2,331) Extraordinary item -- 51,730 -- Receivables (390) (20,680) 6,515 Materials and supplies 389 (542) (704) Accounts payable 22,291 3,293 (4,476) Other 15,899 3,148 (5,707) -------- -------- ------- Net cash provided from operating activities 102,124 88,231 88,751 -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 5,200 1,563 9,942 Redemptions and Repayments- Preferred stock 12,005 -- -- Long-term debt 8,675 6,088 39,464 Dividend Payments- Common stock 87,362 21,386 21,386 Preferred stock 4,055 4,626 4,626 -------- -------- ------- Net cash used for financing activities 106,897 30,537 55,534 -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 21,964 16,495 14,513 Loan to parent -- 32,500 15,000 Loan payment from parent (34,577) -- -- Other 9,655 1,874 4,431 -------- -------- ------- Net cash used for (provided from) investing activities (2,958) 50,869 33,944 -------- -------- ------- Net increase (decrease) in cash and cash equivalents (1,815) 6,825 (727) Cash and cash equivalents at beginning of year 7,485 660 1,387 -------- -------- ------- Cash and cash equivalents at end of year $ 5,670 $ 7,485 $ 660 ======== ======== ======= SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid during the year- Interest (net of amounts capitalized) $ 19,436 $ 19,057 $21,137 ======== ======== ======= Income taxes $ 33,786 $ 32,290 $38,324 ======== ======== ======= The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENT OF TAXES
For the Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ (In thousands) GENERAL TAXES: State gross receipts $ 13,466 $ 10,830 $ 11,267 Real and personal property 8,626 6,893 6,060 State capital stock 3,067 2,774 2,566 Social security and unemployment 2,875 1,894 2,224 Other 76 149 262 -------- -------- -------- Total general taxes $ 28,110 $ 22,540 $ 22,379 ======== ======== ======== PROVISION FOR INCOME TAXES: Currently payable- Federal $ 29,522 $ 25,938 $ 27,560 State 8,630 7,654 8,061 -------- -------- -------- 38,152 33,592 35,621 -------- -------- -------- Deferred, net- Federal (12,714) (15,454) (5,096) State (3,493) (4,553) (1,535) -------- -------- -------- (16,207) (20,007) (6,631) -------- -------- -------- Investment tax credit amortization (3,111) (2,289) (2,331) -------- -------- -------- Total provision for income taxes $ 18,834 $ 11,296 $ 26,659 ======== ======== ======== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating expenses $ 17,757 $ 31,794 $ 25,555 Other income 1,077 710 1,104 Extraordinary item -- (21,208) -- -------- -------- -------- Total provision for income taxes $ 18,834 $ 11,296 $ 26,659 ======== ======== ======== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes $ 31,482 $ 20,522 $ 58,131 ======== ======== ======== Federal income tax expense at statutory rate $ 11,019 $ 7,183 $ 20,346 Increases (reductions) in taxes resulting from: State income taxes, net of federal income tax benefit 3,339 2,016 4,242 Amortization of investment tax credits (3,111) (2,289) (2,331) Amortization of tax regulatory assets 7,059 4,745 4,554 Other, net 528 (359) (152) -------- -------- -------- Total provision for income taxes $ 18,834 $ 11,296 $ 26,659 ======== ======== ======== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Competitive transition charge $115,277 $135,730 $ -- Property basis differences 73,694 69,867 172,094 Allowance for equity funds used during construction 5,688 7,219 29,875 Deferred nuclear expense -- -- 7,163 Customer receivables for future income taxes 8,354 9,690 37,954 Unamortized investment tax credits (2,987) (3,193) (10,681) Other (17,324) (6,886) 3,547 -------- -------- -------- Net deferred income tax liability $182,702 $212,427 $239,952 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company, a wholly owned subsidiary of Ohio Edison Company (Edison), follows the accounting policies and practices prescribed by the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain prior year amounts have been reclassified to conform with the current year presentation. Results of operations for 1999 include Penn and its wholly owned subsidiary, Penn Power Energy, Inc. (PPE). The subsidiary was formed to market energy products and services coincident with the commencement of electricity generation customer choice and competition in Pennsylvania in January 1999. All significant intercompany transactions have been eliminated. The Company transferred its 100% ownership in PPE to FirstEnergy Services Corp., an affiliate, effective December 31, 1999. 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, 1999 or 1998, with respect to any particular segment of the Company's customers. REGULATORY PLAN- In June 1998, the PPUC authorized a rate restructuring plan for the Company, which essentially resulted in the deregulation of the Company's generation business as of June 30, 1998. The Company was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business and assess all other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded that any supplemental regulated cash flows such as a competitive transition charge (CTC) should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, the Company reduced its nuclear generating unit investments by approximately $305 million, of which approximately $227 million was recognized as a regulatory asset to be recovered through a CTC over a seven-year transition period; the remaining net amount of $78 million was written off. The charge of $51.7 million ($30.5 million after income taxes) for discontinuing the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to the Company's generation business was recorded as a 1998 extraordinary item on the Statement of Income. The Company's net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $76 million as of December 31, 1999. All of the Company's regulatory assets are being recovered under provisions of the regulatory plan. In addition, the PPUC had authorized the Company to accelerate at least $358 million, more than the amounts that would have been recognized if the regulatory plan was not in effect. These additional amounts are being recovered through current rates. As of December 31, 1999, the Company's cumulative additional capital recovery and regulatory asset amortization amounted to $225 million (including the impairment discussed above and CTC recovery). In December 1996, Pennsylvania enacted "The Electricity Generation Customer Choice and Competition Act," which permitted customers, including the Company's customers, to choose their electric generation supplier, while transmission and distribution services would continue to be supplied by their current providers. Customer choice began with 66% of each customer class able to choose alternative suppliers of generation on January 2, 1999, and all remaining customers having choice as of January 1, 2001. Under the rate restructuring plan, the Company continues to deliver power to homes and businesses through its transmission and 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 will be excluded from their bill 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. The Company is entitled to recover $236 million of stranded costs through a CTC that began in 1999 and ends in 2006. 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 2.5% in 1999, 3.0% in 1998 and 2.7% in 1997. In addition to the straight-line depreciation recognized in 1999, 1998 and 1997, the Company also recognized additional capital recovery of $3 million, $15 million and $27 million, respectively, as additional depreciation expense in accordance with the regulatory plan. Annual depreciation expense includes approximately $3.2 million for future decommissioning costs applicable to the Company's ownership interest in three nuclear generating units. The Company's future decommissioning costs reflect the increase in its ownership interests related to the asset transfer with Duquesne Light Company (Duquesne) discussed below in "Common Ownership of Generating Facilities." The Company's share of the future obligation to decommission these units is approximately $315 million in current dollars and (using a 4.0% escalation rate) approximately $695 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $15 million for decommissioning through its electric rates from customers through December 31, 1999. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Company expects that additional amount to be recoverable from its customers. The Company has approximately $104.8 million invested in external decommissioning trust funds as of December 31, 1999. This includes additions to the trust funds and the corresponding liability of $89 million as a result of the asset transfer. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Company has also recognized an estimated liability of approximately $9.2 million at December 31, 1999 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. The Financial Accounting Standards Board (FASB) issued a proposed accounting standard for nuclear decommissioning costs in 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could increase; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) income from the external decommissioning trusts could be reported as investment income. The FASB subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in the first quarter of 2000. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company and other Central Area Power Coordination Group (CAPCO) companies formerly owned, 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. On March 26, 1999, FirstEnergy completed its agreements with Duquesne to exchange certain generating assets. All regulatory approvals were received by October 1999. In December 1999, Duquesne transferred 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Company, Edison and The Cleveland Electric Illuminating Company (CEI), an affiliate. As part of this exchange, the Company transferred its 339-megawatt New Castle Plant and its 4-megawatt interest in the Niles Plant to Duquesne. The Company acquired Duquesne's ownership interest in the Beaver Valley Station and acquired, with Edison and CEI, Duquesne's ownership interest in the Bruce Mansfield Plant. The agreements for the exchange of assets, which was structured as a like-kind exchange for tax purposes, provides FirstEnergy's utility operating companies with exclusive ownership and operating control of all CAPCO generating units. The three FirstEnergy plants transferred are being sold by Duquesne to a wholly owned subsidiary of Orion Power Holdings, Inc. (Orion). The Company, Edison and CEI will continue to operate those plants until the assets are transferred to the new owners. Duquesne funded decommissioning costs equal to its percentage interest in the three nuclear generating units that were transferred to FirstEnergy. The Duquesne asset transfer to the Orion subsidiary could take place by the middle of 2000. Under the agreements, Duquesne was no longer a participant in the CAPCO arrangements after the exchange. The amounts reflected on the Balance Sheet under utility plant at December 31, 1999 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 $ 58.2 $ 23.3 $ 1.7 20.80% Bruce Mansfield #1, #2 and #3 204.2 113.3 3.1 16.38% Beaver Valley #1 and #2 31.0 9.7 5.8 39.37% Perry #1 2.1 0.9 1.4 5.24% - ------------------------------------------------------------------------- Total $295.5 $147.2 $12.0 =========================================================================
NUCLEAR FUEL- OES Fuel, Incorporated (OES Fuel), a wholly owned subsidiary of Edison, is the sole lessor for the Company's nuclear fuel requirements. Minimum lease payments during the next five years are estimated to be as follows:
(In millions) - --------------------------- 2000 $15.4 2001 11.5 2002 5.5 2003 1.7 2004 0.6 - ---------------------------
The Company amortizes the cost of nuclear fuel based on the rate of consumption. The Company's electric rates include amounts for the future disposal of spent nuclear fuel based upon the formula used to compute payments to the DOE. 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. Since Edison became a wholly owned subsidiary of FirstEnergy on November 8, 1997, 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. In 1998, the Company's, Edison's and Centerior Energy Corporation's pension plans were merged into the FirstEnergy pension 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, 1999. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the FirstEnergy plans in 1999 and 1998 and amounts recognized on the Balance Sheets as of December 31 (which includes the Company's share of the FirstEnergy 1999 plans' net prepaid pension cost and accrued other postretirement benefit costs of $13.8 million and $31.7 million, respectively, and the Company's share of the FirstEnergy 1998 plans' net prepaid pension cost and accrued other postretirement benefits costs of $9.0 million and $28.4 million, respectively):
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 1999 1998 1999 1998 - ----------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1 $1,500.1 $1,327.5 $ 601.3 $ 534.1 Service cost 28.3 25.0 9.3 7.5 Interest cost 102.0 92.5 40.7 37.6 Plan amendments -- 44.3 -- 40.1 Actuarial loss (gain) (155.6) 101.6 (17.6) 10.7 Net increase from asset swap 14.8 -- 12.5 -- Benefits paid (95.5) (90.8) (37.8) (28.7) - ---------------------------------------------------------------------------- Benefit obligation as of December 31 1,394.1 1,500.1 608.4 601.3 - ---------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1 1,683.0 1,542.5 3.9 2.8 Actual return on plan assets 220.0 231.3 0.6 0.7 Company contribution -- -- 0.4 0.4 Benefits paid (95.5) (90.8) -- -- - ---------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,807.5 1,683.0 4.9 3.9 - ---------------------------------------------------------------------------- Funded status of plan 413.4 182.9 (603.5) (597.4) Unrecognized actuarial loss (gain) (303.5) (110.8) 24.9 30.6 Unrecognized prior service cost 57.3 63.0 24.1 27.4 Unrecognized net transition obligation (asset) (10.1) (18.0) 120.1 129.3 - ---------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 157.1 $ 117.1 $(434.4) $(410.1) ============================================================================ Assumptions used as of December 31: Discount rate 7.75% 7.00% 7.75% 7.00% 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 year ended December 31, 1999 (FirstEnergy plans in 1999 and 1998 and the Company's plan in 1997) were computed as follows:
Other Pension Benefits Postretirement Benefits -------------------- ---------------------- 1999 1998 1997 1999 1998 1997 - ----------------------------------------------------------------------------- (In millions) Service cost $ 28.3 $ 25.0 $ 2.7 $ 9.3 $ 7.5 $0.9 Interest cost 102.0 92.5 8.9 40.7 37.6 3.2 Expected return on plan assets (168.1) (152.7) (14.7) (0.4) (0.3) -- Amortization of transition obligation (asset) (7.9) (8.0) (1.0) 9.2 9.2 1.2 Amortization of prior service cost 5.7 2.3 0.4 3.3 (0.8) -- Recognized net actuarial gain -- (2.6) (0.4) -- -- -- Voluntary early retirement program expense -- -- 5.8 -- -- 0.3 - ---------------------------------------------------------------------------- Net benefit cost $ (40.0) $ (43.5) $ 1.7 $62.1 $53.2 $5.6 ============================================================================ Company's share of total plan costs $ (4.8) $ (6.1) $ 1.7 $ 7.5 $ 5.4 $5.6 - ----------------------------------------------------------------------------
The FirstEnergy plan's health care trend rate assumption is 5.3% in 2000, 5.2% in 2001 and 5.0% for 2002 and 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 $4.5 million and the postretirement benefit obligation by $72.0 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.5 million and the postretirement benefit obligation by $58.2 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Transactions with affiliated companies are included on the Statements of Income as follows:
1999 1998 1997 - ------------------------------------------------------------------------- (In millions) Operating revenues: Electric sales $12.6 $ 9.8 $ 6.1 Bruce Mansfield Plant administrative and general charges to affiliates 5.3 6.3 0.9 Other transactions 0.7 0.7 0.4 - ------------------------------------------------------------------------- $18.6 $16.8 $ 7.4 ========================================================================= Fuel and purchased power: Purchased power $12.9 $20.9 $12.7 Nuclear fuel leased from OES Fuel 8.8 5.9 7.5 - ------------------------------------------------------------------------- $21.7 $26.8 $20.2 ========================================================================= Other operating costs: Rental of transmission lines $ 1.3 $ 1.3 $ 1.0 Data processing services 6.2 2.8 2.9 Other transactions 8.2 5.4 4.4 - ------------------------------------------------------------------------- $15.7 $ 9.5 $ 8.3 =========================================================================
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 December 31, 1999 and 1998, cash and cash equivalents included $5 million and $2 million, respectively, to be used for the redemption of long- term debt in the first quarter of 2000 and in 1999, respectively. The Company reflects temporary cash investments at cost, which approximates their market value. Noncash financing and investing activities included capital lease transactions amounting to $27.1 million, $0.8 million and $8.5 million for the years 1999, 1998 and 1997, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles 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:
1999 1998 - ----------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ----------------------------------------------------------------------- (In millions) Long-term debt $283 $279 $278 $294 Preferred stock 15 14 15 16 Investments other than cash and cash equivalents 108 116 17 21 - -----------------------------------------------------------------------
The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents consist primarily of decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Company's regulatory plan. Based on the regulatory plan, at this time, the Company is continuing to bill and collect cost-based rates relating to the Company's nongeneration operations and continues the application of SFAS 71 to these operations. The Company recognized additional cost recovery of $39 million, $24 million and $11 million in 1999, 1998 and 1997, respectively, as additional regulatory asset amortization in accordance with its regulatory plan. Regulatory assets on the Balance Sheets are comprised of the following:
1999 1998 - ------------------------------------------------------------ (In millions) Competitive transition charge $280.4 $331.0 Customer receivables for future income taxes 20.3 23.6 Loss on reacquired debt 7.1 8.2 Employee postretirement benefit costs 5.4 6.2 Other 1.4 2.0 - ----------------------------------------------------------- Total $314.6 $371.0 ===========================================================
2. LEASES The Company leases certain transmission facilities, 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, 1999, are summarized as follows:
1999 1998 1997 - ------------------------------------------------------------- (In millions) Operating leases Interest element $0.6 $0.5 $0.5 Other 1.6 1.3 1.5 Capital leases Interest element 0.6 0.6 0.7 Other 0.5 0.7 0.8 - ------------------------------------------------------------- Total rental payments $3.3 $3.1 $3.5 =============================================================
The future minimum lease payments as of December 31, 1999, are:
Capital Operating Leases Leases - ------------------------------------------------------------- (In millions) 2000 $ 1.2 $0.2 2001 1.0 0.2 2002 1.0 0.2 2003 0.9 0.2 2004 0.8 0.2 Years thereafter 9.0 3.0 - ---------------------------------------------------------- Total minimum lease payments 13.9 $4.0 Executory costs 2.9 ==== - ------------------------------------------- Net minimum lease payments 11.0 Interest portion 6.8 - ------------------------------------------- Present value of net minimum lease payments 4.2 Less current portion 0.3 - ------------------------------------------- Noncurrent portion $3.9 ===========================================
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 $2.0 million as of December 31, 1999. (B) COMPREHENSIVE INCOME- In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Statements of Common Stockholder's Equity. Comprehensive income includes net income as reported on the Statements of Income and all other changes in common stockholder's equity except dividends to stockholders. (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, 1999, 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 2000 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 $29.0 million in 2000, $1.0 million in 2001, $1.0 million in 2002, $41.0 million in 2003 and $40.7 million in 2004. The Company's obligations to repay certain pollution control revenue bonds are secured by series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. The $10.3 million pollution control revenue bond is entitled to the benefit of irrevocable bank letters of credit of $10.4 million. To the extent that drawings are made under this letter of credit to pay principal of, or interest on, the pollution control revenue bond, the Company is entitled to a credit against its obligation to repay this bond. The Company pays an annual fee of 0.525% of the amount of the letter of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. 4. SHORT-TERM BORROWINGS: The Company has a credit agreement with Edison whereby either company can borrow funds from the other by issuing unsecured notes at the prevailing prime or similar interest rate. Under the terms of this agreement, the maximum borrowing is limited only by the availability of funds; however, the Company's borrowing under this agreement is currently limited by the PPUC to a total of $50 million. Either company can terminate the agreement with six months' notice. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $234 million for property additions and improvements from 2000- 2004, of which approximately $38 million is applicable to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $90 million, of which approximately $24 million applies to 2000. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $86 million and $18 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership interests in the Beaver Valley Station and the Perry Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other affiliate co- owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $74 million per incident but not more than $8.4 million in any one year for each incident. The Company is also insured as to its interest in Beaver Valley and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $367 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 $9.7 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. The Company estimates additional capital expenditures for environmental compliance of approximately $31 million, which is included in the construction forecast provided under "Capital Expenditures" for 2000 through 2004. The Company is in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. NOx reductions are being achieved through combustion controls and generating more electricity from lower-emitting plants. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Company's Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In May 1999, the U.S. Court of Appeals for the D.C. Circuit issued a stay which delays implementation of EPA's NOx Transport Rule until the Court has ruled on the merits of various appeals. Under the NOx Transport Rule, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA contemplating an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Company's Ohio and Pennsylvania plants, by May 2003 in the event implementation of the NOx Transport Rule is delayed. New Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. FirstEnergy continues to evaluate its compliance plans and other compliance options. The Company is 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 Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards back to the EPA finding constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. The Company cannot predict the EPA's action in response to the Court's remand order. The cost of compliance with these regulations, if they are reinstated, may be substantial and depends on the manner in which they are ultimately implemented, if at all, by the states in which the Company operates affected facilities. In September 1999, FirstEnergy received, and subsequently in October 1999, the Company and Edison received a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. In November 1999, the Company and Edison received a citizen suit notification letter from the Connecticut Attorney General's office alleging Clean Air Act violations at the Sammis Plant. On November 3, 1999, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 32 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor-owned utilities, which included a complaint against the Company and Edison in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. The Company and Edison believe the Sammis Plant is in full compliance with the Clean Air Act and the NOV and complaint are without merit. However, the Company and Edison are unable to predict the outcome of this litigation. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain operating results by quarter for 1999 and 1998.
March 31, June 30, September 30, December 31, Three Months Ended 1999 1999 1999 1999 - ---------------------------------------------------------------------------- (In millions) Operating Revenues $81.4 $82.1 $82.4 $83.4 Operating Expenses and Taxes 67.1 72.4 73.2 84.5 - ---------------------------------------------------------------------------- Operating Income (Loss) 14.3 9.7 9.2 (1.1) Other Income 1.0 0.3 0.2 -- Net Interest Charges 5.0 5.9 4.9 5.1 - ---------------------------------------------------------------------------- Net Income (Loss) $10.3 $ 4.1 $ 4.5 $(6.2) ============================================================================ Earnings (Loss) on Common Stock $ 9.2 $ 2.9 $ 3.3 $(7.2) ============================================================================
March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - ---------------------------------------------------------------------------- (In millions) Operating Revenues $78.5 $ 80.3 $87.9 $77.0 Operating Expenses and Taxes 65.9 70.3 71.5 58.0 - ---------------------------------------------------------------------------- Operating Income 12.6 10.0 16.4 19.0 Other Income 0.7 0.6 0.6 0.6 Net Interest Charges 5.4 5.2 5.2 5.1 - ---------------------------------------------------------------------------- Income Before Extraordinary Item 7.9 5.4 11.8 14.5 Extraordinary Item (Net of Income Taxes) (Note 1) -- (30.5) -- -- - ---------------------------------------------------------------------------- Net Income (Loss) $ 7.9 $(25.1) $11.8 $14.5 ============================================================================ Earnings (Loss) on Common Stock $ 6.8 $(26.2) $10.7 $13.3 ============================================================================
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, 1999 and 1998, 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, 1999. 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 generally accepted auditing standards. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 11, 2000 EX-23.3 37 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, 2000 EX-27.4 38
UT This schedule contains summary financial information extracted from the related Form 10-K financial statements for Pennsylvania Power Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's.) Income tax expense includes $1,077,000 related to other income. 0000077278 PENNSYLVANIA POWER COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 DEC-31-1999 1 PER-BOOK 433,391 124,559 137,813 319,853 0 1,015,616 188,700 (310) 11,218 199,608 15,000 39,105 274,821 0 0 0 29,174 0 0 13,851 444,057 1,015,616 329,234 18,834 279,414 297,171 32,063 1,438 33,501 20,853 12,648 4,370 8,278 87,362 19,627 102,124 0 0
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