FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 NOVEMBER 9, 1999
----- -----------------------
FirstEnergy Corp., $.10 par value 233,023,987
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 10-14
Ohio Edison Company
Consolidated Statements of Income 15
Consolidated Balance Sheets 16-17
Consolidated Statements of Cash Flows 18
Report of Independent Public Accountants 19
Management's Discussion and Analysis of Results of
Operations and Financial Condition 20-23
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 24
Consolidated Balance Sheets 25-26
Consolidated Statements of Cash Flows 27
Report of Independent Public Accountants 28
Management's Discussion and Analysis of Results of
Operations and Financial Condition 29-31
The Toledo Edison Company
Consolidated Statements of Income 32
Consolidated Balance Sheets 33-34
Consolidated Statements of Cash Flows 35
Report of Independent Public Accountants 36
Management's Discussion and Analysis of Results of
Operations and Financial Condition 37-39
Pennsylvania Power Company
Consolidated Statements of Income 40
Consolidated Balance Sheets 41-42
Consolidated Statements of Cash Flows 43
Report of Independent Public Accountants 44
Management's Discussion and Analysis of Results of
Operations and Financial Condition 45-47
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 unaudited 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 preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make periodic estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenue and expenses. Actual results could differ from those estimates.
The reported results of operations are not indicative of results of
operations for any future period. Certain prior year amounts have been
reclassified to conform with the current year presentation.
The sole assets of the subsidiary trust that is the obligor on
the preferred securities included in FirstEnergy's and OE's
capitalization are $123,711,350 principal amount of 9% Junior
Subordinated Debentures of OE due December 31, 2025.
2 - COMMITMENTS, 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 $455
million (FirstEnergy-$117 million, OE-$156 million, CEI-$111 million,
TE-$41 million and Penn-$30 million) is applicable to 1999. Investments
for additional nuclear fuel during the 1999-2003 period are estimated to
be approximately $364 million (OE-$128 million, CEI-$118 million, TE-$92
million and Penn-$26 million), of which approximately $51 million (OE-
$23 million, CEI-$14 million, TE-$9 million and Penn-$5 million) applies
to 1999.
STOCK REPURCHASE PROGRAM-
On November 17, 1998, the Board of Directors authorized the
repurchase of up to 15 million shares of FirstEnergy's common stock over
a three-year period beginning in 1999. Repurchases are made on the open
market, at prevailing prices, and will be funded primarily through the
use of operating cash flows. During the third quarter of 1999,
FirstEnergy repurchased and retired 1.5 million shares of its common
stock at an average price of $28.30 per share. During the first nine
months of 1999, FirstEnergy repurchased and retired 4.0 million shares
at an average price of $28.83 per share.
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, which
expires December 31, 1999. As of September 30, 1999, the Companies'
share of the guarantees was $19.9 million (OE-$11.3 million, CEI-$4.4
million, TE-$2.6 million and Penn-$1.6 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.
- 1 -
<PAGE>
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
electricity from lower-emitting plants. In September 1998, the
Environmental Protection Agency (EPA) finalized regulations requiring
additional NOx reductions from the Companies' Ohio and Pennsylvania
facilities by May 2003. The EPA`s NOx Transport Rule imposes uniform
reductions of NOx emissions across a region of twenty-two states and
the District of Columbia, including Ohio and Pennsylvania, based on a
conclusion that such NOx emissions are contributing significantly to
ozone pollution in the eastern United States. In May 1999, the U.S.
Court of Appeals for the D.C. Circuit issued a stay which delays
implementation of EPA's NOx Transport Rule until the Court has ruled on
the merits of various appeals. Under the NOx Transport Rule, each of
the twenty-two states are required to submit revised State
Implementation Plans (SIP) which comply with individual state NOx
budgets established by the EPA contemplating an approximate 85%
reduction in utility plant NOx emissions from projected 2007 emissions.
A proposed Federal Implementation Plan accompanied the NOx Transport
Rule and may be implemented by the EPA in states which fail to revise
their SIP. In another separate but related action, eight states filed
petitions with the EPA under Section 126 of the Clean Air Act seeking
reductions of NOx emissions which are alleged to contribute to ozone
pollution in the eight petitioning states. The EPA suggests that the
Section 126 petitions will be adequately addressed by the NOx Transport
Program, but 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. New Section
126 petitions were filed by New Jersey, Maryland, Delaware and the
District of Columbia in mid-1999 and are still under evaluation by the
EPA. The Companies continue to evaluate their compliance plans and
other compliance options.
The Companies are required to meet federally approved SO2
regulations. Violations of such regulations can result in shutdown of
the generating unit involved and/or civil or criminal penalties of up
to $27,500 for each day the unit is in violation. The EPA has an
interim enforcement policy for SO2 regulations in Ohio that allows for
compliance based on a 30-day averaging period. The Companies cannot
predict what action the EPA may take in the future with respect to the
interim enforcement policy.
In July 1997, the EPA promulgated changes in the National
Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS
for previously unregulated ultra-fine particulate matter. In May 1999,
the U.S. Court of Appeals for the D.C. Circuit remanded both standards
back to the EPA finding constitutional and other defects in the new
NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA
petition for rehearing. The Companies cannot predict the EPA's action
in response to the Court's remand order. The cost of compliance with
these regulations, if they are reinstated, may be substantial and
depends on the manner in which they are ultimately implemented, if at
all, by the states in which the Companies operate affected facilities.
In September 1999, FirstEnergy received, and subsequently in
October 1999, OE and Penn received a citizen suit notification letter
from the New York Attorney General's office alleging Clean Air Act
violations at the W. H. Sammis Plant. FirstEnergy believes the Sammis
Plant is in full compliance with the Clean Air Act, but cannot predict
whether New York will nonetheless file a lawsuit.
On November 3, 1999, the EPA issued Notices of Violation
(NOV) or a Compliance Order to eight utilities covering 32 power
plants, including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-owned
utilities, which included a complaint against OE and Penn in the U.S.
District Court for the Southern District of Ohio. The NOV and complaint
allege violations of the Clean Air Act based on operation and
maintenance of the Sammis Plant dating back to 1984. The complaint
requests permanent injunctive relief to require the installation of
"best available control technology" and civil penalties of up to
$27,500 per day of violation. FirstEnergy believes the NOV and
complaint are without merit. However, FirstEnergy is unable to predict
the outcome of this litigation. Criminal penalties could be imposed if
the Sammis Plant continues to operate without correcting the alleged
violations and a court determines that the allegations are valid. It is
anticipated at this time that the Sammis Plant will continue to operate
while the matter is being decided.
CEI and TE have been named as "potentially responsible
parties" (PRPs) at waste disposal sites which may require cleanup under
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980. Allegations of disposal of hazardous substances at
historical sites and the liability involved, are often unsubstantiated
and subject to dispute. Federal law provides that all PRPs for a
particular site be held liable on a joint and several basis. CEI and TE
have accrued liabilities of $4.6 million and $1.0 million,
respectively, as of September 30, 1999, based on estimates of the costs
- 2 -
<PAGE>
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. All
regulatory approvals were received by October 1999. 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 are being sold by
Duquesne to a wholly owned subsidiary of Orion Power Holdings, Inc.
(Orion). The Companies will continue to operate those plants until the
assets are transferred to the new owners. Duquesne will fund
decommissioning costs equal to its percentage interest in the three
nuclear generating units to be transferred. The asset transfer to
Duquesne is expected to occur in December 1999 and the Duquesne asset
transfer to the Orion subsidiary could take place by the middle of 2000.
Under the agreements, Duquesne will no longer be a participant in the
CAPCO arrangements when the assets are exchanged with Duquesne.
3 - REGULATORY ACCOUNTING:
On July 6, 1999, the Governor of the State of Ohio 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 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.
On October 4, 1999, FirstEnergy, on behalf of OE, CEI and TE,
filed with the PUCO its comprehensive transition plan under the new law.
The plan itemizes the price of electricity into separate components and
details FirstEnergy's strategy to implement corporate separation of its
regulated and nonregulated operations. Under the plan, customers who
remain with OE, CEI, or TE as their generation provider will continue to
receive savings under FirstEnergy's rate plans, expected to total $759
million between 2000 and 2005. In addition, customers will save $358
million through reduced charges for taxes and a five percent reduction
in the price of generation for residential customers beginning January
1, 2001. Customer prices are expected to be frozen through a five-year
market development period (2001-2005), except for certain limited
statutory exceptions including the five percent reduction in the price
of generation for residential customers. The plan proposes recovery of
generation-related transition costs of approximately $4.5 billion ($3.9
billion, net of deferred income taxes) over the market development
period; transition costs related to regulatory assets aggregating
approximately $4.3 billion ($3.0 billion, net of deferred income taxes)
will be recovered over the period of 2001 through early 2005 for OE;
2001 through mid-2008 for TE; and 2001 through mid-2009 for CEI.
The PUCO rejected FirstEnergy's filing on November 4, 1999,
because the PUCO has not yet prescribed the transition plan filing
rules. FirstEnergy will refile its transition plan once those rules have
been established. Despite rejecting FirstEnergy's filing, the PUCO
indicated that it will endeavor to issue its order in this case within
275 days of FirstEnergy's initial filing date. 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 continue to bill and collect
cost-based rates for their transmission and distribution services, which
will remain regulated; accordingly, it is appropriate that the Companies
continue the application of SFAS 71 to those respective operations after
December 31, 2000.
4 - NEW ACCOUNTING STANDARDS:
In June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133." The statement amended
SFAS 133 to make it effective for fiscal years beginning after June 15,
- 3 -
<PAGE>
2000. This represents a one-year deferral from the original effective
date. FirstEnergy expects to adopt SFAS 133 effective January 1, 2001.
SFAS 133 requires derivative instruments to be recognized on the balance
sheet as assets or liabilities at their fair value. FirstEnergy has not
yet quantified the effects of adopting SFAS 133 on its financial
statements. However, SFAS 133 could increase volatility in earnings and
other comprehensive income.
5 - 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)
<S> <C> <C> <C> <C> <C>
September 30, 1999
- ------------------
External revenues $ 1,528 $ 40 $ 164 $ -- $ 1,732
Intersegment revenues 7 22 28 (57) --
Total revenues 1,535 62 192 (57) 1,732
Depreciation and amortization 312 -- 9 -- 321
Net interest charges 136 1 16 (12) 141
Income taxes 114 -- -- -- 114
Net income/Earnings on common stock 186 -- (1) 1 186
Total assets 17,123 72 1,812 (932) 18,075
Property additions 110 -- 5 -- 115
Acquisitions -- -- -- -- --
September 30, 1998
- ------------------
External revenues $ 1,449 $179 $ 94 $ -- $ 1,722
Intersegment revenues 8 23 23 (54) --
Total revenues 1,457 202 117 (54) 1,722
Depreciation and amortization 194 -- 4 -- 198
Net interest charges 148 -- 17 (12) 153
Income taxes 127 (20) 5 -- 112
Net income/Earnings on common stock 191 (29) 4 (3) 163
Total assets 17,619 52 1,692 (952) 18,411
Property additions 67 -- -- -- 67
Acquisitions -- -- 10 -- 10
Nine Months Ended:
- ------------------
September 30, 1999
- ------------------
External revenues $ 4,140 $ 69 $ 465 $ -- $ 4,674
Intersegment revenues 23 43 74 (140) --
Total revenues 4,163 112 539 (140) 4,674
Depreciation and amortization 706 -- 20 -- 726
Net interest charges 421 1 49 (36) 435
Income taxes 312 (2) (1) -- 309
Net income/Earnings on common stock 454 (3) -- (3) 448
Total assets 17,123 72 1,812 (932) 18,075
Property additions 231 -- 59 -- 290
Acquisitions -- -- 9 -- 9
September 30, 1998
- ------------------
External revenues $ 4,008 $403 $ 142 $ -- $ 4,553
Intersegment revenues 24 26 65 (115) --
Total revenues 4,032 429 207 (115) 4,553
Depreciation and amortization 579 -- 7 -- 586
Net interest charges 437 1 51 (37) 452
Income taxes 277 (34) 4 -- 247
Net income/Earnings on common stock 372 (50) -- (6) 316
Total assets 17,619 52 1,692 (952) 18,411
Property additions 185 -- 13 -- 198
Acquisitions -- -- 250 -- 250
</TABLE>
<PAGE>
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<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Electric sales $1,467,619 $1,391,134 $3,964,937 $3,834,689
Other - electric utilities 66,099 66,881 194,426 192,986
Facilities services 133,821 72,061 355,144 108,684
Trading services 40,408 178,958 68,974 403,080
Other 24,444 12,953 90,201 13,604
---------- ---------- ---------- ----------
Total revenues 1,732,391 1,721,987 4,673,682 4,553,043
---------- ---------- ---------- ----------
EXPENSES:
Fuel and purchased power 269,755 291,227 678,385 832,384
Other expenses:
Electric utilities 368,066 366,915 1,158,037 1,074,521
Facilities services 119,798 65,642 332,438 102,335
Trading services 40,208 221,446 73,472 481,881
Other 27,393 11,911 91,563 20,646
Provision for depreciation and
amortization 321,171 198,329 726,403 586,146
General taxes 144,584 138,471 422,144 409,953
---------- ---------- ---------- ----------
Total expenses 1,290,975 1,293,941 3,482,442 3,507,866
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 441,416 428,046 1,191,240 1,045,177
---------- ---------- ---------- ----------
NET INTEREST CHARGES:
Interest expense 125,712 136,204 386,452 409,365
Allowance for borrowed funds used during
construction and capitalized interest (3,410) (2,461) (9,471) (5,129)
Subsidiaries' preferred stock dividends 19,007 19,568 57,767 47,359
---------- ---------- ---------- ----------
Net interest charges 141,309 153,311 434,748 451,595
---------- ---------- ---------- ----------
INCOME TAXES 114,284 111,644 308,626 246,885
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 185,823 163,091 447,866 346,697
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- -- -- (30,522)
---------- ---------- ---------- ----------
NET INCOME $ 185,823 $ 163,091 $ 447,866 $ 316,175
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 226,432 229,482 227,646 225,292
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
Income before extraordinary item $ .82 $ .71 $ 1.97 $ 1.54
Extraordinary item (Net of income taxes) -- -- -- (.14)
----- ----- ------ ------
Net income $ .82 $ .71 $ 1.97 $ 1.40
===== ===== ====== ======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $1.125 $1.125
===== ===== ====== ======
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
</TABLE>
<PAGE>
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<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 115,604 $ 77,798
Receivables-
Customers (less accumulated provisions of $7,783,000
and $6,397,000, respectively, for uncollectible
accounts) 328,979 239,183
Other (less accumulated provisions of $46,962,000 and
$46,251,000, respectively, for uncollectible accounts) 423,361 322,186
Materials and supplies, at average cost-
Owned 116,273 145,926
Under consignment 106,258 110,109
Prepayments and other 163,061 171,931
----------- -----------
1,253,536 1,067,133
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
In service 15,075,021 14,961,664
Less--Accumulated provision for depreciation 6,282,901 6,012,761
----------- -----------
8,792,120 8,948,903
Construction work in progress 240,337 293,671
----------- -----------
9,032,457 9,242,574
----------- -----------
INVESTMENTS:
Capital trust investments 1,283,575 1,329,010
Nuclear plant decommissioning trusts 406,589 358,371
Letter of credit collateralization 277,763 277,763
Other 666,030 453,860
----------- -----------
2,633,957 2,419,004
----------- -----------
DEFERRED CHARGES:
Regulatory assets 2,579,815 2,887,437
Goodwill 2,108,816 2,167,968
Property taxes 270,666 270,666
Other 195,633 199,400
----------- -----------
5,154,930 5,525,471
----------- -----------
$18,074,880 $18,254,182
=========== ===========
</TABLE>
<PAGE>
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<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock $ 1,082,371 $ 876,470
Short-term borrowings 287,631 254,470
Accounts payable 232,180 257,524
Accrued taxes 501,713 401,688
Accrued interest 138,266 141,575
Other 252,082 251,262
----------- -----------
2,494,243 2,182,989
----------- -----------
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized 300,000,000
shares - 233,023,987 and 237,069,087 shares
outstanding, respectively 23,302 23,707
Other paid-in capital 3,734,814 3,846,513
Accumulated comprehensive income (439) (439)
Retained earnings 909,592 718,409
Unallocated employee stock ownership plan common stock -
6,997,705 and 7,406,332 shares, respectively (130,624) (139,032)
----------- -----------
Total common stockholders' equity 4,536,645 4,449,158
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 648,395 660,195
Subject to mandatory redemption 154,996 174,710
OE obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely OE subordinated
debentures 120,000 120,000
Long-term debt 5,817,547 6,352,359
----------- -----------
11,277,583 11,756,422
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,235,541 2,282,864
Accumulated deferred investment tax credits 274,377 286,154
Pensions and other postretirement benefits 537,327 525,647
Other 1,255,809 1,220,106
----------- -----------
4,303,054 4,314,771
----------- -----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ----------- -----------
$18,074,880 $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>
<PAGE>
- 7 -
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 185,823 $ 163,091 $ 447,866 $ 316,175
Adjustments to reconcile net income
to net cash from operating activities-
Provision for depreciation and
amortization 321,171 198,329 726,403 586,146
Nuclear fuel and lease amortization 27,535 21,974 75,484 62,606
Other amortization, net (2,855) (760) (7,109) (10,442)
Deferred income taxes, net (30,421) 3,917 (45,166) (20,290)
Investment tax credits, net (6,856) (5,841) (13,675) (17,180)
Extraordinary item -- -- -- 51,730
Receivables (5,501) (192,236) (165,948) (103,750)
Materials and supplies 26,879 21,275 33,607 11,478
Accounts payable (75,808) (97,985) (26,635) (133,134)
Other 108,621 153,718 9,172 54,401
--------- --------- ---------- ---------
Net cash provided from operating
activities 548,588 265,482 1,033,999 797,740
--------- --------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock -- -- -- 203,855
Long-term debt 84,331 10,151 277,696 272,556
Ohio Schools Council prepayment program -- -- -- 116,598
Short-term borrowings, net 54,353 145,612 29,625 37,169
Redemptions and Repayments-
Common stock 41,035 -- 116,610 --
Preferred stock 11,920 6,000 33,409 21,379
Long-term debt 525,532 209,963 618,540 559,874
Common stock dividend payments 85,247 86,040 256,683 253,017
--------- --------- ---------- ---------
Net cash used for financing
activities 525,050 146,240 717,921 204,092
--------- --------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 114,873 76,614 298,549 447,838
Cash investments (71) (205) (41,276) 111,405
Other 19,665 (3,873) 20,999 14,971
--------- --------- ---------- ---------
Net cash used for investing
activities 134,467 72,536 278,272 574,214
--------- --------- ---------- ---------
Net increase (decrease) in cash and
cash equivalents (110,929) 46,706 37,806 19,434
Cash and cash equivalents at beginning
of period 226,533 70,965 77,798 98,237
--------- --------- ---------- ---------
Cash and cash equivalents at end of period $ 115,604 $ 117,671 $ 115,604 $ 117,671
========= ========= ========== =========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
</TABLE>
<PAGE>
- 8 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FirstEnergy Corp.:
We have reviewed the accompanying consolidated balance sheet of
FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of
September 30, 1999, and the related consolidated statements of income
and cash flows for the three-month and nine-month periods ended
September 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
November 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 $1.97 per share for the nine-month period ended September
30, 1999, from $1.40 per share for the same period last year. For the
third quarter of 1999, earnings increased to $.82 per share, from $.71
per share in the third 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. These sources of improved
earnings were partially offset by increased accelerated depreciation
and amortization of nuclear and regulatory assets under OE's rate plan.
Also, 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 $10.4 million in the third quarter of 1999
and $120.6 million during the nine-month period ended September 30,
1999 as compared to the same periods in 1998. The revenue increases
resulted primarily from the 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 the current quarter and nine-month period revenues,
compared to the corresponding periods of 1998, are summarized in the
following table.
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
------ ------
(In millions)
<S> <C> <C>
Electric sales $ 76.5 $ 130.2
Other electric utility revenues (0.8) 1.4
------- -------
EUOC 75.7 131.6
FETS (138.6) (334.1)
New businesses acquired 58.5 285.4
Unregulated electric sales 14.8 37.7
------- -------
Net Revenue Increase $ 10.4 $ 120.6
======= =======
</TABLE>
Growth in the Company's consolidated kilowatt-hour sales,
consisting of regulated electric sales (EUOC) and unregulated electric
sales has been a significant factor in the overall net increase of
revenues in the current quarter and the nine months of 1999, compared
to the corresponding periods of 1998. Consolidated retail kilowatt-hour
sales increased 7.5% in the third quarter of 1999, with sales to
residential, commercial and industrial customers increasing 6.2%, 13.6%
and 4.2%, respectively. For the first nine months, retail sales
increased 6.5%, compared to the same period in 1998, with residential,
commercial and industrial customers all contributing to the improved
results with sales increases of 6.8%, 12.1% and 2.6%, respectively.
Total sales increased 10.7% for the quarter and 6.3% for the nine-month
period as compared to the prior year.
The increases in EUOC revenues for the third quarter and the
nine-month period as compared to the prior year resulted from
additional EUOC kilowatt-hour sales, which were partially offset by
reduced unit prices. Residential, commercial and industrial customers
all contributed to the additional EUOC kilowatt-hour sales with
increases of 6.3%, 4.9% and 4.4%, respectively, for the current quarter
of 1999 and increases of 6.9%, 4.1% and 2.4%, respectively, for the
nine-month period. Growth of the EUOC customer base and increased use
of electricity per customer stimulated by a strong consumption-driven
- 10 -
<PAGE>
economy, continued to expand residential and commercial kilowatt-hour
sales. Industrial consumption of electricity also benefited from the
strong economy. Sales to industrial customers experienced additional
volume in the third quarter of 1999, compared to the same period last
year, due to a labor strike in 1998 experienced by a major customer in
the automotive sector. In total, retail sales increased 5.1% in the
third quarter of 1999 and 4.2% for the first nine months of 1999 as
compared to the same periods in 1998. Overall, EUOC kilowatt-hour sales
increased 8.5% in the third quarter of 1999 and 4.2% for the first nine
months of the current year from the corresponding periods of 1998.
Contributing to the increases were sales to the wholesale market in the
current quarter, which increased 39.9% from the third quarter of 1998.
The decreases in FETS revenues for the current year quarter
and nine-month period compared to the prior year resulted from a
refocus of trading activities in the support of FirstEnergy's retail
marketing activities. Acquisition of facilities services companies and
sales of electricity to the unregulated market by Penn Power Energy and
FirstEnergy Services Corp. contributed to the significant increase in
other revenues for both the third quarter and nine-month periods of
1999. The purchase of MARBEL Energy Corporation (MARBEL) also added to
the increase in the current nine-month period revenues from the prior
year, but was not a contributing factor to the third quarter increase.
Total expenses decreased $3.0 million in the third quarter
and were $25.4 million lower in the first nine months of 1999 compared
to the corresponding periods of 1998. Contributing to this overall
reduction in expenses were EUOC purchased power costs which were down
$23.0 million in the third quarter of 1999 and $152.1 million lower in
the first nine months of 1999. Much of the improvement occurred in the
second quarter due to the absence of unusual conditions experienced in
1998, which resulted in an additional $77.4 million of purchased power
costs. Those costs were incurred during a period of record heat and
humidity in late June 1998, which coincided with a regional power
shortage resulting in high prices for purchased power. Unscheduled
outages at several of the Companies' power plants at that time required
the Companies to purchase significant amounts of power on the spot
market. The outage at the Beaver Valley Plant continued as well for
most of the third quarter of 1998. Although above normal temperatures
were also experienced in 1999, the Companies maintained a stronger
capacity position this year compared to 1998.
Other expenses for the EUOCs increased only slightly in the
third quarter of 1999 from the same period last year, while increasing
$83.5 million in the nine-month period from the corresponding period in
1998. Higher nuclear expenses due to refueling outages at Beaver Valley
Unit 2 and the Perry Plant; increased customer and sales expenses
resulting from marketing programs and information system requirements;
and higher distribution expenses, from storm damage, line and meter
maintenance all contributed to the year-to-date increase in other EUOC
expenses.
Reduced FETS activity resulted in significant cost reductions
in that business segment for both the third quarter and nine-month
period of 1999 when compared to the same periods of 1998. Also, FETS
expenses for the nine-month period of 1998 included credit losses
resulting from the effects of unprecedented market prices for power in
that year. The increase in other expenses was primarily due to the
expansion of the facilities services business through additional
acquisitions, the purchase of MARBEL and costs attributable to
unregulated sales activity.
Accelerated cost recovery in connection with the OE rate plan
was the primary factor contributing to the increase in depreciation and
amortization in the third quarter and year-to-date periods of 1999 from
the same periods of 1998. Accelerated depreciation and amortization
increased $116 million in the third quarter and $121 million in the
first nine months of 1999 from the corresponding periods last year.
General taxes increased for both the third quarter and year-to-date
periods of 1999 primarily due to increases in the gross receipts tax,
Ohio property tax and payroll taxes.
Interest expenses decreased in the third quarter and first
nine months 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, as a result of 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 quarter of 1999, capital requirements for property
additions and capital leases are expected to be about $161 million,
including $4 million for nuclear fuel. The Companies have additional
cash requirements of approximately $86.6 million (excluding an OE
revolving credit agreement) to meet sinking fund requirements for
- 11 -
<PAGE>
preferred stock and maturing long-term debt during the fourth quarter
of 1999. These cash requirements are expected to be satisfied with
internal cash and/or short-term credit arrangements.
During the third quarter of 1999, the Company repurchased 1.5
million shares of its common stock at an average price of $28.30 per
share - bringing its total repurchases to 4.0 million shares, through
September 30, 1999, at an average price of $28.83 per share.
As of September 30, 1999, the Company and its subsidiaries
had about $115.6 million of cash and temporary investments and $287.6
million of short-term indebtedness. Unused borrowing capability
included $96.0 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.
On July 26, 1999, CEI completed its purchase of the remaining
20 percent interest in the Seneca pumped storage hydroelectric
generation plant from General Public Utilities for $43 million. The
purchase makes available 84 megawatts of additional capacity and
provides the Company full ownership of the plant.
On August 17, 1999, FirstEnergy Services Corporation (FSC), a
wholly owned subsidiary, signed a Master Energy Services and Supply
Agreement with Republic Technologies International, Inc. (RTI). The
agreement could produce more than $1 billion in sales over the five-
year contract period. Over the next five years FSC will manage: the
supply and delivery of all of RTI's electricity and natural gas needs;
RTI's heating, ventilation and air-conditioning requirements; and other
energy-related services for RTI.
The Company and Range Resources Corporation formed a joint
venture, Great Lakes Energy Partners, LLC, on September 30, 1999. This
joint venture combined each company's Appalachian oil and natural gas
properties and related gas gathering and transportation systems with
the objective of lowering operating costs, and increasing natural gas
market share in the Appalachian Basin. As exclusive marketing agent for
the new joint venture, the Company continues to expand its network of
gas assets to supply its retail customer base.
On October 5, 1999, FirstEnergy completed the acquisition of
Columbus, Ohio-based Volunteer Energy LLC (Volunteer), formerly a
retail natural gas subsidiary of The Williams Cos. Volunteer serves
about 30,000 business and residential customers in the Midwest and had
approximately $150 million of revenues in 1998. On November 5, 1999,
FirstEnergy also completed its acquisition of Belden Energy Services
Company (Belden), based in North Canton, Ohio. Belden was formerly a
retail natural gas subsidiary of Belden & Blake Corporation. The newly
acquired company serves about 600 business customers in Ohio and had
approximately $44 million of revenues in 1998. The two acquisitions
further expand FirstEnergy's retail natural gas business in Ohio and
surrounding states, bringing FirstEnergy's total annual retail gas
revenues to approximately $500 million.
Regulatory Matters
- ------------------
In early October, the Company filed its comprehensive
transition plan under the new Ohio electricity restructuring law (see
Note 3). The law is designed to facilitate the transition of Ohio's
electric utility industry from a regulated environment to a competitive
market in the generation of electricity. The Company's plan itemizes
the price of electricity into separate components -- primarily
generation, transmission, distribution and transition charges - and
details the Company's strategy to implement corporate separation of its
regulated and nonregulated operations. The plan proposes recovery of
generation-related transition costs of approximately $8.8 billion ($6.9
billion, net of deferred income taxes). Of that amount, approximately
$4.5 billion ($3.9 billion net of deferred income taxes) would be
recovered over the five-year market development period (2001-2005).
Under the proposed plan, the remainder would be recovered from 2001-
2009 -- 2001 through early 2005 for OE; 2001 through mid-2008 for TE;
and 2001 through mid-2009 for CEI. Current rates will be frozen during
the market development period, except for certain limited statutory
exceptions including a 5% reduction in the generation component of
residential customers' rates. On November 4, 1999, the PUCO rejected
FirstEnergy's filing because the PUCO has not yet prescribed the
transition plan filing rules. The Company will refile its transition
plan once those rules have been established. Despite rejecting
FirstEnergy's filing, the PUCO indicated that it will endeavor to issue
its order in this case within 275 days of the Company's initial filing
date. 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.
- 12 -
<PAGE>
All regulatory approvals have been received for the transfer
of generating assets between the Company and Duquesne, which is
intended to be a tax-free asset exchange. When completed in
December 1999, the transaction will provide FirstEnergy with exclusive
ownership and operating control of all generating assets that are
currently jointly owned and operated under the CAPCO agreement (see
Note 2, "Pending Exchange of Assets").
Environmental Matters
- ---------------------
In September 1999, FirstEnergy received, and subsequently in
October 1999, OE and Penn received a citizen suit notification letter
from the New York Attorney General's office alleging Clean Air Act
violations at the W. H. Sammis Plant. FirstEnergy believes the Sammis
Plant is in full compliance with the Clean Air Act, but cannot predict
whether New York will nonetheless file a lawsuit.
On November 3, 1999, the EPA issued Notices of Violation
(NOV) or a Compliance Order to eight utilities covering 32 power
plants, including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-owned
utilities, which included a complaint against OE and Penn in the U.S.
District Court for the Southern District of Ohio. The NOV and complaint
allege violations of the Clean Air Act based on operation and
maintenance of the Sammis Plant dating back to 1984. The complaint
requests permanent injunctive relief to require the installation of
"best available control technology" and civil penalties of up to
$27,500 per day of violation. FirstEnergy believes the NOV and
complaint are without merit. However, FirstEnergy is unable to predict
the outcome of this litigation. Criminal penalties could be imposed if
the Sammis Plant continues to operate without correcting the alleged
violations and a court determines that the allegations are valid. It is
anticipated at this time that the Sammis Plant will continue to operate
while the matter is being decided.
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.
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 (PPUC) 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 contacted all its key suppliers and does not
anticipate any service interruptions with them based on the information
they have provided. Further, the Company has reviewed its stocking
levels of critical supplies and has determined the appropriate stocking
levels to maintain approaching the year 2000. The Company has initiated
- 13 -
<PAGE>
actions to ensure that these materials are at the required levels
consistent with the assumptions in its contingency plan.
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 uses both internal and external resources to
reprogram and/or replace and test its software for Year 2000
modifications. Of the $87.1 million total project cost, approximately
$69.5 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 $17.6 million will be
expensed as incurred. As of September 30, 1999, the Company had spent
$67.7 million for Year 2000 capital projects and had expensed
approximately $15.0 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.
- 14 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $770,518 $696,226 $2,050,365 $1,912,689
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 143,486 146,194 364,951 413,242
Nuclear operating costs 64,547 69,723 213,862 210,632
Other operating costs 103,398 113,769 321,454 314,033
-------- -------- ---------- ----------
Total operation and maintenance
expenses 311,431 329,686 900,267 937,907
Provision for depreciation and
amortization 228,775 109,920 457,330 327,146
General taxes 61,890 59,714 185,712 178,208
Income taxes 48,120 56,222 137,787 123,963
-------- -------- ---------- ----------
Total operating expenses and taxes 650,216 555,542 1,681,096 1,567,224
-------- -------- ---------- ----------
OPERATING INCOME 120,302 140,684 369,269 345,465
OTHER INCOME 10,179 12,589 32,577 36,857
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 130,481 153,273 401,846 382,322
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 44,583 47,258 135,888 140,255
Allowance for borrowed funds used during
construction and capitalized interest (1,041) (363) (3,023) (1,492)
Other interest expense 6,510 7,811 24,293 26,696
Subsidiaries' preferred stock dividend
requirements 3,831 3,857 11,544 11,570
-------- -------- ---------- ----------
Net interest charges 53,883 58,563 168,702 177,029
-------- -------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 76,598 94,710 233,144 205,293
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- -- -- (30,522)
-------- -------- ---------- ----------
NET INCOME 76,598 94,710 233,144 174,771
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,914 3,020 8,740 9,057
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 73,684 $ 91,690 $ 224,404 $ 165,714
======== ======== ========== ==========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an
integral part of these statements.
</TABLE>
<PAGE>
- 15 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service $8,250,044 $8,158,763
Less--Accumulated provision for depreciation 3,776,557 3,610,155
---------- ----------
4,473,487 4,548,608
---------- ----------
Construction work in progress-
Electric plant 173,728 174,418
Nuclear fuel 1,154 17,003
---------- ----------
174,882 191,421
---------- ----------
4,648,369 4,740,029
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 470,928 475,087
Nuclear plant decommissioning trusts 144,734 130,572
Letter of credit collateralization 277,763 277,763
Other 424,587 407,839
---------- ----------
1,318,012 1,291,261
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 10,955 33,213
Receivables-
Customers (less accumulated provisions of $7,783,000
and $6,397,000, respectively, for uncollectible accounts) 289,985 215,257
Associated companies 216,856 229,854
Other 50,882 47,684
Materials and supplies, at average cost-
Owned 52,021 76,756
Under consignment 50,042 48,341
Prepayments and other 74,960 78,618
---------- ----------
745,701 729,723
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,643,333 1,913,808
Property taxes 101,360 101,360
Unamortized sale and leaseback costs 86,349 90,098
Other 65,838 57,547
---------- ----------
1,896,880 2,162,813
---------- ----------
$8,608,962 $8,923,826
========== ==========
</TABLE>
<PAGE>
- 16 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
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 474,249 583,144
---------- ----------
Total common stockholder's equity 2,572,978 2,681,873
Preferred stock-
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 5,000 10,000
Preferred stock of consolidated subsidiary-
Not subject to mandatory redemption 39,105 50,905
Subject to mandatory redemption 15,000 15,000
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely OE
subordinated debentures 120,000 120,000
Long-term debt 1,974,219 2,215,042
---------- ----------
4,887,267 5,253,785
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 589,348 528,792
Short-term borrowings-
Associated companies 101,867 88,732
Other 239,382 249,451
Accounts payable-
Associated companies 36,593 10,176
Other 53,327 89,483
Accrued taxes 264,222 188,295
Accrued interest 42,970 45,221
Other 120,333 114,162
---------- ----------
1,448,042 1,314,312
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,502,368 1,601,887
Accumulated deferred investment tax credits 147,163 154,538
Pensions and other postretirement benefits 144,302 136,856
Other 479,820 462,448
---------- ----------
2,273,653 2,355,729
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$8,608,962 $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>
<PAGE>
- 17 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,598 $ 94,710 $233,144 $ 174,771
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 228,775 109,920 457,330 327,146
Nuclear fuel and lease amortization 10,718 8,244 32,131 21,590
Deferred income taxes, net (55,793) (13,903) (86,548) (63,561)
Investment tax credits, net (5,320) (3,897) (9,204) (11,345)
Extraordinary item -- -- -- 51,730
Receivables (60,020) (166,506) (64,928) (208,382)
Materials and supplies 25,799 6,512 23,034 11,092
Accounts payable (47,709) 76,043 (9,739) 185,633
Other 104,710 60,949 72,565 106,535
--------- --------- -------- ---------
Net cash provided from operating
activities 277,758 172,072 647,785 595,209
--------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 2,936 10,039 161,451 117,499
Short-term borrowings, net -- -- 3,066 3,956
Redemptions and Repayments-
Preferred stock 10,920 5,000 17,005 5,000
Long-term debt 329,094 4,522 348,234 286,157
Short-term borrowings, net 86,754 79,581 -- --
Dividend Payments-
Common stock -- 44,597 333,603 254,379
Preferred stock 2,611 3,093 8,437 8,952
--------- --------- -------- ---------
Net cash used for financing activities 426,443 126,754 542,762 433,033
--------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 45,736 36,793 140,523 125,163
Other (21,040) (1,767) (13,242) (1,645)
--------- --------- -------- ---------
Net cash used for investing activities 24,696 35,026 127,281 123,518
--------- --------- -------- ---------
Net increase (decrease) in cash and cash
equivalents (173,381) 10,292 (22,258) 38,658
Cash and cash equivalents at beginning of
period 184,336 33,046 33,213 4,680
--------- --------- -------- ---------
Cash and cash equivalents at end of period $ 10,955 $ 43,338 $ 10,955 $ 43,338
========= ========= ======== =========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an
integral part of these statements.
</TABLE>
<PAGE>
- 18 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ohio Edison Company:
We have reviewed the accompanying consolidated balance sheet of Ohio
Edison Company (an Ohio corporation and wholly owned subsidiary of
FirstEnergy Corp.) and subsidiaries as of September 30, 1999, and the
related consolidated statements of income and cash flows for the three-
month and nine-month periods ended September 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
November 9, 1999
- 19 -
<PAGE>
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Earnings on common stock declined to $73.7 million in the
third quarter of 1999 from $91.7 million in the third quarter of 1998.
Higher operating revenues and lower operation and maintenance expenses
were more than offset by increased accelerated depreciation and
amortization of nuclear and regulatory assets under the OE rate plan.
For the nine-month period ended September 30, 1999, earnings increased
to $224.4 million from $165.7 million in the same period of last year.
Year-to-date earnings in 1998 included an extraordinary charge of $30.5
million resulting from Penn's discontinued application of SFAS 71 to its
generation business.
Operating revenues increased $74.3 million in the third
quarter and $137.7 million in the first nine months of 1999, compared
to the same periods in 1998. Higher third 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 during the third quarter
of 1999, with increases of 11.9%, 11.7% and 9.9%, respectively.
Overall, retail kilowatt-hour sales increased 11.1%. Sales to wholesale
customers were 38.4% higher and combined with the additional retail
sales to generate a 15.6% increase in total kilowatt-hour sales. Sales
to industrial customers experienced additional volume in the current
quarter, compared to the same period last year, due to a labor strike
in 1998 experienced by a major customer in the automotive sector. For
the first nine months of 1999, residential, commercial and industrial
sales increased 8.8%, 9.4% and 3.5%, respectively, compared to the same
period in 1998. Retail kilowatt-hour sales increased 6.8% and total
kilowatt-hour sales increased 8.5%, benefited by a 16.9% increase in
sales to wholesale customers. Growth of the OE companies' customer base
and increased use of electricity per customer stimulated by a strong
consumption-driven economy continued to expand residential and
commercial kilowatt-hour sales. Additionally, kilowatt-hour sales by
Penn's nonregulated affiliate, Penn Power Energy, Inc., contributed to
the increase in the OE companies' commercial sales. Industrial
consumption of electricity also benefited from the strong economy.
Operation and maintenance expenses decreased $18.3 million in
the third quarter and were $37.6 million lower in the first nine months
of 1999 compared to the corresponding periods of 1998. Fuel and
purchased power costs were lower in both the third quarter and nine-
month periods of 1999 than the corresponding periods of 1998, primarily
due to lower purchased power costs. Much of the reduction in the
current nine-month period was due to the absence of unusual conditions
experienced in June 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 higher prices for purchased power.
Unscheduled outages at Beaver Valley Units 1 and 2 reduced the OE
companies' production capabilities to the point that they purchased
significant amounts of power during that period. In addition, the
Beaver Valley Plant remained out of service through most of the third
quarter of 1998. Although above normal temperatures were also
experienced in 1999, OE maintained a stronger capacity position this
year compared to 1998, which reduced the need for purchased power.
Nuclear operating costs were lower in the third quarter of
1999, compared to the third quarter of 1998, primarily reflecting
reduced costs at the Beaver Valley Plant. However, costs for the first
nine months of 1999 remained slightly higher due to expenses associated
with the refueling outages at Beaver Valley Unit 2 and the Perry Plant
during the first half of 1999. Other operating costs were lower
primarily as a result of lower fossil production costs due in part to
expenditures incurred last year for outages at the Mansfield and Sammis
Plants. However, in the first nine months of 1999 other operating costs
increased from the year-to-date period of last year primarily as a
result of higher customer and sales expenses including expenditures for
energy marketing programs, information systems requirements and other
customer-related costs.
Depreciation and amortization in the third quarter and year-
to-date periods of 1999 increased from the same periods 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 $173.5 million in
the third quarter of 1999, up from $57.7 million in the third quarter
of the previous year. In the first nine months of 1999, total
accelerated depreciation and amortization under the regulatory plans
was $282.4 million, compared to $161.7 million in the first nine months
of 1998. General taxes increased for both the third quarter and year-
to-date periods of 1999, compared to 1998, primarily due to increases
in the gross receipts tax, Ohio property tax and payroll taxes. A
higher tax base and increased rates produced the increase in property
taxes.
- 20 -
<PAGE>
Net interest charges decreased in the third quarter and first
nine months of 1999 primarily due to refinancings and redemptions of
long-term debt.
Capital Resources and Liquidity
- -------------------------------
The OE companies have continuing cash requirements for
planned capital expenditures and debt maturities. During the fourth
quarter of 1999, capital requirements for property additions and
capital leases are expected to be about $72 million, including $4
million for nuclear fuel. The OE companies have additional cash
requirements of approximately $3.5 million (excluding an OE revolving
credit agreement) to meet sinking fund requirements for maturing long-
term debt during the fourth quarter of 1999. These requirements are
expected to be satisfied with internal cash and/or short-term credit
arrangements.
As of September 30, 1999, the OE companies had approximately
$11.0 million of cash and temporary investments and $341.2 million of
short-term indebtedness. In addition, the OE companies' unused
borrowing capability included $41.0 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 September 30, 1999, the OE companies would
have been permitted to issue up to $1.1 billion of additional first
mortgage bonds on the basis of bondable property additions and retired
bonds.
Regulatory Matters
- ------------------
In early October, FirstEnergy filed a comprehensive
transition plan for OE under the new Ohio electricity restructuring law
(see Note 3). The law is designed to facilitate the transition of
Ohio's electric utility industry from a regulated environment to a
competitive market in the generation of electricity. OE's plan itemizes
the price of electricity into separate components -- primarily
generation, transmission, distribution and transition charges - and
details FirstEnergy's strategy to implement corporate separation of
OE's regulated and nonregulated operations. The plan proposes recovery
of transition costs of approximately $3.3 billion ($2.5 billion, net of
deferred income taxes). All of that amount is estimated to be recovered
over the five-year market development period (2001-2005). Current rates
will be frozen during the market development period except for certain
limited statutory exceptions including a 5% reduction in the generation
component of residential customers' rates. On November 4, 1999, the
PUCO rejected FirstEnergy's filing because the PUCO has not yet
prescribed the transition plan filing rules. FirstEnergy will refile its
transition plan once those rules have been established. Despite
rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor
to issue its order in this case within 275 days of FirstEnergy's initial
filing date. If the transition plan ultimately approved by the PUCO for
OE does not provide adequate recovery of OE's nuclear generating unit
investments and regulatory assets, there would be a charge to earnings
which could have a material adverse effect on OE's results of operations
and financial condition.
All regulatory approvals have been received for the transfer
of generating assets between FirstEnergy and Duquesne, which is
intended to be a tax-free asset exchange. When completed in December
1999, the transaction will provide FirstEnergy with exclusive ownership
and operating control of all generating assets that are currently
jointly owned and operated under the CAPCO agreement (see Note 2,
"Pending Exchange of Assets").
Environmental Matters
- ---------------------
In September 1999, FirstEnergy received, and subsequently in
October 1999, the OE companies received a citizen suit notification
letter from the New York Attorney General's office alleging Clean Air
Act violations at the W. H. Sammis Plant. FirstEnergy believes the
Sammis Plant is in full compliance with the Clean Air Act, but cannot
predict whether New York will nonetheless file a lawsuit.
On November 3, 1999, the EPA issued Notices of Violation
(NOV) or a Compliance Order to eight utilities covering 32 power
plants, including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-owned
utilities, which included a complaint against the OE companies in the
U.S. District Court for the Southern District of Ohio. The NOV and
complaint allege violations of the Clean Air Act based on operation and
maintenance of the Sammis Plant dating back to 1984. The complaint
requests permanent injunctive relief to require the installation of
"best available control technology" and civil penalties of up to
$27,500 per day of violation. FirstEnergy believes the NOV and
complaint are without merit. However, FirstEnergy is unable to predict
the outcome of this litigation. Criminal penalties could be imposed if
the Sammis Plant continues to operate without correcting the alleged
- 21 -
<PAGE>
violations and a court determines that the allegations are valid. It is
anticipated at this time that the Sammis Plant will continue to operate
while the matter is being decided.
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 results of
their remediation and testing efforts, the OE companies filed documents
with the North American Electric Reliability Council, Nuclear
Regulatory Commission, PUCO and 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,
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 contacted all their key suppliers and
do not anticipate any service interruptions with them based on the
information the suppliers have provided. Further, the OE companies have
reviewed their stocking levels of critical supplies and have determined
the appropriate stocking levels to maintain approaching the year 2000.
The OE companies have initiated actions to ensure that these materials
are at the required levels consistent with the assumptions in their
contingency plans.
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 use both internal and external resources to
reprogram and/or replace and test their software for Year 2000
modifications. Of the $42.6 million total project cost, approximately
$33.6 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 $9.0 million will be
expensed as incurred. As of September 30, 1999, the OE companies have
spent $32.6 million for Year 2000 capital projects and have expensed
approximately $7.6 million for Year 2000-related maintenance activities.
The OE companies' total Year 2000 project costs, 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
- 22 -
<PAGE>
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.
- 23 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $534,503 $514,555 $1,435,297 $1,404,158
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 118,816 127,347 310,400 358,704
Nuclear operating costs 22,978 24,470 92,799 71,367
Other operating costs 88,528 77,633 265,805 233,742
-------- -------- ---------- ----------
Total operation and maintenance
expenses 230,322 229,450 669,004 663,813
Provision for depreciation and
amortization 58,156 59,048 174,154 175,696
General taxes 56,855 55,356 165,497 163,730
Income taxes 50,273 45,598 99,591 88,314
-------- -------- ---------- ----------
Total operating expenses and taxes 395,606 389,452 1,108,246 1,091,553
-------- -------- ---------- ----------
OPERATING INCOME 138,897 125,103 327,051 312,605
OTHER INCOME 1,272 6,227 6,489 10,326
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 140,169 131,330 333,540 322,931
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 52,581 57,072 160,146 177,883
Allowance for borrowed funds used
during construction (425) (664) (1,158) (1,620)
Other interest expense (credit) 48 (95) (948) (2,821)
-------- -------- ---------- ----------
Net interest charges 52,204 56,313 158,040 173,442
-------- -------- ---------- ----------
NET INCOME 87,965 75,017 175,500 149,489
PREFERRED STOCK DIVIDEND REQUIREMENTS 8,230 8,547 25,312 17,053
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 79,735 $ 66,470 $ 150,188 $ 132,436
======== ======== ========== ==========
<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>
<PAGE>
- 24 -
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service $4,702,049 $4,648,725
Less--Accumulated provision for depreciation 1,711,141 1,631,974
---------- ----------
2,990,908 3,016,751
---------- ----------
Construction work in progress-
Electric plant 36,197 42,428
Nuclear fuel 416 14,864
---------- ----------
36,613 57,292
---------- ----------
3,027,521 3,074,043
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 517,256 543,161
Nuclear plant decommissioning trusts 143,396 125,050
Other 26,899 21,059
---------- ----------
687,551 689,270
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 29,403 19,526
Receivables-
Customers 19,070 16,588
Associated companies 16,640 15,636
Other 200,985 142,834
Notes receivable from associated companies -- 53,509
Materials and supplies, at average cost-
Owned 35,558 38,213
Under consignment 36,044 43,620
Prepayments and other 51,385 58,342
---------- ----------
389,085 388,268
---------- ----------
DEFERRED CHARGES:
Regulatory assets 541,450 555,925
Goodwill 1,442,721 1,471,563
Property taxes 126,464 126,464
Other 12,935 12,650
---------- ----------
2,123,570 2,166,602
---------- ----------
$6,227,727 $6,318,183
========== ==========
</TABLE>
<PAGE>
- 25 -
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, without par value, authorized
105,000,000 shares - 79,590,689 shares outstanding $ 931,962 $ 931,962
Retained earnings 71,996 76,276
---------- ----------
Total common stockholder's equity 1,003,958 1,008,238
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 134,996 149,710
Long-term debt 2,684,211 2,888,202
---------- ----------
4,061,490 4,284,475
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 331,039 208,050
Accounts payable-
Associated companies 64,216 47,680
Other 44,674 67,929
Notes payable to associated companies 42,237 80,618
Accrued taxes 232,643 192,359
Accrued interest 65,486 66,685
Other 37,974 58,585
---------- ----------
818,269 721,906
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 556,093 524,285
Accumulated deferred investment tax credits 87,986 90,946
Pensions and other postretirement benefits 214,704 217,719
Other 489,185 478,852
---------- ----------
1,347,968 1,311,802
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$6,227,727 $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>
<PAGE>
- 26 -
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 87,965 $ 75,017 $175,500 $ 149,489
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 58,156 59,048 174,154 175,696
Nuclear fuel and lease amortization 8,830 8,154 24,801 24,510
Other amortization (2,855) (593) (7,109) (10,010)
Deferred income taxes, net 17,472 1,750 26,348 27,582
Investment tax credits, net (986) (1,296) (2,960) (3,889)
Receivables 44,144 (44,448) (61,637) (132,016)
Materials and supplies 1,139 13,684 10,231 2,962
Accounts payable (34,572) (58,965) (6,719) (31,461)
Accrued taxes 46,014 76,357 40,284 44,024
Other 13,023 (5,332) (26,355) (36,757)
-------- --------- -------- --------
Net cash provided from operating
activities 238,330 123,376 346,538 210,130
-------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 26,459 -- 26,459 5,822
Ohio Schools Council prepayment program -- -- -- 116,598
Short-term borrowings, net -- 30,528 -- 4,036
Redemptions and Repayments-
Preferred stock 1,000 1,000 14,714 14,714
Long-term debt 89,424 172,192 113,438 198,773
Short-term borrowings, net 13,653 -- 38,381 --
Dividend Payments-
Common stock 68,000 28,653 150,974 54,122
Preferred stock 8,230 8,559 25,312 26,300
-------- --------- -------- --------
Net cash used for financing activities 153,848 179,876 316,360 167,453
-------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 55,881 16,327 86,180 43,741
Loans to associated companies -- -- -- 26,628
Loan payments from associated companies -- (110,272) (53,509) --
Capital trust investments (7) 35 (25,905) (31,923)
Other 3,079 24,183 13,535 10,230
-------- --------- -------- --------
Net cash used for (provided from)
investing activities 58,953 (69,727) 20,301 48,676
-------- --------- -------- --------
Net increase (decrease) in cash and cash
equivalents 25,529 13,227 9,877 (5,999)
Cash and cash equivalents at beginning of period 3,874 14,549 19,526 33,775
-------- --------- -------- ---------
Cash and cash equivalents at end of period $ 29,403 $ 27,776 $ 29,403 $ 27,776
======== ========= ======== =========
<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>
<PAGE>
- 27 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Cleveland Electric Illuminating Company:
We have reviewed the accompanying consolidated balance sheet of The
Cleveland Electric Illuminating Company (an Ohio corporation and wholly
owned subsidiary of FirstEnergy Corp.) and subsidiary as of September
30, 1999, and the related consolidated statements of income and cash
flows for the three-month and nine-month periods ended September 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
November 9, 1999
- 28 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues increased $19.9 million in the third
quarter of 1999, and were $31.1 million higher in the first nine months
of 1999, compared to the same periods in 1998. Higher third quarter and
year-to-date operating revenues were the result of increased kilowatt-
hour sales, which were partially offset by reduced unit prices. Total
kilowatt-hour sales increased 7.0% in the current quarter, compared to
the same period of 1998. While retail sales increased only 0.5% in the
third quarter of 1999, kilowatt-hour sales to wholesale customers
increased 86.1% as a result of available power from CEI generating
units and strong weather-induced demand in the wholesale market. Retail
kilowatt-hour sales to residential and commercial customers increased
2.1% and 0.9%, respectively, whereas, sales to industrial customers
decreased 1.1%. In the first nine months of 1999, total kilowatt-hour
sales increased 5.5%, compared to the same period of 1998, benefiting
from a 47.0% rise in sales to wholesale customers and a 2.6% increase
in kilowatt-hour sales to retail customers. Residential and commercial
customers contributed to the higher retail sales, with increases of
6.6% and 2.6%, respectively. Kilowatt-hour sales to industrial
customers were essentially unchanged during the nine-month period.
Operation and maintenance expenses increased only slightly in
the current quarter and were $5.2 million higher in the first nine
months of 1999 compared to the same periods of 1998. Fuel and purchased
power costs were lower in both the third quarter and year-to-date
periods of 1999. An increased mix of nuclear generation in the third
quarter of 1999 reduced fuel costs and was the primary cause of lower
fuel and purchased power costs in that period. However, in this year's
nine-month period, lower purchased power costs was the largest factor.
Most of the year-to-date reduction in purchased power costs was due to
the absence of unusual conditions experienced in June 1998, which
increased the cost during last year's nine-month period. 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 CEI to purchase significant quantities of power on the spot
market during that period. In addition, Beaver Valley Unit 2 remained
out of service through most of the third quarter of 1998. Although
above normal temperatures were also experienced in 1999, CEI maintained
a stronger capacity position this year compared to the prior year.
Therefore, CEI was not only able to reduce its dependence on purchased
power this year, but also took advantage of the strong demand for power
through sales to the wholesale market.
More than offsetting the current year-to-date reduction in
fuel and purchased power costs were increases in nuclear operating
costs and other operating costs. Expenses associated with the refueling
outages at Beaver Valley Unit 2 and the Perry Plant increased nuclear
operating costs in the first nine months of 1999. The increases in
other operating costs in the third quarter and nine-month period of
1999 resulted from higher customer and sales expenses including
expenditures for energy marketing programs, information system
requirements and other customer-related costs.
Lower other income in the third quarter and year-to-date
periods of 1999, compared to the corresponding periods if 1998 was due
primarily to a reduction in interest income.
Net interest charges decreased in the third quarter and first
nine months of 1999 primarily due to refinancings and redemptions of
long-term debt. Preferred stock dividend requirements increased in the
nine-month period ended September 30, 1999, compared to the first nine
months 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 fourth quarter of 1999,
capital requirements for property additions and capital leases are
expected to be about $27 million, with no additional expenditures for
nuclear fuel. CEI has additional cash requirements of approximately
$82.8 million to meet sinking fund requirements for preferred stock and
maturing long-term debt during the fourth quarter of 1999. These
requirements are expected to be satisfied with internal cash and/or
short-term credit arrangements.
As of September 30, 1999, CEI had approximately $29.4 million
of cash and temporary investments and $42.2 million of short-term
indebtedness to affiliated companies. Together with TE, CEI had unused
borrowing capability of $55 million under a FirstEnergy revolving line
of credit at the end of the third quarter of 1999. Under its first
- 29 -
<PAGE>
mortgage indenture, as of September 30, 1999, CEI would have been
permitted to issue up to $509 million of additional first mortgage
bonds on the basis of bondable property additions and retired bonds.
On July 26, 1999, CEI completed its purchase of the remaining
20 percent interest in the Seneca pumped storage hydroelectric
generation plant from General Public Utilities for $43 million. This
purchase makes available 84 megawatts of additional capacity and
provides the Company full ownership of the plant.
Regulatory Matters
- ------------------
In early October, FirstEnergy filed a comprehensive
transition plan for CEI under the new Ohio electricity restructuring
law (see Note 3). The law is designed to facilitate the transition of
Ohio's electric utility industry from a regulated environment to a
competitive market in the generation of electricity. CEI's plan
itemizes the price of electricity into separate components -- primarily
generation, transmission, distribution and transition charges - and
details FirstEnergy's strategy to implement corporate separation of
CEI's regulated and nonregulated operations. The plan proposes recovery
of generation-related transition costs of approximately $3.8 billion
($3.0 billion, net of deferred income taxes). Of that amount,
approximately $1.9 billion ($1.6 billion, net of deferred income taxes)
would be recovered over the five-year market development period (2001-
2005). Under the proposed plan, the remainder is estimated to be
recovered from 2001 through mid-2009. Current rates will be frozen
during the market development period, except for certain limited
statutory exceptions including a 5% reduction in the generation
component of residential customers' rates. On November 4, 1999, the
PUCO rejected FirstEnergy's filing because the PUCO has not yet
prescribed the transition plan filing rules. FirstEnergy will refile its
transition plan once those rules have been established. Despite
rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor
to issue its order in this case within 275 days of FirstEnergy's initial
filing date. If the transition plan ultimately approved by the PUCO for
CEI does not provide adequate recovery of CEI's nuclear generating unit
investments and regulatory assets, there would be a charge to earnings
which could have a material adverse effect on CEI's results of
operations and financial condition.
All regulatory approvals have been received for the transfer
of generating assets between FirstEnergy and Duquesne, which is
intended to be a tax-free asset exchange. When completed in December
1999, the transaction will provide FirstEnergy with exclusive ownership
and operating control of all generating assets that are currently
jointly owned and operated under the CAPCO agreement (see Note 2,
"Pending Exchange of Assets").
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 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
- 30 -
<PAGE>
payable systems were replaced at the end of 1998. CEI'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.
CEI has contacted all its key suppliers and does not
anticipate any service interruptions with them based on the information
they have provided. Further, CEI has reviewed its stocking levels of
critical supplies and has determined the appropriate stocking levels to
maintain approaching the year 2000. CEI has initiated actions to ensure
that these materials are at the required levels consistent with the
assumptions in its contingency plan.
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 uses both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$29.1 million total project cost, approximately $23.4 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 $5.7 million will be expensed as incurred.
As of September 30, 1999, CEI had spent $22.9 million for Year 2000
capital projects and had expensed approximately $4.9 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.
- 31 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $233,697 $253,282 $693,143 $714,116
-------- -------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 51,793 56,708 130,639 164,049
Nuclear operating costs 35,082 40,576 126,208 115,801
Other operating costs 41,974 39,785 119,284 106,626
-------- -------- -------- --------
Total operation and maintenance
expenses 128,849 137,069 376,131 386,476
Provision for depreciation and
amortization 26,112 26,691 78,008 80,047
General taxes 22,532 21,435 66,364 63,393
Income taxes 13,490 16,884 41,699 43,187
-------- -------- -------- --------
Total operating expenses and taxes 190,983 202,079 562,202 573,103
-------- -------- -------- --------
OPERATING INCOME 42,714 51,203 130,941 141,013
OTHER INCOME 2,840 2,674 9,007 9,573
-------- -------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 45,554 53,877 139,948 150,586
-------- -------- -------- --------
NET INTEREST CHARGES:
Interest on long-term debt 20,412 21,524 62,570 66,780
Allowance for borrowed funds used
during construction (254) (344) (860) (927)
Other interest expense (credit) (889) 10 (3,403) (1,089)
-------- -------- -------- --------
Net interest charges 19,269 21,190 58,307 64,764
-------- -------- -------- --------
NET INCOME 26,285 32,687 81,641 85,822
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,034 4,145 12,173 9,680
-------- -------- -------- --------
EARNINGS ON COMMON STOCK $ 22,251 $ 28,542 $ 69,468 $ 76,142
======== ======== ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
</TABLE>
<PAGE>
- 32 -
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service $1,777,714 $1,757,364
Less--Accumulated provision for depreciation 661,991 626,942
---------- ----------
1,115,723 1,130,422
---------- ----------
Construction work in progress-
Electric plant 28,448 26,603
Nuclear fuel 394 11,191
---------- ----------
28,842 37,794
---------- ----------
1,144,565 1,168,216
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 295,391 310,762
Nuclear plant decommissioning trusts 118,459 102,749
Other 5,352 3,656
---------- ----------
419,202 417,167
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 57,418 4,140
Receivables-
Customers 8,948 7,338
Associated companies 20,037 30,006
Other 4,731 31,688
Notes receivable from associated companies 42,237 101,236
Materials and supplies, at average cost-
Owned 22,471 25,745
Under consignment 20,172 18,148
Prepayments and other 23,921 25,647
---------- ----------
199,935 243,948
---------- ----------
DEFERRED CHARGES:
Regulatory assets 395,032 417,704
Goodwill 465,085 474,593
Property taxes 42,842 42,842
Other 6,898 4,295
---------- ----------
909,857 939,434
---------- ----------
$2,673,559 $2,768,765
========== ==========
</TABLE>
<PAGE>
- 33 -
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $5 par value, authorized 60,000,000
shares - 39,133,887 shares outstanding $ 195,670 $ 195,670
Other paid-in capital 328,559 328,559
Retained earnings 39,236 51,463
---------- ----------
Total common stockholder's equity 563,465 575,692
Preferred stock not subject to mandatory redemption 210,000 210,000
Long-term debt 987,767 1,083,666
---------- ----------
1,761,232 1,869,358
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 156,660 130,426
Accounts payable-
Associated companies 32,865 34,260
Other 27,493 38,832
Notes payable to associated companies 151 --
Accrued taxes 44,182 62,288
Accrued interest 23,828 24,965
Other 30,317 35,082
---------- ----------
315,496 325,853
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 166,563 151,321
Accumulated deferred investment tax credits 39,228 40,670
Pensions and other postretirement benefits 120,521 122,314
Other 270,519 259,249
---------- ----------
596,831 573,554
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$2,673,559 $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>
<PAGE>
- 34 -
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
1999 1998 1999 1998
---------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,285 $32,687 $ 81,641 $ 85,822
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 26,112 26,691 78,008 80,047
Nuclear fuel and lease amortization 6,734 5,576 18,552 16,506
Deferred income taxes, net 8,127 1,021 18,432 16,173
Investment tax credits, net (481) (648) (1,442) (1,946)
Receivables (7,202) 1,473 35,316 4,699
Materials and supplies 163 1,578 1,250 (1,929)
Accounts payable (2,964) (9,566) (12,734) (9,680)
Accrued taxes 2,738 7,083 (18,106) 13,556
Other 22,414 26,241 (12,597) (6,449)
-------- ------- -------- --------
Net cash provided from operating
activities 81,926 92,136 188,320 196,799
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 54,929 -- 89,779 3,657
Short-term borrowings, net 151 -- 151 --
Redemptions and Repayments-
Preferred stock -- -- 1,690 1,665
Long-term debt 106,802 33,273 162,427 74,968
Dividend Payments-
Common stock 20,000 15,654 80,351 36,786
Preferred stock 4,034 4,074 12,173 12,309
-------- ------- -------- --------
Net cash used for financing activities 75,756 53,001 166,711 122,071
-------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 8,734 14,518 27,656 29,165
Loans to associated companies -- -- -- 38,793
Loan payments from associated companies (58,136) (5,855) (58,999) --
Capital trust investments (64) (240) (15,371) (2,177)
Other 2,935 13,923 15,045 9,761
-------- ------- -------- -------
Net cash used for (provided from)
investing activities (46,531) 22,346 (31,669) 75,542
-------- ------- -------- -------
Net increase (decrease) in cash and cash
equivalents 52,701 16,789 53,278 (814)
Cash and cash equivalents at beginning of period 4,717 4,567 4,140 22,170
-------- ------- -------- --------
Cash and cash equivalents at end of period $ 57,418 $21,356 $ 57,418 $ 21,356
======== ======= ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
</TABLE>
<PAGE>
- 35 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Toledo Edison Company:
We have reviewed the accompanying consolidated balance sheet of The
Toledo Edison Company (an Ohio corporation and wholly owned subsidiary
of FirstEnergy Corp.) and subsidiary as of September 30, 1999, and the
related consolidated statements of income and cash flows for the three-
month and nine-month periods ended September 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
November 9, 1999
- 36 -
<PAGE>
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues decreased $19.6 million in the third quarter
of 1999, and were $21.0 million lower in the first nine months of 1999,
compared to the same periods in 1998. Increases in kilowatt-hour sales
were more than offset by reduced unit prices. Total kilowatt-hour sales
increased 5.8% in the current quarter, compared to the same period of
1998. While retail sales decreased 1.7% in the third quarter of 1999,
kilowatt-hour sales to wholesale customers increased 47.9% as a result
of available power from TE generating units and strong weather-induced
demand in the wholesale market. Retail kilowatt-hour sales to
residential and commercial customers declined in the third quarter by
8.2% and 6.9%, respectively. However, sales to industrial customers
increased 3.7%. In the first nine months of 1999, total kilowatt-hour
sales increased 7.0%, compared to the same period of 1998, benefiting
from a 45.7% increase in sales to wholesale customers. Retail kilowatt-
hour sales increased 1.1%; sales to industrial customers increased
4.1%. However, residential and commercial customers decreased 0.8% and
3.2%, respectively.
Operation and maintenance expenses decreased $8.2 million in
the third quarter of 1999 and were $10.3 million lower in the first
nine months of 1999, compared to the same periods of 1998. In addition,
fuel and purchased power costs were lower in the third quarter and in
the first nine months of 1999. Most of the year-to-date reduction in
purchased power costs was due to the absence of unusual conditions
experienced in June 1998, which increased the prior year's costs.
Record heat and humidity in late June 1998 coincided with a regional
power shortage resulting in higher prices for purchased power. During
this period, unscheduled outages at Beaver Valley Unit 2 and the Davis-
Besse Plant required TE to purchase significant quantities of power on
the spot market during that period. In addition, Beaver Valley Unit 2
remained out of service through most of the third quarter of 1998.
Although above normal temperatures were also experienced in 1999, TE
maintained a stronger capacity position this year compared to the prior
year. Therefore, TE was not only able to reduce its dependence on
purchased power in the current year, but also took advantage of the
strong demand for power through sales to the wholesale market.
Nuclear operating costs were lower in the third quarter of
1999, compared to the prior year quarter primarily due to reduced costs
at the Beaver Valley Plant. However, costs for the first nine months of
1999 remained higher than the prior period due to expenses associated
with the refueling outages at Beaver Valley Unit 2 and the Perry Plant.
The increases in other operating costs in this year's quarter and nine-
month period were primarily due to higher customer and sales expenses
including energy marketing programs, information system requirements
and other customer-related costs.
Net interest charges decreased in the third quarter and the
first nine months of 1999 principally as a result of redemptions of
long-term debt.
Capital Resources and Liquidity
- ------------------------------
TE has continuing cash requirements for planned capital
expenditures and debt maturities. During the fourth quarter of 1999,
capital requirements for property additions and capital leases are
expected to be about $11 million, with no additional expenditures for
nuclear fuel. TE has additional cash requirements of approximately
$400,000 for maturing long-term debt during the fourth quarter of 1999.
These requirements are expected to be satisfied with internal cash
and/or short-term credit arrangements.
As of September 30, 1999, TE had approximately $99.7 million
of cash and temporary investments and $151,000 of short-term
indebtedness to associated companies. Together with CEI, TE had unused
borrowing capability of $55 million under a FirstEnergy revolving line
of credit at the end of the third quarter of 1999. Under its first
mortgage indenture, as of September 30, 1999, TE would have been
permitted to issue approximately $264 million of additional first
mortgage bonds on the basis of bondable property additions and retired
bonds.
Regulatory Matters
- ------------------
FirstEnergy filed a comprehensive transition plan for TE on
October 4, 1999, under the new Ohio electricity restructuring law (see
Note 3). The law is designed to facilitate the transition of Ohio's
electric utility industry from a regulated environment to a competitive
market in the generation of electricity. TE's plan itemizes the price
of electricity into separate components -- primarily generation,
transmission, distribution and transition charges - and details
- 37 -
<PAGE>
FirstEnergy's strategy to implement corporate separation of TE's
regulated and nonregulated operations. The plan proposes recovery of
generation-related transition costs of approximately $1.7 billion ($1.4
billion, net of deferred income taxes). Of that amount, approximately
$880 million ($770 million, net of deferred income taxes) would be
recovered over the five-year market development period (2001-2005) and
the remainder is estimated to be recovered from 2001 through mid-2008.
These transition costs will be recovered as a component of frozen rates
scheduled to be in effect pursuant to TE's rate plan as of January 1,
2001. Those rates will be adjusted to reflect a 5% reduction in the
generation component of residential customers' rates. On November 4,
1999, the PUCO rejected FirstEnergy's filing because the PUCO has not
yet prescribed the transition plan filing rules. FirstEnergy will refile
its transition plan once those rules have been established. Despite
rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor
to issue its order in this case within 275 days of FirstEnergy's initial
filing date. If the transition plan ultimately approved by the PUCO for
TE does not provide adequate recovery of TE's nuclear generating unit
investments and regulatory assets, there would be a charge to earnings
which could have a material adverse effect on TE's results of operations
and financial condition.
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 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. The customer
service system was made Year 2000 compliant in June 1999.
TE has contacted all its key suppliers and does not
anticipate any service interruptions with them based on the information
they have provided. Further, TE has reviewed its stocking levels of
critical supplies and has determined the appropriate stocking levels to
maintain approaching the year 2000. TE has initiated actions to ensure
that these materials are at the required levels consistent with the
assumptions in its contingency plan.
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 uses both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$15.4 million total project cost, approximately $12.5 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 $2.9 million will be expensed as incurred.
As of September 30, 1999, TE had spent $12.2 million for Year 2000
capital projects and had expensed approximately $2.5 million for Year
2000-related maintenance activities. TE's total Year 2000 project cost,
as well as its estimates of the time needed to complete remedial
- 38 -
<PAGE>
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.
- 39 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $82,354 $87,885 $245,843 $246,732
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 25,978 21,948 61,244 62,835
Nuclear operating costs 5,165 6,700 20,168 20,568
Other operating costs 14,281 14,972 45,526 40,673
------- ------- -------- --------
Total operation and maintenance expenses 45,424 43,620 126,938 124,076
Provision for depreciation and amortization 15,790 13,125 46,505 46,133
General taxes 7,151 5,335 19,395 16,608
Income taxes 4,824 9,375 19,788 20,847
------- ------- -------- --------
Total operating expenses and taxes 73,189 71,455 212,626 207,664
------- ------- -------- --------
OPERATING INCOME 9,165 16,430 33,217 39,068
OTHER INCOME 194 569 1,441 1,942
------- ------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 9,359 16,999 34,658 41,010
------- ------- -------- --------
NET INTEREST CHARGES:
Interest expense 4,972 5,234 16,090 15,951
Allowance for borrowed funds used during
construction (91) (52) (323) (196)
------- ------- -------- --------
Net interest charges 4,881 5,182 15,767 15,755
------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 4,478 11,817 18,891 25,255
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- -- -- (30,522)
------- ------- -------- --------
NET INCOME (LOSS) 4,478 11,817 18,891 (5,267)
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,131 1,157 3,444 3,470
------- ------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 3,347 $10,660 $ 15,447 $ (8,737)
======= ======= ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
</TABLE>
<PAGE>
- 40 -
<TABLE>
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service $702,725 $686,771
Less--Accumulated provision for depreciation 303,005 291,188
-------- --------
399,720 395,583
-------- --------
Construction work in progress-
Electric plant 13,143 17,187
Nuclear fuel 385 508
-------- --------
13,528 17,695
-------- --------
413,248 413,278
-------- --------
OTHER PROPERTY AND INVESTMENTS 34,849 29,177
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 260 7,485
Notes receivable from parent company 16,090 50,000
Receivables-
Customers (less accumulated provisions of
$3,753,000 and $3,599,000, respectively, for
uncollectible accounts) 33,399 34,737
Associated companies 24,375 34,430
Other 11,546 12,472
Materials and supplies, at average cost 12,790 15,515
Prepayments 5,904 2,657
-------- --------
104,364 157,296
-------- --------
DEFERRED CHARGES:
Regulatory assets 329,626 371,027
Other 6,633 6,994
-------- --------
336,259 378,021
-------- --------
$888,720 $977,772
======== ========
</TABLE>
<PAGE>
- 41-
<TABLE>
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $30 par value, authorized 6,500,000
shares - 6,290,000 shares outstanding $188,700 $188,700
Other paid-in capital (310) (310)
Retained earnings 22,084 86,891
-------- --------
Total common stockholder's equity 210,474 275,281
Preferred stock-
Not subject to mandatory redemption 39,105 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 6,392 6,617
Other 257,849 281,072
-------- --------
528,820 628,875
-------- --------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 4,709 5,557
Other 23,879 984
Accounts payable-
Associated companies 20,692 9,676
Other 16,597 23,156
Accrued taxes 11,817 12,849
Accrued interest 3,886 6,519
Other 11,443 17,046
-------- --------
93,023 75,787
-------- --------
DEFERRED CREDITS:
Accumulated deferred income taxes 201,419 212,427
Accumulated deferred investment tax credits 7,379 7,787
Other 58,079 52,896
-------- --------
266,877 273,110
-------- --------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) -------- --------
$888,720 $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>
<PAGE>
- 42 -
<TABLE>
PENNSYLVANIA POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,478 $ 11,817 $ 18,891 $ (5,267)
Adjustments to reconcile net income (loss) to
net cash from operating activities-
Provision for depreciation and amortization 15,790 13,125 46,505 46,133
Nuclear fuel and lease amortization 1,919 1,460 5,153 3,252
Deferred income taxes, net (143) 931 (1,016) (26,058)
Investment tax credits, net (1,942) (573) (2,237) (1,717)
Extraordinary item -- -- -- 51,730
Receivables 1,481 881 12,319 1,827
Materials and supplies 5,067 (839) 2,725 (1,012)
Accounts payable (6,759) (12,493) 4,457 (7,487)
Other (5,280) (1,533) (12,481) (7,937)
-------- -------- -------- --------
Net cash provided from operating
activities 14,611 12,776 74,316 53,464
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt -- -- -- 1,621
Redemptions and Repayments-
Preferred stock 5,920 -- 12,005 --
Long-term debt 1,843 1,443 4,988 3,994
Dividend Payments-
Common stock 15,000 5,347 80,362 16,040
Preferred stock 1,393 1,232 3,130 3,470
-------- -------- -------- --------
Net cash used for financing activities 24,156 8,022 100,485 21,883
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 8,160 4,541 16,489 11,560
Loan to parent -- 4,400 -- 16,900
Loan payment from parent (12,597) -- (33,910) --
Other (3,391) (2,194) (1,523) (313)
-------- -------- -------- --------
Net cash used for (provided from)
investing activities (7,828) 6,747 (18,944) 28,147
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents (1,717) (1,993) (7,225) 3,434
Cash and cash equivalents at beginning of period 1,977 6,087 7,485 660
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 260 $ 4,094 $ 260 $ 4,094
======== ======== ======== ========
<FN>
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
</TABLE>
<PAGE>
- 43 -
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 September 30,
1999, and the related consolidated statements of income and cash flows
for the three-month and nine-month periods ended September 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
November 9, 1999
- 44 -
<PAGE>
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Earnings on common stock declined to $3.3 million in the third
quarter of 1999 from $10.7 million in the third quarter of 1998. Reduced
fossil generating capacity resulted in lower wholesale revenues and
increased purchased power costs in the third quarter of 1999, from the
prior year's third quarter levels, contributing to the lower earnings.
In the first nine months of 1999, earnings on common stock increased to
$15.4 million from a loss on common stock of $8.7 million for the same
period last year. The nine-month period ended September 30, 1998,
included an extraordinary charge of $30.5 million resulting from Penn's
discontinued application of SFAS 71 to its generation business.
Operating revenues declined approximately $5.5 million in the
third quarter and $0.9 million for the first nine months of 1999,
compared to the corresponding periods of 1998. The lower third quarter
operating revenues resulted primarily from a decline in kilowatt-hours
sales. Total kilowatt-hour sales decreased 3.8% in the third quarter of
1999, compared to the same period of 1998. This resulted from reduced
kilowatt-hour sales to wholesale customers, which declined 33.1% in the
third quarter of 1999 from the third quarter of 1998. The decrease
resulted from a reduction in fossil generation available for the
wholesale market during that period. However, sales to retail customers
increased 6.2% in the third quarter of 1999, compared to the third
quarter of 1998. Kilowatt-hour sales to commercial and industrial
customers increased 4.6% and 16.4%, respectively, whereas, sales to
residential customers decreased 3.1% in the third quarter of 1999 from a
year ago. Lower unit prices offset an increase in kilowatt-hour sales
during the first nine months of 1999, compared to the year-to-date
period of 1998. Total kilowatt-hour sales increased 2.6% in the current
nine-month period, with retail sales 8.2% higher and sales to wholesale
customers 18.5% lower. Additionally, kilowatt-hour sales to retail
customers were higher in the first nine months of 1999, compared to the
first nine months of 1998, with increased sales to residential,
commercial and industrial customers of 5.6%, 16.7% and 4.1%,
respectively. Contributing to the higher sales to commercial customers
were increased sales by Penn's nonregulated affiliate, Penn Power
Energy, Inc.
Operation and maintenance expenses increased $1.8 million and
$2.9 million in the third quarter and first nine months of 1999,
respectively, compared to the corresponding periods of 1998. Fuel and
purchased power costs were higher in the third quarter of 1999 due to
an increase in purchased power costs. The increase resulted from an
outage at the New Castle Plant and reduced available internally
generated power. However, Beaver Valley Unit 1, which remained out of
service for most of the first three quarters of 1998, was available for
service for nearly all of the first nine months of 1999. As a result,
in the 1999 year-to-date period, the increased mix of nuclear
generation lowered fuel costs. Nuclear operating costs were lower in
the third quarter of 1999, compared to the third quarter of 1998,
reflecting lower costs at Beaver Valley Unit 1. Other operating costs
were higher in the first nine months of 1999, compared to the same
period in 1998, primarily due to higher customer and sales expenses,
including expenditures for energy marketing programs and information
system requirements, and increased employee benefit costs.
The provision for depreciation and amortization increased in
the third quarter of 1999, compared to the third quarter of 1998, as a
result of increases in the amortization of regulatory assets related to
the Penn rate restructuring plan that began in 1999. For the first nine
months of 1999, the increase in amortization expense was substantially
offset by lower depreciation expense related to the reduction in the
nuclear plant investments at the end of June 1998. This reduction was
the result of an extraordinary charge discussed above. General taxes
increased for both the third quarter and nine-month periods of 1999,
compared to the same periods in 1998, primarily due to increases in the
gross receipts tax, Ohio property tax and payroll taxes.
Capital Resources and Liquidity
- ------------------------------
Penn has continuing cash requirements for planned capital
expenditures. During the fourth quarter of 1999, capital requirements
for property additions and capital leases are expected to be about $18
million, including $1 million for nuclear fuel. Penn has additional
cash requirements of approximately $487,000 to meet requirements for
maturing long-term debt during the fourth quarter of 1999. These
requirements are expected to be satisfied with internal cash.
As of September 30, 1999, Penn had approximately $16.4
million of cash and temporary investments and no short-term
indebtedness. In addition, Penn has $2 million available from an unused
bank facility, which may be borrowed for up to several days at the
bank's discretion. Under its first mortgage indenture, as of September
30, 1999, Penn would have been permitted to issue at least $120 million
of additional first mortgage bonds on the basis of bondable property
additions and retired bonds.
- 45 -
<PAGE>
Regulatory Matters
- ------------------
All regulatory approvals have been received for the transfer
of generating assets between FirstEnergy and Duquesne, which is
intended to be a tax-free asset exchange. When completed in December
1999, the transaction will provide FirstEnergy with exclusive ownership
and operating control of all generating assets that are currently
jointly owned and operated under the CAPCO agreement (see Note 2,
"Pending Exchange of Assets").
Environmental Matters
- ---------------------
In September 1999, FirstEnergy received, and subsequently in
October 1999, Penn received a citizen suit notification letter from the
New York Attorney General's office alleging Clean Air Act violations at
the W. H. Sammis Plant. FirstEnergy believes the Sammis Plant is in
full compliance with the Clean Air Act, but cannot predict whether New
York will nonetheless file a lawsuit.
On November 3, 1999, the EPA issued Notices of Violation
(NOV) or a Compliance Order to eight utilities covering 32 power
plants, including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-owned
utilities, which included a complaint against Penn in the U.S. District
Court for the Southern District of Ohio. The NOV and complaint allege
violations of the Clean Air Act based on operation and maintenance of
the Sammis Plant dating back to 1984. The complaint requests permanent
injunctive relief to require the installation of "best available
control technology" and civil penalties of up to $27,500 per day of
violation. FirstEnergy believes the NOV and complaint are without
merit. However, FirstEnergy is unable to predict the outcome of this
litigation. Criminal penalties could be imposed if the Sammis Plant
continues to operate without correcting the alleged violations and a
court determines that the allegations are valid. It is anticipated at
this time that the Sammis Plant will continue to operate while the
matter is being decided.
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, 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,
Penn filed documents 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 contacted all its key suppliers and does not
anticipate any service interruptions with them based on the information
they have provided. Further, Penn has reviewed its stocking levels of
critical supplies and has determined the appropriate stocking levels to
maintain approaching the year 2000. Penn has initiated actions to
ensure that these materials are at the required levels consistent with
the assumptions in its contingency plan.
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.
- 46 -
<PAGE>
Penn uses both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$4.8 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 $1.3 million will be expensed as incurred.
As of September 30, 1999, Penn had spent $3.4 million for Year 2000
capital projects and had expensed approximately $1.0 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.
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.
- 47 -
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
On November 3, 1999, the EPA issued Notices of Violation (NOV) or
a Compliance Order to eight utilities covering 32 power plants,
including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-
owned utilities, which included a complaint against OE and Penn
in the U.S. District Court for the Southern District of Ohio. The
NOV and complaint allege violations of the Clean Air Act based on
operation and maintenance of the Sammis Plant dating back to
1984. The complaint requests permanent injunctive relief to
require the installation of "best available control technology"
and civil penalties of up to $27,500 per day of violation.
FirstEnergy believes the NOV and complaint are without merit.
However, FirstEnergy is unable to predict the outcome of this
litigation. Criminal penalties could be imposed if the Sammis
Plant continues to operate without correcting the alleged
violations and a court determines that the allegations are valid.
It is anticipated at this time that the Sammis Plant will
continue to operate while the matter is being decided.
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, TE and Penn
---------------------------------
None
- 48 -
<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.
November 12, 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
- 49 -
<PAGE>
EXHIBIT 15
November 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 September 30, 1999, which
includes our report dated November 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 9,032,457
<OTHER-PROPERTY-AND-INVEST> 2,633,957
<TOTAL-CURRENT-ASSETS> 1,253,536
<TOTAL-DEFERRED-CHARGES> 5,154,930
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 18,074,880
<COMMON> 23,302
<CAPITAL-SURPLUS-PAID-IN> 3,603,751
<RETAINED-EARNINGS> 909,592
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,536,645
274,996
648,395
<LONG-TERM-DEBT-NET> 5,817,547
<SHORT-TERM-NOTES> 167,649
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,982
<LONG-TERM-DEBT-CURRENT-PORT> 985,072
38,464
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 58,835
<OTHER-ITEMS-CAPITAL-AND-LIAB> 5,427,295
<TOT-CAPITALIZATION-AND-LIAB> 18,074,880
<GROSS-OPERATING-REVENUE> 4,673,682
<INCOME-TAX-EXPENSE> 308,626
<OTHER-OPERATING-EXPENSES> 3,482,442
<TOTAL-OPERATING-EXPENSES> 3,791,068
<OPERATING-INCOME-LOSS> 882,614
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 882,614
<TOTAL-INTEREST-EXPENSE> 434,748
<NET-INCOME> 447,866
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 256,683
<TOTAL-INTEREST-ON-BONDS> 481,727
<CASH-FLOW-OPERATIONS> 1,033,999
<EPS-BASIC> 1.97
<EPS-DILUTED> 1.97
</TABLE>
EXHIBIT 15
November 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 September 30, 1999, which includes our report dated
November 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 includes $15,320,000 related
to other income.
</LEGEND>
<CIK> 0000073960
<NAME> OHIO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,648,369
<OTHER-PROPERTY-AND-INVEST> 1,318,012
<TOTAL-CURRENT-ASSETS> 745,701
<TOTAL-DEFERRED-CHARGES> 1,896,880
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,608,962
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,098,728
<RETAINED-EARNINGS> 474,249
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,572,978
140,000
200,070
<LONG-TERM-DEBT-NET> 1,974,219
<SHORT-TERM-NOTES> 221,267
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,982
<LONG-TERM-DEBT-CURRENT-PORT> 580,888
5,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 3,460
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,791,098
<TOT-CAPITALIZATION-AND-LIAB> 8,608,962
<GROSS-OPERATING-REVENUE> 2,050,365
<INCOME-TAX-EXPENSE> 153,107
<OTHER-OPERATING-EXPENSES> 1,543,309
<TOTAL-OPERATING-EXPENSES> 1,681,096
<OPERATING-INCOME-LOSS> 369,269
<OTHER-INCOME-NET> 32,577
<INCOME-BEFORE-INTEREST-EXPEN> 401,846
<TOTAL-INTEREST-EXPENSE> 168,702
<NET-INCOME> 233,144
8,740
<EARNINGS-AVAILABLE-FOR-COMM> 224,404
<COMMON-STOCK-DIVIDENDS> 333,603
<TOTAL-INTEREST-ON-BONDS> 178,642
<CASH-FLOW-OPERATIONS> 647,785
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 15
November 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 September 30, 1999, which includes our report dated
November 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 1,000's). Income tax expense includes
$9,944,000 related to other income.
</LEGEND>
<CIK> 0000020947
<NAME> THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,027,521
<OTHER-PROPERTY-AND-INVEST> 687,551
<TOTAL-CURRENT-ASSETS> 389,085
<TOTAL-DEFERRED-CHARGES> 2,123,570
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,227,727
<COMMON> 931,962
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 71,996
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,003,958
134,996
238,325
<LONG-TERM-DEBT-NET> 2,684,211
<SHORT-TERM-NOTES> 42,237
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 266,730
33,464
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 30,845
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,792,961
<TOT-CAPITALIZATION-AND-LIAB> 6,227,727
<GROSS-OPERATING-REVENUE> 1,435,297
<INCOME-TAX-EXPENSE> 109,535
<OTHER-OPERATING-EXPENSES> 1,008,655
<TOTAL-OPERATING-EXPENSES> 1,108,246
<OPERATING-INCOME-LOSS> 327,051
<OTHER-INCOME-NET> 6,489
<INCOME-BEFORE-INTEREST-EXPEN> 333,540
<TOTAL-INTEREST-EXPENSE> 158,040
<NET-INCOME> 175,500
25,312
<EARNINGS-AVAILABLE-FOR-COMM> 150,188
<COMMON-STOCK-DIVIDENDS> 150,974
<TOTAL-INTEREST-ON-BONDS> 210,819
<CASH-FLOW-OPERATIONS> 346,538
<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 by reference to such financial statements. (Amounts
in 1,000's.) Income tax expense includes $4,759,000 related to other income.
</LEGEND>
<CIK> 0000352049
<NAME> THE TOLEDO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,144,565
<OTHER-PROPERTY-AND-INVEST> 419,202
<TOTAL-CURRENT-ASSETS> 199,935
<TOTAL-DEFERRED-CHARGES> 909,857
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,673,559
<COMMON> 195,670
<CAPITAL-SURPLUS-PAID-IN> 328,559
<RETAINED-EARNINGS> 39,236
<TOTAL-COMMON-STOCKHOLDERS-EQ> 563,465
0
210,000
<LONG-TERM-DEBT-NET> 987,767
<SHORT-TERM-NOTES> 151
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 132,130
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 24,530
<OTHER-ITEMS-CAPITAL-AND-LIAB> 755,516
<TOT-CAPITALIZATION-AND-LIAB> 2,673,559
<GROSS-OPERATING-REVENUE> 693,143
<INCOME-TAX-EXPENSE> 46,458
<OTHER-OPERATING-EXPENSES> 520,503
<TOTAL-OPERATING-EXPENSES> 562,202
<OPERATING-INCOME-LOSS> 130,941
<OTHER-INCOME-NET> 9,007
<INCOME-BEFORE-INTEREST-EXPEN> 139,948
<TOTAL-INTEREST-EXPENSE> 58,307
<NET-INCOME> 81,641
12,173
<EARNINGS-AVAILABLE-FOR-COMM> 69,468
<COMMON-STOCK-DIVIDENDS> 80,351
<TOTAL-INTEREST-ON-BONDS> 80,283
<CASH-FLOW-OPERATIONS> 188,320
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 15
November 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 September 30, 1999, which includes
our report dated November 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 Pennsylvania Power Company
and is qualified in its entirety by reference to such financial statements.
(Amounts in 1,000's.) Income tax expense includes $416,000 related to
other income.
</LEGEND>
<CIK> 0000077278
<NAME> PENNSYLVANIA POWER COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 413,248
<OTHER-PROPERTY-AND-INVEST> 34,849
<TOTAL-CURRENT-ASSETS> 104,364
<TOTAL-DEFERRED-CHARGES> 336,259
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 888,720
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (310)
<RETAINED-EARNINGS> 22,084
<TOTAL-COMMON-STOCKHOLDERS-EQ> 210,474
15,000
39,105
<LONG-TERM-DEBT-NET> 264,241
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 23,487
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 5,101
<OTHER-ITEMS-CAPITAL-AND-LIAB> 331,312
<TOT-CAPITALIZATION-AND-LIAB> 888,720
<GROSS-OPERATING-REVENUE> 245,843
<INCOME-TAX-EXPENSE> 20,204
<OTHER-OPERATING-EXPENSES> 192,838
<TOTAL-OPERATING-EXPENSES> 212,626
<OPERATING-INCOME-LOSS> 33,217
<OTHER-INCOME-NET> 1,441
<INCOME-BEFORE-INTEREST-EXPEN> 34,658
<TOTAL-INTEREST-EXPENSE> 15,767
<NET-INCOME> 18,891
3,444
<EARNINGS-AVAILABLE-FOR-COMM> 15,447
<COMMON-STOCK-DIVIDENDS> 80,362
<TOTAL-INTEREST-ON-BONDS> 19,203
<CASH-FLOW-OPERATIONS> 74,316
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
