FORM 10-Q/A
AMENDMENT NO. 2
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 March 31, 2002
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 No. Address; and Telephone Number Identification
-------------- ------------------------------------ ---------------
1-446 METROPOLITAN EDISON COMPANY 23-0870160
(A Pennsylvania Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
EXPLANATORY NOTE
Metropolitan Edison Company (Met-Ed) is filing this Amendment No. 2 to
its Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 to amend
its financial statements and management's discussion and analysis of results of
operations and financial condition contained in Amendment No. 1 (filed on June
3, 2002) and the fixed charge ratios contained in the initial report as filed
with the Securities and Exchange Commission on May 15, 2002, to solely reflect
the potential adverse impact of a pending Pennsylvania Supreme Court decision
related to Met-Ed's Provider of Last Resort Obligation (see amended Note 4).
As part of the combined Form 10-Q filing for FirstEnergy Corp. and its
subsidiaries, Met-Ed is including the following in this amended filing:
Part I of Item 1 of Met-Ed's report as filed in Amendment No. 1 -
(i) The Notes to Financial Statements appearing on pages 1 through 8
with Note 4 - "Regulatory Matters: Pennsylvania" amendment on
page 7; and
(ii) its financial statements (as amended), the amended letter of
PricewaterhouseCoopers LLP and Management's Discussion and Analysis
of Results of Operations and Financial Condition (as amended),
appearing on pages 64 through 72.
and Exhibit 12 - fixed charge ratios as originally filed.
Reference is made to such report as originally filed for the complete
text of all other portions of such report.
TABLE OF CONTENTS
Pages
Part I. Financial Information
Notes to Financial Statements................................. 1-6
Metropolitan Edison Company
Consolidated Statements of Income............................. 64
Consolidated Balance Sheets................................... 65-66
Consolidated Statements of Cash Flows......................... 67
Report of Independent Accountants............................. 68
Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................... 69-72
PART I. FINANCIAL INFORMATION
------------------------------
FIRSTENERGY CORP. AND SUBSIDIARIES
OHIO EDISON COMPANY AND SUBSIDIARIES
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARIES
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
PENNSYLVANIA POWER COMPANY
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARIES
METROPOLITAN EDISON COMPANY AND SUBSIDIARIES
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARIES
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
eight principal electric utility operating subsidiaries, Ohio Edison Company
(OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison
Company (TE), Pennsylvania Power Company (Penn), American Transmission Systems,
Inc. (ATSI), Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). These utility
subsidiaries are referred to throughout as "Companies." Penn is a wholly owned
subsidiary of OE. FirstEnergy's results include the results of JCP&L, Met-Ed and
Penelec from the November 7, 2001 merger date with GPU, Inc., the former parent
company of JCP&L, Met-Ed and Penelec. The merger was accounted for by the
purchase method of accounting and the applicable effects were reflected on the
financial statements of JCP&L, Met-Ed and Penelec as of the merger date.
Accordingly, the post-merger financial statements reflect a new basis of
accounting, and pre-merger period and post-merger period financial results of
JCP&L, Met-Ed and Penelec (separated by a heavy black line) are presented.
FirstEnergy's consolidated financial statements also include its other principal
subsidiaries: FirstEnergy Solutions Corp. (FES); FirstEnergy Facilities Services
Group, LLC (FEFSG); MYR Group, Inc. (MYR); MARBEL Energy Corporation;
FirstEnergy Nuclear Operating Company (FENOC); GPU Capital, Inc.; GPU Power,
Inc.; FirstEnergy Service Company (FECO); and GPU Service, Inc. (GPUS). FES
provides energy-related products and services and, through its FirstEnergy
Generation Corp. (FGCO) subsidiary, operates FirstEnergy's nonnuclear generation
business. FENOC operates the Companies' nuclear generating facilities. FEFSG is
the parent company of several heating, ventilating, air conditioning and energy
management companies, and MYR is a utility infrastructure construction service
company. MARBEL is a fully integrated natural gas company. GPU Capital owns and
operates electric distribution systems in foreign countries and GPU Power owns
and operates generation facilities in foreign countries. FECO and GPUS provide
legal, financial and other corporate support services to affiliated FirstEnergy
companies.
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 conjunction with the
financial statements and notes included in the combined Annual Report on Form
10-K for the year ended December 31, 2001 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 and disclosure of contingent assets and liabilities. 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.
Preferred Securities
Met-Ed and Penelec have each formed statutory business trusts for the
issuance of $100 million each of preferred securities due 2039. However,
ownership of the respective Met-Ed and Penelec trusts is through separate
wholly-owned limited partnerships, of which a wholly-owned subsidiary of each
company is the sole general partner. In these transactions, the sole assets and
sources of revenues of each trust are the preferred securities of the applicable
limited partnership, whose sole assets are in the 7.35% and 7.34% subordinated
debentures (aggregate principal amount of $103.1 million each) of Met-Ed and
Penelec, respectively. In each case, the applicable parent company has
effectively provided a full and unconditional guarantee of its obligations under
its trust's preferred securities.
1
Derivative Accounting
On January 1, 2001, FirstEnergy adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities --
an amendment of FASB Statement No. 133". The cumulative effect to January 1,
2001 was a charge of $8.5 million (net of $5.8 million of income taxes) or $.03
per share of common stock.
FirstEnergy is exposed to financial risks resulting from the fluctuation
of interest rates and commodity prices, including electricity, natural gas and
coal. To manage the volatility relating to these exposures, FirstEnergy uses a
variety of non-derivative and derivative instruments, including forward
contracts, options, futures contracts and swaps. The derivatives are used
principally for hedging purposes, and to a lesser extent, for trading purposes.
FirstEnergy's Risk Policy Committee, comprised of executive officers, exercises
an independent risk oversight function to ensure compliance with corporate risk
management policies and prudent risk management practices.
FirstEnergy uses derivatives to hedge the risk of price, interest rate
and foreign currency fluctuations. FirstEnergy's primary ongoing hedging
activity involves cash flow hedges of electricity and natural gas purchases. The
maximum periods over which the variability of electricity and natural gas cash
flows are hedged are two and three years, respectively. Gains and losses from
hedges of commodity price risks are included in net income when the underlying
hedged commodities are delivered. The current net deferred loss of $133.6
million included in Accumulated Other Comprehensive Loss (AOCL) as of March 31,
2002, for derivative hedging activity, as compared to the December 31, 2001
balance of $169.4 million in AOCL, resulted from a $18.9 million increase
related to current hedging activity and a $16.9 million increase due to net
hedge losses included in earnings during the quarter. Approximately $7.1 million
(after tax) of the current net deferred loss on derivative instruments in AOCL
is expected to be reclassified to earnings during the next twelve months as
hedged transactions occur. However, the fair value of these derivative
instruments will fluctuate from period to period based on various market factors
and will generally be more than offset by the margin on related sales and
revenues.
FirstEnergy engages in the trading of commodity derivatives and
periodically experiences net open positions. FirstEnergy's risk management
policies limit the exposure to market risk from open positions and require daily
reporting to management of potential financial exposures.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Capital Expenditures
FirstEnergy's current forecast reflects expenditures of approximately
$3.2 billion (OE-$195 million, CEI-$256 million, TE-$129 million, Penn-$45
million, JCP&L-$572 million, Met-Ed-$336 million, Penelec-$387 million,
ATSI-$118 million, FES-$814 million and other subsidiaries-$309 million) for
property additions and improvements from 2002-2006, of which approximately $863
million (OE-$39 million, CEI-$57 million, TE-$27 million, Penn-$9 million,
JCP&L-$144 million, Met-Ed-$79 million, Penelec-$84 million, ATSI-$20 million,
FES-$261 million and other subsidiaries-$143 million) is applicable to 2002.
Investments for additional nuclear fuel during the 2002-2006 period are
estimated to be approximately $502 million (OE-$136 million, CEI-$166 million,
TE-$113 million and Penn-$87 million), of which approximately $35 million
(OE-$10 million, CEI-$12 million, TE-$8 million and Penn-$5 million) applies to
2002.
Environmental Matters
Various federal, state and local authorities regulate the Companies with
regard to air and water quality and other environmental matters. FirstEnergy
estimates additional capital expenditures for environmental compliance of
approximately $235 million, which is included in the construction forecast
provided under "Capital Expenditures" for 2002 through 2006.
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 believe they 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
nineteen states and the District of Columbia,
2
including New Jersey, Ohio and Pennsylvania, based on a conclusion that such NOx
emissions are contributing significantly to ozone pollution in the eastern
United States. State Implementation Plans (SIP) must comply by May 31, 2004 with
individual state NOx budgets established by the EPA. Pennsylvania submitted a
SIP that requires compliance with the NOx budgets at the Companies' Pennsylvania
facilities by May 1, 2003 and Ohio submitted a "draft" SIP that requires
compliance with the NOx budgets at the Companies' Ohio facilities by May 31,
2004.
In July 1997, the EPA promulgated changes in the National Ambient Air
Quality Standard (NAAQS) for ozone emissions 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 found constitutional and other defects in
the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new
NAAQS rules regulating ultra-fine particulates but found defects in the new
NAAQS rules for ozone and decided that the EPA must revise those rules. The
future cost of compliance with these regulations may be substantial and will
depend if and how they are ultimately implemented by the states in which the
Companies operate affected facilities.
In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a
Compliance Order to nine utilities covering 44 power plants, including the W. H.
Sammis Plant. In addition, the U.S. Department of Justice filed eight 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 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. The Sammis Plant
continues to operate while these proceedings are pending.
In December 2000, the EPA announced it would proceed with the
development of regulations regarding hazardous air pollutants from electric
power plants. The EPA identified mercury as the hazardous air pollutant of
greatest concern. The EPA established a schedule to propose regulations by
December 2003 and issue final regulations by December 2004. The future cost of
compliance with these regulations may be substantial.
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. In April 2000, the
EPA announced that it will develop national standards regulating disposal of
coal ash under its authority to regulate nonhazardous waste.
Various environmental liabilities have been recognized on the
Consolidated Balance Sheet as of March 31, 2002, based on estimates of the total
costs of cleanup, the Companies' proportionate responsibility for such costs and
the financial ability of other nonaffiliated entities to pay. The Companies 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. In addition, JCP&L
has accrued liabilities for environmental remediation of former manufactured gas
plants in New Jersey; those costs are being recovered by JCP&L through a
non-bypassable societal benefits charge. The Companies have total accrued
liabilities aggregating approximately $58.2 million (JCP&L-$50.3 million,
CEI-$2.9 million, TE-$0.2 million, Met-Ed-$0.2 million, Penelec-$0.9 million and
other-$3.7 million) as of March 31, 2002. FirstEnergy does not believe
environmental remediation costs will have a material adverse effect on its
financial condition, cash flows or results of operations.
3 - PENDING DIVESTITURES:
FirstEnergy identified certain former GPU international operations for
divestiture within twelve months of the merger date. These operations constitute
individual "lines of business" as defined in Accounting Principles Board Opinion
(APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," with physically and operationally separable
activities. Application of Emerging Issues Task Force (EITF) Issue No. 87-11,
"Allocation of Purchase Price to Assets to Be Sold," required that expected,
pre-sale cash flows, including incremental interest costs on related acquisition
debt, of these operations be considered part of the purchase price allocation.
Accordingly, subsequent to the merger date, results of operations and
incremental interest costs related to these international subsidiaries were not
included in FirstEnergy's Consolidated Statements of Income. Additionally,
assets and liabilities of these international operations were segregated under
separate captions in the Consolidated Balance Sheet as "Assets Pending Sale" and
"Liabilities Related to Assets Pending Sale."
3
In October 2001, FirstEnergy and Aquila, Inc. (formerly UtiliCorp
United) announced that Aquila made an offer to FirstEnergy to purchase Avon
Energy Partners Holdings, FirstEnergy's wholly owned holding company of Midlands
Electricity plc, for $2.1 billion including the assumption of $1.7 billion of
debt. FirstEnergy accepted the offer upon completion of its merger with GPU and
regulatory approvals for the transaction were received by Aquila. On March 18,
2002, FirstEnergy announced that the terms of the initial offer by Aquila were
modified such that Aquila would now acquire a 79.9 percent interest in Avon for
approximately $1.9 billion (including the assumption of $1.7 billion of debt).
FirstEnergy and Aquila together will own all of the outstanding shares of Avon
through a jointly owned subsidiary, with each company having a 50-percent voting
interest. The transaction closed on May 8, 2002. In accordance with applicable
accounting guidance, the earnings of those foreign operations were capitalized
in advance of the sale and not recognized in current earnings from the date of
the GPU acquisition until February 6, 2002. However, the revision to the initial
offer by Aquila caused a reversal of this accounting in the first quarter of
2002, resulting in the recognition of a cumulative effect of a change in
accounting which increased net income by $31.7 million. This resulted from the
application of guidance provided by EITF Issue No. 90-6, "Accounting for Certain
Events Not Addressed in Issue No. 87-11 relating to an Acquired Operating Unit
to Be Sold," accounting under EITF Issue No. 87-11, recognizing the net income
of Avon from November 7, 2001 to February 6, 2002 that previously was not
recognized by FirstEnergy in its consolidated earnings as discussed above. In
addition, Avon's financial statements are no longer presented as "Assets Pending
Sale" and "Liabilities Related to Assets Pending Sale" in FirstEnergy's
Consolidated Balance Sheet at March 31, 2002.
4 - REGULATORY MATTERS:
In Ohio, New Jersey and Pennsylvania, laws applicable to electric
industry deregulation included the following provisions which are reflected in
the Companies' respective state regulatory plans:
o allowing the Companies' electric customers to select their generation
suppliers;
o establishing provider of last resort (PLR) obligations to non-
shopping customers in the Companies' service areas;
o allowing recovery of potentially stranded investment (or transition
costs);
o itemizing (unbundling) the current price of electricity into its
component elements - including generation, transmission, distribution
and stranded costs recovery charges;
o deregulating the Companies' electric generation businesses; and
o continuing regulation of the Companies' transmission and distribution
systems.
Pennsylvania
The Pennsylvania Public Utility Commission (PPUC) authorized 1998 rate
restructuring plans for Penn, Met-Ed and Penelec. In 2000, the PPUC disallowed a
portion of the requested additional stranded costs above those amounts granted
in Met-Ed's and Penelec's 1998 rate restructuring plan orders. The PPUC required
Met-Ed and Penelec to seek an IRS ruling regarding the return of certain
unamortized investment tax credits and excess deferred income tax benefits to
customers. Should the IRS ruling ultimately support returning these tax benefits
to customers, there would be no effect to FirstEnergy's, Met-Ed's or Penelec's
net income since the contingency existed prior to the merger.
As a result of their generating asset divestitures, Met-Ed and Penelec
obtain their supply of electricity to meet their PLR obligations almost entirely
from contracted and open market purchases. In 2000, Met-Ed and Penelec filed a
petition with the PPUC seeking permission to defer, for future recovery, energy
costs in excess of amounts reflected in their capped generation rates; the PPUC
subsequently consolidated this petition in January 2001 with the FirstEnergy/GPU
merger proceeding.
In June 2001, the PPUC entered orders approving the Settlement
Stipulation with all of the major parties in the combined merger and rate relief
proceedings which approved the merger and provided Met-Ed and Penelec PLR rate
relief. The PPUC permitted Met-Ed and Penelec to defer for future recovery the
difference between their actual energy costs and those reflected in their capped
generation rates, retroactive to January 1, 2001. Correspondingly, in the event
that energy costs incurred by Met-Ed and Penelec are below their respective
capped generation rates, that difference will reduce costs that had been
deferred for recovery in future periods. This deferral accounting procedure will
cease on December 31, 2005. Thereafter, costs which had been deferred through
that date would be recoverable through application of competitive transition
charge (CTC) revenues received by Met-Ed and Penelec through December 31, 2010.
Met-Ed's and Penelec's PLR obligations extend through December 31, 2010; during
that period CTC revenues will be applied first to PLR costs, then to
non-nonutility generation (NUG) stranded costs and finally to NUG stranded
costs. Met-Ed and Penelec would be permitted to recover any remaining stranded
costs through a continuation of the CTC after
4
December 31, 2010 through no later than December 31, 2015. Any amounts not
expected to be recovered by December 31, 2015 would be written off at the time
such nonrecovery becomes probable.
Several parties had filed Petitions for Review in June and July 2001
with the Commonwealth Court of Pennsylvania regarding the June 2001 PPUC orders.
On February 21, 2002, the Court affirmed the PPUC decision regarding the
FirstEnergy/GPU merger, remanding the decision to the PPUC only with respect to
the issue of merger savings. The Court reversed the PPUC's decision regarding
the PLR obligations of Met-Ed and Penelec, and rejected those parts of the
settlement that permitted the companies to defer for accounting purposes the
difference between their non-NUG wholesale power costs and the amount that they
collect from retail customers. FirstEnergy and the PPUC each filed a Petition
for Allowance of Appeal with the Pennsylvania Supreme Court on March 25, 2002,
asking it to review the Commonwealth Court decision. Also on March 25, 2002, one
intervenor filed a motion seeking an appeal of the Commonwealth Court's decision
to affirm the FirstEnergy and GPU merger with the Supreme Court of Pennsylvania.
In September 2002, Met-Ed and Penelec established reserves for their PLR
deferred energy costs. The reserves reflect the potential adverse impact of a
pending Pennsylvania Supreme Court decision as to whether or not it will review
the Commonwealth Court ruling. In the original interim financial statements for
the quarter ended March 31, 2002, FirstEnergy, Met-Ed and Penelec had previously
disclosed, in consultation with its independent accountants, that the
finalization of that potential pre-acquisition contingency relating to the
FirstEnergy/GPU merger would be reflected as an adjustment to the allocation of
the purchase price prior to the end of the third quarter of 2002.
During the third quarter of 2002 and in connection with FirstEnergy
finalizing the purchase accounting relating to the FirstEnergy/GPU merger,
Met-Ed and Penelec revised the previously disclosed accounting for this
potential pre-acquisition contingency after further consultation with its
independent accountants. Accordingly, Met-Ed and Penelec amended their interim
financial statements for the quarter ended March 31, 2002 to reflect
establishment of the reserves in the first quarter of 2002, totaling $103.0
million at Met-Ed and $111.1 million at Penelec, with a corresponding increase
in goodwill, net of tax ($60.3 million at Met-Ed and $65.0 million at Penelec).
In addition, net income for the quarter ended March 31, 2002 increased $7.5
million for Met-Ed and $4.7 million for Penelec from the amounts previously
reported. The increase in net income reflects the difference between the non-NUG
cost of power and the amounts that Met-Ed and Penelec collected from their
customers for the quarter ended March 31, 2002. That difference had been
previously reflected as a change in regulatory assets based on the PPUC
decision. Since these revisions are not significant to FirstEnergy's
consolidated financial statements for this period, there will be no restatement
of FirstEnergy's consolidated financial statements. The following tables
summarize the impact on net income for Met-Ed and Penelec for the first quarter
of 2002.
Met-Ed 3 Months Ended,
------ ---------------
March 31, 2002
--------------
Net income as previously reported $19,118
Effect of revision............ 7,494
-------
Net income as revised......... $26,612
=======
Penelec 3 Months Ended,
------- ---------------
March 31, 2002
--------------
Net income as previously reported $14,147
Effect of revision............ 4,692
-------
Net income as revised......... $18,839
=======
5 - NEW ACCOUNTING STANDARDS:
The Financial Accounting Standards Board (FASB) approved SFAS 141,
"Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," on
June 29, 2001. SFAS 141 requires all business combinations initiated after June
30, 2001, to be accounted for using purchase accounting. The provisions of the
new standard relating to the determination of goodwill and other intangible
assets have been applied to the GPU merger, which was accounted for as a
purchase transaction, and have not materially affected the accounting for this
transaction. Under SFAS 142, amortization of existing goodwill ceased January 1,
2002. Instead, goodwill will be tested for impairment at least on an annual
basis -- no impairment of goodwill is anticipated as a result of a preliminary
analysis. Prior to the adoption of SFAS 142, FirstEnergy amortized about $57
million ($.25 per share of common stock) of goodwill annually. There was no
goodwill amortization in 2001 associated with the GPU merger under the
provisions of the new standard. FirstEnergy's net income in the first quarter of
2001 and the year 2001 of $98 million and $646 million, respectively, would have
been $111 million and $701 million, respectively, excluding goodwill
amortization.
5
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." The new statement provides accounting standards for retirement
obligations associated with tangible long-lived assets, with adoption required
by January 1, 2003. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recorded in the period in which it is incurred.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. Over time the capitalized costs are depreciated
and the present value of the asset retirement liability increases, resulting in
a period expense. Upon retirement, a gain or loss will be recorded if the cost
to settle the retirement obligation differs from the carrying amount.
FirstEnergy is currently assessing the new standard and has not yet determined
the impact on its financial statements.
In September 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The Statement also supersedes the accounting and reporting
provisions of APB 30. FirstEnergy's adoption of this Statement, effective
January 1, 2002, will result in its accounting for any future impairments or
disposals of long-lived assets under the provisions of SFAS 144, but will not
change the accounting principles used in previous asset impairments or
disposals. Application of SFAS 144 is not anticipated to have a major impact on
accounting for impairments or disposal transactions compared to the prior
application of SFAS 121 or APB 30.
6 - SEGMENT INFORMATION:
FirstEnergy operates under the following reportable segments: regulated
services, competitive services and other (primarily corporate support services
and international operations). FirstEnergy's primary segment is regulated
services, which include eight electric utility operating companies in Ohio,
Pennsylvania and New Jersey that provide electric transmission and distribution
services. Its other material business segment consists of the subsidiaries that
operate unregulated energy and energy-related businesses. Certain prior year
amounts have been reclassified to conform with the current year presentation.
The regulated services segment designs, constructs, operates and
maintains FirstEnergy's regulated transmission and distribution systems. It also
provides generation services to regulated franchise customers who have not
chosen an alternative, competitive generation supplier. The regulated services
segment obtains a portion of its required generation through power supply
agreements with the competitive services segment.
Segment Financial Information
-----------------------------
Regulated Competitive Reconciling
Services Services Other Adjustments Consolidated
--------- -------- ----- ----------- ------------
(In millions)
Three Months Ended:
-------------------
March 31, 2002
--------------
External revenues.............. $ 1,995 $ 678 $ 123 $ 6 (a) $ 2,802
Internal revenues.............. 355 410 117 (882)(b) --
Total revenues............... 2,350 1,088 240 (876) 2,802
Depreciation and amortization 244 7 12 -- 263
Net interest charges........... 161 10 103 (14)(b) 260
Income taxes................... 162 (41) (40) -- 81
Income before cumulative effect
of a change in accounting.... 198 (60) (53) -- 85
Net income (loss).............. 198 (60) (22) -- 116
Total assets................... 29,147 2,706 6,288 (836)(b) 37,305
Property additions............. 144 37 14 -- 195
March 31, 2001
--------------
External revenues.............. $ 1,309 $ 633 $ 1 $ 43 (a) $ 1,986
Internal revenues.............. 334 500 65 (899)(b) --
Total revenues............... 1,643 1,133 66 (856) 1,986
Depreciation and amortization 215 4 8 -- 227
Net interest charges........... 145 (4) 8 (23)(b) 126
Income taxes................... 67 13 4 -- 84
Income before cumulative effect
of a change in accounting.... 123 (24) 7 -- 106
Net income (loss).............. 123 (32) 7 -- 98
Total assets................... 15,624 1,896 481 -- 18,001
Property additions............. 53 94 4 -- 151
Reconciling adjustments to segment operating results from internal management
reporting to consolidated external financial reporting:
(a) Principally fuel marketing revenues which are reflected as reductions to
expenses for internal management reporting purposes.
(b) Elimination of intersegment transactions.
6
METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2001
--------- --------
(Restated)
(In thousands)
OPERATING REVENUES.............................................................. $245,790 | $221,020
-------- | --------
|
OPERATING EXPENSES AND TAXES: |
Purchased power.............................................................. 136,140 | 125,227
Other operating costs........................................................ 29,005 | 36,553
-------- | --------
Total operation and maintenance expenses................................. 165,145 | 161,780
Provision for depreciation and amortization.................................. 15,292 | 17,794
General taxes................................................................ 16,912 | 10,632
Income taxes................................................................. 14,871 | 6,413
-------- | --------
Total operating expenses and taxes....................................... 212,220 | 196,619
-------- | --------
|
OPERATING INCOME................................................................ 33,570 | 24,401
|
OTHER INCOME.................................................................... 5,131 | 4,685
-------- | --------
|
INCOME BEFORE NET INTEREST CHARGES.............................................. 38,701 | 29,086
-------- | --------
|
NET INTEREST CHARGES: |
Interest on long-term debt................................................... 10,455 | 9,154
Allowance for borrowed funds used during construction........................ (284) | (159)
Deferred interest............................................................ (193) | --
Other interest expense....................................................... 273 | 2,236
Subsidiaries' preferred stock dividend requirements.......................... 1,838 | 1,838
-------- | --------
Net interest charges..................................................... 12,089 | 13,069
-------- | --------
|
|
NET INCOME...................................................................... $ 26,612 | $ 16,017
======== | ========
The preceding Notes to Financial Statements as they relate to Metropolitan
Edison Company are an integral part of these statements.
64
METROPOLITAN EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
----------- ------------
(Restated)
(In thousands)
ASSETS
------
UTILITY PLANT:
In service................................................................ $1,618,998 $1,609,974
Less--Accumulated provision for depreciation.............................. 541,786 530,006
---------- ----------
1,077,212 1,079,968
Construction work in progress.............................................. 13,701 14,291
---------- ----------
1,090,913 1,094,259
OTHER PROPERTY AND INVESTMENTS:
Nuclear plant decommissioning trusts...................................... 159,952 157,699
Long-term notes receivable from associated companies...................... 12,418 12,418
Other..................................................................... 33,490 13,391
---------- ----------
205,860 183,508
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents................................................. 20,812 25,274
Receivables-
Customers (less accumulated provisions of $10,641,000 and $12,271,000
respectively, for uncollectible accounts)............................. 104,258 112,257
Associated companies.................................................... 1,628 8,718
Other................................................................... 18,850 16,675
Prepayments and other..................................................... 39,136 12,239
---------- ----------
184,684 175,163
---------- ----------
DEFERRED CHARGES:
Regulatory assets......................................................... 1,206,162 1,320,412
Goodwill.................................................................. 844,719 784,443
Other..................................................................... 52,802 49,402
---------- ----------
2,103,683 2,154,257
---------- ----------
$3,585,140 $3,607,187
========== ==========
The preceding Notes to Financial Statements as they relate to Metropolitan
Edison Company are an integral part of these balance sheets.
65
METROPOLITAN EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
----------- ------------
(Restated)
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, without par value, authorized 900,000 shares -
859,500 shares outstanding............................................ $1,274,325 $1,274,325
Accumulated other comprehensive income (loss)........................... (158) 11
Retained earnings....................................................... 41,229 14,617
---------- ----------
Total common stockholder's equity................................... 1,315,396 1,288,953
Company-obligated trust preferred securities.............................. 92,200 92,200
Long-term debt............................................................ 541,779 583,077
---------- ----------
1,949,375 1,964,230
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock...................... 40,029 30,029
Accounts payable-
Associated companies.................................................... 53,019 67,351
Other................................................................... 30,270 36,750
Notes payable to associated companies..................................... 127,558 72,011
Accrued taxes............................................................. 5,686 7,037
Accrued interest.......................................................... 10,635 17,468
Other..................................................................... 11,205 13,652
---------- ----------
278,402 244,298
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes......................................... 267,473 300,438
Accumulated deferred investment tax credits............................... 13,098 13,310
Purchase power contract loss liability.................................... 721,812 730,662
Nuclear fuel disposal costs............................................... 37,066 36,906
Nuclear plant decommissioning costs....................................... 269,834 268,967
Other..................................................................... 48,080 48,376
---------- ----------
1,357,363 1,398,659
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 2).......................................
---------- ---------
$3,585,140 $3,607,187
========== ==========
The preceding Notes to Financial Statements as they relate to Metropolitan
Edison Company are an integral part of these balance sheets.
66
METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2002 2001
---------- --------
(Restated)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income................................................................... $ 26,612 | $ 16,017
Adjustments to reconcile net income to net |
cash from operating activities- |
Provision for depreciation and amortization........................... 15,292 | 17,794
Other amortization.................................................... (938) | 237
Deferred costs, net................................................... (6,920) | 296
Deferred income taxes, net............................................ 7,882 | 1,372
Investment tax credits, net........................................... (212) | (212)
Receivables........................................................... 12,914 | (173)
Accounts payable...................................................... (20,812) | (2,283)
Other................................................................. (51,331) | (40,473)
-------- | --------
Net cash used for operating activities.............................. (17,513) | (7,425)
-------- | --------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
New Financing- |
Short-term borrowings, net.............................................. 55,547 | 40,300
Redemptions and Repayments- |
Long-term debt.......................................................... 30,000 | --
Dividend Payments- |
Common stock............................................................ -- | 15,000
-------- | --------
Net cash provided from financing activities......................... 25,547 | 25,300
-------- | --------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Property additions........................................................ 9,096 | 11,793
Capital trust investments................................................. 3,161 | 2,371
Other..................................................................... 239 | 2,991
-------- | --------
Net cash used for investing activities.............................. 12,496 | 17,155
-------- | --------
|
Net increase (decrease) in cash and cash equivalents......................... (4,462) | 720
Cash and cash equivalents at beginning of period ............................ 25,274 | 3,439
-------- | --------
Cash and cash equivalents at end of period................................... $ 20,812 | $ 4,159
======== | ========
The preceding Notes to Financial Statements as they relate Metropolitan Edison
Company are an integral part of these statements.
67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Metropolitan
Edison Company:
We have reviewed the accompanying consolidated balance sheet of Metropolitan
Edison Company and its subsidiaries as of March 31, 2002, and the related
consolidated statements of income and cash flows for the three-month period
ended March 31, 2002. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements, after the
restatement described in Note 4, for them to be in conformity with accounting
principles generally accepted in the United States of America.
PricewaterhouseCoopers LLP
Cleveland, Ohio
May 15, 2002, except as to Note 4,
which is as of November 26, 2002
68
METROPOLITAN EDISON COMPANY
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Met-Ed is a wholly owned electric utility subsidiary of FirstEnergy.
Met-Ed conducts business in eastern and south central parts of Pennsylvania,
offering regulated electric distribution services. Met-Ed also provides power to
those customers electing to retain them as their power supplier. Met-Ed's
regulatory plan requires it to itemize, or unbundle, the price of electricity
into its component elements - including generation, transmission, distribution
and transition charges. Met-Ed was formerly a wholly owned subsidiary of GPU,
Inc., which merged with FirstEnergy on November 7, 2001.
Results of Operations
---------------------
Operating revenues increased by $24.8 million or 11.2% in the first
quarter of 2002 compared to the first quarter of 2001. The sources of the
changes in operating revenues, as compared to the same period in 2001, are
summarized in the following table.
Sources of Operating Revenue Changes
--------------------------------------------------------------------
Increase (Decrease) (In millions)
Change in kilowatt-hour sales due to level of retail
customers shopping for generation service........... $ 35.5
Change in other retail kilowatt-hour sales............. (6.2)
Decrease in wholesale sales............................ (1.0)
All other changes...................................... (3.5)
--------------------------------------------------------------------
Net Increase in Operating Revenues..................... $ 24.8
--------------------------------------------------------------------
Electric Sales
In the first quarter of 2002, a significant reduction in the number of
customers who received their power from alternate suppliers continued to have an
effect on operating revenues. During the first quarter of 2001, 32.0% of
kilowatt-hour deliveries were to shopping customers; whereas, only 7.7% of
kilowatt-hour deliveries during the first quarter of 2002 were to shopping
customers. More than offsetting this increase in revenues from returning
shopping customers was lower kilowatt-hour sales to residential customers,
primarily due to milder weather during the first quarter of 2002 compared to the
first quarter of 2001. Sales to industrial customers also decreased due to a
decline in economic conditions. Changes in kilowatt-hour deliveries by customer
class during the first quarter of 2002, as compared to the same period of 2001,
are summarized in the following table:
Changes in Kilowatt-hour Deliveries
---------------------------------------------------------
Increase (Decrease)
Residential.................. (7.1)%
Commercial................... 0.7%
Industrial................... (8.9)%
---------------------------------------------------------
Total Retail................. (5.4)%
Wholesale.................... 7.4%
---------------------------------------------------------
Total Deliveries............. (4.5)%
---------------------------------------------------------
Operating Expenses and Taxes
Total operating expenses and taxes increased $15.6 million in the first
quarter of 2002 compared to the same period of 2001. Higher purchased power
costs accounted for the majority of the increase, as Met-Ed required more power
to satisfy its provider of last resort (PLR) obligation to customers who
returned from alternate suppliers in the first quarter of 2002. The $7.5 million
decrease in other operating costs in the first quarter of 2002 compared to the
same period of 2001 was primarily attributable to the absence of costs related
to early retirement programs offered to certain bargaining unit employees in
2001.
69
Net Interest Charges
Net interest charges decreased by $1.0 million in the first three months
of 2002, compared to the same period in 2001 due to the redemption of $30
million of long-term debt in the first quarter of 2002.
Financial Statements Revision
During the third quarter of 2002, Met-Ed established a reserve and
recorded a non-cash charge for deferred energy costs incurred subsequent to the
merger (see Pennsylvania Regulatory Matters). The reserve reflects the potential
adverse impact of a pending Pennsylvania Supreme Court decision whether to
review the Commonwealth Court ruling. In the originally filed interim financial
statements for the quarter ended March 31, 2002, Met-Ed had previously
disclosed, in consultation with its independent accountants, that the
finalization of that potential pre-acquisition contingency relating to the
FirstEnergy/GPU merger would be reflected as an adjustment to the allocation of
the purchase price prior to the end of the third quarter of 2002. During the
third quarter of 2002 and in connection with FirstEnergy finalizing the purchase
accounting relating to the FirstEnergy/GPU merger, Met-Ed revised the previously
disclosed accounting for this potential pre-acquisition contingency after
further consultation with its independent accountants. This resulted in the
recognition of a reserve related to deferred energy costs. Accordingly, Met-Ed
amended its interim consolidated financial statements for the quarter ended
March 31, 2002 to reflect an increase of net income by approximately $7.5
million related to changes in PLR related energy costs incurred that had been
previously reflected as changes to its regulatory assets (see Note 4). Should
the Pennsylvania Supreme Court ultimately uphold FirstEnergy's appeal, the
charge relating to 2002 would be reversed into earnings.
Capital Resources and Liquidity
-------------------------------
Met-Ed has continuing cash requirements for planned capital expenditures
and maturing debt. During the remaining three quarters of 2002, capital
requirements for property additions are expected to be about $69 million. These
requirements are expected to be satisfied from internal cash and/or short-term
credit arrangements.
As of March 31, 2002, Met-Ed had about $20.8 million of cash and
temporary investments and $127.6 million of short-term indebtedness. Met-Ed may
borrow from its affiliates on a short-term basis. Met-Ed will not issue first
mortgage bonds (FMBs) other than as collateral for senior notes, since its
senior note indentures prohibit (subject to certain exceptions) it from issuing
any debt which is senior to the senior notes. As of March 31, 2002, Met-Ed had
the capability to issue $112 million of additional senior notes based upon FMB
collateral. Met-Ed has no restrictions on the issuance of preferred stock.
Market Risk Information
-----------------------
Met-Ed uses various market sensitive instruments, including derivative
contracts, primarily to manage the risk of price fluctuations. Met-Ed's Risk
Policy Committee, comprised of FirstEnergy executive officers, exercises an
independent risk oversight function to ensure compliance with corporate risk
management policies and prudent risk management practices.
Commodity Price Risk
Met-Ed is exposed to market risk primarily due to fluctuations in
electricity and natural gas prices. To manage the volatility relating to these
exposures, Met-Ed uses a variety of derivative instruments, including options
and futures contracts. The derivatives are used principally for hedging
purposes. The change in the fair value of commodity derivative contracts related
to energy production during the first quarter of 2002 is summarized in the
following table:
Change in the Fair Value of Commodity Derivative Contracts
----------------------------------------------------------
(In millions)
Outstanding as of December 31, 2001...... $ 2.3
Contract value when entered.............. 0.2
Increase in value of existing contracts.. 18.8
----------------------------------------------------------
Outstanding as of March 31, 2002......... $21.3
==========================================================
The valuation of derivative contracts is based on observable market
information to the extent that such information is available. In cases where
such information is not available, Met-Ed relies on model-based information. The
model provides estimates of future regional prices for electricity and an
estimate of related price volatility. Met-Ed utilizes these results in
developing estimates of fair value for the later years of applicable electricity
contracts for financial reporting purposes and for internal management decision
making. Sources of information for the valuation of derivative contracts by year
are summarized in the following table:
70
Source of Information - Fair Value by Contract Year
----------------------------------------------------
2002* 2003 2004 Thereafter Total
------------------------------------------------------------------------------
(In millions)
Prices actively quoted........ $0.3 $1.8 $1.9 $ -- $ 4.0
Prices based on models**...... -- -- -- 17.3 17.3
------------------------------------------------------------------------------
Total.................... $0.3 $1.8 $1.9 $17.3 $21.3
==============================================================================
* For the remaining quarters of 2002.
** Relates to an embedded option that is offset by a regulatory liability and
does not affect earnings.
Met-Ed performs sensitivity analyses to estimate its exposure to the
market risk of its commodity position. A hypothetical 10% adverse shift in
quoted market prices in the near term on derivative instruments would not have
had a material effect on Met-Ed's consolidated financial position or cash flows
as of March 31, 2002.
Pennsylvania Regulatory Matters
-------------------------------
In June and July 2001, several parties had filed Petitions for Review
with the Commonwealth Court of Pennsylvania regarding the June 2001 PPUC orders
which approved the FirstEnergy/GPU merger and provided rate relief for Met-Ed.
On February 21, 2002, the Court affirmed the PPUC decision regarding the
FirstEnergy/GPU merger, remanding the decision to the PPUC only with respect to
the issue of merger savings. The Court reversed the PPUC's decision regarding
Met-Ed's PLR obligation, and rejected those parts of the settlement that
permitted the Company to defer for accounting purposes the difference between
its wholesale power costs and the amount collected from retail customers. Met-Ed
and PPUC each filed a Petition for Allowance of Appeal with the Pennsylvania
Supreme Court on March 25, 2002, asking it to review the Commonwealth Court's
decision. Also on March 25, 2002, Citizens Power filed a motion seeking an
appeal of the Commonwealth Court's decision to affirm the FirstEnergy/GPU merger
with the Supreme Court of Pennsylvania (see Financial Statements Revision and
Note 4).
Significant Accounting Policies
-------------------------------
Met-Ed prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States. Application of
these principles often requires a high degree of judgment, estimates and
assumptions that affect its financial results. All of Met-Ed's assets are
subject to their own specific risks and uncertainties and are periodically
reviewed for impairment. Assets related to the application of the policies
discussed below are similarly reviewed with their risks and uncertainties
reflecting these specific factors. Met-Ed's more significant accounting policies
are described below.
Purchase Accounting - Acquisition of GPU
On November 7, 2001, the merger between FirstEnergy and GPU became
effective, and Met-Ed became a wholly owned subsidiary of FirstEnergy. The
merger was accounted for by the purchase method of accounting, which requires
judgment regarding the allocation of the purchase price based on the fair values
of the assets acquired (including intangible assets) and the liabilities
assumed. The fair values of the acquired assets and assumed liabilities were
based primarily on estimates. The adjustments reflected in Met-Ed's records,
which are subject to adjustment in 2002 when finalized, primarily consist of:
(1) revaluation of certain property, plant and equipment; (2) adjusting
preferred stock subject to mandatory redemption and long-term debt to estimated
fair value; (3) recognizing additional obligations related to retirement
benefits; and (4) recognizing estimated severance and other compensation
liabilities. The excess of the purchase price over the estimated fair values of
the assets acquired and liabilities assumed was recognized as goodwill, which
will be reviewed for impairment at least annually. As of March 31, 2002, Met-Ed
had recorded goodwill of approximately $844.7 million related to the merger.
Regulatory Accounting
Met-Ed is subject to regulation that sets the prices (rates) it is
permitted to charge customers based on costs that regulatory agencies determine
Met-Ed is permitted to recover. At times, regulators permit the future recovery
through rates of costs that would be currently charged to expense by an
unregulated company. This rate-making process results in the recording of
regulatory assets based on anticipated future cash inflows. As a result of the
changing regulatory framework in Pennsylvania, a significant amount of
regulatory assets have been recorded - $1.2 billion as of March 31, 2002. Met-Ed
regularly reviews these assets to assess their ultimate recoverability within
the approved regulatory guidelines. Impairment risk associated with these assets
relates to potentially adverse legislative, judicial or regulatory actions in
the future.
71
Derivative Accounting
Determination of appropriate accounting for derivative transactions
requires the involvement of management representing operations, finance and risk
assessment. In order to determine the appropriate accounting for derivative
transactions, the provisions of the contract need to be carefully assessed in
accordance with the authoritative accounting literature and management's
intended use of the derivative. New authoritative guidance continues to shape
the application of derivative accounting. Management's expectations and
intentions are key factors in determining the appropriate accounting for a
derivative transaction and, as a result, such expectations and intentions must
be documented. Derivative contracts that are determined to fall within the scope
of SFAS 133, as amended, must be recorded at their fair value. Active market
prices are not always available to determine the fair value of the later years
of a contract, requiring that various assumptions and estimates be used in their
valuation. Met-Ed continually monitors its derivative contracts to determine if
its activities, expectations, intentions, assumptions and estimates remain
valid. As part of its normal operations, Met-Ed enters into commodities
contracts, which increase the impact of derivative accounting judgments.
Revenue Recognition
Met-Ed follows the accrual method of accounting for revenues,
recognizing revenue for kilowatt-hours that have been delivered but have not
been billed through March 31, 2002. The determination of unbilled revenues
requires management to make various estimates including:
o Net energy generated or purchased for retail load
o Losses of energy over transmission and distribution lines
o Mix of kilowatt-hour usage by residential, commercial and industrial
customers
o Kilowatt-hour usage of customers receiving electricity from
alternative suppliers
Recently Issued Accounting Standards Not Yet Implemented
--------------------------------------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligations." The new statement provides
accounting standards for retirement obligations associated with tangible
long-lived assets with adoption required as of January 1, 2003. SFAS 143
requires that the fair value of a liability for an asset retirement obligation
be recorded in the period in which it is incurred. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Over time the capitalized costs are depreciated and the
present value of the asset retirement liability increases resulting in a period
expense. Upon retirement, a gain or loss will be recorded if the cost to settle
the retirement obligation differs from the carrying amount. Met-Ed is currently
assessing its asset retirement obligations under the new standard and has not
yet determined the impact on its financial statements.
72
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 26, 2002
METROPOLITAN EDISON COMPANY
---------------------------
Registrant
/s/Harvey L. Wagner
-------------------------------
Harvey L. Wagner
Vice President, Controller
and Chief Accounting Officer
83
Certification
I, H. Peter Burg, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Metropolitan Edison
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: November 26, 2002
/s/H. Peter Burg
-------------------------------
H. Peter Burg
Chief Executive Officer
83.1
Certification
I, Richard H. Marsh, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Metropolitan Edison
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: November 26, 2002
/s/Richard H. Marsh
-------------------------------
Richard H. Marsh
Chief Financial Officer
83.2