FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to _______
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
333-21011 FIRSTENERGY CORP. 34-1843785
(An Ohio Corporation)
76 South Main Street
Akron, 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
<PAGE>
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
OUTSTANDING
CLASS AS OF AUGUST 9, 1999
----- --------------------
FirstEnergy Corp., $.10 par value 233,963,887
Ohio Edison Company, $9 par value 100
The Cleveland Electric Illuminating
Company, no par value 79,590,689
The Toledo Edison Company, $5 par value 39,133,887
Pennsylvania Power Company, $30 par value 6,290,000
FirstEnergy Corp. is the sole holder of Ohio Edison Company, The
Cleveland Electric Illuminating Company and The Toledo Edison Company
common stock; Ohio Edison Company is the sole holder of Pennsylvania
Power Company common stock.
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 and other similar factors.
<PAGE>
TABLE OF CONTENTS
Pages
Part I. Financial Information
Notes to Consolidated Financial Statements 1-4
FirstEnergy Corp.
Consolidated Statements of Income 5
Consolidated Balance Sheets 6-7
Consolidated Statements of Cash Flows 8
Report of Independent Public Accountants 9
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10-13
Ohio Edison Company
Consolidated Statements of Income 14
Consolidated Balance Sheets 15-16
Consolidated Statements of Cash Flows 17
Report of Independent Public Accountants 18
Management's Discussion and Analysis of Results
of Operations and Financial Condition 19-21
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 22
Consolidated Balance Sheets 23-24
Consolidated Statements of Cash Flows 25
Report of Independent Public Accountants 26
Management's Discussion and Analysis of Results of
Operations and Financial Condition 27-29
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 35-37
Pennsylvania Power Company
Consolidated Statements of Income 38
Consolidated Balance Sheets 39-40
Consolidated Statements of Cash Flows 41
Report of Independent Public Accountants 42
Management's Discussion and Analysis of Results of
Operations and Financial Condition 43-45
Part II. Other Information
<PAGE>
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 AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 - CONSOLIDATED FINANCIAL STATEMENTS:
The principal business of FirstEnergy Corp. (FirstEnergy) is
the holding, directly or indirectly, of all of the outstanding common
stock of its four 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.
The condensed consolidated 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, 1998
for FirstEnergy and the Companies. The reported results of operations
are not indicative of results of operations for any future period.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
The sole assets of the subsidiary trust that is the obligor on
the preferred securities included in FirstEnergy's and OE's
capitalization are $123,711,350 principal amount of 9% Junior
Subordinated Debentures of OE due December 31, 2025.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
FirstEnergy's current forecast reflects expenditures of
approximately $2.2 billion (FirstEnergy-$263 million, OE-$856 million,
CEI-$701 million, TE-$257 million and Penn-$167 million) for property
additions and improvements from 1999-2003, of which approximately $538
million (FirstEnergy-$172 million, OE-$156 million, CEI-$124 million,
TE-$48 million and Penn-$38 million) is applicable to 1999. Investments
for additional nuclear fuel during the 1999-2003 period are estimated to
be approximately $394 million (OE-$137 million, CEI-$129 million, TE-
$100 million and Penn-$28 million), of which approximately $46 million
(OE-$19 million, CEI-$15 million, TE-$8 million and Penn-$4 million)
applies to 1999.
GUARANTEES-
The Companies and Duquesne Light Company (Duquesne) have each
severally guaranteed certain debt and lease obligations in connection
with a coal supply contract for the Bruce Mansfield Plant. As of
June 30, 1999, the Companies' share of the guarantees was $23.5 million
(OE-$13.6 million, CEI-$5.0 million, TE-$2.9 million and Penn-$2.0
million). The price under the coal supply contract, which includes
certain minimum payments, has been determined to be sufficient to
satisfy the debt and lease obligations.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate the
Companies with regard to air and water quality and other environmental
matters. The Companies estimate additional capital expenditures for
environmental compliance of approximately $449 million (OE-$213
million, CEI-$145 million, TE-$44 million and Penn-$47 million), which
is included in the construction forecast provided under "Capital
Expenditures" for 1999 through 2003.
The Companies are in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under
the Clean Air Act Amendments of 1990. SO2 reductions are being achieved
by burning lower-sulfur fuel, generating more electricity from lower-
emitting plants, and/or purchasing emission allowances. NOx reductions
are being achieved through combustion controls and generating more
- 1 -
<PAGE>
electricity from lower-emitting plants. In September 1998, the
Environmental Protection Agency (EPA) finalized regulations requiring
additional NOx reductions from the Companies' Ohio and Pennsylvania
facilities by May 2003. The EPA`s NOx Transport Rule imposes uniform
reductions of NOx emissions across a region of twenty-two states and
the District of Columbia, including Ohio and Pennsylvania, based on a
conclusion that such NOx emissions are contributing significantly to
ozone pollution in the eastern United States. In May 1999, the U.S.
Court of Appeals for the D.C. Circuit issued a stay which delays
implementation of EPA's NOx Transport Rule until the Court has ruled on
the merits of various appeals. Under the NOx Transport Rule, each of
the twenty-two states are required to submit revised State
Implementation Plans (SIP) which comply with individual state NOx
budgets contemplating an 85% reduction in utility plant NOx emissions
from 1990 emissions established by the EPA; the original September 1999
deadline has been extended by the D.C. Circuit Court stay. A proposed
Federal Implementation Plan accompanied the NOx Transport Rule and may
be implemented by the EPA in states which fail to revise their SIP. In
another separate but related action, eight states filed petitions with
the EPA under Section 126 of the Clean Air Act seeking reductions of
NOx emissions which are alleged to contribute to ozone pollution in the
eight petitioning states. The EPA suggests that the Section 126
petitions will be adequately addressed by the NOx Transport Program,
but an April 30, 1999 rulemaking established an alternative program
which would require nearly identical 85% NOx reductions at the
Companies' Ohio and Pennsylvania plants by May 2003 in the event
implementation of the NOx Transport Rule is delayed. In June 1999, the
EPA stayed the April 30,1999 rulemaking and proposed changes to that
rulemaking in response to the D.C. Circuit Court rulings. The Companies
continue to evaluate their compliance plans and other compliance
options and currently estimate the additional capital expenditures for
NOx reductions may reach $500 million.
The Companies are required to meet federally approved SO2
regulations. Violations of such regulations can result in shutdown of
the generating unit involved and/or civil or criminal penalties of up
to $25,000 for each day the unit is in violation. The EPA has an
interim enforcement policy for SO2 regulations in Ohio that allows for
compliance based on a 30-day averaging period. The Companies cannot
predict what action the EPA may take in the future with respect to the
interim enforcement policy.
In July 1997, the EPA promulgated changes in the National
Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS
for previously unregulated ultra-fine particulate matter. In May 1999,
the U.S. Court of Appeals for the D.C. Circuit remanded both standards
back to the EPA finding constitutional and other defects in the new
NAAQS rules. The EPA is seeking rehearing by the D.C. Circuit Court.
The Companies cannot predict either the outcome of the rehearing
request or the time period before the new NAAQS could become
enforceable either through Court action or EPA action in response to
the Court's remand order. The cost of compliance with these regulations
may be substantial and depends on the manner in which they are
ultimately implemented, if at all, by the states in which the Companies
operate affected facilities.
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 $4.6 million and $1.0 million,
respectively, as of June 30, 1999, based on estimates of the costs of
cleanup and the proportionate responsibility of other PRPs for such
costs. CEI and TE believe that waste disposal costs will not have a
material adverse effect on their financial condition, cash flows or
results of operations.
Legislative, administrative and judicial actions will
continue to change the way that the Companies must operate in order to
comply with environmental laws and regulations. With respect to any
such changes and to the environmental matters described above, the
Companies expect that while they remain regulated, any resulting
additional capital costs which may be required, as well as any required
increase in operating costs, would ultimately be recovered from their
customers.
PENDING EXCHANGE OF ASSETS-
On March 26, 1999, FirstEnergy announced that it completed its
agreements with Duquesne to exchange certain generating assets. Upon
receipt of regulatory approvals, Duquesne will transfer 1,436 megawatts
owned by Duquesne at eight Central Area Power Coordination Group (CAPCO)
generating units in exchange for 1,328 megawatts at three non-CAPCO
power plants owned by the Companies. The agreements for the exchange of
assets, which is structured as a like-kind exchange for tax purposes,
will provide the Companies with exclusive ownership and operating
control of all CAPCO generating units. The three FirstEnergy plants to
be transferred will be included in Duquesne's upcoming auction of its
generating assets. The Companies will operate the plants until the
assets are transferred to the new owners. Duquesne will fund
decommissioning costs equal to its percentage interest in the three
nuclear generating units to be transferred. The asset transfer could
take place in late 1999 or early 2000. Under the agreements, the
existing CAPCO arrangements will terminate upon transfer of the assets.
- 2 -
<PAGE>
3 - REGULATORY ACCOUNTING:
On July 6, 1999, Ohio Governor Bob Taft signed legislation
which will allow Ohio electric customers to select their generation
suppliers beginning January 1, 2001. Among other things, the new law
provides for a five percent rate reduction on the generation portion of
residential customers' bills and the opportunity to recover transition
costs, including regulatory assets, from January 1, 2001 through
December 31, 2005. The period for the recovery of regulatory assets only
can be extended up to December 31, 2010. The Public Utilities Commission
of Ohio (PUCO) has been authorized to determine the level of transition
cost recovery, as well as the recovery period for the regulatory assets
portion of those costs, in considering each Ohio electric utility's
transition plan application. These applications must be filed with the
PUCO by January 3, 2000. Upon conclusion of the hearing process, the
PUCO will issue an order of its findings regarding recoverability of
transition costs. The application of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71) to OE's generation business and the nonnuclear
generation businesses of CEI and TE will be discontinued at that time.
If the transition plans ultimately approved by the PUCO for OE, CEI and
TE do not provide adequate recovery of their nuclear generating unit
investments and regulatory assets, there would be a charge to earnings
which could have a material adverse effect on the results of operations
and financial condition for FirstEnergy, OE, CEI and TE. The Companies
believe they will be able to bill and collect cost-based rates for their
transmission and distribution services, which will remain regulated;
accordingly, it is appropriate that the Companies continue the
application of SFAS 71, to those respective operations after
December 31, 2000.
4 - SEGMENT INFORMATION:
FirstEnergy's primary segment is its Electric Utility Group
which includes four electric utility operating companies that provide
electric service in Ohio and Pennsylvania. Its other material business
segment is the FirstEnergy Trading Services, Inc. subsidiary (formerly
known as FirstEnergy Trading & Power Marketing, Inc.) which markets and
trades electricity in nonregulated markets. Financial data for these
business segments and products and services are as follows:
<TABLE>
Segment Financial Information
<CAPTION>
FirstEnergy
Electric Trading All Reconciling
Three Months Ended: Utilities Services Other Eliminations Totals
- ------------------ --------- ----------- ----- ------------ ------
(In millions)
June 30, 1999
- -------------
<S> <C> <C> <C> <C> <C>
External revenues $ 1,340 $ 17 $ 167 $ -- $ 1,524
Intersegment revenues 8 21 24 (53) --
Total revenues 1,348 38 191 (53) 1,524
Depreciation and amortization 208 -- 7 -- 215
Net interest charges 143 -- 16 (12) 147
Income taxes 101 (1) 1 -- 101
Net income/Earnings on common
stock 125 (2) 5 (3) 125
Total assets 17,393 91 1,833 (934) 18,383
Property additions 69 -- 24 -- 93
Acquisitions -- -- -- -- --
June 30, 1998
- -------------
External revenues $ 1,323 $ 108 $ 33 $ -- $ 1,464
Intersegment revenues 8 3 21 (32) --
Total revenues 1,331 111 54 (32) 1,464
Depreciation and amortization 192 -- 2 -- 194
Net interest charges 149 -- 18 (12) 155
Income taxes 66 (14) -- -- 52
Net income/Earnings on common
stock 55 (21) (3) (2) 29
Total assets 17,815 62 1,543 (899) 18,521
Property additions 60 -- 7 -- 67
Acquisitions -- -- 240 -- 240
- 3 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FirstEnergy
Electric Trading All Reconciling
Six Months Ended: Utilities Services Other Eliminations Totals
- ------------------ --------- ------------ ----- ------------ ------
(In millions)
June 30, 1999
- -------------
<S> <C> <C> <C> <C> <C>
External revenues $ 2,612 $ 28 $ 301 $ -- $ 2,941
Intersegment revenues 16 21 47 (84) --
Total revenues 2,628 49 348 (84) 2,941
Depreciation and amortization 394 -- 11 -- 405
Net interest charges 285 -- 32 (24) 293
Income taxes 197 (2) (1) -- 194
Net income/Earnings on common
stock 268 (3) 1 (4) 262
Total assets 17,393 91 1,833 (934) 18,383
Property additions 121 -- 54 -- 175
Acquisitions -- -- 9 -- 9
June 30, 1998
- -------------
External revenues $ 2,559 $ 224 $ 48 $ -- $ 2,831
Intersegment revenues 16 3 42 (61) --
Total revenues 2,575 227 90 (61) 2,831
Depreciation and amortization 385 -- 3 -- 388
Net interest charges 289 1 33 (25) 298
Income taxes 150 (14) (1) -- 135
Net income/Earnings on common
stock 181 (21) (4) (3) 153
Total assets 17,815 62 1,543 (899) 18,521
Property additions 118 -- 13 -- 131
Acquisitions -- -- 240 -- 240
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Electric sales $1,277,424 $1,262,966 $2,497,318 $2,443,555
Other - electric utilities 70,001 65,399 128,327 126,105
Facilities services 116,755 27,094 221,323 36,623
Trading services 17,089 108,304 28,566 224,122
Other 42,612 214 65,757 651
---------- ---------- ---------- ----------
Total revenues 1,523,881 1,463,977 2,941,291 2,831,056
---------- ---------- ---------- ----------
EXPENSES:
Fuel and purchased power 204,273 326,292 408,630 541,157
Other expenses:
Electric utilities 424,060 363,930 789,971 707,606
Facilities services 111,287 26,697 212,640 36,693
Trading services 20,460 143,312 33,264 260,435
Other 34,840 8,118 64,170 8,735
Provision for depreciation and amortization 215,394 193,690 405,232 387,817
General taxes 139,466 135,108 277,560 271,482
---------- ---------- ---------- ----------
Total expenses 1,149,780 1,197,147 2,191,467 2,213,925
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 374,101 266,830 749,824 617,131
---------- ---------- ---------- ----------
NET INTEREST CHARGES:
Interest expense 131,359 137,392 260,740 273,161
Allowance for borrowed funds used during
construction and capitalized interest (3,376) (1,187) (6,061) (2,668)
Subsidiaries' preferred stock dividends 19,379 18,463 38,760 27,791
---------- ---------- ---------- ----------
Net interest charges 147,362 154,668 293,439 298,284
---------- ---------- ---------- ----------
INCOME TAXES 101,417 52,208 194,342 135,241
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 125,322 59,954 262,043 183,606
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- (30,522) -- (30,522)
---------- ---------- ---------- ----------
NET INCOME $ 125,322 $ 29,432 $ 262,043 $ 153,084
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 227,367 223,987 228,254 223,197
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
Income before extraordinary item $ .55 $ .27 $1.15 $ .83
Extraordinary item (Net of income taxes) -- (.14) -- (.14)
----- ----- ----- -----
Net income $ .55 $ .13 $1.15 $ .69
===== ===== ===== =====
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $ .75 $ .75
===== ===== ===== =====
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 226,533 $ 77,798
Receivables-
Customers (less accumulated provisions of
$6,504,000 and $6,397,000, respectively,
for uncollectible accounts) 258,561 239,183
Other (less accumulated provisions of
$45,962,000 and $46,251,000, respectively,
for uncollectible accounts) 466,250 322,186
Materials and supplies, at average cost-
Owned 136,379 145,926
Under consignment 113,032 110,109
Prepayments and other 210,675 171,931
----------- -----------
1,411,430 1,067,133
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
In service 15,101,664 14,961,664
Less--Accumulated provision for depreciation 6,109,397 6,012,761
----------- -----------
8,992,267 8,948,903
Construction work in progress 231,907 293,671
----------- -----------
9,224,174 9,242,574
----------- -----------
INVESTMENTS:
Capital trust investments 1,284,196 1,329,010
Nuclear plant decommissioning trusts 396,451 358,371
Letter of credit collateralization 277,763 277,763
Other 459,552 453,860
----------- -----------
2,417,962 2,419,004
----------- -----------
DEFERRED CHARGES:
Regulatory assets 2,722,184 2,887,437
Goodwill 2,121,178 2,167,968
Property taxes 270,666 270,666
Other 215,590 199,400
----------- -----------
5,329,618 5,525,471
----------- -----------
$18,383,184 $18,254,182
=========== ===========
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Currently payable long-term debt
and preferred stock $ 1,201,245 $ 876,470
Short-term borrowings 228,769 254,470
Accounts payable 304,059 257,524
Accrued taxes 433,012 401,688
Accrued interest 140,103 141,575
Other 203,401 251,262
----------- -----------
2,510,589 2,182,989
----------- -----------
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized
300,000,000 shares - 234,490,887 and
237,069,087 shares outstanding, respectively 23,449 23,707
Other paid-in capital 3,774,680 3,846,513
Accumulated comprehensive income (439) (439)
Retained earnings 809,017 718,409
Unallocated employee stock ownership plan
common stock - 7,163,192 and 7,406,332
shares, respectively (133,470) (139,032)
----------- -----------
Total common stockholders' equity 4,473,237 4,449,158
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 648,395 660,195
Subject to mandatory redemption 160,996 174,710
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
OE subordinated debentures 120,000 120,000
Long-term debt 6,142,847 6,352,359
----------- -----------
11,545,475 11,756,422
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,259,100 2,282,864
Accumulated deferred investment tax credits 279,335 286,154
Pensions and other postretirement benefits 533,236 525,647
Other 1,255,449 1,220,106
----------- -----------
4,327,120 4,314,771
----------- -----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ----------- -----------
$18,383,184 $18,254,182
=========== ===========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy
Corp. are an integral part of these balance sheets.
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 125,322 $ 29,432 $ 262,043 $153,084
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 215,394 193,690 405,232 387,817
Nuclear fuel and lease amortization 21,354 16,319 47,949 40,632
Other amortization, net (3,789) (9,410) (4,254) (9,682)
Deferred income taxes, net (8,310) (29,431) (14,745) (24,207)
Investment tax credits, net (3,375) (5,568) (6,819) (11,339)
Extraordinary item -- 51,730 -- 51,730
Receivables (142,077) 48,421 (160,447) 88,486
Materials and supplies 11,734 197 6,728 (9,797)
Accounts payable 37,015 1,526 49,173 (35,149)
Other 19,513 (18,160) (99,449) (99,317)
--------- -------- --------- ---------
Net cash provided from operating
activities 272,781 278,746 485,411 532,258
--------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock -- 203,855 -- 203,855
Long-term debt 181,088 114,286 193,365 262,405
Ohio Schools Council prepayment program -- 116,598 -- 116,598
Redemptions and Repayments-
Common stock 31,076 -- 75,575 --
Preferred stock 21,489 15,379 21,489 15,379
Long-term debt 12,206 189,930 93,008 349,911
Short-term borrowings, net 35,992 87,599 24,728 108,443
Common stock dividend payments 85,299 83,586 171,436 166,977
--------- -------- --------- --------
Net cash provided from (used for)
financing activities (4,974) 58,245 (192,871) (57,852)
--------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 92,971 307,120 183,676 371,224
Cash investments 63 66 (41,205) 111,610
Other (6,148) 7,685 1,334 18,844
--------- -------- --------- --------
Net cash used for investing activities 86,886 314,871 143,805 501,678
--------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents 180,921 22,120 148,735 (27,272)
Cash and cash equivalents at beginning of
period 45,612 48,845 77,798 98,237
--------- -------- --------- --------
Cash and cash equivalents at end of period $ 226,533 $ 70,965 $ 226,533 $ 70,965
========= ======== ========= ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
</TABLE>
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FirstEnergy Corp.:
We have reviewed the accompanying consolidated balance sheet of
FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of June 30,
1999, and the related consolidated statements of income and cash flows
for the three-month and six-month periods ended June 30, 1999 and 1998.
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 generally accepted auditing
standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of FirstEnergy Corp.
and subsidiaries as of December 31, 1998 (not presented herein), and, in
our report dated February 12, 1999, 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, 1998, is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
August 9, 1999
- 9 -
<PAGE>
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company, as a producer and trader of electricity and
natural gas, has certain financial risks inherent in its business
activities. With respect to its trading operations, the Company uses
principally over-the-counter and commodity exchange contracts for the
purchase and sale of electricity and natural gas. These contracts may
expose the Company to commodity price fluctuations. Market risk
represents the risk of loss that may impact financial position, results
of operations or cash flow due to either changes in the commodity market
prices for electricity and natural gas or the failure of contract
counterparties to perform. Various policies and procedures have been
established to manage market risk. However, electricity and natural gas
are subject to unpredictable price fluctuations due to changing economic
and weather conditions and constraints, which arise from time to time in
availability of supply.
Results of Operations
- ---------------------
Basic and diluted earnings per share of common stock increased
to $1.15 per share for the six-month period ended June 30, 1999, from
$.69 per share for the same period last year. For the second quarter of
1999, earnings increased to $.55 per share, from $.13 per share for the
second quarter of 1998. Higher earnings resulted from several factors
including higher retail revenues, lower purchased power costs, reduced
costs from the FirstEnergy Trading Services, Inc. (FETS) business
segment and lower interest expenses. Also, second quarter and year-to-
date earnings for 1998 included an extraordinary charge of $30.5
million, or $.14 per common share, resulting from Penn's discontinued
application of SFAS 71 to its generation business.
Revenues increased $59.9 million in the second quarter of
1999 compared to the second quarter of 1998, and $110.2 million during
the six-month period ending June 30, 1999, compared to the same period
of 1998. The revenue increases resulted from contributions from the
Electric Utility Operating Companies (EUOC) business segment and newly
acquired businesses, offset by reduced revenues from the FETS business
segment. The sources of increases in second quarter and year-to-date
1999 revenues are summarized in the following table.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------
(In millions)
Three Six
Months Months
Ended Ended
------ ------
<S> <C> <C>
Electric sales $ 14.5 $ 53.8
Other electric utility revenues 4.6 2.2
------ -------
EUOC 19.1 56.0
FETS (91.2) (195.6)
New businesses acquired 132.0 249.8
------ -------
Net Revenue Increase $ 59.9 $ 110.2
====== =======
</TABLE>
The increases in EUOC revenues for the second quarter and
year-to-date periods of 1999 compared to the same periods of 1998
resulted from increases in EUOC kilowatt-hour sales, which were
partially offset by reduced unit prices. Residential, commercial and
industrial customers all contributed to the increases in EUOC kilowatt-
hour sales with increases of 2.8%, 3.4% and 1.8%, respectively, for the
second quarter of 1999 and increases of 7.3%, 3.6% and 1.5%,
respectively, for the year-to-date period. A net increase of more than
10,000 new EUOC residential customers over the last twelve months ending
June 30, 1999, added to the growth in residential sales. Continued
service sector growth contributed to the commercial kilowatt-hour sales
increase. Sales to industrial customers showed modest growth with some
additional strength in the second quarter due in part to a rebound in
kilowatt-hour sales to primary metal customers. Overall, EUOC kilowatt-
hour sales increased 3.3% in the second quarter of 1999 and 1.9% for the
first six months of the current year from the corresponding periods of
1998.
The decreases in FETS revenues for the second quarter and
first half of 1999 compared to the prior year resulted from limiting
trading activities to the support of FirstEnergy's retail marketing
activities. Acquisition of facilities services companies, the purchase
of MARBEL Energy Corporation (MARBEL) and sales of electricity to the
- 10 -
<PAGE>
unregulated market by Penn Power Energy and FirstEnergy Services Corp.
combined to cause the significant increase in other revenues.
Total expenses decreased $47.4 million in the second quarter
of 1999, compared to the same quarter of 1998, and were down $22.5
million in the first half of 1999 compared to the first half of the
prior year. Contributing to this overall reduction were EUOC purchased
power costs which were down $122.1 million in the second quarter of
1999 from the same quarter of 1998 and were $129.1 million lower in the
first half of 1999, compared to the first half of 1998. Most of the
improvement in second quarter results was due to the absence of unusual
conditions experienced in the second quarter of 1998, which resulted in
an additional $77.4 million of unusually high purchased power costs.
Those costs were incurred during a period of record heat and humidity
in late June 1998, which coincided with a regional power shortage
resulting in high prices for purchased power. Unscheduled outages at
several of the Companies' power plants at that time required the
Companies to purchase significant amounts of power on the spot market.
Although the second quarter of 1999 also experienced above normal
temperatures in June, the Companies maintained a stronger generating
capacity position during the period, due in part to a program designed
to increase available internal generation during the summer months. The
program involves moving maintenance away from the summer months,
increasing the reliability of generating units, adding peaking
resources, and in some cases increasing the power output of existing
facilities. The price extremes of the prior year also did not occur in
the first half of 1999.
Other expenses for the EUOCs increased $60.1 million in the
second quarter of 1999 compared to the same period the prior year and
$82.4 million in the six-month period ended June 30, 1999 compared to
the corresponding period of 1998. A portion of the second quarter and
year-to-date increases resulted from the program (mentioned above) to
increase internal generation during the summer months. As part of that
program, the outage at Bruce Mansfield Unit 1 was moved from Fall 1999
to a period extending from late March to May 31, 1999, in order to
enhance readiness for the peak summer months. Nuclear expenses also
contributed significantly to the increases in other expenses primarily
as a result of refueling outages at Beaver Valley Unit 2 and the Perry
Plant. Additionally, higher customer and sales expenses contributed
to the increases of EUOC other expenses in both periods of 1999.
Reduced FETS activity resulted in a significant cost
reduction in that business segment for both the second quarter and
year-to-date periods when compared to the same periods of 1998. Also,
FETS expenses for the second quarter of 1998 included credit losses
resulting from the unprecedented market prices for purchased power in
that year. Expansion of the facilities services business through
additional acquisitions, the purchase of MARBEL and costs attributable
to unregulated sales activity all combined to increase other expenses.
Depreciation and amortization in the second quarter and year-to-date
periods of 1999 increased from the same periods of 1998 primarily as a
result of accelerated expenses in connection with the OE rate plan.
Interest expenses decreased in the second quarter and first
half of 1999 from the same periods of the previous year due to
refinancings and redemptions of long-term debt. Subsidiaries' preferred
stock dividend requirements increased in the year-to-date period of
1999, compared to the year-to-date period of 1998, due to the
declaration in the fourth quarter of 1997 of preferred stock dividends
payable in 1998 by TE and CEI.
Capital Resources and Liquidity
- ------------------------------
The Company and its subsidiaries have continuing cash
requirements for planned capital expenditures and debt maturities.
During the last two quarters of 1999, capital requirements for property
additions and capital leases are expected to be about $379 million,
including $11 million for nuclear fuel. The Companies have additional
cash requirements of approximately $426.1 million (excluding the OE
revolving credit agreement) to meet sinking fund requirements for
preferred stock and maturing long-term debt during the remainder of
1999. These cash requirements are expected to be satisfied with
internal cash and/or short-term credit arrangements.
During the second quarter of 1999, the Company repurchased
over 1 million shares of its common stock at an average price of
approximately $29.41 per share. In the year-to-date period ending
June 30, 1999, the Company repurchased 2.6 million shares at an average
price of approximately $29.13 per share.
As of June 30, 1999, the Company and its subsidiaries had
about $226.5 million of cash and temporary investments and $228.8
million of short-term indebtedness. Unused borrowing capability
included $145.0 million under revolving lines of credit and $32.0
million of bank facilities that provide for borrowings on a short-term
basis at the banks' discretion.
- 11 -
<PAGE>
On June 24, 1999, the Company signed a letter of intent to
form a joint venture with Range Resources Corp., a Texas-based,
independent energy company. Under the agreement, the Company would
merge the exploration, production and certain other assets of its
MARBEL Energy Corporation subsidiary into a single limited liability
company with the Appalachian Basin assets of Range Resources. The joint
venture would produce oil and gas on 980,000 acres in the Appalachian
Basin, which includes parts of Ohio, Pennsylvania, West Virginia,
Kentucky and Tennessee. The objective of the joint venture is to cut
costs, enhance productivity and increase the competitive position of
the joint venture partners in the Appalachian Basin.
FirstEnergy Telecom Corp., a wholly owned subsidiary, joined
with Allegheny Communications Connect, Inc., AEP Communications LLC,
and GPU Telecom Services, Inc., to initiate the interconnection of
their respective fiber optic networks. The agreement was announced on
June 23, 1999. Once the linkages are complete, the network alliance
will have the opportunity to make sales in new regional markets.
In order to assure adequate future generating capacity during
peak periods the Company currently plans to install eight combustion
turbines at several locations totaling 815 megawatts of capacity, with
390 megawatts installed and available in 2000 and the balance available
to meet demand in 2001.
Regulatory Matters
- ------------------
On July 6, 1999, Ohio Governor Bob Taft signed into law
legislation providing residents of Ohio with a choice of generation
suppliers. Among other provisions, the new law provides customer choice
starting January 1, 2001, freezes current rates for a five year market-
development period and includes a five-percent price cut in the
generation component of residential customer bills. Under the new law
OE, CEI and TE will continue to deliver power to homes and businesses
through their distribution systems, which will remain regulated. While
the new law provides guidance for the transition to retail competition
in Ohio, significant authority has been vested in the PUCO to determine
the ultimate recovery of transition costs (see Note 3). The PUCO will
hold hearings as early as the first quarter of next year to decide the
amount of transition costs each utility can recover over a period of up
to ten years. The Company intends to file transition plans for OE, CEI
and TE in the fourth quarter of 1999. The application of SFAS 71 to
OE's generation business and the nonnuclear generation businesses of
CEI and TE will be discontinued when the PUCO issues an order of its
hearing findings. Consequently, the Company is not able to determine,
at this time, the financial impact resulting from the eventual
discontinuation of regulatory accounting under SFAS 71 for those
businesses. The Company believes it will be able to continue to bill
and collect cost-based rates relating to its transmission and
distribution operations.
On June 3, 1999, the Alliance Regional Transmission
Organization submitted to the Federal Energy Regulatory Commission
(FERC) a proposal to form an independent, regional transmission
organization (RTO). If approved, the RTO would become one of the
largest independent RTOs in the world. The companies in the Alliance
filing are American Electric Power, Consumers Energy, Detroit Edison,
FirstEnergy and Virginia Electric and Power. The RTO would be
controlled by a board of directors independent of member companies, and
would not be affiliated with any transmission owner. The Company
believes that the proposed RTO meets the FERC's stated transmission
objectives of providing non-discriminatory service, while providing for
streamlined and cost efficient operation.
In May 1999, a federal appeals court delayed enforcement of
EPA's September 1998 final regulations requiring reductions in nitrogen
oxide emissions for Ohio, Pennsylvania and twenty other eastern states.
The federal appeals court remanded the regulations back to the EPA so
that the agency could address, if possible, constitutional and other
defects in the rules. The EPA has sought a rehearing. The Company
cannot predict either the outcome of these actions or the time period
before final rules could become enforceable.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of the Company's programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. Because so many of the Company's computer functions are date
sensitive, this could cause far-reaching problems, such as system-wide
computer failures and miscalculations, if no remedial action is taken.
- 12 -
<PAGE>
The Company has developed a multi-phase program for Year 2000
compliance that consists of an assessment of its systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. The
Company has focused its Year 2000 review on three areas: centralized
system applications, noncentralized systems and relationships with
third parties (including suppliers as well as end-use customers). The
Company's review of system readiness extends to systems involving
customer service, safety, shareholder needs and regulatory obligations.
The Company is committed to taking appropriate actions to
eliminate or lessen negative effects of the Year 2000 issue on its
operations. The Company has completed an inventory of all computer
systems and hardware including equipment with embedded computer chips,
has determined which systems need to be converted or replaced to become
Year 2000-ready and has completed the remediation of all mission
critical systems and equipment. Based on results of its remediation and
testing efforts, the Company filed documents with the North American
Electric Reliability Council, Nuclear Regulatory Commission, PUCO and
Pennsylvania Public Utility Commission that as of June 30, 1999 its
generation, transmission, and distribution systems were ready to serve
customers in the year 2000.
Most of the Company's Year 2000 issues have been resolved
through system replacement. Of the Company's major centralized systems,
the general ledger system and inventory management, procurement and
accounts payable systems were replaced at the end of 1998. The
Company's payroll system was enhanced to be Year 2000 compliant in July
1998. The customer service system was made Year 2000 compliant in June
1999.
The Company has completed formal communications with most of
its key suppliers to determine the extent to which it is vulnerable to
those third parties' failure to resolve their own Year 2000 problems.
For suppliers having potential compliance problems, the Company is
developing alternate sources and services in the event such
noncompliance occurs. The Company is also identifying areas requiring
higher inventory levels based on compliance uncertainties. There can be
no guarantee that the failure of companies to resolve their own Year
2000 issues will not have a material adverse effect on the Company's
business, financial condition and results of operations, although it
does not consider this likely to occur.
The Company has completed the development of formal
contingency plans in all mission critical areas to establish procedures
to be followed in handling unlikely events which could impact the
provision of electric service to its customers.
The Company is using both internal and external resources to
reprogram and/or replace and test its software for Year 2000
modifications. Of the $90 million total project cost, approximately $70
million will be capitalized since those costs are attributable to the
purchase of new software for total system replacements because the Year
2000 solution comprises only a portion of the benefits resulting from
the system replacements. The remaining $20 million will be expensed as
incurred. As of June 30, 1999, the Company had spent $66 million for
Year 2000 capital projects and had expensed approximately $14 million
for Year 2000-related maintenance activities. The Company's total Year
2000 project cost, as well as its estimates of the time needed to
complete remedial efforts, are based on currently available information
and do not include the estimated costs and time associated with the
impact of third party Year 2000 issues.
The Company believes it is managing the Year 2000 issue in
such a way that its customers will not experience any interruption of
service. The Company believes the most likely worst-case scenario from
the Year 2000 issue will be disruption in power plant monitoring
systems, thereby producing inaccurate data and potential failures in
electronic switching mechanisms at transmission junctions. This would
prolong localized outages, as technicians would have to manually
activate switches. Such an event could have a material, but currently
undeterminable, effect on its financial results.
The costs of the project and the dates on which the Company
plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived from numerous assumptions of future
events including the continued availability of certain resources, and
other factors. However, there can be no guarantee that this project will
be completed as planned and actual results could differ materially from
the estimates. Specific factors that might cause material differences
include but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer code,
and similar uncertainties.
- 13 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $646,729 $618,598 $1,279,847 $1,216,463
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 109,443 153,133 221,465 267,048
Nuclear operating costs 76,879 69,043 149,315 140,909
Other operating costs 117,773 108,091 218,056 200,264
-------- -------- ---------- ----------
Total operation and maintenance expenses 304,095 330,267 588,836 608,221
Provision for depreciation and amortization 125,151 106,030 228,555 217,226
General taxes 61,562 58,969 123,822 118,494
Income taxes 41,904 29,684 89,667 67,741
-------- -------- ---------- ----------
Total operating expenses and taxes 532,712 524,950 1,030,880 1,011,682
-------- -------- ---------- ----------
OPERATING INCOME 114,017 93,648 248,967 204,781
OTHER INCOME 13,080 11,766 22,398 24,268
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 127,097 105,414 271,365 229,049
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 46,222 46,329 91,305 92,997
Allowance for borrowed funds used during
construction and capitalized interest (885) (469) (1,982) (1,129)
Other interest expense 9,164 9,391 17,783 18,885
Subsidiaries' preferred stock dividend
requirements 3,856 3,856 7,713 7,713
-------- -------- ---------- ----------
Net interest charges 58,357 59,107 114,819 118,466
-------- -------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 68,740 46,307 156,546 110,583
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- (30,522) -- (30,522)
-------- -------- ---------- ----------
NET INCOME 68,740 15,785 156,546 80,061
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,913 3,018 5,826 6,037
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 65,827 $ 12,767 $ 150,720 $ 74,024
======== ======== ========== ==========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an
integral part of these statements.
</TABLE>
- 14 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service $8,209,980 $8,158,763
Less--Accumulated provision for depreciation 3,674,931 3,610,155
---------- ----------
4,535,049 4,548,608
---------- ----------
Construction work in progress-
Electric plant 175,967 174,418
Nuclear fuel 1,137 17,003
---------- ----------
177,104 191,421
---------- ----------
4,712,153 4,740,029
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 471,478 475,087
Nuclear plant decommissioning trusts 141,692 130,572
Letter of credit collateralization 277,763 277,763
Other 428,389 407,839
---------- ----------
1,319,322 1,291,261
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 184,336 33,213
Receivables-
Customers (less accumulated provisions of
$6,504,000 and $6,397,000, respectively,
for uncollectible accounts) 236,152 215,257
Associated companies 214,553 229,854
Other 46,997 47,684
Materials and supplies, at average cost-
Owned 69,581 76,756
Under consignment 58,281 48,341
Prepayments and other 102,948 78,618
---------- ----------
912,848 729,723
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,774,192 1,913,808
Property taxes 101,360 101,360
Unamortized sale and leaseback costs 87,599 90,098
Other 59,486 57,547
---------- ----------
2,022,637 2,162,813
---------- ----------
$8,966,960 $8,923,826
========== ==========
</TABLE>
- 15 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
--------- -----------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
CAPITALIZATION:
Common stockholder's equity-
Common stock, $9 par value, authorized
175,000,000 shares - 100 shares outstanding $ 1 $ 1
Other paid-in capital 2,098,728 2,098,728
Retained earnings 400,440 583,144
---------- ----------
Total common stockholder's equity 2,499,169 2,681,873
Preferred stock-
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 10,000 10,000
Preferred stock of consolidated subsidiary-
Not subject to mandatory redemption 39,105 50,905
Subject to mandatory redemption 15,000 15,000
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely OE
subordinated debentures 120,000 120,000
Long-term debt 2,061,597 2,215,042
---------- ----------
4,905,836 5,253,785
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt
and preferred stock 829,750 528,792
Short-term borrowings-
Associated companies 209,231 88,732
Other 218,772 249,451
Accounts payable-
Associated companies 55,268 10,176
Other 82,361 89,483
Accrued taxes 230,142 188,295
Accrued interest 44,816 45,221
Other 66,477 114,162
---------- ----------
1,736,817 1,314,312
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,554,894 1,601,887
Accumulated deferred investment tax credits 150,654 154,538
Pensions and other postretirement benefits 140,996 136,856
Other 477,763 462,448
---------- ----------
2,324,307 2,355,729
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$8,966,960 $8,923,826
========== ==========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to
Ohio Edison Company are an integral part of these balance sheets.
</TABLE>
- 16 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
--------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,740 $ 15,785 $156,546 $ 80,061
Adjustments to reconcile net income to
net cash from operating activities-
Provision for depreciation and amortization 125,151 106,030 228,555 217,226
Nuclear fuel and lease amortization 9,483 6,563 20,160 13,346
Deferred income taxes, net (18,745) (36,679) (30,755) (49,658)
Investment tax credits, net (1,907) (3,622) (3,884) (7,448)
Extraordinary item -- 51,730 -- 51,730
Receivables 30,463 (73,744) (4,907) (41,876)
Materials and supplies (3,507) 4,755 (2,765) 4,580
Accounts payable 25,552 92,415 37,970 109,590
Other (24,362) (4,046) (30,893) 45,586
-------- -------- -------- --------
Net cash provided from operating activities 210,868 159,187 370,027 423,137
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 190,680 104,822 158,515 107,460
Short-term borrowings, net 74,594 -- 89,820 83,537
Redemptions and Repayments-
Preferred stock 6,085 -- 6,085 --
Long-term debt 10,558 141,774 19,140 281,635
Short-term borrowings, net -- 15,619 -- --
Dividend Payments-
Common stock 251,865 39,884 333,603 209,782
Preferred stock 3,057 2,834 5,826 5,859
-------- -------- -------- --------
Net cash used for financing activities 6,291 95,289 116,319 306,279
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 40,749 47,354 94,787 88,370
Other (5,969) (4,847) 7,798 122
-------- -------- -------- --------
Net cash used for investing activities 34,780 42,507 102,585 88,492
-------- -------- -------- --------
Net increase in cash and cash equivalents 169,797 21,391 151,123 28,366
Cash and cash equivalents at beginning
of period 14,539 11,655 33,213 4,680
-------- -------- -------- --------
Cash and cash equivalents at end of period $184,336 $ 33,046 $184,336 $ 33,046
======== ======== ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company
are an integral part of these statements.
</TABLE>
- 17 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ohio Edison Company:
We have reviewed the accompanying consolidated balance sheet of Ohio
Edison Company (an Ohio corporation and wholly owned subsidiary of
FirstEnergy Corp.) and subsidiaries as of June 30, 1999, and the
related consolidated statements of income and cash flows for the three-
month and six-month periods ended June 30, 1999 and 1998. 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 generally
accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Ohio Edison
Company and subsidiaries as of December 31, 1998 (not presented
herein), and, in our report dated February 12, 1999, 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, 1998, is fairly stated, in all material respects, in relation to
the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
August 9, 1999
- 18 -
<PAGE>
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues increased $28.1 million in the second
quarter of 1999, compared to the second quarter of 1998, and increased
$63.4 million in the first half of 1999, compared to the same period of
the prior year. Higher second quarter and year-to-date operating
revenues resulted primarily from increased kilowatt-hour sales.
Residential, commercial and industrial customers all contributed to the
increase in retail kilowatt-hour sales in the second quarter of 1999,
compared to the same period of 1998, with increases of 2.7%, 6.8% and
2.7%, respectively. Overall, retail kilowatt-hour sales increased 3.9%
and total kilowatt-hour sales increased 3.5% from the 1998 second
quarter results. Residential, commercial and industrial customers also
combined to increase retail kilowatt-hour sales in the first six months
of 1999, compared to the same period of 1998, with increases of 7.1%,
8.1% and 0.3%, respectively. Retail kilowatt-hour sales increased 4.6%
and total kilowatt-hour sales increased 4.7% from the first half of
1998. Growth in the customer base and increased kilowatt-hour sales per
customer contributed to the residential sales increase for both the
second quarter and first half of 1999, compared to the corresponding
prior year periods. Service sector growth and an expansion of sales by
Penn's nonregulated affiliate were factors increasing commercial
kilowatt-hour sales. A rebound of sales to primary metal customers
contributed to renewed growth of kilowatt-hour sales to industrial
customers.
Operation and maintenance expenses decreased $26.2 million in
the second quarter of 1999 from the same period of 1998, and were $19.4
million lower in the first half of 1999, compared to the first six
months of 1999. Fuel and purchased power costs were lower in both the
second quarter and year-to-date periods of 1999 than the corresponding
periods of 1998, primarily due to lower purchased power costs. Most of
the reduction in 1999 was due to the absence of unusual conditions
experienced in the second quarter of 1998, which increased the prior
period's costs. Record heat and humidity in late June 1998 coincided
with a regional power shortage resulting in high prices for purchased
power. Unscheduled outages at Beaver Valley Units 1 and 2, which
continued through the second quarter of 1998, required that OE and Penn
(OE companies) purchase significant quantities of power on the spot
market during that period. Although the second quarter of 1999 also
experienced above normal temperatures in June, spot market prices were
less extreme and the OE companies maintained a stronger capacity
position during the period. Therefore, the OE companies were able to
reduce their dependence on purchased power in 1999.
Expenses associated with the 1999 refueling outages at Beaver
Valley Unit 2 and the Perry Plant increased nuclear expenses in the
second quarter and first half of 1999, compared to the corresponding
periods of 1998. Other operating costs increased in the second quarter
and year-to-date periods of 1999 from the same periods last year
primarily due to higher customer and sales expenses. Factors
contributing to the increase included energy marketing program
expenditures, and similar costs in 1998 being recognized later that
year.
Depreciation and amortization in the second quarter and first
half of 1999 increased from the same period of 1998 primarily due to
the effect of the OE rate plan. Total accelerated depreciation and
amortization of nuclear and regulatory assets under the OE rate plan
and Penn's restructuring plan was $64.3 million in the second quarter
of 1999, up from $49.0 million in the second quarter of the previous
year. In the first six months of 1999, total accelerated depreciation
and amortization under the OE rate plan was $108.9 million, compared to
$104.0 million in the first half of 1998.
Second quarter and year-to-date results for 1998 include an
extraordinary charge of $30.5 million resulting from Penn's
discontinued application of SFAS 71 to its generation business.
Capital Resources and Liquidity
- -------------------------------
The OE companies have continuing cash requirements for
planned capital expenditures and debt maturities. During the last half
of 1999, capital requirements for property additions and capital leases
are expected to be about $120 million, with no additional expenditures
for nuclear fuel. The OE companies have additional cash requirements of
approximately $161.4 million (excluding the OE revolving credit
agreement) to meet sinking fund requirements for preferred stock and
maturing long-term debt during the remainder of 1999. These cash
requirements are expected to be satisfied with internal cash and/or
short-term credit arrangements. OE also completed optional refinancings
of $50 million principal amount of pollution control notes in July 1999
and intends to complete an additional optional refinancing of $108
million of pollution control notes during the balance of 1999. In
addition, Penn completed a $5.8 million optional redemption of 8.00%
preferred stock in July 1999.
- 19 -
<PAGE>
As of June 30, 1999, the OE companies had approximately
$184.3 million of cash and temporary investments and $428.0 million of
short-term indebtedness. In addition, the OE companies' unused
borrowing capability included $45.0 million under revolving lines of
credit and $32.0 million of bank facilities that provide for borrowings
on a short-term basis at the banks' discretion. Under their first
mortgage indentures, as of June 30, 1999, the OE companies would have
been permitted to issue up to $1.3 billion of additional first mortgage
bonds on the basis of bondable property additions and retired bonds.
Regulatory Matters
- ------------------
On July 6, 1999, Ohio Governor Bob Taft signed into law
legislation providing residents of Ohio with a choice of generation
suppliers. Among other provisions, the new law provides customer choice
starting January 1, 2001, freezes current rates for a five year market-
development period and includes a five-percent price cut in the
generation component of residential customer bills. Under the new law
OE will continue to deliver power to homes and businesses through its
distribution system, which will remain regulated. While the new law
provides guidance for the transition to retail competition in Ohio,
significant authority has been vested in the PUCO to determine the
ultimate recovery of transition costs (see Note 3). The PUCO will hold
hearings as early as the first quarter of next year to decide the
amount of transition costs each utility can recover over a period of up
to ten years. FirstEnergy intends to file a transition plan for OE in
the fourth quarter of 1999. The application of SFAS 71 to OE's
generation business will be discontinued when the PUCO issues an order
of its hearing findings. Consequently, OE is not able to determine, at
this time, the financial impact resulting from the eventual
discontinuation of regulatory accounting under SFAS 71 for its
generation business. OE believes it will be able to continue to bill
and collect cost-based rates on its transmission and distribution
operations.
In May 1999, a federal appeals court delayed enforcement of
EPA's September 1998 final regulations requiring reductions in nitrogen
oxide emissions for Ohio, Pennsylvania and twenty other eastern states.
The federal appeals court remanded the regulations back to the EPA so
the agency could address, if possible, constitutional and other defects
in the rules (see "Environmental Matters" in Note 2). The EPA has
sought a rehearing. OE cannot predict either the outcome of these
actions or the time period before final rules could become enforceable.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of the OE companies' programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than
the year 2000. Because so many of the OE companies' computer functions
are date sensitive, this could cause far-reaching problems, such as
system-wide computer failures and miscalculations, if no remedial
action is taken.
The OE companies have developed a multi-phase program for
Year 2000 compliance that consists of an assessment of their systems
and operations that could be affected by the Year 2000 problem;
remediation or replacement of noncompliant systems and components; and
testing of systems and components following such remediation or
replacement. The OE companies have focused their Year 2000 review on
three areas: centralized system applications, noncentralized systems
and relationships with third parties (including suppliers as well as
end-use customers). The OE companies' review of system readiness
extends to systems involving customer service, safety, shareholder
needs and regulatory obligations.
The OE companies are committed to taking appropriate actions
to eliminate or lessen negative effects of the Year 2000 issue on their
operations. The OE companies have completed an inventory of all
computer systems and hardware including equipment with embedded
computer chips, have determined which systems need to be converted or
replaced to become Year 2000-ready and have completed the remediation
of all mission critical systems and equipment. Based on the results of
their remediation and testing efforts, the OE companies filed (through
FirstEnergy) with the North American Electric Reliability Council,
Nuclear Regulatory Commission, PUCO and Pennsylvania Public Utility
Commission (PPUC) that as of June 30, 1999 their generation,
transmission, and distribution systems were ready to serve customers in
the year 2000.
Most of the OE companies' Year 2000 issues have been resolved
through system replacement. Of the OE companies' major centralized
systems, the general ledger system and inventory management,
- 20 -
<PAGE>
procurement and accounts payable systems were replaced at the end of
1998. The OE companies' payroll system was enhanced to be Year 2000
compliant in July 1998. The customer service system was made Year 2000
compliant in June 1999.
The OE companies have completed formal communications with
most of their key suppliers to determine the extent to which they are
vulnerable to those third parties' failure to resolve their own Year
2000 problems. For suppliers having potential compliance problems, the
OE companies are developing alternate sources and services in the event
such noncompliance occurs. The OE companies are also identifying areas
requiring higher inventory levels based on compliance uncertainties.
There can be no guarantee that the failure of companies to resolve
their own Year 2000 issues will not have a material adverse effect on
the OE companies' business, financial condition and results of
operations, although it does not consider this likely to occur.
The OE companies have completed the development of formal
contingency plans in all mission critical areas to establish procedures
to be followed in handling unlikely events which could impact the
provision of electric service to their customers.
The OE companies are using both internal and external
resources to reprogram and/or replace and test their software for Year
2000 modifications. Of the $44 million total project cost, approximately
$34 million will be capitalized since those costs are attributable to
the purchase of new software for total system replacements because the
Year 2000 solution comprises only a portion of the benefits resulting
from the system replacements. The remaining $10 million will be expensed
as incurred. As of June 30, 1999, the OE companies have spent $32
million for Year 2000 capital projects and had expensed approximately $7
million for Year 2000-related maintenance activities. The OE companies'
total Year 2000 project cost, as well as their estimates of the time
needed to complete remedial efforts, are based on currently available
information and do not include the estimated costs and time associated
with the impact of third party Year 2000 issues.
The OE companies believe they are managing the Year 2000
issue in such a way that their customers will not experience any
interruption of service. The OE companies believe the most likely
worst-case scenario from the Year 2000 issue will be disruption in
power plant monitoring systems, thereby producing inaccurate data and
potential failures in electronic switching mechanisms at transmission
junctions. This would prolong localized outages, as technicians would
have to manually activate switches. Such an event could have a
material, but currently undeterminable, effect on their financial
results.
The costs of the project and the dates on which the OE
companies plan to complete the Year 2000 modifications are based on
management's best estimates, which were derived from numerous
assumptions of future events including the continued availability of
certain resources, and other factors. However, there can be no guarantee
that this project will be completed as planned and actual results could
differ materially from the estimates. Specific factors that might cause
material differences include but are not limited to, the availability
and cost of trained personnel, the ability to locate and correct all
relevant computer code, and similar uncertainties.
- 21 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $481,955 $474,576 $900,794 $889,603
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 100,554 139,642 191,584 231,357
Nuclear operating costs 40,305 20,658 69,821 46,897
Other operating costs 92,360 83,415 177,277 156,109
-------- -------- -------- --------
Total operation and maintenance expenses 233,219 243,715 438,682 434,363
Provision for depreciation and amortization 58,311 59,419 115,998 116,648
General taxes 54,629 53,863 108,642 108,374
Income taxes 29,163 20,773 49,318 42,716
-------- -------- -------- --------
Total operating expenses and taxes 375,322 377,770 712,640 702,101
-------- -------- -------- --------
OPERATING INCOME 106,633 96,806 188,154 187,502
-------- -------- -------- --------
OTHER INCOME (EXPENSE) (1,240) (3,494) 5,217 4,099
-------- -------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 105,393 93,312 193,371 191,601
-------- -------- -------- --------
NET INTEREST CHARGES:
Interest on long-term debt 53,812 60,751 107,565 120,811
Allowance for borrowed funds used during
construction (517) (404) (733) (956)
Other interest expense (credit) (517) (1,882) (996) (2,726)
-------- -------- -------- --------
Net interest charges 52,778 58,465 105,836 117,129
-------- -------- -------- --------
NET INCOME 52,615 34,847 87,535 74,472
PREFERRED STOCK DIVIDEND REQUIREMENTS 8,541 7,438 17,082 8,506
-------- -------- -------- --------
EARNINGS ON COMMON STOCK $ 44,074 $ 27,409 $ 70,453 $ 65,966
======== ======== ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
</TABLE>
- 22 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service $4,657,245 $4,648,725
Less--Accumulated provision for depreciation 1,667,572 1,631,974
---------- ----------
2,989,673 3,016,751
---------- ----------
Construction work in progress-
Electric plant 28,003 42,428
Nuclear fuel 408 14,864
---------- ----------
28,411 57,292
---------- ----------
3,018,084 3,074,043
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 517,263 543,161
Nuclear plant decommissioning trusts 139,521 125,050
Other 31,377 21,059
---------- ----------
688,161 689,270
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 3,874 19,526
Receivables-
Customers 17,478 16,588
Associated companies 15,613 15,636
Other 247,748 142,834
Notes receivable from associated companies -- 53,509
Materials and supplies, at average cost-
Owned 36,806 38,213
Under consignment 35,935 43,620
Prepayments and other 69,288 58,342
---------- ----------
426,742 388,268
---------- ----------
DEFERRED CHARGES:
Regulatory assets 541,912 555,925
Goodwill 1,452,359 1,471,563
Property taxes 126,464 126,464
Other 14,046 12,650
---------- ----------
2,134,781 2,166,602
---------- ----------
$6,267,768 $6,318,183
========== ==========
</TABLE>
- 23 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
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 59,688 76,276
---------- ----------
Total common stockholder's equity 991,650 1,008,238
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 135,996 149,710
Long-term debt 2,869,859 2,888,202
---------- ----------
4,235,830 4,284,475
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and
preferred stock 209,861 208,050
Accounts payable-
Associated companies 58,382 47,680
Other 85,080 67,929
Notes payable to associated companies 55,890 80,618
Accrued taxes 186,629 192,359
Accrued interest 65,573 66,685
Other 47,544 58,585
---------- ----------
708,959 721,906
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 532,747 524,285
Accumulated deferred investment tax credits 88,972 90,946
Pensions and other postretirement benefits 215,767 217,719
Other 485,493 478,852
---------- ----------
1,322,979 1,311,802
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$6,267,768 $6,318,183
========== ==========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these balance sheets.
</TABLE>
- 24 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,615 $ 34,847 $ 87,535 $ 74,472
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 58,311 59,419 115,998 116,648
Nuclear fuel and lease amortization 6,665 6,127 15,971 16,356
Other amortization (3,789) (9,417) (4,254) (9,417)
Deferred income taxes, net 5,136 14,096 8,876 25,832
Investment tax credits, net (987) (1,297) (1,974) (2,593)
Receivables (90,588) (77,237) (105,781) (87,568)
Materials and supplies 11,005 (6,374) 9,092 (10,722)
Accounts payable 16,220 53,237 27,853 27,504
Other 19,411 (32,607) (45,108) (63,758)
--------- -------- --------- --------
Net cash provided from operating
activities 73,999 40,794 108,208 86,754
--------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt -- 5,822 -- 5,822
Ohio Schools Council prepayment program -- 116,598 -- 116,598
Redemptions and Repayments-
Preferred stock 13,714 13,714 13,714 13,714
Long-term debt 6,346 15,029 24,014 26,581
Short-term borrowings, net 12,883 45,290 24,728 26,492
Dividend Payments-
Common stock 75,811 25,469 82,974 25,469
Preferred stock 8,541 8,870 17,082 17,741
--------- -------- --------- --------
Net cash provided from (used for)
financing activities (117,295) 14,048 (162,512) 12,423
--------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 20,204 12,080 30,299 27,414
Loans to associated companies -- 59,900 -- 136,900
Loan payments from associated companies (59,077) -- (53,509) --
Capital trust investments -- -- (25,898) (31,958)
Other 6,135 (18,137) 10,456 (13,953)
--------- -------- --------- --------
Net cash used for (provided from)
investing activities (32,738) 53,843 (38,652) 118,403
--------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents (10,558) 999 (15,652) (19,226)
Cash and cash equivalents at beginning of period 14,432 13,550 19,526 33,775
--------- -------- --------- --------
Cash and cash equivalents at end of period $ 3,874 $ 14,549 $ 3,874 $ 14,549
========= ======== ========= ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
</TABLE>
- 25 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Cleveland Electric Illuminating Company:
We have reviewed the accompanying consolidated balance sheet of The
Cleveland Electric Illuminating Company (an Ohio corporation and wholly
owned subsidiary of FirstEnergy Corp.) and subsidiary as of June 30,
1999, and the related consolidated statements of income and cash flows
for the three-month and six-month periods ended June 30, 1999 and 1998.
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 generally accepted auditing
standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of The Cleveland
Electric Illuminating Company and subsidiary as of December 31, 1998
(not presented herein), and, in our report dated February 12, 1999, 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, 1998, is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
August 9, 1999
- 26 -
<PAGE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues increased $7.4 million in the second
quarter of 1999, compared to the second quarter of 1998 and were $11.2
million higher in the first half of 1999, compared to the same period
the prior year. Increases in kilowatt-hour sales were substantially
offset by reduced unit prices. Residential, commercial and industrial
customers all contributed to the increase in retail kilowatt-hour sales
in the second quarter of 1999, compared to the same period of 1998,
with increases of 3.9%, 5.2% and 1.5%, respectively. Overall, retail
kilowatt-hour sales increased 3.3% and total kilowatt-hour sales
increased 10.0% from the 1998 second quarter results. Residential,
commercial and industrial customers also combined to increase retail
kilowatt-hour sales in the first six months of 1999, compared to the
same period of 1998, with increases of 9.2%, 3.6% and 0.6%,
respectively. Retail kilowatt-hour sales increased 3.7% and total
kilowatt-hour sales increased 4.7% from the first half of 1998. Lower
temperatures in the first quarter of 1999, compared to the milder
weather in the same period of 1998, contributed to stronger residential
growth in the first quarter of 1999, which is reflected in year-to-date
increases in residential kilowatt-hour sales. Service sector growth
supported continuing increases in sales to commercial customers. Total
kilowatt-hour sales benefited from strong weather-induced demand in the
wholesale market during June and available capacity at CEI. Sales to
wholesale customers increased 131.3% in the second quarter of 1999, and
were 20.6% higher in the first half than the corresponding periods of
1998.
Operation and maintenance expenses decreased $10.5 million in
the second quarter of 1999 from the same period of 1998, and were $4.3
million higher in the first half of 1999, compared to the first six
months of 1998. Fuel and purchased power costs were lower in both the
second quarter and year-to-date periods of 1999 than the corresponding
periods of 1998, primarily due to lower purchased power costs. Most of
the reduction was due to the absence of unusual conditions experienced
in the second quarter of 1998, which increased the prior period's
costs. Record heat and humidity in late June 1998 coincided with a
regional power shortage resulting in high prices for purchased power.
Unscheduled outages at Beaver Valley Unit 2, the Davis-Besse Plant and
Avon Lake Unit 9 required that CEI purchase significant quantities of
power on the spot market during that period. Although the second
quarter of 1999 also experienced above normal temperatures in June, CEI
maintained a stronger capacity position during the period. Therefore,
CEI was not only able to reduce its dependence on purchased power in
1999 but also took advantage of the strong demand for power through
sales to the wholesale market (discussed above). Offsetting the second
quarter reduction in purchased power costs were expenses associated
with the refueling outages at Beaver Valley Unit 2 and the Perry Plant,
which increased nuclear expenses in the second quarter and first half
of 1999, compared to the corresponding periods of 1998. Other operating
costs increased in the second quarter and year-to-date periods of 1999
from the corresponding periods of last year due primarily to higher
customer and sales expenses.
Long-term debt refinancings of $264 million and net
redemptions of $211 million during the twelve months ended June 30,
1999, contributed to the reduction in long-term debt interest expense
in the second quarter and first half of 1999, compared to the
corresponding periods of the prior year. Preferred stock dividend
requirements increased in the six-month period ending June 30, 1999,
compared to the first half of 1998, due to the declaration in the
fourth quarter of 1997 of preferred stock dividends payable in 1998 by
CEI.
Capital Resources and Liquidity
- -------------------------------
CEI has continuing cash requirements for planned capital
expenditures and debt maturities. During the last half of 1999, capital
requirements for property additions and capital leases are expected to
be about $103 million, including $8 million for nuclear fuel. CEI has
additional cash requirements of approximately $164.3 million to meet
sinking fund requirements for preferred stock and maturing long-term
debt during the remainder of 1999. These cash requirements are expected
to be satisfied with internal cash and/or short-term credit
arrangements.
As of June 30,1999, CEI had approximately $3.9 million of
cash and temporary investments and $55.9 million of short-term
indebtedness to affiliated companies. Together with TE, CEI had unused
borrowing capability of $100 million under a FirstEnergy revolving line
of credit at the end of the second quarter of 1999. Under its first
mortgage indenture, as of June 30, 1999, CEI would have been permitted
to issue up to $552 million of additional first mortgage bonds on the
basis of bondable property additions and retired bonds.
- 27 -
<PAGE>
Regulatory Matters
- ------------------
On July 6, 1999, Ohio Governor Bob Taft signed into law
legislation providing residents of Ohio with a choice of generation
suppliers. Among other provisions, the new law provides customer choice
starting January 1, 2001, freezes current rates for a five year market-
development period and includes a five-percent price cut in the
generation component of residential customer bills. Under the new law
CEI will continue to deliver power to homes and businesses through its
distribution system, which will remain regulated. While the new law
provides guidance for the transition to retail competition in Ohio,
significant authority has been vested in the PUCO to determine the
ultimate recovery of transition costs (see Note 3). The PUCO will hold
hearings as early as the first quarter of next year to decide the
amount of transition costs each utility can recover over a period of up
to ten years. FirstEnergy intends to file a transition plan for CEI in
the fourth quarter of 1999. The application of SFAS 71 to CEI's
nonnuclear generation business will be discontinued when the PUCO
issues an order of its hearing findings. Consequently, CEI is not able
to determine, at this time, the financial impact resulting from the
eventual discontinuation of regulatory accounting under SFAS 71 for its
nonnuclear generation business. CEI believes it will be able to
continue to bill and collect cost-based rates on its transmission and
distribution operations.
In May 1999, a federal appeals court delayed enforcement of
EPA's September 1998 final regulations requiring reductions in nitrogen
oxide emissions for Ohio, Pennsylvania and twenty other eastern states.
The federal appeals court remanded the regulations back to the EPA so
the agency could address, if possible, constitutional and other defects
in the rules (see "Environmental Matters" in Note 2). The EPA has
sought a rehearing. CEI cannot predict either the outcome of these
actions or the time period before final rules could become enforceable.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of CEI's programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
Because so many of CEI's computer functions are date sensitive, this
could cause far-reaching problems, such as system-wide computer
failures and miscalculations, if no remedial action is taken.
CEI has developed a multi-phase program for Year 2000
compliance that consists of an assessment of its systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. CEI
has focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers). CEI's
review of system readiness extends to systems involving customer
service, safety, shareholder needs and regulatory obligations.
CEI is committed to taking appropriate actions to eliminate
or lessen negative effects of the Year 2000 issue on its operations.
CEI has completed an inventory of all computer systems and hardware
including equipment with embedded computer chips, has determined which
systems need to be converted or replaced to become Year 2000-ready and
has completed the remediation of all mission critical systems and
equipment. Based on results of its remediation and testing efforts, CEI
filed documents (through FirstEnergy) with the North American Electric
Reliability Council, Nuclear Regulatory Commission and PUCO that as of
June 30, 1999 its generation, transmission, and distribution systems
were ready to serve customers in the year 2000.
Most of CEI's Year 2000 issues have been resolved through
system replacement. Of CEI's major centralized systems, the general
ledger system and inventory management, procurement and accounts
payable systems were replaced at the end of 1998. CEI's payroll system
was enhanced to be Year 2000 compliant in July 1998; all employees have
been converted to the new system. The customer service system was made
Year 2000 compliant in June 1999.
CEI has completed formal communications with most of its key
suppliers to determine the extent to which it is vulnerable to those
third parties' failure to resolve their own Year 2000 problems. For
suppliers having potential compliance problems, CEI is developing
alternate sources and services in the event such noncompliance occurs.
CEI is also identifying areas requiring higher inventory levels based
on compliance uncertainties. There can be no guarantee that the failure
of companies to resolve their own Year 2000 issues will not have a
material adverse effect on CEI's business, financial condition and
results of operations, although it does not consider this likely to
occur.
- 28 -
<PAGE>
CEI has completed the development of formal contingency plans
in all mission critical areas to establish procedures to be followed in
handling unlikely events which could impact the provision of electric
service to its customers.
CEI is using both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$30 million total project cost, approximately $23 million will be
capitalized since those costs are attributable to the purchase of new
software for total system replacements because the Year 2000 solution
comprises only a portion of the benefits resulting from the system
replacements. The remaining $7 million will be expensed as incurred. As
of June 30, 1999, CEI had spent $22 million for Year 2000 capital
projects and had expensed approximately $5 million for Year 2000-related
maintenance activities. CEI's total Year 2000 project cost, as well as
its estimates of the time needed to complete remedial efforts, are based
on currently available information and do not include the estimated
costs and time associated with the impact of third party Year 2000
issues.
CEI believes it is managing the Year 2000 issue in such a way
that its customers will not experience any interruption of service. CEI
believes the most likely worst-case scenario from the Year 2000 issue
will be disruption in power plant monitoring systems, thereby producing
inaccurate data and potential failures in electronic switching
mechanisms at transmission junctions. This would prolong localized
outages, as technicians would have to manually activate switches. Such
an event could have a material, but currently undeterminable, effect on
its financial results.
The costs of the project and the dates on which CEI plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived from numerous assumptions of future events
including the continued availability of certain resources, and other
factors. However, there can be no guarantee that this project will be
completed as planned and actual results could differ materially from the
estimates. Specific factors that might cause material differences
include but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer code,
and similar uncertainties.
- 29 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $235,184 $239,731 $459,446 $460,834
-------- -------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 42,444 72,500 78,846 107,341
Nuclear operating costs 49,232 37,430 91,126 75,225
Other operating costs 43,796 33,868 77,310 66,841
-------- -------- -------- --------
Total operation and maintenance expenses 135,472 143,798 247,282 249,407
Provision for depreciation and amortization 26,153 27,874 51,896 53,356
General taxes 22,734 20,928 43,832 41,958
Income taxes 11,302 9,287 28,209 26,303
-------- -------- -------- --------
Total operating expenses and taxes 195,661 201,887 371,219 371,024
-------- -------- -------- --------
OPERATING INCOME 39,523 37,844 88,227 89,810
OTHER INCOME 3,245 3,057 6,167 6,899
-------- -------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 42,768 40,901 94,394 96,709
-------- -------- -------- --------
NET INTEREST CHARGES:
Interest on long-term debt 21,117 22,370 42,158 45,256
Allowance for borrowed funds used during
construction (404) (314) (606) (583)
Other interest expense (credit) (1,153) (285) (2,514) (1,099)
-------- -------- -------- --------
Net interest charges 19,560 21,771 39,038 43,574
-------- -------- -------- --------
NET INCOME 23,208 19,130 55,356 53,135
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,069 4,150 8,139 5,535
-------- -------- -------- --------
EARNINGS ON COMMON STOCK $ 19,139 $ 14,980 $ 47,217 $ 47,600
======== ======== ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
</TABLE>
- 30 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service $1,768,439 $1,757,364
Less--Accumulated provision for depreciation 638,340 626,942
---------- ----------
1,130,099 1,130,422
---------- ----------
Construction work in progress-
Electric plant 26,006 26,603
Nuclear fuel 386 11,191
---------- ----------
26,392 37,794
---------- ----------
1,156,491 1,168,216
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 295,455 310,762
Nuclear plant decommissioning trusts 115,238 102,749
Other. 6,390 3,656
---------- ----------
417,083 417,167
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 4,717 4,140
Receivables-
Customers 2,978 7,338
Associated companies 14,010 30,006
Other 9,526 31,688
Notes receivable from associated companies 100,373 101,236
Materials and supplies, at average cost-
Owned 23,990 25,745
Under consignment 18,816 18,148
Prepayments and other 31,490 25,647
---------- ----------
205,900 243,948
---------- ----------
DEFERRED CHARGES:
Regulatory assets 406,080 417,704
Goodwill 468,255 474,593
Property taxes 42,842 42,842
Other 7,446 4,295
---------- ----------
924,623 939,434
---------- ----------
$2,704,097 $2,768,765
========== ==========
</TABLE>
- 31 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
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 36,984 51,463
---------- ----------
Total common stockholder's equity 561,213 575,692
Preferred stock not subject to mandatory
redemption 210,000 210,000
Long-term debt 1,040,289 1,083,666
---------- ----------
1,811,502 1,869,358
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and
preferred stock 156,382 130,426
Accounts payable-
Associated companies 31,919 34,260
Other 31,403 38,832
Accrued taxes 41,444 62,288
Accrued interest 24,608 24,965
Other 23,971 35,082
---------- ----------
309,727 325,853
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 162,992 151,321
Accumulated deferred investment tax credits 39,709 40,670
Pensions and other postretirement benefits 121,131 122,314
Other 259,036 259,249
---------- ----------
582,868 573,554
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$2,704,097 $2,768,765
========== ==========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these balance sheets.
</TABLE>
- 32 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,208 $ 19,130 $ 55,356 $ 53,135
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 26,153 27,874 51,896 53,356
Nuclear fuel and lease amortization 5,206 3,629 11,818 10,930
Deferred income taxes, net 6,623 8,631 10,305 15,152
Investment tax credits, net (480) (649) (961) (1,298)
Receivables 57,935 (14,975) 42,518 3,226
Materials and supplies 3,467 (527) 1,087 (3,507)
Accounts payable (4,105) 12,658 (9,770) (114)
Other (22,932) (29,086) (55,855) (26,217)
-------- -------- -------- --------
Net cash provided from operating
activities 95,075 26,685 106,394 104,663
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 34,850 3,657 34,850 3,657
Redemptions and Repayments-
Preferred stock 1,690 1,665 1,690 1,665
Long-term debt 43,191 33,127 55,625 41,695
Dividend Payments-
Common stock 60,351 21,132 60,351 21,132
Preferred stock 4,069 4,108 8,139 8,235
-------- -------- -------- --------
Net cash used for financing activities 74,451 56,375 90,955 69,070
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 9,991 6,898 18,922 14,647
Loans to associated companies -- -- -- 44,648
Loan payments from associated companies (3,725) (33,150) (863) --
Capital trust investments 63 66 (15,307) (1,937)
Other 9,751 (7,698) 12,110 (4,162)
-------- -------- -------- --------
Net cash used for (provided from)
investing activities 16,080 (33,884) 14,862 53,196
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 4,544 4,194 577 (17,603)
Cash and cash equivalents at beginning of period 173 373 4,140 22,170
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 4,717 $ 4,567 $ 4,717 $ 4,567
======== ======== ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
</TABLE>
- 33 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Toledo Edison Company:
We have reviewed the accompanying consolidated balance sheet of The
Toledo Edison Company (an Ohio corporation and wholly owned subsidiary
of FirstEnergy Corp.) and subsidiary as of June 30, 1999, and the
related consolidated statements of income and cash flows for the three-
month and six-month periods ended June 30, 1999 and 1998. 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 generally accepted auditing
standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of The Toledo Edison
Company and subsidiary as of December 31, 1998 (not presented herein),
and, in our report dated February 12, 1999, 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, 1998, is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
August 9, 1999
- 34 -
<PAGE>
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues decreased $4.5 million in the second
quarter of 1999, compared to the second quarter of 1998, and were $1.4
million lower in the first half of 1999, compared to the same period of
the prior year. Increases in kilowatt-hour sales were substantially
offset by reduced unit prices. A reduction in other revenue contributed
to the decrease in operating revenues. Total kilowatt-hour sales
increased 6.4% in the second quarter of 1999, compared to the same
period of 1998. While retail sales decreased 1.6% in the second
quarter, kilowatt-hour sales to wholesale customers increased 69.2% as
a result of available power at TE and strong weather-induced demand in
the wholesale market during June. Retail kilowatt-hour sales to
residential, commercial and industrial customers declined in the second
quarter by 1.7%, 1.3% and 1.6%, respectively. In the first half of
1999, total kilowatt-hour sales increased 7.7%, compared to the same
period of 1998, benefiting from a 44.2% increase in sales to wholesale
customers. Retail kilowatt-hour sales increased 2.6% from the year-ago
period, with sales to residential and industrial customers up 3.2% and
4.3% respectively. Sales to commercial customers decreased 1.4%.
Operation and maintenance expenses decreased $8.3 million in
the second quarter of 1999 from the same period of 1998, and were $2.1
million lower in the first half of 1999, compared to the first six
months of 1998. Fuel and purchased power costs were lower in the second
quarter and year-to-date periods of 1999 than the corresponding periods
of 1998, due to lower purchased power costs. Most of the reduction in
1999 was due to the absence of unusual conditions experienced in the
second quarter of 1998, which increased the prior period's costs.
Record heat and humidity in late June 1998 coincided with a regional
power shortage resulting in high prices for purchased power. During
this period, unscheduled outages at Beaver Valley Unit 2 and the Davis-
Besse Plant required that TE purchase significant quantities of power
on the spot market during that period. Although the second quarter of
1999 also experienced above normal temperatures in June, spot market
prices were less extreme, and TE maintained a stronger generating
capacity position during the period. Therefore, TE was not only able to
reduce its dependence on purchased power in 1999 but also took
advantage of the strong demand for power through sales to the wholesale
market (discussed above). Offsetting a portion of the reduction in
purchased power costs were increases in nuclear operating costs at
Beaver Valley Unit 2 and the Perry plant resulting from refueling
outages at those locations. Other operating costs increased in the
second quarter and year-to-date periods of 1999 from the corresponding
periods of last year due in part to higher customer and sales expenses.
Interest expenses decreased in the second quarter and first
half of 1999 from the same periods of the previous year primarily due
to redemptions of long-term debt.
Capital Resources and Liquidity
- -------------------------------
TE has continuing cash requirements for planned capital
expenditures and debt maturities. During the last half of 1999, capital
requirements for property additions and capital leases are expected to
be about $32 million, including $3 million for nuclear fuel. TE has
additional cash requirements of approximately $100.4 million to meet
requirements for maturing long-term debt during the remainder of 1999.
These cash requirements are expected to be satisfied with internal cash
and/or short-term credit arrangements.
As of June 30, 1999, TE had approximately $105.1 million of
cash and temporary investments and no short-term indebtedness. Together
with CEI, TE had unused borrowing capability of $100 million under a
FirstEnergy revolving line of credit at the end of the second quarter
of 1999. Under its first mortgage indenture, as of June 30, 1999, TE
would have been permitted to issue approximately $234 million of
additional first mortgage bonds on the basis of bondable property
additions and retired bonds.
Regulatory Matters
- ------------------
On July 6, 1999, Ohio Governor Bob Taft signed into law
legislation providing residents of Ohio with a choice of generation
suppliers. Among other provisions, the new law provides customer choice
starting January 1, 2001, freezes current rates for a five year market-
development period and includes a five-percent price cut in the
generation component of residential customer bills. Under the new law
TE will continue to deliver power to homes and businesses through its
distribution system, which will remain regulated. While the new law
provides guidance for the transition to retail competition in Ohio,
significant authority has been vested in the PUCO to determine the
- 35 -
<PAGE>
ultimate recovery of transition costs (see Note 3). The PUCO will hold
hearings as early as the first quarter of next year to decide the
amount of transition costs each utility can recover over a period of up
to ten years. FirstEnergy intends to file a transition plan for TE in
the fourth quarter of 1999. The application of SFAS 71 to TE's
nonnuclear generation business will be discontinued when the PUCO
issues an order of its hearing findings. Consequently, TE is not able
to determine, at this time, the financial impact resulting from the
eventual discontinuation of regulatory accounting under SFAS 71 for its
nonnuclear generation business. TE believes it will be able to continue
to bill and collect cost-based rates on its transmission and
distribution operations.
In May 1999, a federal appeals court delayed enforcement of
the EPA's September 1998 final regulations requiring reductions in
nitrogen oxide emissions for Ohio, Pennsylvania and twenty other
eastern states. The federal appeals court remanded the regulations back
to the EPA so the agency could address, if possible, constitutional and
other defects in the rules (see "Environmental Matters" in Note 2). The
EPA has sought a rehearing. TE cannot predict either the outcome of
these actions or the time period before final rules could become
enforceable.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of TE's programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
Because so many of TE's computer functions are date sensitive, this
could cause far-reaching problems, such as system-wide computer
failures and miscalculations, if no remedial action is taken.
TE has developed a multi-phase program for Year 2000
compliance that consists of an assessment of its systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. TE
has focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers). TE's review
of system readiness extends to systems involving customer service,
safety, shareholder needs and regulatory obligations.
TE is committed to taking appropriate actions to eliminate or
lessen negative effects of the Year 2000 issue on its operations. TE
has completed an inventory of all computer systems and hardware
including equipment with embedded computer chips, has determined which
systems need to be converted or replaced to become Year 2000-ready and
has completed the remediation of all mission critical systems and
equipment. Based on results of its remediation and testing efforts, TE
filed documents (through FirstEnergy) with the North American Electric
Reliability Council, Nuclear Regulatory Commission and PUCO that as of
June 30, 1999 its generation, transmission, and distribution systems
were ready to serve customers in the year 2000.
Most of TE's Year 2000 issues have been resolved through
system replacement. Of TE's major centralized systems, the general
ledger system and inventory management, procurement and accounts
payable systems were replaced at the end of 1998. TE's payroll system
was enhanced to be Year 2000 compliant in July 1998; all employees have
been converted to the new system. The customer service system was made
Year 2000 compliant in June 1999.
TE has completed formal communications with most of its key
suppliers to determine the extent to which it is vulnerable to those
third parties' failure to resolve their own Year 2000 problems. For
suppliers having potential compliance problems, TE is developing
alternate sources and services in the event such noncompliance occurs.
TE is also identifying areas requiring higher inventory levels based on
compliance uncertainties. There can be no guarantee that the failure of
companies to resolve their own Year 2000 issues will not have a
material adverse effect on TE's business, financial condition and
results of operations, although it does not consider this likely to
occur.
TE has completed the development of formal contingency plans
in all mission critical areas to establish procedures to be followed in
handling unlikely events which could impact the provision of electric
service to its customers.
TE is using both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$16 million total project cost, approximately $13 million will be
capitalized since those costs are attributable to the purchase of new
software for total system replacements because the Year 2000 solution
comprises only a portion of the benefits resulting from the system
replacements. The remaining $3 million will be expensed as incurred. As
of June 30, 1999, TE had spent $12 million for Year 2000 capital
projects and had expensed approximately $2 million for Year 2000-related
maintenance activities. TE's total Year 2000 project cost, as well as
- 36 -
<PAGE>
its estimates of the time needed to complete remedial efforts, are based
on currently available information and do not include the estimated
costs and time associated with the impact of third party Year 2000
issues.
TE believes it is managing the Year 2000 issue in such a way
that its customers will not experience any interruption of service. TE
believes the most likely worst-case scenario from the Year 2000 issue
will be disruption in power plant monitoring systems, thereby producing
inaccurate data and potential failures in electronic switching
mechanisms at transmission junctions. This would prolong localized
outages, as technicians would have to manually activate switches. Such
an event could have a material, but currently undeterminable, effect on
its financial results.
The costs of the project and the dates on which TE plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived from numerous assumptions of future events
including the continued availability of certain resources, and other
factors. However, there can be no guarantee that this project will be
completed as planned and actual results could differ materially from the
estimates. Specific factors that might cause material differences
include but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer code,
and similar uncertainties.
- 37 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $82,117 $ 80,271 $163,489 $158,847
------- -------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 18,354 23,089 35,266 40,887
Nuclear operating costs 8,290 6,762 15,003 13,868
Other operating costs 16,517 13,511 31,245 25,701
------- -------- -------- --------
Total operation and maintenance expenses 43,161 43,362 81,514 80,456
Provision for depreciation and amortization 16,278 16,510 30,715 33,008
General taxes 6,340 5,494 12,244 11,273
Income taxes 6,578 4,906 14,964 11,472
------- -------- -------- --------
Total operating expenses and taxes 72,357 70,272 139,437 136,209
------- -------- -------- --------
OPERATING INCOME 9,760 9,999 24,052 22,638
OTHER INCOME 250 634 1,247 1,373
------- -------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 10,010 10,633 25,299 24,011
------- -------- -------- --------
NET INTEREST CHARGES:
Interest expense 6,022 5,223 11,118 10,717
Allowance for borrowed funds used during
construction (86) (62) (232) (144)
------- -------- -------- --------
Net interest charges 5,936 5,161 10,886 10,573
------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 4,074 5,472 14,413 13,438
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- (30,522) -- (30,522)
------- -------- -------- --------
NET INCOME (LOSS) 4,074 (25,050) 14,413 (17,084)
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,156 1,156 2,313 2,313
------- -------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 2,918 $(26,206) $ 12,100 $(19,397)
======= ======== ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
</TABLE>
- 38 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service $696,055 $686,771
Less--Accumulated provision for depreciation 297,319 291,188
-------- --------
398,736 395,583
-------- --------
Construction work in progress-
Electric plant 14,849 17,187
Nuclear fuel 379 508
-------- --------
15,228 17,695
-------- --------
413,964 413,278
-------- --------
OTHER PROPERTY AND INVESTMENTS 34,205 29,177
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 1,977 7,485
Notes receivable from parent company 28,687 50,000
Receivables-
Customers (less accumulated provisions of
$3,766,000 and $3,599,000, respectively, for
uncollectible accounts) 37,311 34,737
Associated companies 15,666 34,430
Other 17,824 12,472
Materials and supplies, at average cost 17,857 15,515
Prepayments 9,600 2,657
-------- --------
128,922 157,296
-------- --------
DEFERRED CHARGES:
Regulatory assets 343,739 371,027
Other 6,478 6,994
-------- --------
350,217 378,021
-------- --------
$927,308 $977,772
======== ========
</TABLE>
- 39 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
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 34,118 86,891
-------- --------
Total common stockholder's equity 222,508 275,281
Preferred stock-
Not subject to mandatory redemption 39,105 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 7,405 6,617
Other 280,919 281,072
-------- --------
564,937 628,875
-------- --------
CURRENT LIABILITIES:
Currently payable long-term debt and
preferred stock-
Associated companies 5,403 5,557
Other 6,731 984
Accounts payable-
Associated companies 21,533 9,676
Other 22,515 23,156
Accrued taxes 18,765 12,849
Accrued interest 6,546 6,519
Other 10,797 17,046
-------- --------
92,290 75,787
-------- --------
DEFERRED CREDITS:
Accumulated deferred income taxes 206,258 212,427
Accumulated deferred investment tax credits 7,492 7,787
Other 56,331 52,896
-------- --------
270,081 273,110
-------- --------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) -------- --------
$927,308 $977,772
======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these balance sheets.
</TABLE>
- 40 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,074 $(25,050) $ 14,413 $(17,084)
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 16,278 16,510 30,715 33,008
Nuclear fuel and lease amortization 1,411 852 3,234 1,792
Deferred income taxes, net 1,150 (24,177) (873) (26,989)
Investment tax credits, net (112) (572) (295) (1,144)
Extraordinary item -- 51,730 -- 51,730
Receivables 14,623 (16) 10,838 946
Materials and supplies (1,610) 203 (2,342) (173)
Accounts payable 5,031 3,842 11,216 5,006
Other 5,250 3,470 (7,201) (6,404)
------- -------- -------- --------
Net cash provided from operating
activities 46,095 26,792 59,705 40,688
------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt -- 1,621 -- 1,621
Redemptions and Repayments-
Preferred stock 6,085 -- 6,085 --
Long-term debt 1,400 791 3,145 2,551
Dividend Payments-
Common stock 33,597 5,347 65,362 10,693
Preferred stock 671 1,081 1,737 2,238
------- -------- -------- --------
Net cash used for financing activities 41,753 5,598 76,329 13,861
------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 3,696 3,735 8,329 7,019
Loan to parent -- 13,500 -- 12,500
Loan payment from parent (1,071) -- (21,313) --
Other 605 1,069 1,868 1,881
------- -------- -------- --------
Net cash used for (provided from)
investing activities 3,230 18,304 (11,116) 21,400
------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 1,112 2,890 (5,508) 5,427
Cash and cash equivalents at beginning of period 865 3,197 7,485 660
------- -------- -------- --------
Cash and cash equivalents at end of period $ 1,977 $ 6,087 $ 1,977 $ 6,087
======= ======== ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
</TABLE>
- 41 -
<PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Power Company:
We have reviewed the accompanying consolidated balance sheet of
Pennsylvania Power Company (a Pennsylvania corporation and wholly owned
subsidiary of Ohio Edison Company) and subsidiary as of June 30, 1999,
and the related consolidated statements of income and cash flows for the
three-month and six-month periods ended June 30, 1999 and 1998. 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 generally accepted auditing
standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Pennsylvania Power Company as
of December 31, 1998 (not presented herein), and, in our report dated
February 12, 1999, 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, 1998, is fairly stated, in
all material respects, in relation to the balance sheet from which it
has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
August 9, 1999
- 42 -
<PAGE>
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Earnings were adversely affected in the second quarter and
year-to-date periods of 1998 by an extraordinary item resulting from the
deregulation of Penn's generation business and the corresponding
discontinuation of SFAS 71 with respect to its generation business. This
action was taken following the June 18, 1998, authorization by the
Pennsylvania Public Utility Commission (PPUC) of the restructuring plan
for Penn. Earnings on common stock in the second quarter of 1999 were
$2.9 million, compared to $4.3 million, excluding the extraordinary item
in the second quarter of 1998; for the first half of 1999, earnings on
common stock were $12.1 million compared to $11.1 million for the same
period of 1998.
Operating revenues increased $1.8 million in the second
quarter of 1999, compared to the second quarter of 1998, and $4.6
million in the first half of 1999, compared to the same period of the
prior year. The increases in operating revenues resulted from
additional kilowatt-hour sales, which were partially offset by reduced
unit prices. Residential, commercial and industrial customers all
contributed to higher retail kilowatt-hour sales in the second quarter
of 1999, compared to the same period of 1998, with increases of 4.1%,
23.4% and 7.3%, respectively. Overall, retail kilowatt-hour sales
increased 10.9% and total kilowatt-hour sales increased a more moderate
5.6% due to reduced sales to wholesale customers during the period. In
the first half of 1999 residential and commercial customers contributed
to the increase in retail kilowatt-hour sales, increasing 10.1% and
23.5%, respectively, from the prior year, while sales to industrial
customers decreased 1.5%. Overall, retail sales increased 9.2% and
total sales increased 6.2%. Growth in sales per customer was the
primary factor supporting increased residential sales in the second
quarter and first half of 1999, compared to the corresponding prior
year periods. Continued service sector growth contributed to the
commercial sales increase while industrial sales benefited in the
second quarter from a rebound in sales to the primary metal sector.
Retail kilowatt-hour sales also increased due to nonregulated sales by
Penn Power Energy, Inc. (PPE), a wholly owned subsidiary. Most of the
new PPE sales were to commercial customers resulting in the unusually
large percentage increase in kilowatt-hour sales to those customers.
Operation and maintenance expenses decreased $0.2 million in
the second quarter of 1999 from the same period of 1998, and were $1.1
million higher in the first half of 1999, compared to the first half of
1998. The relatively small changes in these expenses resulted from
larger increases and offsetting decreases as discussed below. Fuel and
purchased power costs were lower in both the second quarter and
year-to-date periods of 1999 than the corresponding periods of 1998 due
to an increased mix of nuclear production, which reduced the cost of
fuel, and lower purchased power costs. Most of the reduction in purchased
power costs in 1999 was due to the absence of unusual conditions experienced
in the second quarter of 1998, which increased the prior period's costs.
Record heat and humidity in late June 1998 coincided with a regional power
shortage resulting in high prices for purchased power. Due in part to an
unscheduled outage at Beaver Valley Unit 1, which continued through the
second quarter of 1998, Penn purchased significant quantities of power
on the spot market during that period. Although the second quarter of
1999 also experienced above normal temperatures in June, spot market
prices were less extreme and Penn maintained a stronger capacity
position during the period. Therefore, Penn was able to reduce its
dependence on purchased power in 1999.
Expenses associated with the 1999 refueling outage at the
Perry Plant increased nuclear expenses in the second quarter and first
half of 1999, compared to the corresponding periods of 1998. Other
operating costs increased in the second quarter and year-to-date
periods of 1999 from the same periods of last year primarily due to
increased energy marketing program expenditures.
Capital Resources and Liquidity
- -------------------------------
Penn has continuing cash requirements for planned capital
expenditures. During the second half of 1999, capital requirements for
property additions and capital leases are expected to be about $30
million, with no additional expenditures for nuclear fuel. Penn has
additional cash requirements of approximately $0.5 million to meet
requirements for maturing long-term debt during the remainder of 1999.
These requirements are expected to be satisfied with internal cash.
As of June 30, 1999, Penn had approximately $30.7 million of
cash and temporary investments and no short-term indebtedness. Penn had
$2 million of an unused bank facility as of June 30, 1999, which may be
borrowed for up to several days at the bank's discretion. Under its
first mortgage indenture, as of June 30, 1999, Penn would have been
- 43 -
<PAGE>
permitted to issue at least $233 million of additional first mortgage
bonds on the basis of bondable property additions and retired bonds.
Regulatory Matters
- ------------------
In May 1999, a federal appeals court delayed enforcement of
EPA's September 1998 final regulations requiring reductions in nitrogen
oxide emissions for Pennsylvania, Ohio and twenty other eastern states.
The federal appeals court remanded the regulations back to the EPA so
the agency could address, if possible, constitutional and other defects
in the rules (see "Environmental Matters" in Note 2). The EPA has
sought a rehearing. Penn cannot predict either the outcome of these
actions or the time period before final rules could become enforceable.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of Penn's programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
Because so many of Penn's computer functions are date sensitive, this
could cause far-reaching problems, such as system-wide computer
failures and miscalculations, if no remedial action is taken.
Penn has developed a multi-phase program for Year 2000
compliance that consists of an assessment of its systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. Penn
has focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers). Penn's
review of system readiness extends to systems involving customer
service, safety, shareholder needs and regulatory obligations.
Penn is committed to taking appropriate actions to eliminate
or lessen negative effects of the Year 2000 issue on its operations.
Penn has completed an inventory of all computer systems and hardware
including equipment with embedded computer chips and has determined
which systems need to be converted or replaced to become Year 2000-
ready and has completed the remediation of all mission critical systems
and equipment. Based on results of our remediation and testing efforts,
Penn filed documents (through FirstEnergy) with the North American
Electric Reliability Council, Nuclear Regulatory Commission and PPUC
that as of June 30, 1999 its generation, transmission, and distribution
systems were ready to serve customers in the year 2000.
Most of Penn's Year 2000 issues have been resolved through
system replacement. Of Penn's major centralized systems, the general
ledger system and inventory management, procurement and accounts
payable systems were replaced at the end of 1998. Penn's payroll
system was enhanced to be Year 2000 compliant in July 1998. The
customer service system was made Year 2000 compliant in June 1999.
Penn has completed formal communications with most of its key
suppliers to determine the extent to which it is vulnerable to those
third parties' failure to resolve their own Year 2000 problems. For
suppliers having potential compliance problems, Penn is developing
alternate sources and services in the event such noncompliance occurs.
Penn is also identifying areas requiring higher inventory levels based
on compliance uncertainties. There can be no guarantee that the failure
of companies to resolve their own Year 2000 issues will not have a
material adverse effect on Penn's business, financial condition and
results of operations, although it does not consider this likely to
occur.
Penn has completed the development of formal contingency plans
in all mission critical areas to establish procedures to be followed in
handling unlikely events which could impact the provision of electric
service to its customers.
Penn is using both internal and external resources to
reprogram and/or replace and test its software for Year 2000
modifications. Of the $4.9 million total project cost, approximately
$3.5 million will be capitalized since those costs are attributable to
the purchase of new software for total system replacements because the
Year 2000 solution comprises only a portion of the benefits resulting
from the system replacements. The remaining $1.4 million will be
expensed as incurred. As of June 30, 1999, Penn had spent $3.2 million
for Year 2000 capital projects and had expensed approximately $.9
million for Year 2000-related maintenance activities. Penn's total Year
2000 project cost, as well as its estimates of the time needed to
complete remedial efforts, are based on currently available information
and do not include the estimated costs and time associated with the
impact of third party Year 2000 issues.
- 44 -
<PAGE>
Penn believes it is managing the Year 2000 issue in such a
way that its customers will not experience any interruption of service.
Penn believes the most likely worst-case scenario from the Year 2000
issue will be disruption in power plant monitoring systems, thereby
producing inaccurate data and potential failures in electronic
switching mechanisms at transmission junctions. This would prolong
localized outages, as technicians would have to manually activate
switches. Such an event could have a material, but currently
undeterminable, effect on its financial results.
The costs of the project and the dates on which Penn plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived from numerous assumptions of future events
including the continued availability of certain resources, and other
factors. However, there can be no guarantee that this project will be
completed as planned and actual results could differ materially from the
estimates. Specific factors that might cause material differences
include but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer code,
and similar uncertainties.
- 45 -
<PAGE>
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, FirstEnergy, or, respectively, any of the Companies, has
not 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 the
total assets of FirstEnergy and its subsidiaries on a
consolidated basis, or respectively, any of the Companies, but
hereby agrees to furnish to the Commission on request any such
documents.
(b) Reports on Form 8-K
FirstEnergy, OE, CEI, and TE - One combined report on Form 8-K
----------------------------
was filed since March 31, 1999. A report dated June 24, 1999
reported the Ohio legislature's passage of an electric utility
industry restructuring bill.
Penn
----
None
- 46 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
August 13, 1999
FIRSTENERGY CORP.
-----------------
Registrant
OHIO EDISON COMPANY
-------------------
Registrant
THE CLEVELAND ELECTRIC
----------------------
ILLUMINATING COMPANY
--------------------
Registrant
THE TOLEDO EDISON COMPANY
-------------------------
Registrant
/s/ Harvey L. Wagner
----------------------------
Harvey L. Wagner
Controller
Principal Accounting Officer
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Harvey L. Wagner
-----------------------------
Harvey L. Wagner
Comptroller
Principal Accounting Officer
- 47 -
EXHIBIT 15
August 9, 1999
FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Gentlemen:
We are aware that FirstEnergy Corp. has incorporated by reference
in its Registration Statements No. 333-40065, No. 333-48587, No.
333-48651, No. 333-58279, No. 333-65409 and No. 333-75985 its
Form 10-Q for the quarter ended June 30, 1999, which includes our
report dated August 9, 1999 covering the unaudited interim
financial information contained therein. Pursuant to Regulation C
of the Securities Act of 1933, that report is not considered a
part of the registration statements prepared or certified by our
firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
related Form 10-Q financial statements for FirstEnergy Corp. and is
qualified in its entirety by reference to such financial statements.
(Amounts in 1,000's, except earnings per share.)
</LEGEND>
<CIK> 0001031296
<NAME> FIRSTENERGY CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 9,224,174
<OTHER-PROPERTY-AND-INVEST> 2,417,962
<TOTAL-CURRENT-ASSETS> 1,411,430
<TOTAL-DEFERRED-CHARGES> 5,329,618
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 18,383,184
<COMMON> 23,449
<CAPITAL-SURPLUS-PAID-IN> 3,640,771
<RETAINED-EARNINGS> 809,017
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,473,237
280,996
648,395
<LONG-TERM-DEBT-NET> 6,142,847
<SHORT-TERM-NOTES> 108,787
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,982
<LONG-TERM-DEBT-CURRENT-PORT> 1,096,185
44,264
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 60,796
<OTHER-ITEMS-CAPITAL-AND-LIAB> 5,407,695
<TOT-CAPITALIZATION-AND-LIAB> 18,383,184
<GROSS-OPERATING-REVENUE> 2,941,291
<INCOME-TAX-EXPENSE> 194,342
<OTHER-OPERATING-EXPENSES> 2,191,467
<TOTAL-OPERATING-EXPENSES> 2,385,809
<OPERATING-INCOME-LOSS> 555,482
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 555,482
<TOTAL-INTEREST-EXPENSE> 293,439
<NET-INCOME> 262,043
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 171,436
<TOTAL-INTEREST-ON-BONDS> 514,463
<CASH-FLOW-OPERATIONS> 485,411
<EPS-BASIC> 1.15
<EPS-DILUTED> 1.15
</TABLE>
EXHIBIT 15
August 9, 1999
Ohio Edison Company
76 South Main Street
Akron, OH 44308
Gentlemen:
We are aware that Ohio Edison Company has incorporated by
reference in its Registration Statements No. 33-49135, No. 33-
49259, No. 33-49413, No. 33-51139, No. 333-01489 and No. 333-
05277 its Form 10-Q for the quarter ended June 30, 1999, which
includes our report dated August 9, 1999 covering the unaudited
interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not
considered a part of the registration statements prepared or
certified by our firm or a report prepared or certified by our
firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
related Form 10-Q financial statements for Ohio Edison company and is
qualified in its entirety by reference to such financial statements.
(Amounts in 1,000's.) Income tax expense includess $11,907,000 related
to other income.
</LEGEND>
<CIK> 0000073960
<NAME> OHIO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,712,153
<OTHER-PROPERTY-AND-INVEST> 1,319,322
<TOTAL-CURRENT-ASSETS> 912,848
<TOTAL-DEFERRED-CHARGES> 2,022,637
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,966,960
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,098,728
<RETAINED-EARNINGS> 400,440
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,499,169
145,000
200,070
<LONG-TERM-DEBT-NET> 2,061,597
<SHORT-TERM-NOTES> 308,021
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,982
<LONG-TERM-DEBT-CURRENT-PORT> 815,403
10,800
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 3,547
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,803,371
<TOT-CAPITALIZATION-AND-LIAB> 8,966,960
<GROSS-OPERATING-REVENUE> 1,279,847
<INCOME-TAX-EXPENSE> 101,574
<OTHER-OPERATING-EXPENSES> 941,213
<TOTAL-OPERATING-EXPENSES> 1,030,880
<OPERATING-INCOME-LOSS> 248,967
<OTHER-INCOME-NET> 22,398
<INCOME-BEFORE-INTEREST-EXPEN> 271,365
<TOTAL-INTEREST-EXPENSE> 114,819
<NET-INCOME> 156,546
5,826
<EARNINGS-AVAILABLE-FOR-COMM> 150,720
<COMMON-STOCK-DIVIDENDS> 333,603
<TOTAL-INTEREST-ON-BONDS> 200,814
<CASH-FLOW-OPERATIONS> 370,027
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 15
August 9, 1999
The Cleveland Electric
Illuminating Company
76 South Main Street
Akron, OH 44308
Gentlemen:
We are aware that The Cleveland Electric Illuminating Company has
incorporated by reference in its Registration Statements No. 33-
55513, No. 333-47651 and No. 333-72891 its Form 10-Q for the
quarter ended June 30, 1999, which includes our report dated
August 9, 1999 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of
the registration statements prepared or certified by our firm or
a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
related Form 10-Q financial statements for The Cleveland Electric
Illuminating Company and is qualified in its entirety by reference to such
financial statements. (Amounts in 1000's.) Income tax expense includes
$7,560,000 related to other income.
</LEGEND>
<CIK> 0000020947
<NAME> THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,018,084
<OTHER-PROPERTY-AND-INVEST> 688,161
<TOTAL-CURRENT-ASSETS> 426,742
<TOTAL-DEFERRED-CHARGES> 2,134,781
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,267,768
<COMMON> 931,962
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 59,688
<TOTAL-COMMON-STOCKHOLDERS-EQ> 991,650
135,996
238,325
<LONG-TERM-DEBT-NET> 2,869,859
<SHORT-TERM-NOTES> 55,890
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 144,530
33,464
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 31,867
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,766,187
<TOT-CAPITALIZATION-AND-LIAB> 6,267,768
<GROSS-OPERATING-REVENUE> 900,794
<INCOME-TAX-EXPENSE> 56,878
<OTHER-OPERATING-EXPENSES> 663,322
<TOTAL-OPERATING-EXPENSES> 712,640
<OPERATING-INCOME-LOSS> 188,154
<OTHER-INCOME-NET> 5,217
<INCOME-BEFORE-INTEREST-EXPEN> 193,371
<TOTAL-INTEREST-EXPENSE> 105,836
<NET-INCOME> 87,535
17,082
<EARNINGS-AVAILABLE-FOR-COMM> 70,453
<COMMON-STOCK-DIVIDENDS> 82,974
<TOTAL-INTEREST-ON-BONDS> 216,278
<CASH-FLOW-OPERATIONS> 108,208
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
related Form 10-Q financial statements for The Toledo Edison Company and is
qualified in its entirety to such financial statements. (Amounts in 1,000's.)
Income tax expense includes $3,311,000 related to other income.
</LEGEND>
<CIK> 0000352049
<NAME> THE TOLEDO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,156,491
<OTHER-PROPERTY-AND-INVEST> 417,083
<TOTAL-CURRENT-ASSETS> 205,900
<TOTAL-DEFERRED-CHARGES> 924,623
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,704,097
<COMMON> 195,670
<CAPITAL-SURPLUS-PAID-IN> 328,559
<RETAINED-EARNINGS> 36,984
<TOTAL-COMMON-STOCKHOLDERS-EQ> 561,213
0
210,000
<LONG-TERM-DEBT-NET> 1,040,289
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 131,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 25,382
<OTHER-ITEMS-CAPITAL-AND-LIAB> 736,213
<TOT-CAPITALIZATION-AND-LIAB> 2,704,097
<GROSS-OPERATING-REVENUE> 459,446
<INCOME-TAX-EXPENSE> 31,520
<OTHER-OPERATING-EXPENSES> 343,010
<TOTAL-OPERATING-EXPENSES> 371,219
<OPERATING-INCOME-LOSS> 88,227
<OTHER-INCOME-NET> 6,167
<INCOME-BEFORE-INTEREST-EXPEN> 94,394
<TOTAL-INTEREST-EXPENSE> 39,038
<NET-INCOME> 55,356
8,139
<EARNINGS-AVAILABLE-FOR-COMM> 47,217
<COMMON-STOCK-DIVIDENDS> 60,351
<TOTAL-INTEREST-ON-BONDS> 85,237
<CASH-FLOW-OPERATIONS> 106,394
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 15
August 9, 1999
Pennsylvania Power Company
1 E. Washington Street
P. O. Box 891
New Castle, PA 16103
Gentlemen:
We are aware that Pennsylvania Power Company has incorporated by
reference in its Registration Statements No. 33-62450 and No. 33-
65156 its Form 10-Q for the quarter ended June 30, 1999, which
includes our report dated August 9, 1999 covering the unaudited
interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not
considered a part of the registration statements prepared or
certified by our firm or a report prepared or certified by our
firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains financial information extracted from the
related Form 10-Q financial statements for Pennsylvania Power Company and
is qualified in its entirety by reference to such financial statements.
(Amounts in 1,000's.) Income tax expense includes $267,000 related to other
income.
</LEGEND>
<CIK> 0000077278
<NAME> PENNSYLVANIA POWER COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 413,964
<OTHER-PROPERTY-AND-INVEST> 34,205
<TOTAL-CURRENT-ASSETS> 128,922
<TOTAL-DEFERRED-CHARGES> 350,217
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 927,308
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (310)
<RETAINED-EARNINGS> 34,118
<TOTAL-COMMON-STOCKHOLDERS-EQ> 222,508
15,000
39,105
<LONG-TERM-DEBT-NET> 288,324
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 487
5,800
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 5,847
<OTHER-ITEMS-CAPITAL-AND-LIAB> 350,237
<TOT-CAPITALIZATION-AND-LIAB> 927,308
<GROSS-OPERATING-REVENUE> 163,489
<INCOME-TAX-EXPENSE> 15,231
<OTHER-OPERATING-EXPENSES> 124,473
<TOTAL-OPERATING-EXPENSES> 139,437
<OPERATING-INCOME-LOSS> 24,052
<OTHER-INCOME-NET> 1,247
<INCOME-BEFORE-INTEREST-EXPEN> 25,299
<TOTAL-INTEREST-EXPENSE> 10,886
<NET-INCOME> 14,413
2,313
<EARNINGS-AVAILABLE-FOR-COMM> 12,100
<COMMON-STOCK-DIVIDENDS> 65,362
<TOTAL-INTEREST-ON-BONDS> 19,187
<CASH-FLOW-OPERATIONS> 59,705
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
