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