10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification No. ----------- --------------------------------------- ------------------ 333-21011 FIRSTENERGY CORP. 34-1843785 (An Ohio Corporation) 76 South Main Street Akron, Ohio 44308 Telephone (800)736-3402 1-2578 OHIO EDISON COMPANY 34-0437786 (An Ohio Corporation) 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-2323 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 34-0150020 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3491 PENNSYLVANIA POWER COMPANY 25-0718810 (A Pennsylvania Corporation) 1 East Washington Street P. O. Box 891 New Castle, Pennsylvania 16103 Telephone (412)652-5531 Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
OUTSTANDING CLASS AS OF NOVEMBER 3, 2000 ----- ---------------------- FirstEnergy Corp., $.10 par value 225,469,780 Ohio Edison Company, no par value 100 The Cleveland Electric Illuminating Company, no par value 79,590,689 The Toledo Edison Company, $5 par value 39,133,887 Pennsylvania Power Company, $30 par value 6,290,000
FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company common stock; Ohio Edison Company is the sole holder of Pennsylvania Power Company common stock. This combined Form 10-Q is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to any of the four FirstEnergy subsidiaries is also attributed to FirstEnergy. This Form 10-Q includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms "anticipate", "potential", "expect", "believe", "estimate" and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes (including revised environmental requirements), availability and cost of capital, inability to accomplish or realize anticipated benefits of strategic goals and other similar factors. TABLE OF CONTENTS Pages Part I. Financial Information Notes to Financial Statements 1-5 FirstEnergy Corp. Consolidated Statements of Income 6 Consolidated Balance Sheets 7-8 Consolidated Statements of Cash Flows 9 Report of Independent Public Accountants 10 Management's Discussion and Analysis of Results of Operations and Financial Condition 11-14 Ohio Edison Company Consolidated Statements of Income 15 Consolidated Balance Sheets 16-17 Consolidated Statements of Cash Flows 18 Report of Independent Public Accountants 19 Management's Discussion and Analysis of Results of Operations and Financial Condition 20-22 The Cleveland Electric Illuminating Company Consolidated Statements of Income 23 Consolidated Balance Sheets 24-25 Consolidated Statements of Cash Flows 26 Report of Independent Public Accountants 27 Management's Discussion and Analysis of Results of Operations and Financial Condition 28-29 The Toledo Edison Company Consolidated Statements of Income 30 Consolidated Balance Sheets 31-32 Consolidated Statements of Cash Flows 33 Report of Independent Public Accountants 34 Management's Discussion and Analysis of Results of Operations and Financial Condition 35-36 Pennsylvania Power Company Statements of Income 37 Balance Sheets 38-39 Statements of Cash Flows 40 Report of Independent Public Accountants 41 Management's Discussion and Analysis of Results of Operations and Financial Condition 42-43 Part II. Other Information PART I. FINANCIAL INFORMATION ------------------------------ FIRSTENERGY CORP. AND SUBSIDIARIES OHIO EDISON COMPANY AND SUBSIDIARIES THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY THE TOLEDO EDISON COMPANY AND SUBSIDIARY PENNSYLVANIA POWER COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 1 - FINANCIAL STATEMENTS: The principal business of FirstEnergy Corp. (FirstEnergy) is the holding, directly or indirectly, of all of the outstanding common stock of its principal electric utility operating subsidiaries, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE) and Pennsylvania Power Company (Penn). These utility subsidiaries are referred to throughout as "Companies." Penn is a wholly owned subsidiary of OE. On September 1, 2000, the Companies transferred their transmission assets to FirstEnergy's wholly owned subsidiary, American Transmission Systems, Inc. (ATSI). ATSI owns and operates FirstEnergy's major high-voltage transmission facilities and has interconnections with other regional utilities. The condensed unaudited financial statements of FirstEnergy and each of the Companies reflect all normal recurring adjustments that, in the opinion of management, are necessary to fairly present results of operations for the interim periods. These statements should be read in connection with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 1999 for FirstEnergy and the Companies. Significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. The reported results of operations are not indicative of results of operations for any future period. Certain prior year amounts have been reclassified to conform with the current year presentation. Penn's results of operations for the 1999 interim periods include Penn and its wholly owned subsidiary, Penn Power Energy, Inc. (PPE). Penn's interest in PPE was transferred to FirstEnergy Services Corp. (FE Services), an affiliate, effective December 31, 1999. The sole assets of the subsidiary trust that is the obligor on the preferred securities included in FirstEnergy's and OE's capitalization are $123,711,350 principal amount of 9% Junior Subordinated Debentures of OE due December 31, 2025. 2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- FirstEnergy's current forecast reflects expenditures of approximately $3.0 billion (OE-$766 million, CEI-$529 million, TE-$259 million, Penn-$234 million, ATSI-$98 million and unregulated subsidiaries- $1.114 billion) for property additions and improvements from 2000-2004, of which approximately $639 million (OE-$207 million, CEI-$114 million, TE- $96 million, Penn-$32 million, ATSI-$16 million and unregulated subsidiaries-$174 million) is applicable to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $470 million (OE-$114 million, CEI-$156 million, TE-$107 million and Penn-$93 million), of which approximately $136 million (OE-$25 million, CEI-$53 million, TE-$36 million and Penn-$22 million) applies to 2000. STOCK REPURCHASE PROGRAM- On November 17, 1998, the Board of Directors authorized the repurchase of up to 15 million shares of FirstEnergy's common stock over a three-year period beginning in 1999. Repurchases are made on the open market, at prevailing prices, and are funded primarily through the use of operating cash flows. During the third quarter of 2000 and the first nine months of 2000, FirstEnergy repurchased and retired 1.8 million shares (average price of $25.24 per share) and 5.0 million shares (average price of $23.62 per share) of its common stock, respectively. In 1999, FirstEnergy also - 1 - entered into a forward contract with Credit Suisse First Boston Corporation for the purchase of 1.4 million shares of FirstEnergy's common stock at an average price of $24.22 per share, which was settled on November 1, 2000. 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 capital expenditures for environmental compliance of approximately $292 million (OE-$144 million, CEI-$84 million, TE-$33 million and Penn-$31 million), which is included in the construction estimate given under "Capital Expenditures" for 2000 through 2004. The Companies are required to meet federally approved sulfur dioxide (SO2) regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The Environmental Protection Agency (EPA) has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. The Companies are in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower- sulfur fuel, generating more electricity from lower-emitting plants, and/or using emission allowances. NOx reductions are being achieved through combustion controls and the generation of more electricity at lower-emitting plants. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions (an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions) across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In March 2000, the U.S. Court of Appeals for the D.C. Circuit upheld EPA's NOx Transport Rule except as applied to the State of Wisconsin and portions of Georgia and Missouri. By October 2000, states were to submit revised State Implementation Plans (SIP) to comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania recently submitted a SIP that requires compliance with the NOx budgets at the Companies' Pennsylvania facilities by May 1, 2003 and Ohio indicated in a letter to EPA that it will be submitting a "draft" SIP that requires compliance with the NOx budgets at the Companies' Ohio facilities by May 31, 2004. 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 position is that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Companies' Ohio and Pennsylvania plants, by May 2003, in the event implementation of the NOx Transport Rule is not implemented by a state. Additional Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. The Companies continue to evaluate their compliance plans and other compliance options. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone 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 to the EPA, having found constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. On November 7, 2000, the U.S. Supreme Court held hearings in the appeals of both EPA and industry petitioners regarding the new NAAQS rules and a decision is expected in 2001. The cost of compliance with these regulations, if they are reinstated, may be substantial and will depend 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. 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. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. Although unable to predict the outcome of these proceedings, FirstEnergy believes the Sammis Plant is in full compliance with the Clean Air Act and the NOV and - 2 - 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 these proceedings are pending. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. On April 25, 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. CEI and TE have been named as "potentially responsible parties" (PRPs) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Allegations of disposal of hazardous substances at historical sites and the liability involved, are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. CEI and TE have accrued liabilities of $4.2 million and $0.6 million, respectively, as of September 30, 2000, 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. MERGER AGREEMENT- On August 8, 2000, FirstEnergy and GPU, Inc. (GPU), a Pennsylvania corporation, entered into an Agreement and Plan of Merger. Under the merger agreement, FirstEnergy would acquire all of the outstanding shares of GPU's common stock for approximately $4.5 billion in cash and FirstEnergy common stock. Approximately $7.4 billion of debt and preferred stock of GPU's subsidiaries would still be outstanding. The transaction would be accounted for by the purchase method. The combined company's principal electric utility operating companies would include OE, CEI, TE and Penn, as well as GPU's electric utility operating companies - Jersey Central Power & Light Company, Metropolitan Edison Company, and Pennsylvania Electric Company, which serve customers in New Jersey and Pennsylvania. Under the agreement, GPU shareholders would receive the equivalent of $36.50 for each share of GPU common stock they own, payable in cash or in FirstEnergy common stock, as long as FirstEnergy's common stock price is between $24.2438 and $29.6313. Each GPU shareholder would be able to elect the form of consideration they wish to receive, subject to proration so that the aggregate consideration to all GPU shareholders will be 50 percent cash and 50 percent FirstEnergy common stock. Each GPU share converted into FirstEnergy common stock would receive not less than 1.2318 and not more than 1.5055 shares of FirstEnergy common stock, depending on the average closing price of FirstEnergy stock during the 20- day trading period ending on the seventh trading date prior to the merger closing. The stock portion of the consideration is expected to be tax-free to GPU shareholders. The merger has been approved by the respective Boards of Directors of the Company and GPU and is expected to close promptly after all of the conditions to the consummation of the merger, including shareholder approval and the receipt of all necessary regulatory approvals, are fulfilled or waived. Special meetings for FirstEnergy and GPU shareholders have been scheduled for November 21, 2000, to consider and vote on adoption of the merger agreement. The receipt of all necessary regulatory approvals, including, but not limited to, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Federal Communications Commission, and the Securities and Exchange Commission, are expected by the end of the second quarter of 2001. 3 - REGULATORY ACCOUNTING: On July 19, 2000, the Public Utilities Commission of Ohio (PUCO) approved FirstEnergy's transition plan by adopting the agreement with major parties to the transition plan it had filed in 1999, on behalf of OE, CEI and TE under Ohio's electric utility restructuring law. Major parties to the agreement included the PUCO staff, the Ohio Consumers' Counsel, the Industrial Energy Users-Ohio, certain power marketers and others. Major provisions of the agreement consisted of approval of the transition plan as filed, including recovery of transition costs in the amounts filed in the transition plan through no later than 2006 for OE, mid-2007 for TE and 2008 for CEI, except where a longer period of recovery is provided for in the agreement. FirstEnergy will also give preferred access over FirstEnergy's subsidiaries to nonaffiliated marketers, brokers and aggregators to 1,120 megawatts of generation capacity through 2005 at established prices for sales to the Ohio operating companies' retail customers. The base electric rates for distribution service for OE, CEI and TE under their prior respective regulatory plans will be extended from - 3 - December 31, 2005 through December 31, 2007. The transition rate credits for customers under their prior regulatory plans will also be extended through the Companies' respective transition cost recovery periods. Beginning January 1, 2001, when Ohio electric customers have the choice to select their generation suppliers under the Ohio restructuring law, the agreement provides to FirstEnergy's Ohio customers electing alternative suppliers, an additional incentive applied to the shopping credit of 45% for residential customers, 30% for commercial customers and 15% for industrial customers as reductions from their bills, when they select alternative energy providers (the credits exceed the price FirstEnergy will be offering to electricity suppliers relating to the 1,120 megawatts described on the previous page). The amount of the incentive will serve to reduce the amortization of transition costs during the market development period (January 1, 2001 through December 31, 2005) and will be recovered over the remaining transition cost recovery periods. If the customer shopping goals established in the agreement are not achieved by the end of 2005, the transition cost recovery periods could be shortened for OE, CEI and TE to reduce recovery by as much as $500 million (OE-$250 million, CEI-$170 million and TE-$80 million), but any such adjustment would be computed on a class-by-class and pro-rata basis. 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 was discontinued effective with the issuance of the PUCO order. The effect of such discontinuance was reflected on the financial statements as of June 30, 2000, with the reduction of plant investment and the corresponding recognition of regulatory assets recoverable through future regulatory cash flows for generating assets that were impaired in the amount of approximately $1.6 billion ($1.2 billion, $304 million and $53 million for OE, CEI and TE, respectively). The Companies continue to bill and collect cost-based rates for their transmission and distribution services, which remain regulated; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those respective operations. 4 - RECENTLY ISSUED ACCOUNTING STANDARDS: FirstEnergy has estimated the impact of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133." FirstEnergy anticipates adopting SFAS 133 and SFAS 138 on their effective date of January 1, 2001. If applied to derivatives in existence as of September 30, 2000, the collective impact of SFAS 133 and SFAS 138 is not anticipated to have a significant effect on FirstEnergy's results of operations or financial position. - 4 - 5 - SEGMENT INFORMATION: FirstEnergy's primary segment is its Electric Utility Operating Companies which include five electric utilities that provide electric service in Ohio and Pennsylvania. Its other material business segment consists of the subsidiaries that operate unregulated businesses. Financial data for these business segments are as follows: Segment Financial Information -----------------------------
Electric Unregulated Reconciling Three Months Ended: Utilities Businesses Eliminations Totals ------------------ --------- ----------- ------------ ------ (In millions) September 30, 2000 ------------------ External revenues $ 1,457 $ 435 $ -- $ 1,892 Intersegment revenues 35 33 (68) -- Total revenues 1,492 468 (68) 1,892 Depreciation and amortization 275 6 -- 281 Net interest charges 126 18 (13) 131 Income taxes 144 (15) -- 129 Net income/Earnings on common stock 220 (21) (1) 198 Total assets 17,060 2,149 (1,241) 17,968 Property additions 72 33 -- 105 Acquisitions -- -- -- -- September 30, 1999 ------------------ External revenues $ 1,528 $ 204 $ -- $ 1,732 Intersegment revenues 7 50 (57) -- Total revenues 1,535 254 (57) 1,732 Depreciation and amortization 312 6 -- 318 Net interest charges 136 17 (12) 141 Income taxes 114 -- -- 114 Net income/Earnings on common stock 186 (1) 1 186 Total assets 17,123 1,884 (932) 18,075 Property additions 110 5 -- 115 Acquisitions -- -- -- -- Nine Months Ended: ----------------- September 30, 2000 ------------------ External revenues $ 4,075 $1,127 $ -- $ 5,202 Intersegment revenues 92 100 (192) -- Total revenues 4,167 1,227 (192) 5,202 Depreciation and amortization 692 16 -- 708 Net interest charges 384 54 (37) 401 Income taxes 340 (18) -- 322 Net income/Earnings on common stock 502 (24) (4) 474 Total assets 17,060 2,149 (1,241) 17,968 Property additions 291 90 -- 381 Acquisitions -- -- -- -- September 30, 1999 ------------------ External revenues $ 4,140 $ 534 $ -- $ 4,674 Intersegment revenues 23 117 (140) -- Total revenues 4,163 651 (140) 4,674 Depreciation and amortization 706 20 -- 726 Net interest charges 421 50 (36) 435 Income taxes 312 (3) -- 309 Net income/Earnings on common stock 454 (3) (3) 448 Total assets 17,123 1,884 (932) 18,075 Property additions 231 59 -- 290 Acquisitions -- 9 -- 9
- 5 - FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands, except per share amounts) REVENUES: Electric sales $1,401,936 $1,467,619 $3,889,643 $3,968,399 Other - electric utilities 60,771 66,099 202,679 190,964 Facilities services 158,003 133,821 412,753 355,144 Trading services 131,615 40,408 268,965 68,974 Other 139,320 24,444 427,639 90,201 ---------- ---------- ---------- ---------- Total revenues 1,891,645 1,732,391 5,201,679 4,673,682 ---------- ---------- ---------- ---------- EXPENSES: Fuel and purchased power 200,801 269,755 593,355 678,385 Other expenses: Electric utilities 375,950 368,066 1,204,431 1,158,037 Facilities services 149,679 122,479 395,655 332,438 Trading services 136,248 40,208 285,840 73,472 Other 151,456 27,393 401,041 91,563 Provision for depreciation and amortization 280,884 318,490 707,762 726,403 General taxes 138,054 144,584 417,086 422,144 ---------- ---------- ---------- ---------- Total expenses 1,433,072 1,290,975 4,005,170 3,482,442 ---------- ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 458,573 441,416 1,196,509 1,191,240 ---------- ---------- ---------- ---------- NET INTEREST CHARGES: Interest expense 123,272 125,712 370,358 386,452 Allowance for borrowed funds used during construction and capitalized interest (6,323) (3,410) (19,449) (9,471) Subsidiaries' preferred stock dividends 14,237 19,007 49,650 57,767 ---------- ---------- ---------- ---------- Net interest charges 131,186 141,309 400,559 434,748 ---------- ---------- ---------- ---------- INCOME TAXES 129,200 114,284 322,241 308,626 ---------- ---------- ---------- ---------- NET INCOME $ 198,187 $ 185,823 $ 473,709 $ 447,866 ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 221,846 226,432 223,415 227,646 ======= ======= ======= ======= BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .89 $ .82 $ 2.12 $ 1.97 ===== ===== ====== ====== DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $1.125 $1.125 ===== ===== ====== ====== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
- 6 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 67,213 $ 111,788 Receivables- Customers (less accumulated provisions of $6,864,000 and $6,719,000, respectively, for uncollectible accounts) 374,113 322,687 Other (less accumulated provisions of $9,005,000 and $5,359,000, respectively, for uncollectible accounts) 438,831 445,242 Materials and supplies, at average cost- Owned 136,611 154,834 Under consignment 108,986 99,231 Prepayments and other 189,956 167,894 ---------- ---------- 1,315,710 1,301,676 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: In service 12,004,800 14,645,131 Less--Accumulated provision for depreciation 4,840,580 5,919,170 ----------- ----------- 7,164,220 8,725,961 Construction work in progress 335,336 367,380 ----------- ----------- 7,499,556 9,093,341 ----------- ----------- INVESTMENTS: Capital trust investments 1,232,890 1,281,834 Nuclear plant decommissioning trusts 600,231 543,694 Letter of credit collateralization 277,763 277,763 Other 622,404 599,443 ----------- ----------- 2,733,288 2,702,734 ----------- ----------- DEFERRED CHARGES: Regulatory assets 3,860,941 2,543,427 Goodwill 2,102,912 2,129,902 Property taxes 267,226 276,997 Other 187,946 175,970 ----------- ----------- 6,419,025 5,126,296 ----------- ----------- $17,967,579 $18,224,047 =========== ===========
- 7 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CURRENT LIABILITIES: Currently payable long-term debt and preferred stock $ 446,797 $ 762,520 Short-term borrowings 663,549 417,819 Accounts payable 316,308 360,379 Accrued taxes 520,685 409,724 Accrued interest 122,335 125,397 Other 305,534 301,572 ----------- ----------- 2,375,208 2,377,411 ----------- ----------- CAPITALIZATION: Common stockholders' equity- Common stock, $.10 par value, authorized 300,000,000 shares - 227,446,741 and 232,454,287 shares outstanding, respectively 22,745 23,245 Other paid-in capital 3,607,660 3,722,375 Accumulated comprehensive income (loss) (195) (195) Retained earnings 1,167,041 945,241 Unallocated employee stock ownership plan common stock - 6,058,521 and 6,778,905 shares, respectively (113,487) (126,776) ----------- ----------- Total common stockholders' equity 4,683,764 4,563,890 Preferred stock of consolidated subsidiaries- Not subject to mandatory redemption 648,395 648,395 Subject to mandatory redemption 114,610 136,246 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 5,725,011 6,001,264 ----------- ----------- 11,291,780 11,469,795 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 2,118,258 2,231,265 Accumulated deferred investment tax credits 248,027 269,083 Other postretirement benefits 530,221 498,184 Nuclear plant decommissioning costs 614,922 562,295 Other 789,163 816,014 ----------- ----------- 4,300,591 4,376,841 ----------- ----------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ----------- ----------- $17,967,579 $18,224,047 =========== =========== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these balance sheets.
- 8 - FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ----------------------- 2000 1999 2000 1999 -------- --------- ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $198,187 $ 185,823 $ 473,709 $ 447,866 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 280,884 318,490 707,762 726,403 Nuclear fuel and lease amortization 31,672 27,535 86,376 75,484 Other amortization, net (2,851) (2,855) (9,469) (7,109) Deferred income taxes, net (47,856) (30,421) (81,194) (45,166) Investment tax credits, net (10,569) (6,856) (23,064) (13,675) Receivables (24,187) (5,501) (45,015) (165,948) Materials and supplies (10,790) 26,879 8,468 33,607 Accounts payable (40,929) (75,808) (44,071) (26,635) Other 120,367 111,302 34,434 9,172 -------- --------- ---------- ---------- Net cash provided from operating activities 493,928 548,588 1,107,936 1,033,999 -------- --------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 37,331 84,331 295,749 277,696 Short-term borrowings, net 198,682 54,353 245,730 29,625 Redemptions and Repayments- Common stock 44,445 41,035 118,457 116,610 Preferred stock 6,000 11,920 19,714 33,409 Long-term debt 473,730 525,532 923,254 618,540 Common stock dividend payments 83,391 85,247 251,909 256,683 -------- --------- ---------- ---------- Net cash used for financing activities 371,553 525,050 771,855 717,921 -------- --------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 105,369 114,873 381,446 298,549 Cash investments 60 (71) (40,976) (41,276) Other 37,293 19,665 40,186 20,999 -------- --------- ---------- ---------- Net cash used for investing activities 142,722 134,467 380,656 278,272 -------- --------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (20,347) (110,929) (44,575) 37,806 Cash and cash equivalents at beginning of period 87,560 226,533 111,788 77,798 -------- --------- ---------- ---------- Cash and cash equivalents at end of period $ 67,213 $ 115,604 $ 67,213 $ 115,604 ======== ========= ========== ========== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
- 9 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To FirstEnergy Corp.: We have reviewed the accompanying consolidated balance sheet of FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of September 30, 2000, and the related consolidated statements of income and cash flows for the three-month and nine-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of FirstEnergy Corp. and subsidiaries as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 10, 2000 - 10 - FIRSTENERGY CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations --------------------- Net income increased to $198.2 million in the third quarter of 2000, compared to $185.8 million in the same period in 1999. Basic and diluted earnings per share of common stock were $0.89 in the third quarter of 2000, compared to $0.82 in the third quarter of 1999. In the first nine months of 2000, net income increased to $473.7 million from $447.9 million in the year-to-date period of 1999. Basic and diluted earnings per share of common stock were $2.12 in the first nine months of 2000, compared to $1.97 for the same period in 1999. As a result of increased sales by our unregulated businesses, revenues increased $159.3 million in the third quarter of 2000 and $528.0 million during the nine-month period ended September 30, 2000, as compared to the same periods in 1999. The sources of the increases in the third quarter and first nine months of 2000, compared to the corresponding periods of 1999, are summarized in the following table.
Three Nine Sources of Revenue Changes Months Months -------------------------- ------ ------ (In millions) Electric Utility Operating Companies (EUOC): Electric sales $(65.7) $(78.8) Other electric utility revenues (5.3) 11.7 ------ ------ Total EUOC (71.0) (67.1) Unregulated Businesses: Retail electric sales 33.3 127.3 FirstEnergy Trading Services, Inc. (FETS) 91.2 200.0 Other businesses 105.8 267.8 ------ ------ Net Revenue Increases $159.3 $528.0 ====== ======
Electric Sales EUOC electric sales revenues decreased $65.7 million in the third quarter and $78.8 million in the first nine months of 2000 from the same periods in 1999. Lower unit prices (representing sales from traditional vertically integrated operations) and reduced EUOC electric generation sales contributed to the decrease in the third quarter. In the year-to-date period, lower unit prices offset an increase in EUOC electric generation sales. EUOC other electric revenues decreased in the third quarter of 2000, from the same period last year, due in part to a reduction in investment income. Over the first nine months of 2000, EUOC other electric revenues increased, compared to the same period last year, primarily due to additional transmission service revenues. Total electric generation sales (including unregulated sales) increased in the third quarter and first nine months of 2000, compared to the corresponding periods in 1999. The strong increase in unregulated retail sales continued with sales more than doubling in the third quarter of 2000, compared to the same period in 1999. FirstEnergy made further progress in expanding its retail electric sales to target unregulated markets in the eastern seaboard states. Reduced kilowatt-hour sales to wholesale customers dampened the growth in unregulated sales in the third quarter of 2000 due in part to more available energy in the wholesale market. EUOC kilowatt-hour deliveries (to customers in their franchise service areas) decreased in the third quarter of 2000 from the third quarter in 1999. Weather had a significant impact on residential sales, which declined 9.4% from the third quarter in 1999. Year-to-date kilowatt- hour sales to residential customers were also 4.4% lower in 2000, compared to the same period in 1999, primarily due to the unusually mild third quarter weather. Sales to commercial and - 11 - industrial customers were higher in both the third quarter and first nine months of 2000, compared to the corresponding periods of 1999, reflecting modest service area growth. Changes in electric generation sales and kilowatt-hour deliveries in the third quarter and first nine months of 2000, compared to the respective periods of 1999, are summarized in the following table.
Changes in KWH Sales Three Nine -------------------- Increase (Decrease) Months Months ------ ------ Electric Generation Sales: EUOC - Retail (1.4)% 0.7% Unregulated 16.2% 59.3% ---- ---- Total Electric Generation Sales 1.2% 7.7% ==== ==== EUOC Distribution Deliveries: Residential (9.4)% (4.4)% Commercial 0.1% 1.3% Industrial 1.4% 3.4% ---- ---- Total Distribution Deliveries (2.2)% 0.5% ==== ====
Other Sales Retail natural gas sales were the largest source of increases in other business revenues in the third quarter and first nine months of 2000 from the same periods in 1999. Collectively, three 1999 FETS gas acquisitions - Atlas Gas Marketing Inc., Belden Energy Services Company and Volunteer Energy LLC - significantly expanded FETS revenues in the third quarter and year-to-date periods of 2000, compared to last year. Operating Expenses Fuel and purchased power costs decreased $69.0 million in the third quarter and $85.0 million in the first nine months of 2000, compared to the corresponding periods of 1999. Lower fuel expense continued to be a major contributor to the reduction in fuel and purchased power costs in the third quarter, declining $39.6 million from the same period in 1999. In the nine-month period ended September 30, 2000, fuel expense declined $93.5 million from the same year-to-date period in 1999. These reductions occurred despite a 1.8% increase in internal generation in the third quarter and a 6.0% increase in the year-to-date period of 2000, compared to the corresponding periods of 1999. Factors contributing to the reduced fuel expense included: o A higher proportion of nuclear generation (i.e. lower cost fuel) due to improved nuclear availability and increased nuclear ownership from the exchange of generating assets with Duquesne Light Company (Duquesne) in December 1999; o The expiration of an above-market coal contract; and o Improved coal-blending strategies, which resulted in the use of additional lower cost coal. Purchased power costs were $29.4 million lower in the third quarter of 2000, compared to the same period of 1999, as a result of additional internal generation and lower prices in the wholesale market. In the nine- month period, purchased power costs were $8.5 million higher than the same period last year, in part reflecting generating unit outages in the second quarter of 2000. - 12 - Other expenses for the EUOC increased by $7.9 million in the third quarter of 2000 from the same period in 1999. Excluding a $33.1 million credit for gains resulting from the sale of emission allowances, other expenses for the EUOC increased $41.0 million due to increased maintenance work at several fossil plants and leased portable diesel generators as part of our summer supply strategy, and additional nuclear expenses resulting from the Beaver Valley Unit 2 refueling outage and increased nuclear ownership. Other expenses for the EUOC also rose in the first nine months of 2000, compared to the same period of 1999, as a result of outage-related costs and increased nuclear ownership. Expansion of sales activity by FirstEnergy's unregulated businesses resulted in corresponding increases in other non-EUOC operating costs of $247.3 million in the third quarter of 2000 and $585.1 million in the first nine months of 2000 from the respective periods of 1999. Depreciation and amortization decreased in the third quarter, compared to the same period of 1999, primarily due to reduced accelerated cost recovery in connection with OE's rate reduction plan. Total cost accelerations, which consist of depreciation and amortization of regulatory assets and regulatory assets related to income taxes under the OE rate plan and Penn's restructuring plan were $147.9 million in the third quarter of 2000, down from $173.5 million in the third quarter last year. In the first nine months of 2000, total cost accelerations under the regulatory plans were $291.9 million, compared to $282.4 million in the first nine months of 1999. General taxes were lower in the third quarter and year-to-date periods of 2000, compared to the same periods last year, primarily due to a favorable property tax settlement and phase out of Pennsylvania's franchise tax, partially offset by additional gross receipts taxes. Net Interest Charges Interest charges continued to trend lower, decreasing by $10.1 million in the third quarter and $34.2 million in the first nine months of 2000, compared to the same periods of 1999, due to debt and preferred stock redemption and refinancing activities. During the first nine months of 2000, redemption and refinancing activities totaled $382.7 million and $284.7 million, respectively, and will result in annualized savings of $30.9 million, of which $18.8 million relates to activities occurring in the third quarter. Capital Resources and Liquidity ------------------------------- FirstEnergy and its subsidiaries have continuing cash needs for planned capital expenditures, maturing debt and preferred stock sinking fund requirements. During the last quarter of 2000, capital requirements for property additions and capital leases are expected to be about $242 million, including $29 million for nuclear fuel. The Companies have additional cash requirements of approximately $23.5 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the fourth quarter of 2000. These cash requirements are expected to be satisfied from internal cash and/or short-term credit arrangements. During the third quarter of 2000, FirstEnergy repurchased 1.8 million shares of common stock at an average price of $25.24 per share. For the first nine months of 2000, the Company repurchased 5.0 million shares of common stock at an average price of $23.62 per share. On November 1, 2000, FirstEnergy settled an equity forward purchase contract by purchasing an additional 1.4 million shares at an average price of $24.22 per share (see Note 2 - "Stock Repurchase Program"). As of September 30, 2000, FirstEnergy and its subsidiaries had about $67.2 million of cash and temporary investments and $663.5 million of short-term indebtedness. Available borrowings included $229.0 million from unused revolving lines of credit and $32.0 million of bank facilities that provide for borrowings on a short-term basis at the banks' discretion. On August 8, 2000, FirstEnergy and GPU, Inc. (GPU) entered into an Agreement and Plan of Merger. Under the merger agreement, FirstEnergy would acquire all of the outstanding shares of GPU's common stock for approximately $4.5 billion in cash and FirstEnergy common stock. FirstEnergy would assume approximately $7.4 billion of GPU's debt and preferred stock. The transaction would be accounted for by the purchase method of accounting under the guidelines of Accounting Principles Board Opinion No. 16, "Business Combinations." Under purchase accounting, the results of operations for the combined entity would be reported from the point of consummation forward. - 13 - The combined company is expected to become the sixth-largest investor- owned electric company in the United States, based on the number of customers served (see Note 2 - "Merger Agreement"). Moody's Investors Service (Moody's) and Fitch upgraded the credit ratings of FirstEnergy's EUOC on September 27, 2000 and October 30, 2000, respectively. Moody's senior secured debt ratings of OE and Penn were raised from Baa2 to Baa1, and CEI and TE's from Ba1 to Baa3. Fitch's senior secured debt rating of OE was raised from BBB to BBB+ (Penn's remained at BBB+) and CEI's and TE's from BB+ to BBB-. Ratings of many of the junior securities of the Companies were upgraded to conform to rating relationships typical of investment grade issuers. The ratings of the EUOC remain under review for further possible upgrades by Moody's. Market Risk - Commodity Prices ------------------------------ FirstEnergy is exposed to market risk due to fluctuations in electricity, coal, natural gas and oil prices. To manage the volatility relating to these exposures, FirstEnergy uses 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. Although FirstEnergy believes that the policies and procedures it has adopted are prudent, its financial position, results of operations or cash flow may be adversely affected by unanticipated fluctuations in the commodity prices for electricity, coal, natural gas, oil, or by the failure of contract counterparties to perform. Recently Issued Accounting Standards ------------------------------------ FirstEnergy has estimated the impact of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133." FirstEnergy anticipates adopting SFAS 133 and SFAS 138 on their effective date of January 1, 2001. If applied to derivatives in existence as of September 30, 2000, the collective impact of SFAS 133 and SFAS 138 is not anticipated to have a significant effect on FirstEnergy's results of operations or financial position. - 14 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ---------------------- 2000 1999 2000 1999 -------- -------- ---------- ---------- (In thousands) OPERATING REVENUES $733,906 $770,518 $2,045,527 $2,050,365 -------- -------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 102,973 143,486 305,351 364,951 Nuclear operating costs 83,535 64,547 268,196 213,862 Other operating costs 104,971 103,398 300,710 321,454 -------- -------- ---------- ---------- Total operation and maintenance expenses 291,479 311,431 874,257 900,267 Provision for depreciation and amortization 193,711 228,775 444,445 457,330 General taxes 56,700 61,890 174,161 185,712 Income taxes 62,749 48,120 169,732 137,787 -------- -------- ---------- ---------- Total operating expenses and taxes 604,639 650,216 1,662,595 1,681,096 -------- -------- ---------- ---------- OPERATING INCOME 129,267 120,302 382,932 369,269 OTHER INCOME 16,423 10,179 40,227 32,577 -------- -------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 145,690 130,481 423,159 401,846 -------- -------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 42,208 44,583 126,803 135,888 Allowance for borrowed funds used during construction and capitalized interest (2,324) (1,041) (6,391) (3,023) Other interest expense 7,911 6,510 22,971 24,293 Subsidiaries' preferred stock dividend requirements 3,626 3,831 10,878 11,544 -------- -------- ---------- ---------- Net interest charges 51,421 53,883 154,261 168,702 -------- -------- ---------- ---------- NET INCOME 94,269 76,598 268,898 233,144 PREFERRED STOCK DIVIDEND REQUIREMENTS 2,807 2,914 8,423 8,740 -------- -------- ---------- ---------- EARNINGS ON COMMON STOCK $ 91,462 $ 73,684 $ 260,475 $ 224,404 ======== ======== ========== ========== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
- 15 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $4,960,038 $8,118,783 Less--Accumulated provision for depreciation 2,249,878 3,713,781 ---------- ---------- 2,710,160 4,405,002 ---------- ---------- Construction work in progress- Electric plant 174,570 205,671 Nuclear fuel 22,346 10,059 ---------- ---------- 196,916 215,730 ---------- ---------- 2,907,076 4,620,732 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust 461,156 469,124 Nuclear plant decommissioning trusts 256,861 236,903 Letter of credit collateralization 277,763 277,763 Notes receivable from associated companies 351,808 -- Other 294,805 425,872 ---------- ---------- 1,642,393 1,409,662 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 18,582 87,175 Receivables- Customers (less accumulated provisions of $6,452,000 for uncollectible accounts at both dates) 296,680 278,484 Associated companies 423,672 221,653 Other (less accumulated provisions of $1,000,000 for uncollectible accounts at both dates) 37,713 36,281 Materials and supplies, at average cost- Owned 67,521 69,119 Under consignment 52,744 55,278 Prepayments and other 71,283 73,682 ---------- ---------- 968,195 821,672 ---------- ---------- DEFERRED CHARGES: Regulatory assets 2,613,969 1,618,319 Property taxes 99,290 100,906 Unamortized sale and leaseback costs 81,352 85,100 Other 37,654 44,355 ---------- ---------- 2,832,265 1,848,680 ---------- ---------- $8,349,929 $8,700,746 ========== ==========
- 16 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, without par value, authorized 175,000,000 shares - 100 shares outstanding $2,098,729 $2,098,729 Retained earnings 621,187 525,731 ---------- ---------- Total common stockholder's equity 2,719,916 2,624,460 Preferred stock- Not subject to mandatory redemption 160,965 160,965 Subject to mandatory redemption -- 5,000 Preferred stock of consolidated subsidiary- Not subject to mandatory redemption 39,105 39,105 Subject to mandatory redemption 15,000 15,000 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 1,952,759 2,175,812 ---------- ---------- 5,007,745 5,140,342 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 280,618 422,838 Short-term borrowings- Associated companies 4,720 35,583 Other 311,037 322,713 Accounts payable- Associated companies 74,095 50,883 Other 58,138 63,219 Accrued taxes 269,443 207,362 Accrued interest 40,916 37,572 Other 109,310 94,967 ---------- ---------- 1,148,277 1,235,137 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,338,978 1,468,478 Accumulated deferred investment tax credits 115,448 143,336 Nuclear plant decommissioning costs 256,016 239,695 Other postretirement benefits 157,350 148,421 Other 326,115 325,337 ---------- ---------- 2,193,907 2,325,267 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $8,349,929 $8,700,746 ========== ========== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these balance sheets.
- 17 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- -------------------- 2000 1999 2000 1999 ---------- ---------- ---------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 94,269 $ 76,598 $ 268,898 $233,144 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 193,711 228,775 444,445 457,330 Nuclear fuel and lease amortization 15,205 10,718 40,902 32,131 Deferred income taxes, net (44,589) (55,793) (82,277) (86,548) Investment tax credits, net (9,431) (5,320) (19,004) (9,204) Receivables (181,935) (60,020) (220,549) (64,928) Materials and supplies (5,827) 25,799 4,132 23,034 Accounts payable (54,593) (47,709) 18,131 (9,739) Other 104,842 104,710 91,223 72,565 --------- --------- --------- -------- Net cash provided from operating activities 111,652 277,758 545,901 647,785 --------- --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 6,864 2,936 199,116 161,451 Short-term borrowings, net 7,012 -- -- 3,066 Redemptions and Repayments- Preferred stock 5,000 10,920 5,000 17,005 Long-term debt 237,993 329,094 554,392 348,234 Short-term borrowings, net -- 86,754 42,539 -- Dividend Payments- Common stock 55,700 -- 164,900 333,603 Preferred stock 2,946 2,611 8,543 8,437 --------- --------- --------- -------- Net cash used for financing activities 287,763 426,443 576,258 542,762 --------- --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 57,121 45,736 190,306 140,523 Loans to associated companies 182,997 -- 207,231 -- Sale of assets to associated companies (387,675) -- (387,675) -- Other 20,040 (21,040) 28,374 (13,242) --------- --------- --------- -------- Net cash used for (provided from) investing activities (127,517) 24,696 38,236 127,281 --------- --------- --------- -------- Net increase (decrease) in cash and cash equivalents (48,594) (173,381) (68,593) (22,258) Cash and cash equivalents at beginning of period 67,176 184,336 87,175 33,213 --------- --------- --------- -------- Cash and cash equivalents at end of period $ 18,582 $ 10,955 $ 18,582 $ 10,955 ========= ========= ========= ======== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
- 18 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Ohio Edison Company: We have reviewed the accompanying consolidated balance sheet of Ohio Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of September 30, 2000, and the related consolidated statements of income and cash flows for the three- month and nine-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Ohio Edison Company and subsidiaries as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 10, 2000 - 19 - OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations --------------------- Operating revenues decreased $36.6 million in the third quarter and $4.8 million during the nine-month period ended September 30, 2000, compared to the same periods in 1999. Lower third quarter and year-to-date operating revenues resulted from lower electric sales revenues due to reduced unit prices, which were partially offset by additional transmission service revenues. As a result of higher sales to wholesale customers, total kilowatt-hour sales increased 0.5% in the third quarter and 7.1% in the year-to-date period of 2000, compared to the same periods last year. Additional available internal generation and continuing demand for wholesale power combined to increase sales to the wholesale market in both the third quarter and first nine months of 2000, compared to the previous year. Total retail kilowatt-hour sales decreased 7.5% in the third quarter and 2.0% in the first nine months of 2000, compared to the same periods in 1999, with reduced kilowatt-hour sales primarily in the residential and commercial sectors. The decrease in residential sales was principally due to milder weather during the quarter, resulting in a much lower air-conditioning load. Kilowatt-hour sales to industrial customers were lower in the third quarter of 2000, but remain higher for the year- to-date period of 2000, compared to the same periods in 1999. Industrial kilowatt-hour sales for the first nine months of 2000 benefited from a rebound in demand for domestic steel. Changes in kilowatt-hour sales by customer class for the third quarter and first nine months of 2000, compared to the corresponding periods of 1999, are summarized in the following table.
Changes in KWH Sales Three Nine -------------------- Increase (Decrease) Months Months ------ ------ Residential (13.1)% (5.1)% Commercial (7.7)% (4.2)% Industrial (2.3)% 2.4% ---- ---- Total Retail (7.5)% (2.0)% Wholesale 32.1% 47.8% ---- ---- Total Sales 0.5% 7.1% ==== ====
Operating Expenses and Taxes Total operating expenses and taxes decreased $45.6 million and $18.5 million in the third quarter and first nine months of 2000, respectively, from the same periods of 1999. Lower fuel and purchased power costs in both the third quarter and first nine months of 2000, compared to the same periods in 1999, occurred primarily as a result of reduced fuel expense - down $21.9 million and $45.2 million, respectively. Several factors contributed to the lower fuel expense, which occurred despite an 8.2% third quarter increase in generation and an 11.7% increase in generation during the first nine months of 2000, compared to the prior year. These factors included: o A higher proportion of nuclear generation (i.e. lower cost fuel) due to improved nuclear availability and increased nuclear ownership from the exchange of assets with Duquesne in December 1999; o The expiration of an above-market coal contract; and o Improved coal-blending strategies, which resulted in the use of additional lower cost fuel. - 20 - Nuclear operating costs were higher in both the third quarter and year-to-date periods of 2000, compared to the same periods last year, due to nuclear refueling outages at the Beaver Valley Plant and increased ownership of that plant following the asset exchange. In the first nine months of 2000, other operating costs decreased, compared to the year-to- date period in 1999, due to $21.4 million in gains realized on the sale of emission allowances. Depreciation and amortization decreased in the third quarter of 2000, compared to the same period of 1999, primarily due to reduced accelerated cost recovery in connection with OE's rate reduction plan. Total cost accelerations, which consist of depreciation and amortization of regulatory assets and regulatory assets related to income taxes under the OE rate plan and Penn's restructuring plan were $147.9 million in the third quarter of 2000, down from $173.5 million in the third quarter last year. In the first nine months of 2000, total cost accelerations under the regulatory plans were $291.9 million, compared to $282.4 million in the first nine months of 1999. General taxes decreased in both the third quarter and year-to-date periods of 2000, compared to 1999, primarily due to a favorable property tax settlement and phase out of Pennsylvania's franchise tax. Other Income Other income increased $6.2 million in the third quarter and $7.7 million for the first nine months of 2000, compared to the corresponding periods in 1999 - principally due to interest earned on short-term loans to affiliated companies. Net Interest Charges Net interest charges declined in the third quarter and first nine months of 2000 from the same periods last year due to debt and preferred stock redemption and refinancing activities. During the first nine months of 2000, redemptions and refinancings totaled $117.3 million and $186.5 million, respectively, and will result in annualized savings of $7.7 million, of which $2.1 million relates to redemptions occurring in the third quarter. Financial Condition, Capital Resources and Liquidity ---------------------------------------------------- On September 1, 2000, FirstEnergy's EUOC transferred $1.2 billion of their transmission assets to ATSI. As part of the transfer, OE and Penn (OE companies) sold to ATSI $719.4 million of their transmission assets, net of $339.4 million of accumulated depreciation and $10.9 million of investment tax credits, and approximately $7.7 million of construction work in progress for $169.6 million of cash and $207.2 million of long-term notes. OE companies have continuing cash requirements for planned capital expenditures and maturing debt. During the fourth quarter of 2000, capital requirements for property additions and capital leases are expected to be about $79 million, including $3 million for nuclear fuel. The OE companies will need additional cash of approximately $4.4 million (excluding an OE revolving credit agreement) for maturing long-term debt during the remainder of 2000. These cash requirements are expected to be satisfied from internal cash and/or short-term credit arrangements. As of September 30, 2000, the OE companies had about $19.7 million of cash and temporary investments and $315.8 million of short-term indebtedness. In addition, the OE companies' available borrowing capability included $229.0 million from unused revolving lines of credit and up to $32.0 million from bank facilities on a short-term basis at the banks' discretion. As of September 30, 2000, OE had the capability to issue up to $1.3 billion of additional first mortgage bonds on the basis of property additions and retired bonds. On October 27, 2000, OE paid a special dividend of $200 million to FirstEnergy to meet its funding requirements. Moody's Investors Service (Moody's) upgraded the OE companies' credit ratings on September 27, 2000 and Fitch upgraded OE's credit ratings on October 30, 2000. The improved credit ratings should lower the cost of future borrowings. The OE companies' credit ratings remain under review for further possible upgrades by Moody's. The following table summarizes the changes in credit ratings: - 21 - Credit Ratings Before and After Upgrade ---------------------------------------
Before Upgrade After Upgrade ------------------ --------------------- Moody's Moody's Investors Investors Service Fitch Service Fitch --------- ----- --------- ------ OE First mortgage bonds Baa2 BBB Baa1 BBB+ Preferred Stock ba1 BB+ baa2 BBB- Penn First mortgage bonds Baa2 BBB+ Baa1 Unchanged Preferred Stock ba1 BBB baa2 Unchanged
- 22 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ----------------------- 2000 1999 2000 1999 -------- -------- ---------- ---------- (In thousands) OPERATING REVENUES $525,423 $534,503 $1,419,715 $1,435,297 -------- -------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 109,170 118,816 305,830 310,400 Nuclear operating costs 31,578 22,978 110,016 92,799 Other operating costs 96,889 88,528 271,909 265,805 -------- -------- ---------- ---------- Total operation and maintenance expenses 237,637 230,322 687,755 669,004 Provision for depreciation and amortization 53,566 58,156 169,091 174,154 General taxes 56,584 56,855 167,508 165,497 Income taxes 48,254 50,273 92,254 99,591 -------- -------- ---------- ---------- Total operating expenses and taxes 396,041 395,606 1,116,608 1,108,246 -------- -------- ---------- ---------- OPERATING INCOME 129,382 138,897 303,107 327,051 OTHER INCOME 3,849 1,272 10,134 6,489 -------- -------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 133,231 140,169 313,241 333,540 -------- -------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 48,248 52,581 151,091 160,146 Allowance for borrowed funds used during construction (404) (425) (1,476) (1,158) Other interest expense (credit) 1,385 48 1,660 (948) -------- -------- ---------- ---------- Net interest charges 49,229 52,204 151,275 158,040 -------- -------- ---------- ---------- NET INCOME 84,002 87,965 161,966 175,500 PREFERRED STOCK DIVIDEND REQUIREMENTS 3,733 8,230 18,138 25,312 -------- -------- ---------- ---------- EARNINGS ON COMMON STOCK $ 80,269 $ 79,735 $ 143,828 $ 150,188 ======== ======== ========== ========== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
- 23 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, --------------- -------------- 2000 1999 --------------- -------------- (In thousands) ASSETS ------ UTILITY PLANT: In service $3,843,090 $4,479,098 Less--Accumulated provision for depreciation 1,379,095 1,498,798 ---------- ---------- 2,463,995 2,980,300 ---------- ---------- Construction work in progress- Electric plant 51,183 55,002 Nuclear fuel 14,331 408 ---------- ---------- 65,514 55,410 ---------- ---------- 2,529,509 3,035,710 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 491,838 517,256 Nuclear plant decommissioning trusts 204,215 183,291 Notes receivable from associated companies 92,820 -- Other 17,339 20,708 ---------- ---------- 806,212 721,255 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 161 376 Receivables- Customers 21,776 17,010 Associated companies 40,931 18,318 Other (less accumulated provisions of $1,000,000 for uncollectible accounts at both dates) 120,654 171,274 Materials and supplies, at average cost- Owned 26,897 39,294 Under consignment 33,007 23,721 Prepayments and other 64,114 56,447 ---------- ---------- 307,540 326,440 ---------- ---------- DEFERRED CHARGES: Regulatory assets 825,357 539,824 Goodwill 1,418,426 1,440,283 Property taxes 124,488 132,643 Other 9,808 12,606 ---------- ---------- 2,378,079 2,125,356 ---------- ---------- $6,021,340 $6,208,761 ========== ==========
- 24 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
CAPITALIZATION: Common stockholder's equity- Common stock, without par value, authorized 105,000,000 shares - 79,590,689 shares outstanding $ 931,962 $ 931,962 Retained earnings 128,586 34,654 ---------- ---------- Total common stockholder's equity 1,060,548 966,616 Preferred stock- Not subject to mandatory redemption 238,325 238,325 Subject to mandatory redemption 99,610 116,246 Long-term debt 2,658,090 2,682,795 ---------- ---------- 4,056,573 4,003,982 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 86,737 240,684 Accounts payable- Associated companies 64,639 85,950 Other 31,876 50,570 Notes payable to associated companies 2,751 103,471 Accrued taxes 249,104 177,006 Accrued interest 60,801 60,740 Other 70,572 83,292 ---------- ---------- 566,480 801,713 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 564,740 567,478 Accumulated deferred investment tax credits 80,977 86,999 Nuclear plant decommissioning costs 213,409 192,484 Pensions and other postretirement benefits 229,256 220,731 Other 309,905 335,374 ---------- ---------- 1,398,287 1,403,066 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $6,021,340 $6,208,761 ========== ========== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these balance sheets.
- 25 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 84,002 $ 87,965 $161,966 $175,500 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 53,566 58,156 169,091 174,154 Nuclear fuel and lease amortization 10,038 8,830 27,654 24,801 Other amortization (2,851) (2,855) (9,469) (7,109) Deferred income taxes, net (6,069) 17,472 (8,681) 26,348 Investment tax credits, net (633) (986) (2,597) (2,960) Receivables (1,903) 44,144 40,704 (61,637) Materials and supplies 6,217 1,139 3,111 10,231 Accounts payable (47,940) (34,572) (40,005) (1,105) Other 66,338 59,037 41,052 8,315 --------- -------- -------- -------- Net cash provided from operating activities 160,765 238,330 382,826 346,538 --------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt -- 26,459 -- 26,459 Redemptions and Repayments- Preferred stock 1,000 1,000 14,714 14,714 Long-term debt 184,427 89,424 203,167 113,438 Short-term borrowings, net 11,061 13,653 100,720 38,381 Dividend Payments- Common stock 20,000 68,000 50,000 150,974 Preferred stock 7,479 8,230 23,058 25,312 --------- -------- -------- -------- Net cash used for financing activities 223,967 153,848 391,659 316,360 --------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 17,638 55,881 62,113 86,180 Loans to associated companies 82,583 -- 110,283 -- Loan payments from associated companies -- -- -- (53,509) Capital trust investments -- (7) (25,418) (25,905) Sale of assets to associated companies (172,931) -- (172,931) -- Other 9,525 3,079 17,335 13,535 --------- -------- -------- -------- Net cash used for (provided from) investing activities (63,185) 58,953 (8,618) 20,301 --------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (17) 25,529 (215) 9,877 Cash and cash equivalents at beginning of period 178 3,874 376 19,526 --------- -------- -------- -------- Cash and cash equivalents at end of period $ 161 $ 29,403 $ 161 $ 29,403 ========= ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
- 26 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Cleveland Electric Illuminating Company: We have reviewed the accompanying consolidated balance sheet of The Cleveland Electric Illuminating Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of September 30, 2000, and the related consolidated statements of income and cash flows for the three-month and nine-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of The Cleveland Electric Illuminating Company and subsidiary as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 10, 2000 - 27 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations --------------------- Operating revenues decreased $9.1 million in the third quarter and $15.6 million during the nine-month period ended September 30, 2000, compared to the same periods in 1999. Lower third quarter operating revenues resulted primarily from lower unit prices which were partially offset by increased kilowatt-hour sales. Other electric revenues were down during the first nine months of 2000 due to the elimination of steam sales and joint ownership billings to Duquesne as a result of the fourth quarter 1999 asset exchange. Total kilowatt-hour sales increased 3.3% in the third quarter of 2000 and 8.1% in the year-to-date period, compared to the same periods last year, as a result of higher sales to wholesale customers. For the first nine months of 2000, sales to wholesale customers increased substantially, compared to the same period in 1999, reflecting additional available internal generation earlier in the year and strong demand in the wholesale market. Total retail sales decreased in the third quarter and year-to-date periods of 2000 by 0.9% and 0.2%, respectively, from the corresponding periods of 1999. Kilowatt-hour sales to commercial and industrial customers increased in the third quarter and nine-month periods of 2000 from the corresponding periods last year, but were more than offset by lower residential sales due to the unusually mild weather during the third quarter. Changes in kilowatt-hour sales by customer class for the third quarter and first nine months of 2000, compared to the corresponding periods of 1999, are summarized in the following table:
Changes in KWH Sales Three Nine -------------------- Increase (Decrease) Months Months ------ ------ Residential (10.6)% (6.4)% Commercial 3.7% 2.1% Industrial 1.9% 2.0% ----- ---- Total Retail (0.9)% (0.2)% Wholesale 31.2% 88.7% ----- ---- Total Sales 3.3% 8.1% ===== ====
Operating Expenses and Taxes Total operating expenses and taxes increased $0.4 million in the third quarter and $8.4 million in the year-to-date period of 2000, compared to the same periods of 1999. The increases resulted primarily from higher nuclear and other operating costs, partially offset by lower fuel and purchased power costs and depreciation and amortization. Lower fuel expense more than offset additional purchased power costs in the third quarter and first nine months of 2000, compared to the same periods last year. In the third quarter of 2000, fuel expense decreased by $11.7 million while purchased power costs were $2.1 million higher. In the first nine months of 2000, fuel expense was $35.5 million lower while purchased power costs increased by $30.9 million. As a result of the refueling and maintenance outages from the spring, most of the year-to-date increase in purchased power occurred during the second quarter of 2000, which reduced internal generation in that period. Although slightly lower internal generation contributed to the third quarter of 2000 reduction of fuel expense, the year-to-date period reduction in fuel expense was achieved despite an increase in internal generation from the prior year. Factors contributing to the lower fuel expense included: o A higher proportion of nuclear generation (i.e. lower cost fuel); o The expiration of an above-market coal contract; and o Improved coal-blending strategies, which resulted in the use of additional lower cost fuel. - 28 - Nuclear operating costs were higher in both the third quarter and year-to-date periods of 2000, compared to the same periods in 1999, due to nuclear refueling outages at Beaver Valley Unit 2 in September 2000 and the Davis-Besse Plant in the second quarter of 2000. Excluding credits from gains resulting from the sale of emission allowances, other operating costs increased by $15.5 million in the third quarter and $13.3 million during the first nine months of 2000, compared to the corresponding periods in 1999. Factors contributing to the increases included additional maintenance work at the Eastlake Plant, costs related to newly leased peaking facilities and voluntary early retirement costs. Approval of CEI's transition plan by the PUCO resulted in a net reduction of depreciation and amortization in the third quarter and year-to-date periods of 2000, compared to the same periods last year. As part of the transition plan, generating plant assets were reviewed for possible impairment. As a result, $304 million of impaired nuclear plant investments were recognized in June 2000 as regulatory assets which will begin to be recovered as transition costs in January 2001. This reduction in plant investment resulted in a corresponding reduction of depreciation that began in July 2000. Higher general taxes in the first nine months of 2000, compared to the same period last year, resulted from additional payroll taxes related to nuclear outage work. Net Interest Charges Net interest charges declined in the third quarter and first nine months of 2000 from the same periods last year due to debt redemption and refinancing activities. During the first nine months of 2000, redemptions totaled $189.7 million and will result in annualized savings of $13.9 million, of which $12.7 million relates to redemptions occurring in the third quarter. Financial Condition, Capital Resources and Liquidity ---------------------------------------------------- On September 1, 2000, FirstEnergy's EUOC transferred $1.2 billion of their transmission assets to ATSI. As part of the transfer, CEI sold to ATSI $327.7 million of its transmission assets, net of $155.2 million of accumulated depreciation and $3.4 million of investment tax credits, and approximately $400,000 of construction work in progress for $76.3 million of cash and a $93.2 million long-term note. CEI has continuing cash needs for planned capital expenditures, maturing debt and preferred stock sinking fund requirements. During the fourth quarter of 2000, capital requirements for property additions and capital leases are expected to be about $59 million, including $18 million for nuclear fuel. CEI will need additional cash of approximately $18.8 million to meet sinking fund payments for preferred stock during the remainder of 2000. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of September 30, 2000, CEI had approximately $17.6 million of cash and temporary investments and $2.8 million of short-term indebtedness to associated companies. Under its first mortgage indenture, as of September 30, 2000, CEI had the capability to issue up to $803 million of additional first mortgage bonds on the basis of property additions and retired bonds. Moody's Investors Service (Moody's) and Fitch upgraded CEI's credit ratings on September 27, 2000 and October 30, 2000, respectively. The improved credit ratings should lower the cost of future borrowings. CEI's credit ratings remain under review for further possible upgrades by Moody's. The following table summarizes the changes in credit ratings: Credit Ratings Before and After Upgrade ---------------------------------------
Before Upgrade After Upgrade ----------------- -------------------- Moody's Moody's Investors Investors Service Fitch Service Fitch ------- ----- ------- ----- First mortgage bonds Ba1 BB+ Baa3 BBB- Preferred Stock b1 B baa1 BB
- 29 - THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (In thousands) OPERATING REVENUES $260,803 $233,697 $713,573 $693,143 -------- -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 35,229 51,793 118,027 130,639 Nuclear operating costs 39,596 35,082 130,514 126,208 Other operating costs 33,009 41,974 111,038 119,284 -------- -------- -------- -------- Total operation and maintenance expenses 107,834 128,849 359,579 376,131 Provision for depreciation and amortization 26,501 26,112 79,063 78,008 General taxes 23,187 22,532 68,187 66,364 Income taxes 31,082 13,490 57,052 41,699 -------- -------- -------- -------- Total operating expenses and taxes 188,604 190,983 563,881 562,202 -------- -------- -------- -------- OPERATING INCOME 72,199 42,714 149,692 130,941 OTHER INCOME 2,005 2,840 6,890 9,007 -------- -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 74,204 45,554 156,582 139,948 -------- -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt 17,681 20,412 55,450 62,570 Allowance for borrowed funds used during construction (1,319) (254) (5,464) (860) Other interest expense (credit) 196 (889) (1,100) (3,403) -------- -------- -------- -------- Net interest charges 16,558 19,269 48,886 58,307 -------- -------- -------- -------- NET INCOME 57,646 26,285 107,696 81,641 PREFERRED STOCK DIVIDEND REQUIREMENTS 4,072 4,034 12,211 12,173 -------- -------- -------- -------- EARNINGS ON COMMON STOCK $ 53,574 $ 22,251 $ 95,485 $ 69,468 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
- 30 - THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $1,657,956 $1,776,534 Less--Accumulated provision for depreciation 604,823 670,866 ---------- ---------- 1,053,133 1,105,668 ---------- ---------- Construction work in progress- Electric plant 61,831 95,854 Nuclear fuel 9,123 386 ---------- ---------- 70,954 96,240 ---------- ---------- 1,124,087 1,201,908 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 279,896 295,454 Nuclear plant decommissioning trusts 139,155 123,500 Notes receivable from associated companies 39,125 -- Other 3,820 4,678 ---------- ---------- 461,996 423,632 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 31,272 312 Receivables- Customers (less accumulated provision of $300,000 for uncollectible accounts at September 30, 2000) 9,078 12,965 Associated companies 19,348 48,861 Other 9,861 9,827 Materials and supplies, at average cost- Owned 16,256 23,243 Under consignment 23,235 20,232 Prepayments and other 31,281 25,931 ---------- ---------- 140,331 141,371 ---------- ---------- DEFERRED CHARGES: Regulatory assets 421,615 385,284 Goodwill 461,272 465,169 Property taxes 43,448 43,448 Other 5,965 6,116 ---------- ---------- 932,300 900,017 ---------- ---------- $2,658,714 $2,666,928 ========== ==========
- 31 - THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $5 par value, authorized 60,000,000 shares - 39,133,887 shares outstanding $ 195,670 $ 195,670 Other paid-in capital 328,559 328,559 Retained earnings 78,547 27,475 ---------- ---------- Total common stockholder's equity 602,776 551,704 Preferred stock not subject to mandatory redemption 210,000 210,000 Long-term debt 956,540 981,029 ---------- ---------- 1,769,316 1,742,733 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt 76,478 95,765 Accounts payable- Associated companies 17,593 20,537 Other 17,715 27,100 Notes payable to associated companies 12,335 33,876 Accrued taxes 66,700 57,742 Accrued interest 18,859 21,961 Other 48,229 60,414 ---------- ---------- 257,909 317,395 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 188,933 172,236 Accumulated deferred investment tax credits 35,602 38,748 Nuclear plant decommissioning costs 145,497 130,116 Pensions and other postretirement benefits 119,777 122,986 Other 141,680 142,714 ---------- ---------- 631,489 606,800 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $2,658,714 $2,666,928 ========== ========== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these balance sheets.
- 32 - THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2000 1999 2000 1999 --------- -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 57,646 $ 26,285 $107,696 $ 81,641 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 26,501 26,112 79,063 78,008 Nuclear fuel and lease amortization 6,429 6,734 17,820 18,552 Deferred income taxes, net 1,251 8,127 9,271 18,432 Investment tax credits, net (442) (481) (1,400) (1,442) Receivables (7,939) (7,202) 28,426 35,316 Materials and supplies 818 163 3,984 1,250 Accounts payable (41,139) (2,964) (12,329) (8,177) Other 33,832 25,152 (24,415) (35,260) -------- -------- -------- -------- Net cash provided from operating activities 76,957 81,926 208,116 188,320 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 30,467 54,929 96,633 89,779 Short-term borrowings, net -- 151 -- 151 Redemptions and Repayments- Preferred stock -- -- -- 1,690 Long-term debt 51,310 106,802 162,627 162,427 Short-term borrowings, net 39,599 -- 21,541 -- Dividend Payments- Common stock 10,100 20,000 44,400 80,351 Preferred stock 4,072 4,034 12,211 12,173 -------- -------- -------- -------- Net cash used for financing activities 74,614 75,756 144,146 166,711 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 6,659 8,734 72,436 27,656 Loans to associated companies 28,236 -- 34,185 -- Loan payments from associated companies -- (58,136) -- (58,999) Capital trust investments 60 (64) (15,558) (15,371) Sale of assets to associated companies (73,195) -- (73,195) -- Other 9,612 2,935 15,142 15,045 -------- -------- -------- -------- Net cash used for (provided from) investing activities (28,628) (46,531) 33,010 (31,669) -------- -------- -------- -------- Net increase in cash and cash equivalents 30,971 52,701 30,960 53,278 Cash and cash equivalents at beginning of period 301 4,717 312 4,140 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 31,272 $ 57,418 $ 31,272 $ 57,418 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
- 33 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Toledo Edison Company: We have reviewed the accompanying consolidated balance sheet of The Toledo Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of September 30, 2000, and the related consolidated statements of income and cash flows for the three- month and nine-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of The Toledo Edison Company and subsidiary as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 10, 2000 - 34 - THE TOLEDO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations --------------------- Operating revenues increased $27.1 million in the third quarter and $20.4 million during the nine-month period ended September 30, 2000, compared to the same periods in 1999. Higher third-quarter and year-to- date operating revenues resulted principally from an increase in third quarter 2000 kilowatt-hour sales, which were partially offset by lower unit prices. Transmission service revenues also contributed to the increase in operating revenues. Sales to wholesale customers were 16.1% and 41.0% higher in the third quarter and first nine months of 2000, respectively, compared to the corresponding periods in 1999, due to continued demand in the wholesale market. Total kilowatt-hour sales increased 11.1% in the third quarter and 10.2% in the year-to-date periods of 2000, compared to the same periods last year. Operating Expenses and Taxes Total operating expenses and taxes decreased by $2.4 million in the third quarter and increased by $1.7 million during the first nine months of 2000, compared to the same periods last year. Operation and maintenance expenses decreased substantially in both periods resulting from lower fuel and purchased power costs and other operating costs which were partially offset by higher nuclear expenses. A reduction in internal generation due to refueling and maintenance outages and the expiration of an above-market coal contract contributed to lower fuel expense in the third quarter and year-to-date periods of 2000 - down $5.9 million and $12.8 million, respectively, compared to the same periods last year. Purchased power costs were also $10.7 million lower in the third quarter of 2000, due in part to lower unit costs. Nuclear operating costs increased in the third quarter and the first nine months of 2000, compared to the same periods in 1999, due to nuclear refueling outages at Beaver Valley Unit 2 in September 2000 and the Davis-Besse Plant in the second quarter of 2000. Excluding credits from gains resulting from the sale of emission allowances, other operating costs were $5.6 million higher in the third quarter and $6.4 million higher during the first nine months of 2000, compared to the corresponding periods in 1999. Factors contributing to the increases in other operating costs included maintenance work at the Bay Shore Plant (including repowering of Unit 1) and additional tree trimming expenses. Net Interest Charges Net interest charges declined in the third quarter and first nine months of 2000 from the same periods last year due to debt redemption and refinancing activities. During the first nine months of 2000, redemption and refinancing activities totaled $75.6 million and $98.2 million, respectively, and will result in annualized savings of $8.3 million, of which $4.1 million relates to activities occurring in the third quarter. Financial Condition, Capital Resources and Liquidity ---------------------------------------------------- On September 1, 2000, FirstEnergy's EUOC transferred $1.2 billion of their transmission assets to ATSI. As part of the transfer, TE sold to ATSI $149.2 million of its transmission assets, net of $77.0 million of accumulated depreciation and $1.7 million of investment tax credits, and approximately $1.0 million of construction work in progress for $32.2 million of cash and a $39.3 million long-term note. TE has continuing cash needs for planned capital expenditures and maturing debt. During the fourth quarter of 2000, capital requirements for property additions and capital leases are expected to be about $24 million, including $8 million for nuclear fuel. TE will need additional cash of approximately $0.4 million for maturing long-term debt during the remainder of 2000. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of September 30, 2000, TE had approximately $34.2 million of cash and temporary investments and $12.3 million of short-term indebtedness to associated companies. Under its first mortgage indenture, as of September 30, 2000, TE had capability to issue up to $501 million of additional first mortgage bonds on the basis of property additions and retired bonds. - 35 - Moody's Investors Service (Moody's) and Fitch upgraded TE's credit ratings on September 27, 2000 and October 30, 2000, respectively. The improved credit ratings should lower the cost of future borrowings. TE's credit ratings remain under review for further possible upgrades by Moody's. The following table summarizes the changes in credit ratings: Credit Ratings Before and After Upgrade ---------------------------------------
Before Upgrade After Upgrade ------------------- ------------------ Moody's Moody's Investors Investors Service Fitch Service Fitch ------- ----- ------- ----- First mortgage bonds Ba1 BB+ Baa3 BBB- Subordinated debt Ba3 B+ Ba1 BB Preferred Stock b1 B ba1 BB
- 36 - PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2000 1999 2000 1999 -------- ------- -------- -------- (In thousands) OPERATING REVENUES $102,761 $82,354 $280,277 $245,843 -------- ------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 17,721 25,978 48,756 61,244 Nuclear operating costs 21,914 5,165 88,874 20,168 Other operating costs 9,554 14,281 39,133 45,526 -------- ------- -------- -------- Total operation and maintenance expenses 49,189 45,424 176,763 126,938 Provision for depreciation and amortization 14,367 15,790 41,996 46,505 General taxes 6,511 7,151 19,846 19,395 Income taxes 12,898 4,824 15,623 19,788 -------- ------- -------- -------- Total operating expenses and taxes 82,965 73,189 254,228 212,626 -------- ------- -------- -------- OPERATING INCOME 19,796 9,165 26,049 33,217 OTHER INCOME 421 194 1,265 1,441 -------- ------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 20,217 9,359 27,314 34,658 -------- ------- -------- -------- NET INTEREST CHARGES: Interest expense 5,146 4,972 15,673 16,090 Allowance for borrowed funds used during construction (121) (91) (793) (323) -------- ------- -------- -------- Net interest charges 5,025 4,881 14,880 15,767 -------- ------- -------- -------- NET INCOME 15,192 4,478 12,434 18,891 PREFERRED STOCK DIVIDEND REQUIREMENTS 926 1,131 2,778 3,444 ------- ------- -------- -------- EARNINGS ON COMMON STOCK $14,266 $ 3,347 $ 9,656 $ 15,447 ======= ======= ======== ======== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
- 37 - PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $561,832 $ 646,186 Less--Accumulated provision for depreciation 200,413 237,893 -------- ---------- 361,419 408,293 -------- ---------- Construction work in progress- Electric plant 17,361 18,558 Nuclear fuel 4,991 6,540 -------- ---------- 22,352 25,098 -------- ---------- 383,771 433,391 -------- ---------- OTHER PROPERTY AND INVESTMENTS: Nuclear plant decommissioning trusts 115,716 104,775 Notes receivable from associated companies 33,662 -- Other 23,075 19,784 -------- ---------- 172,453 124,559 -------- ---------- CURRENT ASSETS: Cash and cash equivalents 366 5,670 Receivables- Customers (less accumulated provisions of $3,593,000 and $3,537,000, respectively, for uncollectible accounts) 35,044 34,568 Associated companies 90,879 53,988 Other 8,515 8,896 Materials and supplies, at average cost 23,094 32,483 Prepayments 5,712 2,208 -------- ---------- 163,610 137,813 -------- ---------- DEFERRED CHARGES: Regulatory assets 273,774 314,593 Other 5,625 5,260 -------- ---------- 279,399 319,853 -------- ---------- $999,233 $1,015,616 ======== ==========
- 38 - PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $30 par value, authorized 6,500,000 shares - 6,290,000 shares outstanding $188,700 $ 188,700 Other paid-in capital (310) (310) Retained earnings 20,874 11,218 -------- ---------- Total common stockholder's equity 209,264 199,608 Preferred stock- Not subject to mandatory redemption 39,105 39,105 Subject to mandatory redemption 15,000 15,000 Long-term debt- Associated companies 20,806 18,007 Other 252,714 256,814 -------- ---------- 536,889 528,534 -------- ---------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 16,978 13,504 Other 1,062 29,521 Accounts payable- Associated companies 34,774 26,220 Other 19,539 28,903 Accrued taxes 36,253 21,863 Accrued interest 3,778 6,592 Other 17,913 16,506 -------- ---------- 130,297 143,109 -------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 162,530 182,702 Accumulated deferred investment tax credits 4,482 7,266 Nuclear plant decommissioning costs 116,171 107,816 Other 48,864 46,189 -------- ----------- 332,047 343,973 -------- ----------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) -------- ---------- $999,233 $1,015,616 ======== ========== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these balance sheets.
- 39 - PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 2000 1999 2000 1999 ---------- -------- --------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,192 $ 4,478 $ 12,434 $ 18,891 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 14,367 15,790 41,996 46,505 Nuclear fuel and lease amortization 5,276 1,919 13,143 5,153 Deferred income taxes, net (4,311) (143) (10,020) (1,016) Investment tax credits, net (757) (1,942) (2,329) (2,237) Receivables (10,492) 1,481 (4,792) 12,319 Materials and supplies 3,680 5,067 9,389 2,725 Accounts payable (14,590) (6,759) (810) 4,457 Other 9,037 (5,280) 4,482 (12,481) -------- ------- -------- -------- Net cash provided from operating activities 17,402 14,611 63,493 74,316 -------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions and Repayments- Preferred stock -- 5,920 -- 12,005 Long-term debt 28,227 1,843 42,000 4,988 Dividend Payments- Common stock -- 15,000 -- 80,362 Preferred stock 926 1,393 2,778 3,130 -------- ------- -------- -------- Net cash used for financing activities 29,153 24,156 44,778 100,485 -------- ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 4,314 8,160 22,255 16,489 Loans to associated companies 52,694 -- 78,722 -- Loan payment from parent -- (12,597) (12,866) (33,910) Sale of assets to associated companies (66,529) -- (66,529) -- Other (754) (3,391) 2,437 (1,523) -------- ------- -------- -------- Net cash used for (provided from) investing activities (10,275) (7,828) 24,019 (18,944) -------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents (1,476) (1,717) (5,304) (7,225) Cash and cash equivalents at beginning of period 1,842 1,977 5,670 7,485 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 366 $ 260 $ 366 $ 260 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
- 40 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Pennsylvania Power Company: We have reviewed the accompanying balance sheet of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) as of September 30, 2000, and the related statements of income and cash flows for the three-month and nine-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the balance sheet of Pennsylvania Power Company as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 10, 2000 - 41 - PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations --------------------- Operating revenues increased $20.4 million in the third quarter and $34.4 million during the nine-month period ended September 30, 2000, compared to the same periods in 1999. Retail generation sales to the commercial and industrial sectors increased strongly in the third quarter of 2000 due to the return of former Penn customers served by alternative suppliers and a rebound in demand for domestic steel. Substantial growth in kilowatt-hour sales to the wholesale market also contributed to much higher total electric generation sales in the third quarter and first nine months of 2000, compared to the previous year. Sales to the wholesale market continued to benefit from available internal generation. Overall, operating revenues benefited from the strong growth in kilowatt-hour sales which was partially offset by lower unit prices reflecting the lower margins available in the wholesale market. The transfer of ownership in PPE to FE Services, an affiliated company, in December 1999, also offset a portion of the increase in operating revenues. Changes in electric generation sales and kilowatt-hour deliveries in the third quarter and first nine months of 2000, compared to the corresponding periods of 1999, are summarized in the following table:
Changes in KWH Sales Three Nine -------------------- Increase (Decrease) Months Months ------ ------ Electric Generation Sales: Retail 24.2% 14.0% Wholesale 450.6% 354.3% ----- ----- Total Electric Generation Sales 116.6% 82.0% ===== ===== Kilowatt-hour Deliveries: Residential 3.8% 0.7% Commercial 13.8% 7.7% Industrial 4.3% 16.1% ----- ----- Total Kilowatt-hour Deliveries 6.7% 8.4% ===== =====
Operating Expenses and Taxes Total operating expenses and taxes increased $9.8 million in the third quarter and $41.6 million in the first nine months of 2000, compared to the same periods of 1999. The increases resulted primarily from higher nuclear operating costs, which were partially offset by reductions in fuel and purchased power costs, other operating costs and depreciation and amortization. Lower fuel and purchased power costs resulted from additional internal generation, which reduced the demand for more expensive external sources of power, and the transfer of ownership in PPE to FE Services. Nuclear operating costs were much higher in both the third quarter and year-to-date period of 2000, compared to the corresponding periods last year, due to nuclear refueling outages at the Beaver Valley Plant and increased ownership of that plant following the December 1999 asset exchange with Duquesne. Excluding credits from gains on the sale of emission allowances, other operating costs were $1.6 million higher in the third quarter and approximately the same in the nine-month period of 2000, compared to the same periods in 1999. The third quarter increase in other operating costs resulted from additional maintenance work at the Mansfield Plant and increased ownership of the Mansfield Plant following the asset exchange. Lower depreciation and amortization in the third quarter and year-to-date period of 2000, compared to the corresponding periods in the previous year, reflects a reduction in accrued decommissioning costs. - 42 - Net Interest Charges Net interest charges declined in the first nine months of 2000 compared to the same period last year due to debt redemption and refinancing activities. During the first nine months of 2000, redemptions totaled $23.0 million and will result in annualized savings of $1.4 million, substantially all of which relates to redemptions occurring in the third quarter. Financial Condition, Capital Resources and Liquidity ---------------------------------------------------- On September 1, 2000, FirstEnergy's EUOC transferred $1.2 billion of their transmission assets to ATSI. As part of the transfer, Penn sold to ATSI $125.4 million of its transmission assets, net of $59.0 million of accumulated depreciation and $2.5 million of investment tax credits, and approximately $130,000 of construction work in progress for $30.1 million of cash and a $34.0 million long-term note. Penn has continuing cash requirements for planned capital expenditures and maturing debt. During the fourth quarter of 2000, capital requirements for property additions and capital leases are expected to be about $13 million, including $3 million for nuclear fuel. Penn will need additional cash of approximately $487,000 for maturing long-term debt during the remainder of 2000. These cash requirements are expected to be satisfied with internal cash. As of September 30, 2000, Penn had approximately $48.0 million of cash and temporary investments and no short-term indebtedness. Also, Penn had $2.0 million available from an unused bank facility as of September 30, 2000, which may be borrowed for up to several days at the bank's discretion. Under its first mortgage indenture, as of September 30, 2000, Penn had the capability to issue up to $226 million of additional first mortgage bonds on the basis of property additions and retired bonds. On September 27, 2000, Moody's Investors Service (Moody's) upgraded Penn's credit ratings. Fitch affirmed Penn's existing credit ratings on October 30, 2000. Moody's senior secured debt ratings of Penn were raised from Baa2 to Baa1 and preferred stock ratings were upgraded from ba1 to baa2. The improved credit ratings from Moody's should lower the cost of future borrowings. The credit ratings of Penn remain under review for further possible upgrades by Moody's. - 43 - PART II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit Number ------- FirstEnergy, OE, CEI and Penn ----------------------------- 15 Letter from independent public accountants. TE -- None Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, neither FirstEnergy, OE, CEI, TE nor Penn has filed as an exhibit to this Form 10-Q any instrument with respect to long-term debt if the respective total amount of securities authorized thereunder does not exceed 10% of their respective total assets of FirstEnergy and its subsidiaries on a consolidated basis, or respectively, OE, CEI, TE or Penn, but hereby agrees to furnish to the Commission on request any such documents. (b) Reports on Form 8-K FirstEnergy, OE, CEI, TE and Penn --------------------------------- None - 44 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 14, 2000 FIRSTENERGY CORP. ----------------- Registrant OHIO EDISON COMPANY ------------------- Registrant THE CLEVELAND ELECTRIC ---------------------- ILLUMINATING COMPANY -------------------- Registrant THE TOLEDO EDISON COMPANY ------------------------- Registrant PENNSYLVANIA POWER COMPANY -------------------------- Registrant /s/ Harvey L. Wagner ------------------------------------ Harvey L. Wagner Controller Principal Accounting Officer - 45 -