L-02-044, 2001 Firstenergy Corp. Annual Report Completing Requirements for Retrospective Premimum Guarantee

2001 Firstenergy Corp. Annual Report Completing Requirements for Retrospective Premimum Guarantee

ML021750559
Person / Time
Site:	Beaver Valley, Davis Besse, Perry
Issue date:	04/16/2002
From:	Scilla R FirstEnergy Corp
To:	Dinitz I Office of Nuclear Reactor Regulation
References
-RFPFR, BV-L-02-044, DB-2780, PY-CE/NRR-6235L
Download: ML021750559 (62)

Text

FHtw 76 South Main Street Akron, Ohio 44308-1890 Randy Scilla 330-384-5202 Assistant Treasurer Fax: 330-384-3772 April 16, 2002 PY-CEI/NRR-6235L DB-No.-2780 BV-No. L-02-044 Mr. Ira Dinitz U.S. Nuclear Regulatory Commission Office of Nuclear Reactor Regulation Washington, D.C. 20555 Dear Mr. Dinitz; Re: Docket Nos. 50-346, 50-440, 50-412, 50-334 Retrospective Premium Guarantee Enclosed you will find the 2001 FirstEnergy Corp. Annual Report. This is in addition to the 2002 Internal Cash Flow Projection sent March 28, 2002 and completes the requirements for the Retrospective Premium Guarantee.

Very truly yours, cl Enclosures S:\Treasury\ShrTrs\Financial Studies\Jmm

\CV

CC:

U.S. Nuclear Regulatory Commission Attention: Docket Control Desk Mail Stop OP1-17 Washington, DC 20555-001 U.S. Nuclear Regulatory Commission Region 1 Attention: Regional Administrator 475 Allendale Road King of Prussia, PA 19406-1415 U.S. Nuclear Regulatory Commission Region III Attention: Regional Administrator 801 Warrenville Road Lisle, IL 60352-4351 Mr. Raymond J. Powell NRC Resident Inspector Perry Nuclear Power Plant Mail Zone SBB 50 10 Center Road Perry, OH 44081 Mr. Christopher Thomas NRC Resident Inspector Davis-Besse Power Station Mail Stop DB4030 5501 N. State Route 2 Oak Harbor, OH 43449 Mr. David R. Kern NRC Resident Inspector Beaver Valley Power Station Mail Stop BV-IPAB P.O. Box 4 Shippingport, PA 15077 U.S. Nuclear Regulatory Commission Attention: Mr. Douglas V. Pickett Mail Stop O-4H16 Washington, DC 20555-0001 U.S. Nuclear Regulatory Commission Attention: Mr. Stephen Sands Document Control Desk Washington, DC 20555-0001 U.S. Nuclear Regulatory Commission Attention: Daniel S. Collins Mail Stop 8C2 Washington, DC 20555-0001

FArstE r 2001 ANNUAL REPORT A YEAR OF RECORD EARNINGS AND GROWTH

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$2.85* $25.29

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$2.50 $20.22 BASIC EARNINGS PER BOOK VALUEPER COMMON SHARE COMMON SHARE

• Before cumulative effect of accounting change FINANCIAL HIGHLIGHTSM1 2001 2000 (Oollars in thousands, except pershare amounts)

Total revenues $7,999,362 $7,028,961 Income before cumulative effect of accounting change (2) $654,946 $598,970 Net income $646,447 $598,970 Basic earnings per common share:

Before cumulative effect of accounting change $2.85 $2.69 After cumulative effect of accounting change $2.82 $2.69 Diluted earnings per common share:

Before cumulative effect of accounting change $2.84 $2.69 After cumulative effect of accounting change $2.81 $2.69 Return on average common equity before accounting change 12.9% 13.0%

Dividends per common share $1.50 $1.50 Book value per common share $25.29 $21.29 (1)FinancialHighlightsinclude results from the former GPU, Inc., companies from November 7, 2001 - the effective date of the merger-throughDecember31, 2001.

(2)This accountingchange is described on page 44 in Note 1 to the ConsolidatedFinancialStatements under Supplemental Cash Flows Information.

CONTENTS Message to Shareholders 2 Year in Review 4 Directors and Officers 14 Management's Discussion and Analysis 18 Shareholder Information 57 1

MESSAGE TO SHAREHOLDERS Delivering Results 2001 was a year of record earnings and growth for your Our accomplishments indicate that our business strategy is paying Company.

off. Simply put, our strategy is regional, retail and integratýCld.

With a six-percent increase in basic earnings to an all-time high Focused on a multi-state region within the northeastern U.S., we're of $2.85 per share of common stock - before the cumulative capitalizing on our expanded retail presence achieved through effect of an accounting change - and with the completion of the merger by selling regulated and unregulated electricity and the merger with GPU, Inc., we're delivering on our commitment other energy-related products and services to new and existing to increase the value of your investment and enhance the customers. And, we're remaining an integrated business, with competitiveness of your Company.

generation, transmission and distribution of electricity at the core.

The merger greatly expanded the size and scope of our electric By improving the performance of our regulated and unregulated business. Our seven electric operating companies serve as the operations, and by optimizing the value of our assets through platform for our growth and comprise the nation's fourth largest diversification of our generation portfolio, reinvestment investor-owned electric system, based on 4.3 million customers in the business and divestiture of non-core assets, we're served in Ohio, Pennsylvania and New Jersey.

confident that we'll succeed.

For the year, we produced a total shareholder return of 16 per Enhancing Our Competitive Position cent, ranking us seventh among the 69 Edison Electric Institute We took significant steps to enhance our competitive position companies in this key measure. It represents the market apprecia last year. We retired, refinanced or re-priced long-term debt ard tion of our common stock, including reinvestment of dividends.

preferred stock totaling $552.8 million for the year, which will Our progress has been recognized by leading credit rating agen produce annual savings of $22.6 million.

cies, which upgraded our Ohio electric operating companies' And, consistent with our regional focus, we divested GasNet in debt in 2001. FirstEnergy and all of our electric operating compa Australia through an initial public offering and reached an agree nies now are rated investment grade. This greatly improves our ment to sell 79.9 percent of Avon Energy Partners Holdings in financial flexibility in accessing capital markets and reduces the the United Kingdom to Aquila, Inc. (formerly UtiliCorp United.) of cost of borrowing.

Kansas City, Missouri. Those operations were acquired through We also were named as one of 15 companies in the Dow Jones the merger.

Utility Average, which represents U.S. companies whose business We also reached an agreement to sell four coal-fired power es focus on natural gas, electricity and pipelines.

plants - located along Lake Erie - to NRG Energy, Inc., of Minneapolis, Minnesota. The plant sale - expected to close by 2

6 .. wer deiern on ou co mtm n to inrase thalu ofyu neten*n nac th copttvns of you Company this summer - is consistent with our electricity supply strategy of Based on findings to date, we believe that we can repair the meeting customer demand through a combination of our own existing reactor head. And, we'll soon submit a proposed repair baseload and peaking generation and short- and long-term plan to the Nuclear Regulatory Commission, which must power contracts. approve the plan before repairs are made.

These transactions will help us reach our goal of reducing debt and Increasing the Value of Your Investment preferred stock by approximately $5 billion by the end of 2004. We've made significant progress, but realize there is much work We're also committed to improving our financial performance by ahead to solidify our position as the region's leading retail energy delivering stronger earnings growth. and related services supplier, and to further improve the value of your investment.

We're grateful for the approval of the GPU merger by the New Jersey Board of Public Utilities and the Pennsylvania Public I would like to thank your Board's chairman, Fred Hafer, who Utility Commission (PPUC). And, we look forward to working has elected to retire in May, for his leadership, vision and many with lawmakers and regulators as we provide customers with contributions to GPU and FirstEnergy. I'm sure you'll join me in the high-quality service they expect and deserve. wishing Fred the best in his retirement.

Addressing a Pennsylvania Court Decision And, with the hard work, dedication and expertise of our We're assessing a February decision by a Pennsylvania employees, management team and Board of Directors, I'm Commonwealth Court that affirmed the PPUC's approval of confident we will continue to achieve great success in the the merger, but overturned certain provisions of our merger years ahead.

settlement stipulation in Pennsylvania, which was supported by virtually every major party to the merger proceedings.

Sincerely, We believe the court ignored substantive facts in the case and Pennsylvania law in its ruling with regard to treatment of certain deferred expenses and allocation of merger savings. We are considering our response, which could include asking the A4.4 Pennsylvania Supreme Court to review the decision.

H. Peter Burg 44_ý, -I Extending the Refueling Outage at Davis-Besse Vice Chairman and We are extending the refueling outage that began in February at Chief Executive Officer the Davis-Besse Nuclear Power Station by at least 60 to 90 days as we continue to assess necessary repairs to its reactor head. March 18, 2002 3

L YEAR IN REVIEW

,655*

-irstEnergy emerged as a larger, stronger company in 2001

$599 AiZZwith the completion of the merger with GPU, Inc. The L, combination nearly doubled our electric customer base to 4.3 million and created the nation's fourth largest investor-owned electric utility system, based on customers served.

Our expanded service area spans 36,100 square miles from the Ohio-Indiana border to the New Jersey shore, providing a much larger market for electricity, natural gas and energy-related NET INCOME products and services offered by FirstEnergy companies.

[MILLIONS]

• Before cumulative effect of accounting change 4

The combination nearly doubled our electric customer base to 4.3 million and created the nation's fourth largest investor-owned electric utility system, based on customers served.

FROM LEFTTO RIGHT:

FIRSTENERGY CEO PETEBURGAND CHAIRMAN FREDHAFER* FARMIN NORTHERNPENNSYLVANIA DOWNTOWN CLEVELAND, OHIO THE LARGESTCITYIN OUR SERVICE AREA w COLLEGE OF ST. ELIZABETH INMORRISTOWN, NEWJERSEY As part of the merger, we added three electric operating Transitioning To Full Competition companies: Metropolitan Edison, with 500,000 customers Regulatory frameworks in these markets have created stable in eastern Pennsylvania; Pennsylvania Electric, with 580,000 environments for our continued transition to full competition.

customers in northern and central Pennsylvania; and Jersey Our transition plans - which established the foundation for Central Power & Light, with one million customers in northern how we're operating in these markets - are providing stable and central New Jersey. cash flow for financial flexibility and reinvestment opportunities during the transition.

Our electric operating companies - which also include Ohio Edison, The Cleveland Electric Illuminating Company, Toledo The plans include provisions that allow for fixed distribution Edison and Pennsylvania Power - now serve 30 percent of all rates and recovery of transition costs.

distribution customers in Ohio, Pennsylvania and New Jersey.

5

We're Company by continually improving performance in all enhancing theoperations, areas of our on our core electric business.

competitiveness with anof emphasis your The pending sale of the Ashtabula, Bay Shore, Eastlake and Lake Shore plants - located along Lake Erie - to NRG Energy, Inc., of Minneapolis, Minnesota, is a key step. The sale will enable us to focus on maximizing the efficient use of our coal-fired generating plants located along the Ohio River, where coal transportation costs are inherently lower; our nuclear plants; and our growing number of natural-gas-fired and other peaking plants.

The sale of the plants will reduce our net generating capacity

$7,999*

by 2,535 megawatts (MW). However, NRG is required under

$7,029

$6,320 the agreement to sell up to 10.5 million megawatt-hours a year to us at established prices through 2005, the end of the market development period for electric competition in Ohio. This amount represents the approximate past annual output of the four plants.

The sale of the plants also will move us closer to better matching our generating capabilities with our customer load profiles, while supporting our supply strategy of meeting TOTAL REVENUES [MILLIONS]

"*IncludesGPU results from customer demand through a combination of our own genera November 7 through tion and short- and long-term power contracts.

December 31, 2001 Upon completion of the sale - expected to occur by this summer - our coal-fired generating capacity will decrease to 47 percent from 56 percent. As a result, capacity from our remaining sources of generation will increase - nuclear to 35 percent from 29 percent; oil and natural gas to 12 percent from 10 percent; and pumped-storage hydro to 6 percent from 5 percent.

FROM LEFTTO RIGHT:

COALPILEATOUR W. H. SAMMIS PLANTIN OHIO

• NEWNATURAL-GAS-FIRED PEAKING UNITSAT WEST LORAIN PLANTIN OHIO 0 MAINTENANCE ATA TRANSMISSION TOWER 6

The shift in our generation portfolio reflects our growing reducing emissions and exploring other ways to lessen the amount of peaking generation - units that enable us to respond impact of our plants on the environment.

quickly to electrical load swings. Since 2000, we've added more Despite our progress, legal action by the U.S. Environmental than 800 MW of natural-gas-fired peaking capacity, and expect Protection Agency (EPA) is pending against our W. H. Sammis to add another 340 MW this summer.

Plant and more than 40 other power plants in the Midwest Also, we added more than 200 MW of pumped-storage and and South. The EPA claims that routine maintenance, repairs hydro capacity through the merger, and we'll add more than and replacements at Sammis - common industry practices for 350 MW of nuclear capacity during the next five years through decades under the agency's oversight - have triggered provisions uprates at our Beaver Valley, Davis-Besse and Perry nuclear of the Clean Air Act that require installation of additional power plants. environmental controls, even though capacity and emissions at our plant have not increased. We remain confident that Protecting the Environment all our plants - including Sammis - are in compliance.

We're delivering on our commitment to protect the environment while meeting customer needs for reliable and competitively priced electricity.

We're delivering on our The installation of low-nitrogen-oxide (NOx) burners and other commitment to protect the environmental protection systems has reduced our emissions of environment while meeting NOx by 63 percent and sulfur dioxide by 59 percent since 1990.

customer needs for reliable and Proposals are under consideration in Washington, D.C., that competitively priced electricity.

would require further emission reductions. We support achieving additional reductions in a cost-effective manner. Any law that ultimately results should offer consistency, flexibility and reasonable deadlines to meet reduction targets, and the regulatory certainty needed to encourage future investment in generation and the development of new, more effective technologies.

We've spent nearly $5 billion on environmental protection efforts since passage of the Clean Air Act, 7

JI-Achieving Safety and Operational Improvements The plants achieved other significant accomplishments in The safe and reliable operation of our power plants 2001. Davis-Besse employees ended the year with more than continued to be a top priority in 2001. Employees posted 5.5 million hours worked without a lost-time accident. Beaver another year of impressive safety and operational records. Our Valley Unit 2 operated 363 out of 365 days last year, yielding a company-wide Occupational Safety and Health Administration 99.3 percent availability factor, well above the industry average incident rate of 1.21 per 100 employees ranks us among our of 89 percent. And, plant employees reached more than industry's leaders in safety. 2.5 million hours worked without a lost-time accident in 2001.

This was achieved through the hard work and dedication of Extending the Refueling Outage at Davis-Besse employees, including those at the Bruce Mansfield Plant - our We are extending the refueling outage that began in February largest coal-fired plant - which generated more than 20 percent at the Davis-Besse Nuclear Power Station by at least 60 to of our total output in 2001. Employees at the Mansfield Plant 90 days as we continue to assess necessary repairs to its reactor reached three million hours worked without a lost-time accident. head. A comprehensive inspection - which has not yet been completed - has found cracking on 5 of 69 nozzles that are We also achieved safety and operational milestones at our Beaver inserted into the head of the plant's reactor, as well as corrosion Valley and Davis-Besse nuclear plants, which are operated by around two of the cracked nozzles. Cracked nozzles have been FirstEnergy Nuclear Operating Company. Capacity factors at found at several other plants of similar design.

Davis-Besse and Beaver Valley Unit 2 of 99.8 and 97.2 percent, respectively, ranked the plants among the world's top performers Based on findings to date, we believe that we can repair the in this key measure of plant reliability. existing reactor head. Davis-Besse soon will submit its proposed repair plan to the Nuclear Regulatory Commission, which must approve the plan before repairs are made.

1.66 1 ý54 1.21 Our company-wide Occupational Safety and Health Administration incident rate of 1.21 per 100 employees ranks us among our industry's leaders in safety.

OSHA SAFETY RATING

[INCIDENTSPER 100 EMPLOYEES]

8

We expect repairs to cost between $5 million and $10 million. To further improve performance, we've implemented a regional In addition, the loss of generation output from Davis-Besse management structure in our new service areas in Pennsylvania could increase energy costs between $10 million and $15 million and New Jersey, moving decision making and accountability per month. closer to customers. The decentralized structure has proven effective in our other regions, helping improve operations and Improving Customer Service customer service.

During 2001, we made progress in our ongoing efforts to provide superior customer service. We achieved a key target in In addition, we're installing a new computer software plat customer attitude research that gauges perception of service form called SAP, an information system through which we'll excellence, with more than 60 percent of our customers rating manage customer service and billing, provide management us a 9 or a 10 on a 10-point scale for our performance in areas information, communicate with business partners and meet such as electric service reliability and outage restoration. other needs. Some 200 employees are working on implemen tation of SAP. Its efficiency will play an important role in We're working to further improve performance in these and helping us achieve merger-related benefits while enhancing other areas. And, we're continuing to make the necessary our competitive position. Implementation should be complete investments to enhance the overall reliability of our system.

in the spring of 2003.

We spent nearly $83 million on electric distribution system improvements, including the upgrades of existing facilities and the addition of new substations, overhead and underground FROM LEFTTO RIGHT:

lines and other equipment. We'll invest another $70 million in INSTALLINGUNDERGROUND ELECTRICCABLE4 CONSTRUCTION OF A NEW SUBSTATION

• FIRSTENERGY NUCLEAROPERATING these areas in 2002 throughout our service areas.

COMPANY PRESIDENTROBERTSAUNDERS(R)AND DR. NILSJý DIAZ(L),A COMMISSIONEROF THE NUCLEARREGULATORY COMMISSION, TOURINGTHE PERRYNUCLEAR POWER PLANT With tailored energy and related services packages designed to We're profitable business in competitive markets. Our also taking FirstEnergy strategic Solutions steps tohassecure subsidiary unveiled a new retail marketing strategy, with more emphasis on customizing meet specific needs of individual customers and certain industries, our sales force is better positioned to maximize the number of products and services we provide to each customer.

multiple unregulated energy and related product and service For example, FirstEnergy Solutions is supplying electricity to offerings for commercial and industrial customers in our targeted 74 Giant Eagle superstores and warehouse facilities in region for growth - the northeastern U.S.

Ohio under a multi-year agreement. And, it is managing the Because of the prevalence of consolidated buying decisions in procurement of electricity and natural gas, and providing these markets, FirstEnergy Solutions also reduced its sales and energy conservation recommendations for four PinnacleHealth marketing staff by approximately 30 percent, further enhancing hospitals located in the Harrisburg, Pennsylvania, area.

opportunities for profitable growth.

9

$34.98

$31.56 in grain merchandising and wholesale fertilizer distribution

$22.69 irstEnergy secure Solutions also competitively is helping priced Theand electricity Andersons - a manage natural gas, leader third-party utility bills and identify ways to improve energy efficiency at all of its facilities in six states, including Ohio and Pennsylvania.

And, FirstEnergy Solutions is working with the Electric Power Research Institute and the National Park Service to improve energy efficiency and power quality at five parks, including the YEAR-END MARKET Cuyahoga Valley National Park in northern Ohio. FirstEnergy PRICE PER SHARE Solutions completed energy audits for each of the parks, identifying energy-efficiency opportunities such as heating and lighting savings. It also analyzed alternative sources of electricity for park locations where energy is needed temporarily, or where Approximately 650,000 it is uneconomical to connect to the power grid.

of our Ohio customers Supporting Electric Choice have selected new During the year, we continued to educate customers about suppliers, including electric choice.

some 175,000 who The transition to full competition is under way through electric chose our FirstEnergy choice programs in our three principal states of operation. While Solutions subsidiary, shopping is not occurring at the rate many anticipated in our a certified competitive service areas in Pennsylvania and New Jersey, our Ohio service area has emerged as one of the most active in the country.

supplier in the state.

We're making steady progress toward meeting a target that calls for at least 20 percent of our Ohio customers to switch to new suppliers by 2005. We helped jump-start competition 10 I

in our service area under an innovative agreement through Coordination Agreement (ECAR) region. ECAR oversees system which we're selling 1,120 MW of our generating capacity at reliability in nine East-Central states, including all of Ohio and established prices to competing power marketers and brokers parts of Pennsylvania.

for resale to our customers.

We're also increasing the flexibility of how our generating assets Approximately 650,000 of our Ohio customers have selected are used. We reached an agreement in 2001 to supply new suppliers, including some 175,000 who chose our Pittsburgh, Pennsylvania-based Duquesne Light Company with FirstEnergy Solutions subsidiary, a certified competitive supplier sufficient capacity to meet anticipated capacity credit obligations in the state. Among its customers are those participating in upon its entrance into the PJM West RTO. FirstEnergy also would aggregation or buying groups, including approximately 80,000 in deliver energy to Duquesne Light necessary to meet its provider Toledo who are participating in the city's aggregation group of last resort requirement, in return for delivery of an equal formed under Ohio's Electric Choice law. amount of energy to FirstEnergy's control area.

Further Enhancing Our Competitiveness The agreement must be approved by the Federal Energy We're also taking the necessary steps to enhance the competi Regulatory Commission and is contingent upon PJM certification tiveness of our transmission assets that - with completion of the of our Bruce Mansfield, Beaver Valley and Sammis plants as PJM GPU merger- include 14,700 miles of high-voltage transmission capacity. It also would give us the flexibility to sell the output lines with 103 interconnections and ties to 14 other electric utility from these plants in PJM or ECAR.

systems.

Our American Transmission Systems, Incorporated (ATSI), sub sidiary is continuing to work with eight other regional electric utilities on joining the Midwest or PJM regional transmission organization (RTO). The RTO would operate the transmission assets of its member companies, including those currently owned and operated by ATSI in the East Central Area Reliability FROM LEFTTO RIGHT:

TRANSMISSION TOWER SSKYLINE OF TOLEDO, OHIO, ONEOF MANY CITIES WE SERVE* BICYCLING ALONG THE TOWPATH TRAILINTHE CUYAHOGA VALLEYNATIONAL PARKIN NORTHERNOHIO 11

M The generosity of our employees is rooted in our corporate philosophy, "The greater good is better business."

employees and retirees and matching gifts from the FirstEnergy ties we serve was never more apparent than in 2001. and GPU foundations.

Through their generosity, ur employees' dedication we set an all-time to supporting the communi record in FirstEnergy's annual United Way campaign, with $1.3 million And, we donated $3.4 million to Habitat for Humanity in pledges for 2002 by employees - prior to completion of the International for the construction of approximately 50 houses in merger. These funds are helping support agencies and programs our Ohio service area for families in need. The funding is part of that improve the quality of life in our service area. The our commitment to support residential energy-efficient, low FirstEnergy Foundation pledged another $1.2 million. income housing improvements under our Ohio transition plan.

Employees also far surpassed our company-wide goal of donating The generosity of our employees is rooted in our corporate 200,000 pounds of food to the Harvest for Hunger Food Drive, philosophy, "The greater good is better business." And, we're carrying on that tradition in our expanded service area in collecting the equivalent of 270,000 pounds through food and Pennsylvania and New Jersey - where non-profit organizations cash contributions that are benefiting hunger centers in Ohio received more than $1 million from the GPU Foundation in 2001.

and western Pennsylvania.

We also raised nearly $160,000 to benefit families affected by We're committed to supporting organizations and programs that make our communities better places to live and work, the September 11 terrorist attacks through contributions from based on FirstEnergy's community involvement priorities: to 12 I

FROM LEFTTO RIGHT:

EMPLOYEES COLLECTING DONATIONS TO THE HARVESTFOR HUNGER FOOD ensure the safety and health of the community; to promote DRIVE* TAPINGOF A UNITEDWAY MESSAGE BY CEO PETEBURG,WHO economic development; to advance professional development; CHAIRED THE SUMMIT COUNTY, and, to support employee involvement. OHIO, 2001 CAMPAIGN + EMPLOYEES VOLUNTEERING FORUNITEDWAY'S DAYOF CARING Supporting Economic Development We're also committed to supporting economic development efforts in our service area through programs that promote the 4.3 location, retention and expansion of businesses. They include Export Now, which helps local businesses access resources they need to increase international sales in Canada and Mexico, and Exhibit Now, which helps local companies enhance growth opportunities through trade show marketing.

In 2001, these programs - and others we support - attracted

$2.8 billion in business projects, which should help create or retain more than 5,500 jobs.

ELECTRIC CUSTOMERS SERVED

[MILLIONS]

13

OFFICERS FIRSTENERGY CORP. FIRSTENERGY SERVICE COMPANY H. Peter Burg Nancy C.Ashcom* H. Peter Burg Lynn M. Cavalier Charles E. Jones Vice Chairman and Corporate Secretary Chief Executive Officer Vice President Vice President Chief Executive Officer Thomas C. Navin* Anthony J. Alexander Mark T. Clark David C. Luff Fred D. Hafer Treasurer President and Vice President Vice President Chairman Chief Operating Officer Paulette R. Chatman* Kathryn W. Dindo Stanley F.Szwed Anthony J. Alexander Assistant Controller Earl T. Carey Vice President and Vice President President and Chief Senior Vice President Chief Risk Officer Operating Officer Jeffrey R. Kalata* Bradford F.Tobin Assistant Controller Kevin J. Keough Michael J. Dowling Vice President and Richard H. Marsh* Senior Vice President Vice President Chief Procurement Officer Senior Vice President and Randy Scilla*

Chief Financial Officer Assistant Treasurer Carole B. Snyder Terrance G. Howson Thomas M. Welsh Senior Vice President Vice President Vice President Leila L. Vespoli* Edward J. Udovich*

Senior Vice President Assistant Corporate Mary Beth Carroll Ali Jamshidi David W. Whitehead and General Counsel Secretary Vice President Vice President and Vice President and Chief Information Officer Chief Ethics Officer Harvey L. Wagner* *Also holds the same title Vice President, with FirstEnergyService Controller and Chief Company and FirstEnergy Accounting Officer Solutions Corp.

FIRSTENERGY BOARD OF DIRECTORS H. Peter Burg Dr. Carol A. William F Fred D. Hafer Robert B. Robert L. Russell W. Maier John M. Pietruski Cartwright Conway Heisler, Jr. Loughhead H. Peter Burg, 55 Fred D. Hafer, 61 Russell W. Maier, 65 Vice Chairman of the Board and Chief Chairman of the Board of FirstEnergy Corp. Retired, formerly Chairman of the Board and Executive Officer of FirstEnergy Corp. Director of FirstEnergy Corp. since 2001 Chief Executive Officer of Republic Engineered Director of FirstEnergy Corp. since 1997 and of the former GPU from 1996-2001. Steels, Inc., Massillon, Ohio. Member, Audit and of Ohio Edison from 1989-1997. and Nuclear Committees. Director of Robert B. Heisler, Jr., 53 FirstEnergy Corp. since 1997 and of Ohio Dr. Carol A. Cartwright, 60 Chairman of the Board and Chief Executive Edison from 1995-1997.

President, Kent State University; Kent, Ohio. Officer of KeyBank, Cleveland, Ohio. Member, Chair, Nominating Committee; Member, Compensation and Nominating Committees. John M. Pietruski, 69 Compensation Committee. Director of Director of FirstEnergy Corp. since 1998. Chairman of the Board of Texas Biotechnology FirstEnergy Corp. since 1997 and of Ohio Corporation, Houston, Texas. Member, Edison from 1992-1997. Robert L. Loughhead, 72 Compensation and Finance Committees.

Retired, formerly Chairman of the Board, Director of FirstEnergy Corp. since 2001 William F. Conway, 71 President and Chief Executive Officer of and of the former GPU from 1989-2001.

President of William F Conway & Associates, Weirton Steel Corporation, Weirton, West Inc., Scottsdale, Arizona. Chair, Nuclear Virginia. Chair, Compensation Committee; Committee; Member, Audit Committee. Member, Audit Committee. Director of Director of FirstEnergy Corp. since 1997 FirstEnergy Corp. since 1997 and of Ohio and of the former Centerior Energy Edison from 1980-1997.

Corporation from 1994-1997.

14 I

FIRSTENERGY FIRSTENERGY NUCLEAR SOLUTIONS OPERATING CORP. COMPANY FIRSTENERGY REGIONS Arthur R. Garfield H.Peter Burg OHIO Central Region Western Region President Chairman and Northern Region Stephen E. Morgan John E. Paganie Chief Executive Officer Dennis M. Chack President President Douglas S. Elliott President Senior Vice President Robert F.Saunders Western Region Jacqueline L. Roth President and Paul W. Allison James M. Murray Vice President Guy L.Pipitone Chief Nuclear Officer Vice President President Senior Vice President Lew W. Myers Eastern Region NEW JERSEY R. Joseph Hrach Senior Vice President Thomas A. Clark PENNSYLVANIA Central Region Vice President President Eastern Region Donald M. Lynch Howard W. Bergendahl Jack A. Kline President Alfred G. Roth Vice President Jeffrey A. Elser President Vice President Vice President Northern Region Guy G. Campbell Steven A. Schumacher Steven E. Strah Donald R. Schneider Vice President Southern Region Vice President President Vice President Ronald P. Lantzy John K. Wood President Stephen L. Feld Trent A. Smith Vice President Vice President Vice President I

AL Robert N Pauil I Powers Catherine A Rein Robert C. Savage George M. Smart Carlisle A. H.Trost Jesse T Dr. Patricia K.

Pokelwaldt Williams, Sr. Woolf Robert N. Pokelwaldt, 65 Robert C. Savage, 64 Jesse T. Williams, Sr., 62 Retired, formerly Chairman of the Board and President and Chief Executive Officer of Savage Retired, formerly Vice President of Human Chief Executive Officer of YORK International & Associates, Inc., Toledo, Ohio. Member, Resources Policy, Employment Practices and Corporation, York, Pennsylvania. Member, Finance and Nuclear Committees. Director of Systems of The Goodyear Tire & Rubber Audit and Finance Committees. Director of FirstEnergy Corp. since 1997 and of the former Company, Akron, Ohio. Member, Nominating FirstEnergy Corp. since 2001 and of the former Centerior Energy Corporation from 1990-1997. and Nuclear Committees. Director of GPU from 2000-2001. FirstEnergy Corp. since 1997 and of George M. Smart, 56 Ohio Edison from 1992-1997.

Paul J. Powers, 67 President of Sonoco-Phoenix, Inc., North Retired, formerly Chairman of the Board and Canton, Ohio. Chair, Audit Committee; Dr. Patricia K. Woolf, 67 Chief Executive Officer of Commercial Intertech Member, Finance Committee. Director of Consultant, Author, and Lecturer, Department Corp., Youngstown, Ohio. Chair, Finance FirstEnergy Corp. since 1997 and of Ohio of Molecular Biology, Princeton University, Committee; Member, Compensation Edison from 1988-1997. Princeton, New Jersey. Member, Nominating Committee. Director of FirstEnergy Corp. since and Nuclear Committees. Director of 1997 and of Ohio Edison from 1992-1997. Carlisle A. H. Trost, 71 FirstEnergy Corp. since 2001 and of the Admiral, United States Navy (Retired), former GPU from 1983-2001.

Catherine A. Rein, 59 former Chief of Naval Operations, Annapolis, President and Chief Executive Officer of Maryland. Member, Nominating and Nuclear Metropolitan Property and Casualty Insurance Committees. Director of FirstEnergy Corp. since Company, Warwick, Rhode Island. Member, 2001 and of the former GPU from 1990-2001.

Audit and Compensation Committees. Director of FirstEnergy Corp. since 2001 and of the former GPU from 1989-2001.

15

MANAGEMENT REPORT The consolidated financial statements were prepared by the management of FirstEnergy Corp., who takes responsibility for their integrity and objectivity. The statements were prepared in conformity with accounting principles generally accepted in the United States and are consistent with other financial information appearing elsewhere in this report. Arthur Andersen LLP, independent public accountants, have expressed an unqualified opinion on the Company's consolidated financial statements.

The Company's internal auditors, who are responsible to the Audit Committee of the Board of Directors, review the results and performance of operating units within the Company for adequacy, effectiveness and reliability of accounting and reporting systems, as well as managerial and operating controls.

The Audit Committee consists of six nonemployee directors whose duties include: consideration of the adequacy of the internal controls of the Company and the objectivity of financial reporting; inquiry into the number, extent, adequacy and validity of regular and special audits conducted by independent public accountants and the internal auditors; recommendation to the Board of Directors of independent accountants to conduct the normal annual audit and special purpose audits as may be required; and reporting to the Board of Directors the Committee's findings and any recommendation for changes in scope, methods or procedures of the auditing functions.

The Committee also reviews the results of management's programs to monitor compliance with the Company's policies on business ethics and risk management. The Audit Committee held four meetings in 2001.

Richard H. Marsh Harvey L.Wagner Senior Vice President Vice President, Controller and Chief Financial Officer and Chief Accounting Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of FirstEnergy Corp.:

We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, common stockholders' equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FirstEnergy Corp. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

As explained in Note 1 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities by adopting Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended.

Arthur Andersen LLP Cleveland, Ohio, March 18, 2002 16 I

F RSTENERGY CORP. 2001 SELECTED FINANCIAL DATA (In thousands, except pershare amounts)

For the Years Ended December 31, 2001 2000 1999 1998 1997 Revenues $ 7,999,362 $ 7,028,961 $ 6,319,647 $ 5,874,906 $ 2,961,125 Income Before Extraordinary Item and Cumulative Effect of Accounting Change $ 654,946 $ 598,970 $ 568,299 $ 441,396 $ 305,774 Net Income $ 646,447 $ 598,970 $ 568,299 $ 410,874 $ 305,774 Basic Earnings per Share of Common Stock:

Before Extraordinary Item and Cumulative Effect of Accounting Change $2.85 $2.69 $2.50 $1.95 $1.94 After Extraordinary Item and Cumulative Effect of Accounting Change $2.82 $2.69 $2.50 $1.82 $1.94 Diluted Earnings per Share of Common Stock:

Before Extraordinary Item and Cumulative Effect of Accounting Change $2.84 $2.69 $2.50 $1.95 $1.94 After Extraordinary Item and Cumulative Effect of Accounting Change $2.81 $2.69 $2.50 $1.82 $1.94 Dividends Declared per Share of Common Stock $1.50 $1.50 $1.50 $1.50 $1.50 Total Assets $37,351,513 $17,941,294 $18,224,047 $18,192,177 $18,261,481 Capitalization at December 31:

Common Stockholders' Equity $ 7,398,599 $ 4,653,126 $ 4,563,890 $ 4,449,158 $ 4,159,598 Preferred Stock:

Not Subject to Mandatory Redemption 480,194 648,395 648,395 660,195 660,195 Subject to Mandatory Redemption 594,856 161,105 256,246 294,710 334,864 Long-Term Debt* 12,865,352 5,742,048 6,001,264 6,352,359 6,969,835 Total Capitalization* $21,339,001 $11,204,674 $11,469,795 $11,756,422 $12,124,492

"*2001 includes approximately $1.4 billion of long-term debt (excluding long-term debt due to be repaid within one year)included in "Liabilities Related to Assets Pending Sale" on the ConsolidatedBalance Sheet as of December31, 2001.

PRICE RANGE OF COMMON STOCK The Common Stock of FirstEnergy Corp. is listed on the New York Stock Exchange and is traded on other registered exchanges.

2001 2000 First Quarter High-Low $31.75 $25.10 $23.56 $18.00 Second Quarter High-Low 32.20 26.80 26.88 20.56 Third Quarter High-Low 36.28 29.60 27.88 22.94 Fourth Quarter High-Low 36.98 32.85 32.13 24.11 Yearly High-Low 36.98 25.10 32.13 18.00 Prices are basedon reportspublished in The Wall Street Journal for New York Stock Exchange Composite Transactions.

HOLDERS OF COMMON STOCK There were 173,121 and 172,285 holders of 297,636,276 shares of FirstEnergy's Common Stock as of December 31, 2001 and January 31, 2002, respectively. Information regarding retained earnings available for payment of cash dividends is given in Note 4A.

17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS ($2.3 billion) plus goodwill existing at GPU ($1.9 billion) at the time OF OPERATIONS AND FINANCIAL CONDITION of the merger is not being amortized, reflecting the application of SFAS 142, "Goodwill and Other Intangible Assets." Goodwill contin This discussion includes forward-looking statements based on ues to be subject to review for potential impairment (see Recently information currently available to management that is subject to Issued Accounting Standards). Prior to consummation of the GPU certain risks and uncertainties.Such statements typically contain, merger we identified certain GPU international operations (see Note 2 but are not limited to, the terms anticipate,potential, expect, Divestitures-International Operations) providing gas transmission and believe, estimate and similar words. Actual results may differ electric distribution services for divestiture within twelve months of the materially due to the speed and nature of increasedcompetition merger date. These operations constitute individual "lines of business" and deregulation in the electric utility industry economic or as defined in Accounting Principles Board Opinion (APB) No. 30, weather conditions affecting future sales and margins, changes "Reporting the Results of Operations - Reporting the Effects of in markets for energy services, changing energy and commodity Disposal of a Segment of a Business, and Extraordinary, Unusual and market prices, legislative and regulatory changes (includingrevised Infrequently Occurring Events and Transactions" with physically and environmental requirements), the availabilityand cost of capital, operationally separable activities. Application of Emerging Issues Task our ability to accomplish or realize anticipatedbenefits from Force (EITF) Issue No. 87-11, "Allocation of Purchase Price to Assets strategic initiativesand other similar factors. to Be Sold," requires that expected, pre-sale cash flows (including incremental interest costs on related acquisition debt) of these FirstEnergy Corp. is a holding company that provides regulated operations be considered part of the purchase price allocation.

and competitive energy services (see Results of Operations Accordingly, subsequent to the merger date, results of operations Business Segments) domestically and internationally. The international (and related interest expense) of these international subsidiaries have operations were acquired as part of FirstEnergy's acquisition of GPU, not been included in FirstEnergy's Consolidated Statement of Income.

Inc. in November 2001. GPU Capital, Inc. and its subsidiaries provide Additionally, assets and liabilities of these international operations electric distribution services in foreign countries. GPU Power, Inc. and have been segregated under separate captions - "Assets Pending its subsidiaries develop, own and operate generation facilities in Sale" and "Liabilities Related to Assets Pending Sale" on FirstEnergy's foreign countries. Sales are pending for portions of the international Consolidated Balance Sheet.

operations (see Capital Resources and Liquidity). Prior to the GPU merger, regulated electric distribution services were provided to Results of Operations portions of Ohio and Pennsylvania by our wholly owned subsidiaries Net income increased to $646.4 million in 2001, compared to

- Ohio Edison Company (OE), The Cleveland Electric Illuminating $599.0 million in 2000 and $568.3 million in 1999. Net income Company (CEI), Pennsylvania Power Company (Penn) and The Toledo in 2001 included an after-tax charge of $8.5 million resulting from Edison Company (TE) with American Transmission Systems, Inc. (ATSI) the cumulative effect of an accounting change due to the adoption providing transmission services. Following the GPU merger, regulated of SFAS 133, "Accounting for Derivative Instruments and Hedging services are also provided through wholly owned subsidiaries -. Activities." Excluding the seven weeks of the former GPU companies' Jersey Central Power & Light Company (JCP&L), Metropolitan Edison results (and related interest expense on acquisition debt), net income Company (Met-Ed) and Pennsylvania Electric Company (Penelec) increased to $613.7 million in 2001 due to reduced depreciation and

- which provide electric distribution and transmission services to amortization, general taxes and net interest charges. The benefit portions of Pennsylvania and New Jersey. The coordinated delivery of these reductions was offset in part by lower retail electric sales, of energy and energy-related products to customers in unregulated increased other operating expenses and higher gas costs. In 2000, markets is provided through a number of subsidiaries, often under lower fuel costs, increased generation output, reduced financing master contracts providing for the delivery of multiple energy and costs and gains realized on the sale of emission allowances energy-related services. Prior to the GPU merger, competitive services contributed to the increase in net income from the prior year.

were principally provided by FirstEnergy Solutions Corp. (FES), Total revenues increased $970.4 million in 2001 compared FirstEnergy Facilities Services Group, LLC (FEFSG) and MARBEL Energy to 2000. Excluding the seven weeks of results from the former Corporation. Following the GPU merger, competitive services are also GPU companies, total revenues increased $336.7 million following provided through GPU Advanced Resources, Inc. and MYR Group, Inc. a $709.3 million increase in 2000. In both 2001 and 2000, the additional sales resulted from an expansion of our unregulated GPU Merger businesses, which more than offset lower sales from our electric On November 7, 2001, the merger of FirstEnergy and GPU utility operating companies (EUOC). Sources of changes in pre became effective with FirstEnergy being the surviving company. merger and post-merger companies' revenues during 2001 The merger was accounted for using purchase accounting under and 2000, compared to the prior year, are summarized in the the guidelines of Statement of Financial Accounting Standards No. following table:

(SFAS) 141, "Business Combinations." Under purchase accounting, the results of operations for the combined entity are reported from the point of consummation forward. As a result, FirstEnergy's financial statements for 2001 reflect twelve months of operations for FirstEnergy's pre-merger organization and only seven weeks of operations (November 7, 2001 to December 31, 2001) for the former GPU companies. Additional goodwill resulting from the merger FI RST ENERGY 18 I

Sources of Revenue Changes 2001 kilowatt-hour sales within Ohio as a result of retail customers switch Increase (Decrease) (In millions) ing to FES, our unregulated subsidiary, under Ohio's electricity choice Pre-Merger Companies: program. The higher kilowatt-hour sales in Ohio were partially offset Electric Utilities (Regulated Services): by lower sales in markets outside of Ohio as more customers Retail electric sales $(240.5) $(36.8) returned to their local distribution companies. Declining sales to Other revenues (22.6) 4.7 higher-priced eastern markets contributed to an overall decline in Total Electric Utilities (263.1) (32.1) retail competitive sales revenue in 2001 from the prior year, despite an increase in kilowatt-hour sales in Ohio's competitive market.

Unregulated Businesses (Competitive Services): EUOC retail revenues decreased by $36.8 million in 2000 com Retail electric sales (19.9) 170.7 Wholesale electric sales 287.1 105.7 pared to 1999, as a result of lower unit prices, which were partially Gas sales 226.1 376.3 offset by increased generation sales volume. Despite a milder sum Other revenues 106.5 88.7 mer, retail electric generation sales were 2% higher in 2000 than Total Unregulated Businesses 599.8 741.4 the previous year. Total electric generation sales (including unregulat ed sales) increased 8.4% in 2000, compared to 1999. Unregulated Total Pre-Merger Companies 336.7 709.3 retail sales more than tripled in 2000 reflecting our marketing efforts Former GPU Companies:

to expand retail electric sales to targeted unregulated markets in the Electric utilities 570.4 eastern seaboard states, principally the commercial and industrial Unregulated businesses 101.9 sectors. The cooler summer weather reduced retail customer Total Former GPU Companies 672.3 demand, making more of our energy available to the wholesale Intercompany Revenues (38.6) market. As a result, we were able to achieve moderate growth in kilowatt-hour sales to that market in 2000. EUOC kilowatt-hour Net Revenue Increase $970.4 $709.3 deliveries (to customers in our franchise areas) increased in 2000 from the prior year due to additional sales to commercial and indus Electric Sales trial customers. Kilowatt-hour sales to residential customers declined.

EUOC retail electric sales revenues for our pre-merger companies Other electric utility revenues increased in 2000 from the previous decreased by $240.5 million in 2001, compared to 2000, primarily year primarily due to additional transmission service revenue.

due to lower generation kilowatt-hour sales reflecting the result of Changes in electric generation sales and distribution deliveries customer choice in Ohio and the influence of a declining national in 2001 and 2000 for our pre-merger companies are summarized economy on our regional business activity, which reduced our distri in the following table:

bution deliveries. Both unit prices and sales volumes declined from Changes in Kilowatt-hour Sales 2001 2000 the prior year. As a result of opening Ohio to competing generation suppliers in 2001, sales of electric generation by alternative suppliers Increase (Decrease) in our franchise area increased to 11.3% of total energy delivered, Electric Generation Sales:

Retail compared to 0.8% in 2000. Consequently, generation kilowatt-hour Regulated services (12.2)% 2.0%

sales to retail customers were 12.2% lower in 2001 than the prior Competitive services 10.6% 229.6%

year. Implementation of a 5% reduction in generation charges for Wholesale 165.5% 7.4%

residential customers as part of Ohio's electric utility restructuring Total Electric Generation Sales 8.3% 8.4%

implemented in 2001, also contributed $51.2 million to the reduced electric sales revenues. Weather in 2001 had a minor influence on EUOC Distribution Deliveries:

sales with mild weather in the fourth quarter substantially offsetting Residential 1.7% (1.2)%

Commercial and industrial (3.1)% 2.9%

a net increase in weather-related sales revenue through the third quarter. Kilowatt-hour deliveries to franchise customers were down Total Distribution Deliveries (1.7)% 1.7%

a more moderate 1.7% due in part to the decline in economic conditions, which was a major factor resulting in a 3.1% decrease in kilowatt-hour deliveries to commercial and industrial customers. Other Sales Other regulated electric revenues decreased by $22.6 million in 2001, Natural gas revenues were the largest source of increases in other compared to the prior year, due in part to reduced customer reserva sales in 2001. Beginning November 1, 2000, residential and small tion of transmission capacity. business customers in the service area of Dominion East Ohio, a non Total electric generation sales increased by 8.3% in 2001 com affiliated gas utility, began shopping among alternative gas suppliers pared to the prior year - sales to the wholesale market were the as part of a customer choice program. FES took advantage of this largest single factor contributing to this increase. While revenues opportunity to expand its customer base. The average number of from the wholesale market increased $287.1 million in 2001 from retail gas customers served by FES increased to approximately 161,000 the prior year, kilowatt-hour sales to that market more than doubled in 2001 from approximately 44,000 in 2000. Total gas sales increased as nonaffiliated energy suppliers made use of the 1,120 megawatts by $226.1 million or 40% from the prior year. In 2000, retail natural (MVW) supply commitment under our Ohio transition plan, and reduced gas revenues were the largest source of increase in other sales.

sales to the regulated retail market made additional energy available Collectively, three gas acquisitions in 1999 (Atlas Gas Marketing Inc.,

to pursue opportunities in the wholesale market. Retail kilowatt Belden Energy Services Company and Volunteer Energy LLC), as well hour sales by our competitive services segment increased by 10.6% as increased retail marketing efforts, significantly expanded retail gas in 2001, compared to 2000. The increase resulted from expanding revenues. Wholesale gas revenues were also higher.

19

Expenses ing costs from the competitive services business segment due to Total expenses increased $790.2 million in 2001, which included expanded operations contributed $56.9 million to the increase. Partially

$542.4 million of incremental expenses for the former GPU compa offsetting these higher other operating expenses was a reduction in nies during the last seven weeks of 2001. For our pre-merger low-income payment plan customer costs and a $30.2 million decrease companies, total expenses increased $280.4 million in 2001 and in nuclear operating costs in 2001, compared to the prior year,

$739.8 million in 2000, compared to the prior year. Sources of resulting from one less refueling outage.

changes in pre-merger and post-merger companies' expenses in Fossil operating costs increased $44.3 million in 2001 from last 2001 and 2000, compared to the prior year, are summarized in the year due principally to planned maintenance work at the Mansfield following table: generating plant. Pension costs increased by $32.6 million in 2001 from the prior year primarily due to lower returns on pension plan Sources of Expense Changes 2001 2000 assets (due to significant market-related reductions in the value of Increase (Decrease) (Inmillions) pension plan assets), the completion of the 15-year amortization Pre-Merger Companies: of OE's pension transition asset and changes to plan benefits.

Fuel and purchased power $ 48.7 $125.9 Health care benefit costs also increased by $21.4 million in 2001, Purchased gas 266.5 382.9 compared to 2000, principally due to an increase in the health Other operating expenses 178.2 231.7 Depreciation and amortization (99.0) (4.3) care cost trend rate assumption for computing post-retirement General taxes (114.0) 3.6 health care benefit liabilities.

In 2000, other operating expenses increased from 1999 due to Total Pre-Merger Companies 280.4 739.8 several factors. A significant portion of the increase resulted from Former GPU Companies 542.4 additional nuclear costs associated with three refueling outages in Intercompany Expenses (32.6) 2000 versus two during the previous year and increased nuclear Net Expense Increase $790.2 $739.8 ownership resulting from the Duquesne asset exchange. Costs incurred to improve the availability of our fossil generation fleet and leased portable diesel generators, acquired as part of our summer The following comparisons reflect variances for the pre-merger supply strategy, added to other expenses for the EUOC in 2000, companies only, excluding the incremental expenses for the former compared to 1999. We also incurred increased reserves for poten GPU companies during the last seven weeks of 2001. tially uncollectible accounts from customers in the steel sector as The increase in fuel expense in 2001 compared to 2000 ($24.3 mil well as a reserve for expected construction contract losses at FEFSG.

lion) resulted from the substitution of coal and natural gas fired The increase in other operating costs in 2000 from 1999 also reflect generation for nuclear generation (which has lower unit fuel costs than ed an increase in expenses related to expanded operations of the fossil fuel) during a period of reduced nuclear availability resulting from competitive services business segment. Partially offsetting the higher both planned and unplanned outages. Coal prices were also higher costs were increased gains of $38.5 million realized from the sale of during that period. Purchased power costs increased early in 2001, emission allowances in 2000 as well as the absence of nonrecurring compared to 2000, due to higher winter prices and additional pur costs recognized in the prior year chased power requirements during that period, with the balance of the Charges for depreciation and amortization decreased by $99.0 year offsetting all but $24.4 million of that increase, reflecting generally million in 2001 and $4.3 million in 2000 from the prior year.

lower prices and reduced external power needs than last year's. Approximately $64.6 million of the decrease in 2001 resulted from In 2000, fuel and purchased power increased $125.9 million due to lower incremental transition cost amortization under FirstEnergy's a $201.6 million increase in fuel and purchased power expense of Ohio transition plan compared to accelerated cost recovery in con FirstEnergy Trading Services Inc. (FETS), a wholly owned subsidiary, nection with OE's prior rate plan. The reduction in depreciation and reflecting expansion of its operations to support our retail marketing amortization also reflected additional cost deferrals of $51.2 million efforts (FETS operations were assumed by FES in 2001). Excluding for recoverable shopping incentives under the Ohio transition plan, those competitive activities, fuel and purchased power costs decreased partially offset by increases associated with depreciation on recently

$75.7 million in 2000, compared to 1999. Lower fuel expense completed combustion turbines.

accounted for all of the reduction, declining $103.6 million from In November 2001, we announced an agreement to sell four of our 1999, despite a 7% increase in the output from our generating coal-fired power plants to NRG Energy, Inc. The plants meet the crite units due to additional nuclear generation, the expiration of an ria under SFAS 121, "Accounting for the Impairment of Long-Lived above-market coal contract and continued improvement in coal Assets and for Long-Lived Assets to be Disposed Of" and have been blending strategies. Purchased power costs increased $27.9 million classified as assets to be disposed of since November 2001.

in 2000 from the prior year due to higher average prices and to Accordingly, depreciation of those plants ceased pending their sale.

additional kilowatt-hours purchased. Purchased gas costs increased Due to the cessation of depreciation on those plants, depreciation was 48% in 2001 and 224% in 2000 from the prior year. The increases reduced by $6.6 million in 2001 from what it otherwise would have were due principally to the expansion of FES's retail gas business. been. Under SFAS 121 guidance, the long-lived assets to be disposed Other operating expenses increased by $178.2 million in 2001 and of must be included on the balance sheet at the lower of their carry by $231.7 million in 2000 compared to the prior year. The significant ing amount or fair value less cost to sell (see Outlook - Optimizing the reduction in 2001 of gains from the sale of emission allowances, higher Use of Assets) and at year end continued to be reported at their carry fossil operating costs and additional employee benefit costs accounted ing amount of $539 million.

for $144.5 million of the increase in 2001. Additionally, higher operat- In 2000, depreciation and amortization was reduced by $9.8 mil-FIRSTE NE RGY G0 20 I

lion in the second half of the year, following approval by the Public alternative generation supplier. OE, CEI and TE (Ohio Companies) and Utilities Commission of Ohio (PUCO) of FirstEnergy's Ohio transition Penn obtain generation through a power supply agreement with the plan. Incremental transition costs recovered in 2001 and cost recov competitive services segment (see Outlook - Business Organization).

ery accelerated under OE's rate plan and Penn's restructuring plan in The competitive services segment includes all unregulated energy and 2000 and 1999 are summarized by income statement caption in the energy-related services including commodity sales (both electricity and following table: natural gas) in the retail and wholesale markets, marketing, genera tion, trading and sourcing of commodity requirements, as well as Accelerated Cost Recovery 2001 2000 1999 other competitive energy application services. Competitive products are increasingly marketed to customers as bundled services, often (inmillions)

Depreciation and amortization $268.0 $332.6 $333.3 under master contracts. Financial results discussed below include inter Income tax amortization 41.1 42.6 18.7 segment revenue. A reconciliation of segment financial results to consolidated financial results is provided in Note 7 to the consolidated Total Accelerations $309.1 $375.2 $352.0 financial statements.

General taxes declined $114.0 million from last year primarily due Regulated Services to reduced property taxes and other state tax changes in connection Net income increased to $640.2 million in 2001, compared to with the Ohio electric industry restructuring. In addition, as a result $464.4 million in 2000 and $413.9 million in 1999. Excluding the of successfully resolving certain pending tax issues, a one-time last seven weeks of 2001 results associated with the former GPU benefit of $15 million was also recognized in 2001. The reduction companies, net income increased by $98.7 million in 2001. The in general taxes was partially offset by $66.6 million of new Ohio increases in pre-merger net income are summarized in the following franchise taxes, which are classified as state income taxes on the table:

Consolidated Statements of Income. Regulated Services 2001 2000 Net Interest Charges Increase (Decrease) (Inmillions)

Revenues $(130.2) $ 57.5 Net interest charges increased $26.6 million in 2001, compared Expenses (345.2) 54.1 to 2000. This increase reflects interest on $4 billion of long-term Income Before Interest and Income Taxes 215.0 3.4 debt issued by FirstEnergy in connection with the merger and relat ed bridge financing, which totaled $40.4 million. Excluding the Net interest charges (16.8) (55.9) results associated with the last seven weeks of 2001 for the former Income taxes 133.1 8.8 GPU companies and merger-related financing, net interest charges Net Income Increase $ 98.7 $ 50.5 decreased $39.8 million in 2001, compared to a $43.2 million decrease in 2000 from the prior year. We continued to redeem and refinance our outstanding debt and preferred stock, maintaining a Distribution throughput was 1.7% lower in 2001, compared to downward trend in financing costs during 2001, before the effects 2000, reducing external revenues by $245.7 million. Partially offset of the GPU merger. ting the decrease in external revenues were revenues from FES for After the merger with GPU became probable, we established cash the rental of fossil generating facilities and the sale of generation flow hedges under SFAS 133 covering a portion of our future inter from nuclear plants, resulting in a net $130.2 million reduction to est payments in connection with the anticipated issuance of $4 total revenues. Expenses were $345.2 million lower in 2001 than billion of acquisition-related debt. The hedges provided us with pro 2000 due to lower purchased power, depreciation and amortization tection against a possible upward move in interest rates but limited and general taxes, offset in part by higher other operating expenses.

our ability to completely participate in the benefits of a downward Lower generation sales reduced the need to purchase power from move. Due to a decline in interest rates during the period in which FES, with a resulting $269.0 million decline in those costs in 2001 cash flow hedges were in place, FirstEnergy incurred a net deferred from the prior year. Other operating expenses increased by $178.5 loss in connection with this transaction and a related reduction in million in 2001 from the previous year reflecting a significant reduc other comprehensive income totaling $134 million (after tax). The tion in 2001 of gains from the sale of emission allowances, higher cash flow hedges were the primary contributors to the current net fossil operating costs and additional employee benefit costs. Lower deferred loss of $169.4 million included in Accumulated Other incremental transition cost amortization and the new shopping Comprehensive Loss (AOCL) as of December 31, 2001 for derivative incentive deferrals under FirstEnergy's Ohio transition plan in 2001 hedging activity. In accordance with the requirements of SFAS 133, as compared with the accelerated cost recovery in connection with this amount is being amortized from AOCL to interest expense over OE's prior rate plan in 2000, resulting in a $131.0 million reduction the corresponding interest payment periods hedged - 5,10 and 30 in depreciation and amortization in 2001. A $123.6 million decrease years. in general taxes in 2001 from the prior year primarily resulted from reduced property taxes and other state tax changes in connection Results of Operations - Business Segments with the Ohio electric industry restructuring.

We manage our business as two separate major business segments Lower unit prices in 2000 compared to 1999 produced a $33.2

- regulated services and competitive services. The regulated services million decrease in revenues from nonaffiliates despite a 1.7%

segment designs, constructs, operates and maintains our regulated increase in kilowatt-hour deliveries. Rental of fossil generating domestic transmission and distribution systems. It also provides gener facilities and the sale of generation from nuclear plants more than ation services to franchise customers who have not chosen an 21

offset the reduced external revenue resulting in a net $57.5 million to the additional purchased gas and purchased power costs result increase in total revenues. Expenses increased $54.1 million in 2000 ing from the increased sales. The exchange of fossil assets for from 1999 primarily due to higher purchased power costs resulting nuclear assets with Duquesne Light Company in December 1999 from higher average prices and additional megawatt-hours pur changed the mix of expenses, increasing plant operating costs and chased, as well as higher other operating costs. Interest charges decreasing fuel expense. The resulting net income increase primarily in 2000 decreased $55.9 million compared to 1999, reflecting reflected the contribution of competitive electric sales offset in part the impact of net debt redemptions and refinancings and was by higher interest charges.

the primary contributor to the increase in net income.

Capital Resources and Liquidity Competitive Services We had approximately $220.2 million of cash and temporary Net income decreased to $57.2 million in 2001, compared to investments and $614.3 million of short-term indebtedness on

$137.2 million in 2000 and $129.2 million in 1999. Excluding the last December 31, 2001. Our unused borrowing capability included seven weeks of 2001 results associated with the former GPU compa $1.115 billion under revolving lines of credit and $84 million from nies, net income decreased $83.0 million in 2001. The changes to unused bank facilities. At the end of 2001, OE, CEI, TE and Penn pre-merger net income are summarized in the following table: had the capability to issue $2.2 billion of additional first mortgage bonds (FMB) on the basis of property additions and retired bonds.

Competitive Services 2001 2000 The former GPU EUOC will not issue FMB other than as collateral for Increase (Decrease) (Inmillions) senior notes, since their senior note indentures prohibit (subject to Revenue $254.1 $789.6 certain exceptions) the GPU EUOC from issuance of any debt which Expenses 366.9 773.5 is senior to the senior notes. As of December 31, 2001, the GPU Income Before Interest and Income Taxes (112.8) 16.1 EUOC had the capability to issue $795 million of additional senior Net interest charges 13.5 2.6 notes based upon FMB collateral. At year end 2001, based upon Income taxes (51.8) 5.5 applicable earnings coverage tests and their respective charters, OE, Cumulative effect of a change in accounting (8.5) Penn, TE and JCP&L could issue $7.0 billion of preferred stock Net Income Increase (Decrease) $ (83.0) $ 8.0 (assuming no additional debt was issued). CEI, Met-Ed and Penelec have no restrictions on the issuance of preferred stock.

At the end of 2001, our common equity as a percentage of capi Sales to nonaffiliates increased $523.1 million in 2001, compared to talization, including debt relating to assets held for sale, stood at the prior year, with electric revenues contributing $260.1 million, natu 35% compared to 42% at the end of 2000. This decrease resulted ral gas revenues $226.1 million and the balance of the increase from from the addition of $8.2 billion of debt, $378 million of preferred energy-related services. Reduced power requirements by the regulated stock and $2.6 billion of common stock (issued to former GPU services segment reduced internal revenues by $269.0 million. stockholders) to our capital structure as a result of the GPU acquisi Expenses increased $366.9 million in 2001 from 2000 primarily due to tion. The incremental debt included $6.0 billion of the former GPU a $266.5 million increase in purchased gas costs and increases result companies' debt, $1.5 billion of which was replaced with FirstEnergy ing from additional fuel and purchased power costs (see Results of debt and an additional $2.2 billion of FirstEnergy debt used to pay Operations) as well as higher expenses for energy-related services. GPU shareholders as part of the merger.

Reduced margins for both major competitive product areas - electrici Following approval of our merger with GPU by the New Jersey ty and natural gas - contributed to the reduction in net income, along Board of Public Utilities (NJBPU) on September 26, 2001, and by the with higher interest charges and the cumulative effect of the SFAS Securities and Exchange Commission on October 29, 2001, Standard 133 accounting change. Margins for electricity and gas sales were &Poor's (S&P) and Moody's Investors Service established initial credit both adversely affected by higher fuel costs. ratings for FirstEnergy's holding company and adjusted those of our In 2000, sales to nonaffiliates increased $749.3 million, com EUOC to reflect our new consolidated credit profile. S&P's outlook on pared to the prior year, with electric revenues contributing $283.5 all our credit ratings isstable. On February 22, 2002, Moody's million, natural gas revenues $376.3 million and the balance of the announced a change in its outlook for the credit ratings of FirstEnergy, increase from energy-related services. Additional power sales to the Met-Ed and Penelec from stable to negative. The change was based regulated services segment increased revenues by $40.3 million. upon a decision by the Commonwealth Court of Pennsylvania to Expenses increased $773.6 million in 2000 from 1999 primarily due remand to the Pennsylvania Public Utility Commission (PPUC) for Contractual Obligations 2002 2003 2004 2005 2006 Thereafter Total (In millions)

Long-term debt* $1,205 $ 711 $1,179 $ 854 $1,433 $ 7,596 $12,978 Short-term borrowings* 614 ..- - 614 Mandatory preferred stock 30 13 13 4 4 572 636 Capital leases 6 6 6 5 6 10 39 Operating leases 153 156 184 186 183 2,036 2,898 Unconditional fuel and power purchases 2,493 1,584 1,369 1,219 1,250 6,056 13,971 Total* $4,501 $2,470 $2,751 $2,268 $2,876 $16,270 $31,136

• Excludes approximately $1.75 billion of long-term debt and $233.8 million of-short-term borrowingsrelated to pending divestituresdiscussed below F iRS TE ER G Y 22 I

reconsideration its decisons regarding rate relief, accounting deferrals Commodity Price Risk and the mechanism for sharing merger savings rendered in connection We are exposed to market risk primarily due to fluctuations in elec with its approval of the GPU merger (see State Regulatory Matters tricity, natural gas and coal prices. To manage the volatility relating to Pennsylvania). these exposures, we use a variety of non-derivative and derivative Our cash requirements in 2002 for operating expenses, construc instruments, including forward contracts, options, futures contracts and tion expenditures, scheduled debt maturities and preferred stock swaps. The derivatives are used principally for hedging purposes and, redemptions are expected to be met without increasing our net to a much lesser extent, for trading purposes. The change in the fair debt and preferred stock outstanding. Major contractual obligations value of commodity derivative contracts related to energy production for future cash payments are summarized in the table on the during 2001 is summarized in the following table:

preceding page.

Our capital spending for the period 2002-2006 isexpected to be Increase (Decrease) in the Fair Value about $3.4 billion (excluding nuclear fuel), of which approximately of Commodity Derivative Contracts

$850 million applies to 2002. Investments for additional nuclear fuel (In millions) during the 2002-2006 period are estimated to be approximately $536 Outstanding as of January 1,2001 with SFAS 133 million, of which about $54 million applies to 2002. During the same cumulative adjustment $ 60.5 Acquisition of GPLU 14.9 period, our nuclear fuel investments are expected to be reduced by Contract value when entered 0.6 approximately $507 million and $101 million, respectively, as the Increase/(decrease) invalue of existing contracts (97.1) nuclear fuel is consumed. Change intechniques/assumptions Off balance sheet obligations primarily consist of sale and lease Settled contracts (45.3) back arrangements involving Perry Unit 1, Beaver Valley Unit 2 and Outstanding as of December 31, 2001 $(66.4)*

the Bruce Mansfield Plant, which are reflected in the operating lease payments disclosed above (see Note 3). The present value as of "Does not include $11.6 million of derivative contractfair value increase, December 31, 2001, of these sale and leaseback operating lease as of December 31, 2001, representingour 50% share of Great Lakes Energy Partners,LLC commitments, net of trust investments, total $1.5 billion. CEI and TE sell substantially all of their retail customer receivables, which While the valuation of derivative contracts is always based on provided $200 million of off balance sheet financing as of December active market prices when they are available, longer-term contracts 31, 2001 (see Note 1 - Revenues).

FirstEnergy's sale of the former GPU subsidiary, GasNet, in can require the use of model-based estimates of prices in later years due to the absence of published market prices. We currently use December 2001, eliminated $290 million of debt and also provided modeled prices for the later years of some electric contracts. Our

$125 million of net cash proceeds, which were used to reduce model incorporates explicit assumptions regarding future supply and short-term borrowings. Expected proceeds from the pending sales demand and fuel prices. The model provides estimates of the future of four fossil plants and Avon Energy Partners Holdings, a wholly prices for electricity and an estimate of price volatility. We make use owned subsidiary, are shown in the following table:

of these results in developing estimates of fair value for the later Completed and Pending Divestitures years of those electric contracts for financial reporting purposes as well as for internal management decision making. Sources of infor Cash Proceeds Debt Removed Transaction Date**

mation for the valuation of derivative contracts by year are Completed Sale: summarized in the following table:

GasNet $125 million $290 million December 2001 Pending Sales: Source of Information - Fair Value by Contract Year Avon Energy $238 million* $1.7 billion Second Quarter 2002 Lake Plants $1.355 billion $145 million Mid-2002 2002 2003 2004 Thereafter Total

• Based on receipt of $150 million at closing and the present value of (In millions)

Prices actively quoted $(54.1) $(19.9) $ (3.2) $ - $(77.2)

$19 million per year to be received over six years beginning in 2003. Prices based on models - (8.1) 18.9 10.8

• • Estimated closing dates for pending sales.

Total $(54.1) $(19.9) $(11.3) $18.9 $(66.4)

FirstEnergy continues to pursue divestiture of the remainder of its international operations (see Outlook - Optimizing the Use We perform sensitivity analyses to estimate our exposure to the of Assets).

market risk of our commodity position. A hypothetical 10% adverse shift in quoted market prices in the near term on both our trading Market Risk Information and nontrading derivative instruments would not have had a materi We use various market risk sensitive instruments, including deriva al effect on our consolidated financial position or cash flows as of tive contracts, primarily to manage the risk of price, interest rate and December 31, 2001. We estimate that if energy commodity prices foreign currency fluctuations. Our Risk Policy Committee, comprised move on average 10 percent higher or lower, pretax income for the of executive officers, exercises an independent risk oversight func next twelve months would increase or decrease, respectively, by tion to ensure compliance with corporate risk management policies approximately $2.4 million.

and prudent risk management practices.

23

Comparison of Carrying Value to Fair Value 2002 2003 2004 2005 2006 Thereafter Total Fair Value (Dollarsin millions)

Investments other than Cash and Cash Equivalents:

Fixed Income $ 101 $ 97 $314 $ 58 $ 75 $1,901 $ 2,546 $ 2,568 Average interest rate 6.7% 7.7% 7.8% 7.9% 7.9% 6.6% 6.9%

Liabilities Long-term Debt:*

Fixed rate $1,089 $706 $923 $851 $1,411 $6,519 $11,499 $11,698 Average interest rate 8.2% 7.6% 7.2% 8.1% 5.8% 7.1% 7.2%

Variable rate $ 35 $ 5 $256 $ 3 $ 22 $1,077 $ 1,398 $ 1,399 Average interest rate 5.2% 11.5% 3.1% 10.2% 5.2% 3.0% 3.1%

Short-term Borrowings* $ 614 $ 614 $ 614 Average interest rate 2.8% 2.8%

Preferred Stock $ 30 $ 13 $13 $ 4 $ 4 $ 572 $ 636 $ 626 Average dividend rate 8.7% 8.3% 8.3% 7.5% 7.5% 8.3% 8.3%

• Excludes approximately $1.75 billion of long-term debt and $233.8 million of short-term borrowings relatedto pending divestitures.

Interest Rate Risk and expire on the maturity dates of the bonds. Interest expense is Our exposure to fluctuations in market interest rates is reduced recorded based on the fixed sterling interest rate. Characteristics of since a significant portion of our debt has fixed interest rates, as noted currency swap agreements outstanding as of December 31, 2001 in the above table. We are subject to the inherent interest rate risks are summarized in the following table:

related to refinancing maturing debt by issuing new debt securities.

As discussed in Note 3 to the consolidated financial statements, our Currency Swaps - Dollars/Sterling investments in capital trusts effectively reduce future lease obligations, Weighted also reducing interest rate risk. Changes in the market value of our Notional Amount Maturity Average Interest Rate Fair nuclear decommissioning trust funds are recognized by making corre USD Sterling Date USD Sterling Value sponding changes to the decommissioning liability, as described in (DollarslSterlingin millions)

Note 1 to the consolidated financial statements. 350 212 2002 6.73% 7.66% $46.3 250 152 2007 7.05% 7.72% $26.3 250 153 2008 6.46% 6.94% $23.7 Interest Rate Swap Agreements Penelec, GPU Power through a subsidiary and GPU Electric, Inc.

Outlook (through GPU Power UK) use interest rate swap agreements, We continue to pursue our goal of being the leading regional denominated in dollars and sterling, to manage the risk of increases supplier of energy and related services in the northeastern quadrant in variable interest rates. All of the agreements convert variable rate of the United States, where we see the best opportunities for debt to fixed rate debt. As of December 31, 2001, interest rate growth. We intend to provide competitively priced, high-quality swaps denominated in dollars had a weighted average fixed interest products and value-added services - energy sales and services, ener rate of 6.99%; those in sterling had a weighted average fixed inter gy delivery, power supply and supplemental services related to our est rate of 6.00%. The following summarizes the principal core business. As our industry changes to a more competitive envi characteristics of the swap agreements in effect as of December 31, ronment, we have taken and expect to take actions designed to 2001:

create a larger, stronger regional enterprise that will be positioned to Interest Rate Swaps as of December 31, 2001 compete in the changing energy marketplace.

Denomination Notional Amount Maturity Date Fair Value Business Organization (DollarslSterlingin millions) Beginning in 2001, Ohio utilities that offered both competitive Dollars 50 2002 (1.8) and regulated retail electric services were required to implement a (1.1)

Dollars 26 2005 corporate separation plan approved by the PUCO - one which pro Sterling 125 2003 (2.3) vided a clear separation between regulated and competitive operations. Our business is separated into three distinct units - a Foreign Currency Swap Agreements competitive services unit, a regulated services unit and a corporate GPU Electric uses currency swap agreements to manage currency support unit. FES provides competitive retail energy services while risk caused by fluctuations in the US dollar exchange rate related to the EUOC continue to provide regulated transmission and distribu bonds issued in the US by Avon Energy, which owns GPU Power UK. tion services. FirstEnergy Generation Corp. (FGCO), a wholly owned These swap agreements convert principal and interest payments on subsidiary of FES, leases fossil and hydroelectric plants from the this US dollar debt to fixed sterling principal and interest payments, EUOC and operates those plants. We expect the transfer of owner ship of EUOC generating assets to FGCO will be substantially FIR ST E NE RGY 224

completed by the end of the market development period in 2005. State Regulatory Matters All of the EUOC power supply requirements for the Ohio Companies As of January 1, 2001, customers in all of our service areas, cov and Penn are provided by FES to satisfy their "provider of last resort" ering portions of Ohio, Pennsylvania and New Jersey, could select (PLR) obligations, as well as grandfathered wholesale contracts. alternative energy suppliers. Our EUOC continue to deliver power to homes and businesses through their existing distribution systems, Optimizing the Use of Assets which remain regulated. Customer rates have been restructured A significant step toward being the leading regional supplier into separate components to support customer choice. In each of in our target market was achieved when we merged with GPU the states, we have a continuing responsibility to provide power to in November, making us the fourth largest investor-owned electric those customers not choosing to receive power from an alternative system in the nation based on the number of customers served. energy supplier, subject to certain limits. However, despite similari Through the merger we can create a stronger enterprise with ties, the specific approach taken by each state and for each of our greater resources and more opportunities to provide value to our regulated companies varies.

customers, shareholders and employees. However, additional steps Regulatory assets are costs which the respective regulatory agen must be taken in order to deliver the full value of the merger. While cies have authorized for recovery from customers in future periods GPU's former domestic electric utility companies fit well with our and, without such authorization, would have been charged to regional market focus, GPU's former international companies do not. income when incurred. The increase in those assets in 2001 is pri In December 2001, we divested GasNet, an Australian gas transmis marily the result of the acquisition of the former GPU companies. All sion company. Also, the sale of most of our interest in Avon Energy of the regulatory assets are expected to continue to be recovered the holding company for Midlands Electricity plc - to Aquila, Inc. under the provisions of the respective transition and regulatory plans (formerly UtiliCorp United) is pending. The transaction must be com as discussed below. The regulatory assets of the individual compa pleted by April 26, 2002, or either party may terminate the original nies are as follows:

agreement. On March 18, 2002, we announced that we finalized terms of the agreement under which Aquila will acquire a 79.9 per Regulatory Assets as of December 31, cent interest in Avon for approximately $1.9 billion (including the Company 2001 2000 transfer of $1.7 billion of debt). We and Aquila together will own all of the outstanding shares of Avon through a jointly owned sub (Inmillions)

OE $2,025.4 $2,238.6 sidiary, with each company having a 50-percent voting interest. CEI 874.5 816.2 GPU's other foreign companies (excluding GPU Power) are held for TE 388.8 412.7 sale including our investment in Empresa Distribuidora Electrica Penn 208.8 260.2 Regional S.A. The pending divestitures should increase our financial Met-Ed 1,320.5 Penelec 769.8 flexibility by reducing debt and preferred stock, and aid us in provid JCP&L 3,324.8 ing more competitively priced products and services.

On November 29, 2001, we announced an agreement to sell four Total $8,912.6 $3,727.7 of our older coal-fired power plants located along Lake Erie in Ohio to NRG Energy, Inc. Under the agreement, the Ashtabula, Bay Shore, Eastlake and Lake Shore generating plants with a total net generating Ohio Beginning on January 1, 2001, Ohio customers were able to capacity of 2,535 MW will be sold. The transaction includes our choose their electricity suppliers. Customer rates of OE, CEI and TE purchase of up to 10.5 billion kilowatt-hours of electricity annually, similar to the average annual output of the plants, through 2005 were restructured to establish separate charges for transmission and (the end of the market development period under Ohio's Electric distribution, transition cost recovery and a generation-related com ponent. When one of our Ohio customers elects to obtain power Choice Law). The transaction issubject to the receipt of necessary from an alternative supplier, the regulated utility company reduces regulatory approvals. This transaction is consistent with our strategy of aggressively pursuing cost savings to maintain competitively priced the customer's bill with a "generation shopping credit," based on products and services. The sale will allow us to more closely match the regulated generation component plus an incentive, and the customer receives a generation charge from the alternative supplier.

our generating capabilities to the load profiles of our customers, resulting in more efficient operation of our remaining generating Our Ohio EUOC have continuing responsibility to provide energy to service-area customers as PLR through December 31, 2005.

units. It also enables us to concentrate on our coal-fired generation The transition cost portion of rates provides for recovery of certain along the Ohio River, which should contribute to added supply amounts not otherwise recoverable in a competitive generation efficiencies. The net, after-tax gain from the sale, based on the difference between the sale price of the plants and their market price market (such as regulatory assets). Transition costs are paid by all customers whether or not they choose an alternative supplier. Under used in our Ohio restructuring transition plan, will be credited to cus the PUCO-approved transition plan, we assumed the risk of not tomers by reducing the transition cost recovery period. We expect to recovering up to $500 million of transition revenue if the rate of cus use the net proceeds from the sale for the redemption of high cost tomers (excluding contracts and full-service accounts) switching their debt and preferred stock or to reduce other outstanding obligations service from OE, CEI and TE does not reach 20% for any consecutive to provide additional cost savings.

twelve-month period by December 31, 2005 -the end of the market development period. As of December 31, 2001, the customer switch ing rate, on an annualized basis, implies that our risk of not recovering transition revenue has been reduced to approximately $174 million.

25

We are also committed under the transition agreement to make avail rates were restructured into unbundled service charges and addition able 1,120 MW of our generating capacity to marketers, brokers, and al non-bypassable charges to recover stranded costs (confirmed by a aggregators at set prices, to be used for sales only to retail customers NJBPU Final Decision and Order issued in March 2001). JCP&L has a in our Ohio service areas. Through December 31, 2001, approximately PLR obligation, referred to as Basic Generation Service (BGS), until 1,032 MW of the 1,120 MW supply commitment had been secured July 31, 2002. For the period from August 1, 2002 to July 31, 2003, by alternative suppliers. We began accepting customer applications the NJBPU has authorized the auctioning of BGS to meet the electric for switching to alternative suppliers on December 8, 2000; as of demands of customers who have not selected an alternative suppli December 31, 2001 our Ohio EUOC had been notified that over er. The auction was successfully concluded on February 13, 2002, 600,000 of their customers requested generation services from other thereby eliminating JCP&L's obligation to provide for the energy authorized suppliers, including FES, a wholly owned subsidiary. requirements of BGS during that period. Beginning August 1, 2003, the approach to be taken in procuring the energy needs for BGS has Pennsylvania not been determined. The NJBPU recently initiated a formal proceed Choice of energy suppliers by Pennsylvania customers was phased ing to decide how BGS will be handled after the transition period.

in starting in 1999 and was completed by January 1, 2001. The JCP&L is permitted to defer, for future recovery, the amount by Pennsylvania Public Utility Commission authorized rate restructuring which its reasonable and prudently incurred costs for providing BGS plans for Penn, Met-Ed and Penelec, establishing separate charges to non-shopping customers and costs incurred under NUG agree for transmission, distribution, generation and stranded cost recovery, ments exceed amounts currently reflected in its BGS rate and market which is recovered through a "competitive transition charge" (CTC). transition charge rate (for the recovery of stranded costs).

Pennsylvania customers electing to obtain power from an alternative On September 26, 2001, the NJBPU approved the GPU merger supplier have their bills reduced based on the regulated generation subject to the terms and conditions set forth in a settlement agree component, and the customers receive a generation charge from ment with major intervenors. As part of the settlement, we agreed the alternative supplier. to reduce JCP&L's costs deferred for future recovery by $300 million, In June 2001, Met-Ed, Penelec and FirstEnergy entered into a in order to ensure that customers receive the benefit of future merg settlement agreement with major parties in the combined merger er savings. JCP&L wrote off $300 million of its deferred costs in and rate proceedings that, in addition to resolving certain issues October 2001 upon receipt of the final regulatory approval for the concerning the PPUC's approval of the GPU merger, also addressed merger, which occurred on October 29, 2001.

Met-Ed's and Penelec's request for PLR rate relief. Met-Ed and On February 6, 2002, JCP&L received a Financing Order from the Penelec are permitted to defer, for future recovery, the difference NJBPU with authorization to issue $320 million of transition bonds between their actual energy costs and those reflected in their to securitize the recovery of bondable stranded costs associated with capped generation rates. Those costs will continue to be deferred the previously divested Oyster Creek nuclear generating station. The through December 31, 2005. If energy costs incurred by Met-Ed Order grants JCP&L the right to charge a usage-based, non-bypass and Penelec during that period are below their respective capped able transition bond charge (TBC) and provided for the transfer of generation rates, the difference would be used to reduce their the bondable transition property relating to the TBC to JCP&L recoverable deferred costs. Met-Ed's and Penelec's PLR obligations Transition Funding LLC (Transition Funding), a wholly owned limited were extended through December 31, 2010. Met-Ed's and liability corporation. Transition Funding is expected to issue and sell Penelec's CTC revenues will be applied first to PLR costs, then up to $320 million of transition bonds that will be recognized on to stranded costs other than for non-utility generation (NUG) and our Consolidated Balance Sheet in the second quarter of 2002, with finally to NUG stranded costs through December 31, 2010. Met-Ed the TBC providing recovery of principal, interest and related fees and Penelec would be permitted to recover any remaining strand on the transition bonds.

ed costs through a continuation of the CTC, after December 31, 2010, however, such recovery would extend to no later than FERC RegulatoryMatters December 31, 2015. Any amounts not expected to be recovered On December 19, 2001, the Federal Energy Regulatory by December 31, 2015 would be written off at the time such non Commission (FERC) issued an order in which it stated that the recovery becomes probable. Several parties had appealed this Alliance Regional Transmission Organization (Alliance TransCo) did PPUC decision to the Commonwealth Court of Pennsylvania. On not meet agency requirements to operate the Alliance TransCo as an February 21, 2002, the Court affirmed the PPUC decision regard approved Regional Transmission Organization (RTO). It further con ing approval of the GPU merger, remanding the decision to the cluded that National Grid could be the independent Managing PPUC only with respect to the issue of merger savings. The Court Member of the Alliance TransCo. FERC ordered the Alliance TransCo reversed the PPUC's decision regarding the PLR obligations of Met and National Grid to refile their business plan to consider operating Ed and Penelec, and denied the related requests for rate relief by as an independent transmission company within the Midwest ISO or Met-Ed and Penelec. We are considering our response to the another RTO. The order gave the Alliance TransCo 60 days to file a Court's decision, which could include asking the Pennsylvania status report. On January 22, 2002, the Alliance TransCo companies Supreme Court to review the decision. We are unable to predict filed a series of rehearing applications with FERC.

the outcome of these matters.

Supply Plan New Jersey As part of the Restructuring Orders for the States of Ohio, Customers of JCP&L were able to choose among alternative ener Pennsylvania, and New Jersey, the FirstEnergy companies are obligat gy suppliers beginning in late 1999. To support customer choice, ed to supply electricity to customers who do not choose an alternate FIRS TEN RG 26

supplier. The total forecasted peak of this obligation in 2002 is development of regulations regarding hazardous air pollutants from 20,300 MW (10,100 MW in Ohio, 5,400 MW in New Jersey, and electric power plants. The EPA identified mercury as the hazardous air 4,800 MW in Pennsylvania). The successful BGS auction in New pollutant of greatest concern. The EPA established a schedule to pro Jersey removed JCP&L's BGS obligation for 5,100 MW for the period pose regulations by December 2003 and issue final regulations by from August 1, 2002 to July 31, 2003. In that auction FES was a December 2004. The future cost of compliance with these regula successful bidder to provide 1,700 MW during the same period to tions may be substantial.

JCP&L and two other electric utilities in New Jersey. Our current As a result of the Resource Conservation and Recovery Act of supply portfolio contains 13,283 MW of owned generation and 1976, as amended, and the Toxic Substances Control Act of 1976, approximately 1,600 MW of long-term purchases from non-utility federal and state hazardous waste regulations have been promulgat generators. The remaining obligation is expected to be met through ed. Certain fossil-fuel combustion waste products, such as coal ash, a mix of multi-year forward purchases, short-term forward (less than were exempted from hazardous waste disposal requirements pend one year) purchases and spot market purchases. ing the EPA's evaluation of the need for future regulation. The EPA The announced sale of four fossil generating plants expected to has issued its final regulatory determination that regulation of coal close in mid-2002, will have little impact on our supply plan. As part ash as a hazardous waste is unnecessary. In April 2000, the EPA of the asset sale, FirstEnergy has a power purchase agreement under announced that it will develop national standards regulating disposal which the purchaser will provide a similar amount of electricity as of coal ash under its authority to regulate nonhazardous waste.

was expected before the sale. This power purchase agreement runs Various environmental liabilities have been recognized on the from the close of the sale transaction, through December 31, 2005, Consolidated Balance Sheet as of December 31, 2001, based on esti which is the end of the market development period for the Ohio mates of the total costs of cleanup, the Companies' proportionate operating companies. responsibility for such costs and the financial ability of other nonaffili Unregulated retail sales are generally short-term arrangements (less ated entities to pay. The Companies have been named as "potentially than 18 months) at prevailing market prices. They are primarily responsible parties" (PRPs) at waste disposal sites which may require hedged through short-term purchased power contracts, supplement cleanup under the Comprehensive Environmental Response, ed by any of our excess generation when available and economical. Compensation and Liability Act of 1980. Allegations of disposal of hazardous substances at historical sites and the liability involved, are Environmental Matters often unsubstantiated and subject to dispute. Federal law provides We are in compliance with the current sulfur dioxide (S02) and that all PRPs for a particular site be held liable on a joint and several nitrogen oxide (NOx) reduction requirements under the Clean Air basis. In addition, JCP&L has accrued liabilities for environmental reme Act Amendments of 1990. In 1998, the Environmental Protection diation of former manufactured gas plants in New Jersey; those costs Agency (EPA) finalized regulations requiring additional NOx reduc are being recovered by JCP&L through a non-bypassable societal ben tions in the future from our Ohio and Pennsylvania facilities. Various efits charge. The Companies have total accrued liabilities aggregating regulatory and judicial actions have since sought to further define approximately $60 million as of December 31, 2001. We do not NOx reduction requirements (see Note 6 - Environmental Matters). believe environmental remediation costs will have a material adverse We continue to evaluate our compliance plans and other compli effect on financial condition, cash flows or results of operations.

ance options.

Violations of federally approved S02 regulations can result in Legal Matters shutdown of the generating unit involved and/or civil or criminal Various lawsuits, claims and proceedings related to FirstEnergy's penalties of up to $27,500 for each day a unit is in violation. The normal business operations are pending against FirstEnergy and its EPA has an interim enforcement policy for S02 regulations in Ohio subsidiaries. The most significant are described below.

that allows for compliance based on a 30-day averaging period. We Due to our merger with GPU, we own Unit 2 of the Three Mile cannot predict what action the EPA may take in the future with Island (TMI-2) Nuclear Plant. As a result of the 1979 TMI-2 accident, respect to the interim enforcement policy. claims for alleged personal injury against JCP&L, Met-Ed, Penelec In 1999 and 2000, the EPA issued Notices of Violation (NOV) and GPU were filed in the U.S. District Court for the Middle District or a Compliance Order to nine utilities covering 44 power plants, of Pennsylvania. In 1996, the District Court granted a motion for including the W.H. Sammis Plant. In addition, the U.S. Department summary judgment filed by the GPU companies and dismissed the of Justice filed eight civil complaints against various investor-owned ten initial "test cases" which had been selected for a test case trial, utilities, which included a complaint against OE and Penn. The NOV as well as all of the remaining 2,100 pending claims. In November and complaint allege violations of the Clean Air Act (CAA). The civil 1999, the U.S. Court of Appeals for the Third Circuit affirmed the complaint against OE and Penn requests installation of "best avail District Court's dismissal of the ten test cases, but set aside the dis able control technology" as well as civil penalties of up to $27,500 missal of the additional pending claims, remanding them to the per day. Although unable to predict the outcome of these proceed District Court for further proceedings. Following the resolution of ings, we believe the Sammis Plant is in full compliance with the CAA judicial proceedings dealing with admissible evidence, we have again and that the NOV and complaint are without merit. Penalties could requested summary judgment of the remaining 2,100 claims in the be imposed if the Sammis Plant continues to operate without District Court. On January 15, 2002, the District Court granted our correcting the alleged violations and a court determines that the motion. On February 14, 2002, the plaintiffs filed a notice of appeal allegations are valid. The Sammis Plant continues to operate while of this decision (see Note 6 - Other Legal Proceedings). Although these proceedings are pending. unable to predict the outcome of this litigation, we believe that In December 2000, the EPA announced it would proceed with the any liability to which we might be subject by reason of the TMI-2 27

accident will not exceed our financial protection under the Price approximately $109.4 million in TEBSA and is committed, under cer Anderson Act. tain circumstances, to make additional standby equity contributions of In July 1999, the Mid-Atlantic states experienced a severe heat $21.3 million, which we have guaranteed. The total outstanding sen storm which resulted in power outages throughout the service areas ior debt of the TEBSA project is $315 million at December 31, 2001.

of many electric utilities, including JCP&L. In an investigation into the The lenders include the Overseas Private Investment Corporation, US causes of the outages and the reliability of the transmission and dis Export Import Bank and a commercial bank syndicate. GPU had guar tribution systems of all four New Jersey electric utilities, the NJBPU anteed the obligations of the operators of the TEBSA project, up to a concluded that there was not a prima facie case demonstrating that, maximum of $5.8 million (subject to escalation) under the project's overall, JCP&L provided unsafe, inadequate or improper service to its operations and maintenance agreement.

customers. Two class action lawsuits (subsequently consolidated into GPU believed that various events of default have occurred under a single proceeding) were filed in New Jersey Superior Court in the loan agreements relating to the TEBSA project. In addition, ques July 1999 against JCP&L, GPU and other GPU companies seeking tions have been raised as to the accuracy and completeness of compensatory and punitive damages arising from the service inter information provided to various parties to the project in connection ruptions of July 1999 in the JCP&L territory. In May 2001, the court with the project's formation. We continue to discuss these issues and denied without prejudice the defendant's motion seeking decertifica related matters with the project lenders, CORELCA (the government tion of the class. Discovery continues in the class action, but no trial owned Colombian electric utility with an ownership interest in the date has been set. The judge has set a schedule under which factual project) and the Government of Colombia.

legal discovery would conclude in March 2002, and expert reports Moreover, in September 2001, the DIAN (the Colombian national would be exchanged by June 2002. In October 2001, the court held tax authority) had presented TEBSA with a statement of charges argument on the plaintiffs' motion for partial summary judgment, alleging that certain lease payments made under the Lease which contends that JCP&L is bound to several findings of the Agreement with Los Amigos Leasing Company (an indirect wholly NJBPU investigation. The plaintiffs' motion was denied by the Court owned subsidiary of GPU Power) violated Colombian foreign in November 2001 and the plaintiffs' motion seeking permission to exchange regulations and were, therefore, subject to substantial file an appeal on this denial of their motion was rejected by the New penalties. The DIAN has calculated a statutory penalty amounting to Jersey Appellate Division. We have also filed a motion for partial approximately $200 million and gave TEBSA two months to respond summary judgment that is currently pending before the Superior to the statement of charges. In November 2001, TEBSA filed a for Court. We are unable to predict the outcome of these matters. mal response to this statement of charges. TEBSA is continuing to review the DIAN's position and has been advised by its Colombian Other Commitments, Guarantees and Contingencies counsel that the DIAN's position is without substantial legal merit.

GPU had made significant investments in foreign businesses and We are unable to predict the outcome of these matters.

facilities through its GPU Electric and GPU Power subsidiaries.

Although we will attempt to mitigate our risks related to foreign Significant Accounting Policies investments, we face additional risks inherent in operating in such We prepare our consolidated financial statements in accordance locations, including foreign currency fluctuations. with accounting principles generally accepted in the United States.

GPU Electric, through its subsidiary, Midlands, has a 40% equity Application of these principles often require a high degree of judg interest in a 586 MW power project in Pakistan (the Uch Power ment, estimates and assumptions that affect our financial results. All Project), which commenced commercial operations in October 2000. of our assets are subject to their own specific risks and uncertainties GPU Electric's investment in this project as of December 31, 2001 and are continually reviewed for impairment. Assets related to the was approximately $38 million, plus a guaranty letter of credit of application of the policies discussed below are similarly reviewed with

$3.6 million, and its share of the projected completion costs repre their risks and uncertainties reflecting these specific factors. Our more sents an additional $4.8 million commitment. Cinergy (the former significant accounting policies are described below:

owner of 50% of Midlands Electricity plc) agreed to fund up to an aggregate of $20 million of the required capital contributions and PurchaseAccounting - Acquisition of GPU has reimbursed GPU Electric $4.9 million through December 31, Purchase accounting requires judgment regarding the allocation 2001, leaving a remaining commitment for future cash losses of up of the purchase price based on the fair values of the assets acquired to $15.1 million. Midlands also has a 31 % equity interest in a 478 (including intangible assets) and the liabilities assumed. The fair values MW power project in Turkey (the Trakya Power Project). Trakya is of the acquired assets and assumed liabilities for GPU were based presently engaged in a foreign currency conversion issue with TET primarily on estimates. The more significant of these included the TAS (the state owned electricity purchaser). Midlands established a estimation of the fair value of the international operations, certain

$16.5 million reserve for non-recovery relating to that issue as of domestic operations and the fair value of the pension and other post December 31, 2001. These commitments and contingencies associ retirement benefit assets and liabilities. The preliminary purchase price ated with Midlands will transfer to the new partnership upon allocations for the GPU acquisition are subject to adjustment in 2002 completion of the sale discussed in Note 2 - Merger, and we will when finalized. The excess of the purchase price over the estimated fair be responsible for our lower proportionate interest. values of the assets acquired and liabilities assumed was recognized as El Barranquilla, a wholly owned subsidiary of GPU Power, isan equi goodwill, which will be reviewed for impairment at least annually. As ty investor in Termobarranquilla S.A., Empresa de Servicios Publicos of December 31, 2001, we had $5.6 billion of goodwill (excluding the (TEBSA), which owns a Colombian independent power generation goodwill in "Assets Pending Sale" on the Consolidated Balance Sheet) project. As of December 31, 2001, GPU Power had an investment of that primarily relates to our regulated services segment.

FIRSTENERGY 28 I

RegulatoryAccounting Recently Issued Accounting Standards Our regulated services segment is subject to regulation that sets The Financial Accounting Standards Board (FASB) approved SFAS the prices (rates) we are permitted to charge our customers based on 141, "Business Combinations" and SFAS 142, "Goodwill and Other our costs that the regulatory agencies determine we are permitted to Intangible Assets," on June 29, 2001. SFAS 141 requires all business recover. At times, regulators permit the future recovery through rates combinations initiated after June 30, 2001, to be accounted for using of costs that would be currently charged to expense by an unregulat purchase accounting. The provisions of the new standard relating to ed company. This rate-making process results in the recording of the determination of goodwill and other .intangible assets have been regulatory assets based on anticipated future cash inflows. As a applied to the GPU merger, which was accounted for as a purchase result of the changing regulatory framework in each state in which transaction, and have not materially affected the accounting for this we operate, a significant amount of regulatory assets have been transaction. Under SFAS 142, amortization of existing goodwill will recorded. As of December 31, 2001, we had regulatory assets cease January 1, 2002. Instead, goodwill will be tested for impair of $8.9 billion. We continually review these assets to assess their ment at least on an annual basis, and no impairment of goodwill ultimate recoverability within the approved regulatory guidelines. is anticipated as a result of a preliminary analysis. Prior to the GPU Impairment risk associated with these assets relates to potentially merger, FirstEnergy amortized about $57 million ($.25 per share of adverse legislative, judicial or regulatory actions in the future. As common stock) of goodwill annually. There was no goodwill amorti disclosed in Note 1 - Regulatory Plans, the full recovery of transition zation in 2001 associated with the GPU merger under the provisions costs for the Ohio EUOC is dependent on achieving 20% customer of the new standard.

shopping levels in any twelve-month period by December 31, 2005. In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting DerivativeAccounting standards for retirement obligations associated with tangible long Determination of appropriate accounting for derivative transac lived assets, with adoption required by January 1,2003. SFAS 143 tions requires the involvement of management representing requires that the fair value of a liability for an asset retirement obli operations, finance and risk assessment. In order to determine the gation be recorded in the period in which it is incurred. The appropriate accounting for derivative transactions, the provisions of associated asset retirement costs are capitalized as part of the carry the contract need to be carefully assessed in accordance with the ing amount of the long-lived asset. Over time the capitalized costs authoritative accounting literature and management's intended use are depreciated and the present value of the asset retirement liability of the derivative. New authoritative guidance continues to shape the increases, resulting in a period expense. Upon retirement, a gain or application of derivative accounting. Management's expectations loss will be recorded if the cost to settle the retirement obligation and intentions are key factors in determining the appropriate differs from the carrying amount. We are currently assessing the accounting for a derivative transaction and, as a result, such expec new standard and have not yet determined the impact on our finan tations and intentions must be documented. Derivative contracts cial statements.

that are determined to fall within the scope of SFAS 133, as amend In September 2001, the FASB issued SFAS 144, "Accounting for ed, must be recorded at their fair value. Active market prices are not the Impairment or Disposal of Long-Lived Assets." SFAS 144 super always available to determine the fair value of the later years of a sedes SFAS 121, "Accounting for the Impairment of Long-Lived contract, requiring that various assumptions and estimates be used Assets and for Long-Lived Assets to be Disposed Of." The Statement in the valuation. We continually monitor our derivative contracts to also supersedes the accounting and reporting provisions of APB 30.

determine if our activities, expectations, intentions, assumptions and Our adoption of this Statement, effective January 1, 2002, will result estimates remain valid. As part of our normal operations we enter in our accounting for any future impairments or disposals of long into significant commodities contracts, which increase the impact of lived assets under the provisions of SFAS 144, but will not change the derivative accounting judgments. accounting principles used in previous asset impairments or disposals.

Application of SFAS 144 is not anticipated to have a major impact on Revenue Recognition accounting for impairments or disposal transactions compared to the We follow the accrual method of accounting for revenues, recog prior application of SFAS 121 or APB 30.

nizing revenue for kilowatt-hour sales that have been delivered but not yet been billed through the end of the year. The determination of unbilled revenues requires management to make various esti mates including:

"*Net energy generated or purchased for retail load

"*Losses of energy over distribution lines

"*Mix of kilowatt-hour usage by residential, commercial and industrial customers

"*Kilowatt-hour usage of customers receiving electricity from alternative suppliers 29

FIRSTENERGY CORP. 2001 CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)

For the Years Ended December 31, 2001 2000 1999 REVENUES:

Electric utilities $5,729,036 $5,421,668 $5,453,763 Unregulated businesses 2,270,326 1,607,293 865,884 Total revenues 7,999,362 7,028,961 6,319,647 EXPENSES:

Fuel and purchased power 1,421,525 1,110,845 984,941 Purchased gas 820,031 553,548 170,630 Other operating expenses 2,727,794 2,378,296 2,146,629 Provision for depreciation and amortization 889,550 933,684 937,976 General taxes 455,340 547,681 544,052 Total expenses 6,314,240 5,524,054 4,784,228 INCOME BEFORE INTEREST AND INCOME TAXES 1,685,122 1,504,907 1,535,419 NET INTEREST CHARGES:

Interest expense 519,131 493,473 509,169 Capitalized interest (35,473) (27,059) (13,355)

Subsidiaries' preferred stock dividends 72,061 62,721 76,479 Net interest charges 555,719 529,135 572,293 INCOME TAXES 474,457 376,802 394,827 INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE INACCOUNTING 654,946 598,970 568,299 CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Net of Income Tax Benefit of $5,839,000) (Note 1) (8,499)

NET INCOME $ 646,447 $ 598,970 $ 568,299 BASIC EARNINGS PER SHARE OF COMMON STOCK (Note 4C):

Income before cumulative effect of accounting change $2.85 $2.69 $2.50 Cumulative effect of accounting change (Net of income taxes) (Note 1) (.03)

NET INCOME $2.82 $2.69 $2.50 WEIGHTED AVERAGE NUMBER OF BASIC SHARES OUTSTANDING 229,512 222,444 227,227 DILUTED EARNINGS PER SHARE OF COMMON STOCK (Note 4C):

Income before cumulative effect of accounting change $2.84 $2.69 $2.50 Cumulative effect of accounting change (Net of income taxes) (Note 1) (.03) -

NET INCOME $2.81 $2.69 $2.50 WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 230,430 222,726 227,299 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $1.50 $1.50 $1.50 The accompanying Notes to Consolidated FinancialStatements are an integralpart of these statements.

30 I

FIRSTENERGY CORP. 2001 CONSOLIDATED BALANCE SHEETS (Inthousands)

As of December 31, 2001 2000 ASSETS CURRENT ASSETS:

Cash and cash equivalents $ 220,178 $ 49,258 Receivables Customers (less accumulated provisions of $65,358,000 and $32,251,000, respectively, for uncollectible accounts) 1,074,664 541,924 Other (less accumulated provisions of $7,947,000 and $4,035,000, respectively, for uncollectible accounts) 473,550 376,525 Materials and supplies, at average cost Owned 256,516 171,563 Under consignment 141,002 112,155 Prepayments and other 336,610 189,869 2,502,520 1,441,294 ASSETS PENDING SALE (Note 2) 3,418,225 PROPERTY, PLANT AND EQUIPMENT:

In service 19,981,749 12,417,684 Less- Accumulated provision for depreciation 8,161,022 5,263,483 11,820,727 7,154,201 Construction work in progress 607,702 420,875 12,428,429 7,575,076 INVESTMENTS:

Capital trust investments (Note 3) 1,166,714 1,223,794 Nuclear plant decommissioning trusts 1,014,234 584,288 Letter of credit collateralization (Note 3) 277,763 277,763 Pension investments 273,542 200,178 Other 898,311 468,879 3,630,564 2,754,902 DEFERRED CHARGES:

Regulatory assets 8,912,584 3,727,662 Goodwill 5,600,918 2,088,770 Other 858,273 353,590 15,371,775 6,170,022

$37,351,513 $17,941,294 LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES:

Currently payable long-term debt and preferred stock $ 1,867,657 $ 536,482 Short-term borrowings (Note 5) 614,298 699,765 Accounts payable 704,184 478,661 Accrued taxes 418,555 409,640 Other 1,064,763 469,257 4,669,457 2,593,805 LIABILITIES RELATED TO ASSETS PENDING SALE (Note 2) 2,954,753 CAPITALIZATION (See Consolidated Statements of Capitalization):

Common stockholders' equity 7,398,599 4,653,126 Preferred stock of consolidated subsidiaries Not subject to mandatory redemption 480,194 648,395 Subject to mandatory redemption 65,406 41,105 Subsidiary-obligated mandatorily redeemable preferred securities (Note 4F) 529,450 120,000 Long-term debt 11,433,313 5,742,048 19,906,962 11,204,674 DEFERRED CREDITS:

Accumulated deferred income taxes 2,684,219 2,094,107 Accumulated deferred investment tax credits 260,532 241,005 Nuclear plant decommissioning costs 1,201,599 598,985 Power purchase contract loss liability 3,566,531 Other postretirement benefits 838,943 544,541 Other 1,268,517 664,177 9,820,341 4,142,815 COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 3 and 6)

$37,351,513 $17,941,294 The accompanying Notes to ConsolidatedFinancialStatements are an integral part of these balance sheets.

31

_X FIRSTENERGY CORP. 2001 CONSOLIDATED STATEMENTS OF CAPITALIZATION (Dollarsin thousands, except per shareamounts)

As of December 31, 2001 2000 COMMON STOCKHOLDERS' EQUITY:

Common stock, $0.10 par value - authorized 375,000,000 shares- 297,636,276 and 224,531,580 shares outstanding, respectively $ 29,764 $ 22,453 Other paid-in capital 6,113,260 3,531,821 Accumulated other comprehensive income (loss) (Note 4H) (169,003) 593 Retained earnings (Note 4A) 1,521,805 1,209,991 Unallocated employee stock ownership plan common stock- 5,117,375 and 5,952,032 shares, respectively (Note 4B) (97,227) (111,732)

Total common stockholders' equity 7,398,599 4,653,126 I- I _ _

Number of Shares Outstanding Optional Redemption Price PREFERRED STOCK OF CONSOLIDATED SUBSIDIARIES (Note 4D):

2001 [ 2000 [ Per Share I Aggregate Ohio Edison Company Cumulative, $100 par value- Authorized 6,000,000 shares Not Subject to Mandatory Redemption:

3.90% 152,510 152,510 $ 103.63 $ 15,804 15,251 15,251 4.40% 176,280 176,280 108.00 19,038 17,628 17,628 4.44% 136,560 136,560 103.50 14,134 13,656 13,656 4.56% 144,300 144,300 103.38 14,917 14,430 14,430 609,650 609,650 63,893 60,965 60,965 Cumulative, $25 par value- Authorized 8,000,000 shares Not Subject to Mandatory Redemption:

7.75% 4,000,000 4,000,000 25.00 100,000 100,000 100,000 Total Not Subject to Mandatory Redemption 4,609,650 4,609,650 $163,893 160,965 160,965 Cumulative, $100 par value Subject to Mandatory Redemption:

8.45% 50,000 $ 5,000 Redemption Within One Year (5,000)

Total Subject to Mandatory Redemption 50,000 $

Pennsylvania Power Company Cumulative, $100 par value- Authorized 1,200,000 shares Not Subject to Mandatory Redemption:

4.24% 40,000 40,000 103.13 $ 4,125 4,000 4,000 4.25% 41,049 41,049 105.00 4,310 4,105 4,105 4.64% 60,000 60,000 102.98 6,179 6,000 6,000 7.75% 250,000 250,000 - 25,000 25,000 Total Not Subject to Mandatory Redemption 391,049 391,049 $ 14,614 39,105 39,105 Subject to Mandatory Redemption (Note 4E):

7.625% 150,000 150,000 104.58 $ 15,687 15,000 15,000 Redemption Within One Year (750)

Total Subject to Mandatory Redemption 150,000 150,000 $ 15,687 14,250 15,000 Cleveland Electric Illuminating Company Cumulative, without par value- Authorized 4,000,000 shares Not Subject to Mandatory Redemption:

$7.40 Series A 500,000 500,000 101.00 $ 50,500 50,000 50,000

$7.56 Series B 450,000 450,000 102.26 46,017 45,071 45,071 Adjustable Series L 474,000 474,000 100.00 47,400 46,404 46,404

$42.40 Series T 200,000 200,000 500.00 100,000 96,850 96,850 1,624,000 1,624,000 238,325 243,917 238,325 Redemption Within One Year (Note 4D) (96,850)

Total Not Subject to Mandatory Redemption 1,624,000 1,624,000 $243,917 141,475 238,325 Subject to Mandatory Redemption (Note 4E):

$7.35 Series C 70,000 80,000 101.00 $ 7,070 7,030 8,041

$91.50 Series Q - 10,716 - - 10,716

$88.00 Series R - 50,000 - 51,128

$90.00 Series S 17,750 36,500 17,268 36,686 87,750 177,216 7,070 24,298 106,571 Redemption Within One Year (18,010) (80,466)

Total Subject to Mandatory Redemption 87,750 177,216 $ 7,070 6,288 26,105 32

FIRSTENERGY CORP. 2001 CONSOLIDATED STATEMENTS OF CAPITALIZATION continued (Dollars in thousands, except pershare amounts)

I I As of December 31, 2001 2000 I t Number of Shares Outstanding Optional Redemption Price 2001 [ 00 [ Per Share ] Aggregate PREFERRED STOCK OF CONSOLIDATED SUBSIDIARIES continued Toledo Edison Company Cumulative, $100 par value- Authorized 3,000,000 shares Not Subject to Mandatory Redemption:

$4.25 160,000 160,000 $104.63 $16,740 $16,000 $16,000

$4.56 50,000 50,000 101.00 5,050 5,000 5,000

$4.25 100,000 100,000 102.00 10,200 10,000 10,000

$8.32 100,000 100,000 102.46 10,246 10,000 10,000

$7.76 150,000 150,000 102.44 15,366 15,000 15,000

$7.80 150,000 150,000 101.65 15,248 15,000 15,000

$10.00 190,000 190,000 101.00 19,190 19,000 19,000 900,000 900,000 92,040 90,000 90,000 (59,000)

Redemption Within One Year (Note 4D) 900,000 900,000 92,040 31,000 90,000 Cumulative, $25 par value- Authorized 12,000,000 shares Not Subject to Mandatory Redemption:

$2.21 1,000,000 1,000,000 25.25 25,250 25,000 25,000

$2.365 1,400,000 1,400,000 27.75 38,850 35,000 35,000 Adjustable Series A 1,200,000 1,200,000 25.00 30,000 30,000 30,000 Adjustable Series B 1,200,000 1,200,000 25.00 30,000 30,000 30,000 124,100 120,000 120,000 4,800,000 4,800,000 Redemption Within One Year (Note 4D) (25,000) 4,800,000 4,800,000 124,100 95,000 120,000 Total Not Subject to Mandatory Redemption 5,700,000 5,700,000 $216,140 126,000 210,000 Jersey Central Power & Light Company Cumulative, $100 stated value- Authorized 15,600,000 shares Not Subject to Mandatory Redemption:

4.00% Series 125,000 106.50 $13,313 12,649 Subject to Mandatory Redemption (Note 4E):

8.65% Series J 250,001 101.30 $25,325 26,750 7.52% Series K 265,000 103.76 27,496 28,951 515,001 52,821 55,701 Redemption Within One Year (10,833)

Total Subject to Mandatory Redemption 515,001 $52,821 44,868 SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST OR LIMITED PARTNERSHIP HOLDING SOLELY SUBORDINATED DEBENTURES OF SUBSIDIARIES (Note 4F):

Ohio Edison Co.

Cumulative, $25 stated value- Authorized 4,800,000 shares 9.00% 4,800,000 4,800,000 25.00 $120,000 120,000 120,000 Cleveland Electric Illuminating Co.

Cumulative, $25 stated value- Authorized 4,000,000 shares 9.00% 4,000,000 $ - 100,000 Jersey Central Power & Light Co.

Cumulative, $25 stated value- Authorized 5,000,000 shares 8.56% 5,000,000 25.00 $125,000 125,250 Metropolitan Edison Co.

Cumulative, $25 stated value- Authorized 4,000,000 shares 7.35% 4,000,000 $ - 92,200 Pennsylvania Electric Co.

Cumulative, $25 stated value- Authorized 4,000,000 shares 7.34% 4,000,000 - $ - 92,000 1 33

FIRSTENERGY CORP. 2001 CONSOLIDATED STATEMENTS OF CAPITALIZATION continued LONG-TERM DEBT (Note 4G) (Interest rates reflect weighted average rates) (Inthousands)

V -T -

First Mortgage Bonds Secured Notes Unsecured Notes Total As of December 31, 2001 2000 2001 2000 2001 2000 2001 2000 Ohio Edison Co.

Due 2001-2006 7.89% $ 509,265 $ 509,265 7.60% $ 227,122 $ 235,838 4.28% $441,725 $541,725 Due 2007-2011 -- - 7.22% 10,253 4,336 - -

Due 2012-2016 - 5.17% 59,000 59,000 - -

Due 2017-2021 -- - 7.01% 60,443 129,943 Due 2022-2026 7.99% 219,460 219,460 ..- - .

Due 2027-2031 - - - 3.72% 249,634 180,134 --

Due 2032-2036 - 2.63% 71,900 71,900 - - -

Total-Ohio Edison 728,725 728,725 678,352 681,151 441,725 541,725 $1,848,802 1 $1,951,601 Cleveland Electric Illuminating Co.

Due 2001-2006 8.53% 595,000 595,000 5.84% 593,175 384,680 5.58% 27,700 27,700 Due 2007-2011 6.86% 125,000 125,000 7.29% 271,640 271,640 - -

Due 2012-2016 - - - 8.00% 78,700 118,535 -

Due 2017-2021 - - 7.36% 440,560 560,855 - -

Due 2022-2026 9.00% 150,000 150,000 7.64% 218,950 218,950 -

Due 2027-2031 - - 5.38% 5,993 110,888 -- -

Total-Cleveland Electric 870,000 870,000 1,609,018 1,665,548 27,700 27,700 2,506,718 2,563,248 Toledo Edison Co.

Due 2001-2006 7.90% 179,125 179,525 6.40% 228,700 190,400 7.25% 226,100 226,130 Due 2007-2011 - - - 7.13% 30,000 30,000 10.00% 790 790 Due 2012-2016 - - - - -

Due 2017-2021 - - - 8.14% 129,000 129,000 - -

Due 2022-2026 - - - 7.55% 50,700 118,000 -

Due 2027-2031 - - - 5.90% 13,851 13,851 -

Due 2032-2036 - - - 2.20% 30,900 30,900 - -

Total-Toledo Edison 179,125 179,525 483,151 512,151 226,890 226,920 889,166 918,596 Pennsylvania Power Co.

Due 2001-2006 7.19% 79,370 80,344 3.02% 10,300 5.90% 5,200 5,200 Due 2007-2011 9.74% 4,870 4,870 - -

Due 2012-2016 9.74% 4,870 4,870 5.40% 1,000 1,000 Due 2017-2021 9.74% 2,955 2,955 3.78% 59,807 59,807 --

Due 2022-2026 8.33% 33,750 33,750 6.15% 12,700 12,700 Due 2027-2031 - - - 6.04% 37,672 47,972 - - -

Total-Penn Power 125,815 126,789 121,479 121,479 5,200 5,200 252,494 253,468 Jersey Central Power

& Light Co.

Due 2001-2006 7.14% 500,945 - 6.45% 150,000 - 7.69% 86 Due 2007-2011 7.81% 45,355 - - - 7.69% 124 Due 20122016 7.10% 12,200 - - - 7.69% 180 Due 2017-2021 9.20% 50,000 - - - 7.69% 260 Due 2022-2026 7.68% 485,000 - - - 7.69% 377 Due 2027-2031 - - 7.69% 546 Due 2032-2036 . - - - 7.69% 790 Due 2037-2041 - - - 7.69% 635 Total-Jersey Central 1,093,500 - 150,000 - 2,998 - 1,246,498 Metropolitan Edison Co.

Due 2001-2006 7.14% 261,740 - 5.72% 100,000 - 7.69% 171 Due 2007-2011 6.00% 6,960 - - - 7.69% 248 Due 2012-2016 . 7.69% 359 Due 2017-2021 6.10% 28,500 - - - 7.69% 521 Due 2022-2026 8.05% 180,000 - - - 7.69% 754 Due 2027-2031 5.95% 13,690 - - - - 7.69% 1,092 Due 2032-2036 - - - 7.69% 1,581 Due 2037-2041 ...- 7.69% 1,271 -

Total-Metropolitan Edison 490,890 100,000 5,997 596,887 34

FIRSTENERGY CORP. 2001 CONSOLIDATED STATEMENTS OF CAPITALIZATION continued LONG-TERM DEBT (Interest rates reflect weighted average rates) continued (Inthousands)

First Mortgage Bonds Secured Notes Unsecured Notes Total As of December 31, 2001 2000 2001 2000 2001 2000 2001 2000 Pennsylvania Electric Co.

Due2001-2006 6.13% $ 1,025 $ $- $ - 6.02% $ 183,086 $

Due 2007-2011 5.44% 27,395 - - 6.55% 135,124 Due 2012-2016 - - - 7.69% 180 Due 2017-2021 5.80% 20,000 - - 6.63% 125,260 Due 2022-2026 6.05% 25,000 - 7.69% 377 Due 2027-2031 - - - 7.69% 546 Due 2032-2036 --- 7.69% 790 Due 2037-2041 - - 7.69% 635 Total-Pennsylvania Electric 73,420 - 445,998 - $ 519,418 $

FirstEnergy Corp.

Due 2001-2006 - - - 5.59% 1,550,000 Due 2007-2011 .- - 6.45% 1,500,000 Due 2012-2016 - -... ..

Due 2017-2021 - -.. ..

Due 2022-2026 - -.. ..

Due 2027-2031 ..-. 7.38% 1,500,000 Total-FirstEnergy -- 4,550,000 - 4,550,000 OES Fuel - 2.72% 81,515 91,620 - - - 81,515 91,620 AFN Finance Co. No. 1 -- 4.18% 15,000 - - 15,000 AFN Finance Co. No. 3 - 4.18% 4,000 - - - 4,000 Bay Shore Power - 6.23% 145,400 147,500 - - - 145,400 147,500 MARBEL Energy Corp. - - - - 4.72% 569 638 569 638 Facilities Services Group - 6.12% 15,735 17,601 - - - 15,735 17,601 FirstEnergy Properties - 7.89% 9,902 - - 9,902 Warrenton River Terminal - 6.00% 776 - - - 776 GPU Capital* - - - 6.69% 1,629,582 - 1,629,582 GPU Power - 7.42% 239,373 - 13.50% 56,048 - 295,421 Total $3,561,475 $1,905,039 $3,653,701 $3,237,050 $7,392,707 $802,183 14,607,883 5,944,272 Capital lease obligations 19,390 163,242 Net unamortized premium on debt* 213,834 85,550 Long-term debt due within one year* (1,975,755) (451,016)

Total long-term debt* 12,865,352 5,742,048 TOTAL CAPITALIZATION* $21,339,001 $11,204,674

• 2001 includes amounts in "LiabilitiesRelated to Assets Pending Sale" on the Consolidated Balance Sheet as of December 31, 2001.

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

35

FIRST E R GY CcRP. 2000 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (Dollarsin thousands)

Accumulated Other Unallocated Comprehensive Number Other Comprehensive Retained ESOP Common Income of Shares Par Value Paid-In Capital Income (Loss) Earnings Stock Balance, January 1, 1999 237,069,087 $23,707 $3,846,513 $(439) $718,409 $ (139,032)

Net income $568,299 568,299 Minimum liability for unfunded retirement benefits, net of

$160,000 of income taxes 244 244 Comprehensive income $568,543 Reacquired common stock (4,614,800) (462) (129,671)

Centerior acquisition adjustment (468)

Allocation of ESOP shares 6,001 12,256 Cash dividends on common stock (341,467)

Balance, December 31, 1999 232,454,287 23,245 3,722,375 (195) 945,241 (126,776)

Net income $598,970 598,970 Minimum liability for unfunded retirement benefits, net of

$(85,000) of income taxes (134) (134)

Unrealized gain on investment in securities available for sale 922 922 Comprehensive income $599,758 Reacquired common stock (7,922,707) (792) (194,210)

Allocation of ESOP shares 3,656 15,044 Cash dividends on common stock (334,220)

Balance, December 31, 2000 224,531,580 22,453 3,531,821 593 1,209,991 (111,732)

GPU acquisition 73,654,696 7,366 2,586,097 Net income $646,447 646,447 Minimum liability for unfunded retirement benefits, net of

$(082,000) of income taxes (268) (268)

Unrealized loss on derivative hedges, net of $(0 16,521,000) of income taxes (169,408) (169,408)

Unrealized gain on investments, net of

$56,000 of income taxes 81 81 Unrealized currency translation adjust ments, net of $(0,000) of income taxes (1) (1)

Comprehensive income $476,851 Reacquired common stock (550,000) (55) (15,253)

Allocation of ESOP shares 10,595 14,505 Cash dividends on common stock (334,633)

Balance, December 31, 2001 297,636,276 $29,764 $6,113,260 $(169,003) $1,521,805 $(97,227)

The accompanying Notes to ConsolidatedFinancialStatements are an integralpart of these statements.

36 I

F iRS TEN ERGY CoRP. 2001 CONSOLIDATED STATEMENTS OF PREFERRED STOCK (Dollarsin thousands)

Not Subject to Subject to Mandatory Redemption Mandatory Redemption Number Par or Stated Number Par or Stated of Shares Value of Shares Value Balance, January 1, 1999 12,442,699 $660,195 5,379,044 $334,864 Redemptions 7.64% Series (60,000) (6,000) 8.00% Series (58,000) (5,800) 8.45% Series (50,000) (5,000)

$ 7.35 Series C (10,000) (1,000)

$88.00 Series E (3,000) (3,000)

$91.50 Series Q (10,714) (10,714)

$90.00 Series S (18,750) (18,750)

$9.375 Series (16,900) (1,690)

Balance, December 31, 1999 12,324,699 648,395 5,269,680 294,710 Redemptions 8.450 Series (50,000) (5,000)

$ 7.35 Series C (10,000) (1,000)

$88.00 Series E (3,000) (3,000)

$91.50 Series Q (10,714) (10,714)

$90.00 Series S (18,750) (18,750)

Amortization of fair market value adjustments

$ 7.35 Series C (69)

$88.00 Series R (3,872)

$90.00 Series S (5,734)

Balance, December 31, 2000 12,324,699 648,395 5,177,216 246,571 GPU acquisition 125,000 12,649 13,515,001 365,151 Issues 9.000 Series 4,000,000 100,000 Redemptions 8.45% Series (50,000) (5,000)

$ 7.35 Series C (10,000) (1,000)

$88.00 Series R (50,000) (50,000)

$91.50 Series Q (10,716) (10,716)

$90.00 Series S (18,750) (18,750)

Amortization of fair market value adjustments

$7.35 Series C (11)

$88.00 Series R (1,128)

$90.00 Series S (668)

Balance, December 31, 2001 12,449,699 $661,044 22,552,751 $624,449 The accompanying Notes to ConsolidatedFinancialStatements are an integralpartof these statements.

37

FIRSTENERGY CORP. 2001 CONSOLIDATED STATEMENTS OF CASH FLOWS (Inthousands)

For the Years Ended December 31, 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income $ 646,447 $ 598,970 $ 568,299 Adjustments to reconcile net income to net cash from operating activities:

Provision for depreciation and amortization 889,550 933,684 937,976 Nuclear fuel and lease amortization 98,178 113,330 104,928 Other amortization, net (11,927) (11,635) (10,730)

Deferred costs recoverable as regulatory assets (31,893)

Deferred income taxes, net 31,625 (79,429) (45,054)

Investment tax credits, net (22,545) (30,732) (19,661)

Cumulative effect of accounting change 14,338 Receivables 53,099 (150,520) (203,567)

Materials and supplies (50,052) (29,653) 19,631 Accounts payable (84,572) 118,282 82,578 Other (250,564) 45,529 53,906 Net cash provided from operating activities 1,281,684 1,507,826 1,488,306 CASH FLOWS FROM FINANCING ACTIVITIES:

New Financing Preferred stock 96,739 Long-term debt 4,338,080 307,512 364,832 Short-term borrowings, net - 281,946 163,327 Redemptions and Repayments Common stock 15,308 195,002 130,133 Preferred stock 85,466 38,464 52,159 Long-term debt 394,017 901,764 847,006 Short-term borrowings, net 1,641,484 Common Stock Dividend Payments 334,633 334,220 341,467 Net cash provided from (used for) financing activities 1,963,911 (879,992) (842,606)

CASH FLOWS FROM INVESTING ACTIVITIES:

GPU acquisition, net of cash 2,013,218 Property additions 852,449 587,618 624,901 Cash investments (24,518) (17,449) (41,213)

Other 233,526 120,195 28,022 Net cash used for investing activities 3,074,675 690,364 611,710 Net increase (decrease) in cash and cash equivalents 170,920 (62,530) 33,990 Cash and cash equivalents at beginning of year 49,258 111,788 77,798 Cash and cash equivalents at end of year* $ 220,178 $ 49,258 $ 111,788 SUPPLEMENTAL CASH FLOWS INFORMATION:

Cash Paid During the Year Interest (net of amounts capitalized) $ 425,737 $ 485,374 $ 520,072 Income taxes $ 433,640 $ 512,182 $ 441,067

• 2001 excludes amounts in "Assets PendingSale" on the Consolidated Balance Sheet as of December 31, 2001.

The accompanying Notes to ConsolidatedFinancialStatements are an integralpart of these statements.

38 I

FIRSTENERGY CORP. 2001 CONSOLIDATED STATEMENTS OF TAXES (Inthousands)

For the Years Ended December 31, 2001 2000 1999 GENERAL TAXES:

Real and personal property $ 176,916 $ 281,374 $ 276,227 State gross receipts 102,335 221,385 220,117 Ohio kilowatt-hour excise 117,979 -

Social security and unemployment 44,480 39,134 37,019 Other 13,630 5,788 10,689 Total general taxes $ 455,340 $ 547,681 $ 544,052 PROVISION FOR INCOME TAXES:

Currently payable Federal $ 375,108 $ 467,045 $ 433,872 State 84,322 19,918 25,670 Foreign 108 -

459,538 486,963 459,542 Deferred, net Federal 37,888 (60,831) (36,021)

State (6,177) (18,598) (9,033)

Foreign (86) 31,625 (79,429) (45,054)

Investment tax credit amortization (22,545) (30,732) (19,661)

Total provision for income taxes $ 468,618 $ 376,802 $ 394,827 RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:

Book income before provision for income taxes $1,115,065 $ 975,772 $ 963,126 Federal income tax expense at statutory rate $ 390,273 $ 341,520 $ 337,094 Increases (reductions) in taxes resulting from Amortization of investment tax credits (22,545) (30,732) (19,661)

State income taxes, net of federal income tax benefit 50,794 1,133 10,814 Amortization of tax regulatory assets 30,419 38,702 23,908 Amortization of goodwill 18,416 18,420 19,341 Preferred stock dividends 19,733 18,172 22,988 Other, net (18,472) (10,413) 343 Total provision for income taxes $ 468,618 $ 376,802 $ 394,827 ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:

Property basis differences $1,996,937 $1,245,297 $1,878,904 Customer receivables for future income taxes 178,683 62,527 159,577 Competitive transition charge 1,289,438 1,070,161 537,114 Deferred sale and leaseback costs (77,099) (128,298) (129,775)

Nonutility generation costs (178,393)

Unamortized investment tax credits (86,256) (85,641) (96,036)

Unused alternative minimum tax credits (32,215) (101,185)

Other comprehensive income (115,395)

Other (323,696) (37,724) (17,334)

Net deferred income tax liability* $2,684,219 $2,094,107 $2,231,265

• 2001 excludes amounts in "LiabilitiesRelated to Assets PendingSale" on the Consolidated Balance Sheet as of December 31, 2001.

The accompanying Notes to ConsolidatedFinancialStatements are an integralpart of these statements.

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS sale accounting treatment. CFC's creditors are entitled to be satisfied first out of the proceeds of CFC's assets. The 2001 private sale was

1. Summary of Significant Accounting Policies: used to repay a 1996 public sale of $150 million of receivables-backed The consolidated financial statements include FirstEnergy Corp., a investor certificates which was replaced under an amended securitiza public utility holding company, and its principal electric utility operating tion agreement. FirstEnergy's retained interest in the pool of receivables subsidiaries, Ohio Edison Company (OE), The Cleveland Electric held by the trust (34% as of December 31, 2001) isstated at fair value, Illuminating Company (CEI), Pennsylvania Power Company (Penn), The reflecting adjustments for anticipated credit losses. Sensitivity analyses Toledo Edison Company (TE), American Transmission Systems, Inc. reflecting a 10% and 20% increase in the rate of anticipated credit (ATSI), Jersey Central Power & Light Company (JCP&L), Metropolitan losses did not significantly affect FirstEnergy's retained interest in the Edison Company (Met-Ed) and Pennsylvania Electric Company pool of receivables. Of the $301 million sold to the trust and outstand (Penelec). These utility subsidiaries are referred to throughout as ing as of December 31, 2001, FirstEnergy had a retained interest in "Companies." FirstEnergy's 2001 results include the results of JCP&L, $101 million of the receivables. Accordingly, receivables recorded on Met-Ed and Penelec for the period November 7, 2001 through the Consolidated Balance Sheets were reduced by approximately $200 December 31, 2001 (see Note 2 - Merger). The consolidated financial million due to these sales. Collections of receivables previously trans statements also include FirstEnergy's other principal subsidiaries: ferred to the trust and used for the purchase of new receivables from FirstEnergy Solutions Corp. (FES); FirstEnergy Facilities Services Group, CFC during 2001, totaled approximately $2.2 billion. CEI and TE LLC (FEFSG); MYR Group, Inc. (MYR); MARBEL Energy Corporation processed receivables for the trust and received servicing fees of (MARBEL); FirstEnergy Nuclear Operating Company (FENOC); GPU approximately $4.5 million in 2001. Expenses associated with the factor Capital, Inc.; GPU Power, Inc.; FirstEnergy Service Company (FECO); ing discount related to the sale of receivables were $12 million in 2001.

and GPU Service, Inc. (GPUS). FES provides energy-related products and services and, through its FirstEnergy Generation Corp. (FGCO) Regulatory Plans subsidiary, operates FirstEnergy's nonnuclear generation business. Ohio's 1999 electric utility restructuring law allowed Ohio electric FENOC operates the Companies' nuclear generating facilities. FEFSG is customers to select their generation suppliers beginning January 1, the parent company of several heating, ventilating, air conditioning and 2001, provided for a five percent reduction on the generation portion energy management companies, and MYR is a utility infrastructure of residential customers' bills and the opportunity for utilities to construction service company. MARBEL is a fully integrated natural gas recover transition costs, including regulatory assets. Under this law, company GPU Capital owns and operates electric distribution systems the PUCO approved FirstEnergy's transition plan in 2000 as modified in foreign countries (see Note 2 - Merger) and GPU Power owns and by a settlement agreement with major parties to the transition plan, operates generation facilities in foreign countries. FECO and GPUS which it filed on behalf of OE, CEI and TE (Ohio Companies). The set provide legal, financial and other corporate support services to affiliated tlement agreement included approval for recovery of the amounts of FirstEnergy companies. Significant intercompany transactions have been transition costs filed in the transition plan through no later than 2006 eliminated in consolidation. for OE, mid-2007 for TE and 2008 for CEI, except where a longer The Companies follow the accounting policies and practices pre period of recovery is provided for in the settlement agreement.

scribed by the Public Utilities Commission of Ohio (PUCO), the The settlement also granted preferred access over FirstEnergy's Pennsylvania Public Utility Commission (PPUC), the New Jersey Board of subsidiaries to nonaffiliated marketers, brokers and aggregators to Public Utilities (NJBPU) and the Federal Energy Regulatory Commission 1,120 megawatts (MW) of generation capacity through 2005 at (FERC). The preparation of financial statements in conformity with established prices for sales to the Ohio Companies' retail customers.

accounting principles generally accepted in the United States (GAAP) The Ohio Companies' base electric rates for distribution service requires management to make periodic estimates and assumptions under their prior respective regulatory plans were extended from that affect the reported amounts of assets, liabilities, revenues and December 31, 2005 through December 31, 2007. The transition rate expenses and disclosure of contingent assets and liabilities. Actual credits for customers under their prior regulatory plans were also results could differ from these estimates. Certain prior year amounts extended through the Ohio Companies' respective transition cost have been reclassified to conform with the current year presentation. recovery periods.

The transition plan itemized, or unbundled, the current price of Revenues electricity into its component elements - including generation, The Companies' principal business is providing electric service to transmission, distribution and transition charges. As required by the customers in Ohio, Pennsylvania and New Jersey. The Companies' PUCO's rules, FirstEnergy's transition plan also resulted in the corporate retail customers are metered on a cycle basis. Revenue is recognized separation of its regulated and unregulated operations, operational for unbilled electric service provided through the end of the year. and technical support changes needed to accommodate customer Receivables from customers include sales to residential, commercial choice, an education program to inform customers of their options and industrial customers and sales to wholesale customers. There was under the law, and planned changes in how FirstEnergy's transmission no material concentration of receivables as of December 31, 2001 or system will be operated to ensure access to all users. Customer 2000, with respect to any particular segment of FirstEnergy's customers. prices are frozen through a five-year market development period CEI and TE sell substantially all of their retail customer receivables (2001-2005), except for certain limited statutory exceptions including to Centerior Funding Corp. (CFC), a wholly owned subsidiary of CEI. a 5% reduction in the price of generation for residential customers.

CFC subsequently transfers the receivables to a trust under an asset FirstEnergy's Ohio customers choosing alternative suppliers receive backed securitization agreement. The trust completed private sales an additional incentive applied to the shopping credit of 45% for of $50 million and $150 million of receivables-backed investor certifi residential customers, 30% for commercial customers and 15% for cates in 2000 and 2001, respectively, in transactions that qualified for industrial customers. The amount of the incentive serves to reduce FI RST ENERGY 40 4

the amortization of transition costs during the market development four incumbent New Jersey electric distribution companies, including period and will be recovered through the extension of the transition JCP&L, filed a joint proposal seeking NJBPU approval of a competitive cost recovery periods. Ifthe customer shopping goals established bidding process to procure supply for the provision of BGS for the in the agreement are not achieved by the end of 2005, the transition period of August 1, 2002 through July 31, 2003. In December 2001, cost recovery periods could be shortened for OE, CEI and TE to reduce the NJBPU authorized the auctioning of BGS to meet the electric recovery by as much as $500 million (OE-$250 million, CEI-$170 million demands of all customers who have not selected an alternative and TE-$80 million), but any such adjustment would be computed supplier. BGS for all four companies, for the period of August 1, 2002 on a class-by-class and pro-rata basis. Based on annualized shopping to July 31, 2003, was simultaneously put out for bid. The auction, levels as of December 31, 2001, FirstEnergy believes the maximum which ended on February 13, 2002 and was approved by the NJBPU potential recovery reductions are approximately $174 million on February 15, 2002, removed JCP&L's BGS obligation of 5,100 MW (OE-$87 million, CEI-$52 million and TE-$35 million). for the period from August 1, 2002 to July 31, 2003. The auction New Jersey is also evolving to a competitive electric utility market represents a transitional mechanism and a different model for the place. In March 2001, the NJBPU issued a Final Decision and Order procurement of BGS commencing August 1, 2003 may be adopted.

(Final Order) with respect to JCP&L's rate unbundling, stranded cost On September 26, 2001, the NJBPU approved the merger between and restructuring filings, which superseded its 1999 Summary Order. FirstEnergy and GPU, Inc., (see Note 2 - Merger) subject to the terms The Final Order confirms rate reductions set forth in the Summary and conditions set forth in a Stipulation of Settlement which had been Order, which remain in effect at increasing levels through July 2003 signed by the major parties in the merger discussions. Under this with rates after July 31, 2003 to be determined in a rate case com Stipulation of Settlement, FirstEnergy agreed to reduce JCP&L's regula mencing in 2002. The Final Order also confirms the right of customers tory assets by $300 million, in order to ensure that customers receive to select their generation suppliers effective August 1, 1999, and the benefit of future merger savings. JCP&L wrote off $300 million of includes the deregulation of electric generation service costs. The Final its deferred costs upon receipt of the final regulatory approval for the Order confirms the establishment of a non-bypassable societal benefits merger, which occurred on October 29, 2001.

charge to recover costs which include nuclear plant decommissioning Pennsylvania enacted its electric utility competition law in 1996 and manufactured gas plant remediation, as well as a non-bypassable with the phase-in of customer choice for generation suppliers com market transition charge (MTC) primarily to recover stranded costs; pleted as of January 1, 2001. The PPUC authorized 1998 rate however, the NJBPU deferred making a final determination of the net restructuring plans for Penn, Met-Ed and Penelec which essentially proceeds and stranded costs related to prior generating asset divesti resulted in the deregulation of their respective generation businesses.

tures until JCP&L's request for an Internal Revenue Service (IRS) ruling In 2000, the PPUC disallowed a portion of the requested addi regarding the treatment of associated federal income tax benefits is tional stranded costs above those amounts granted in Met-Ed's and acted upon. Should the IRS ruling support the return of the tax bene Penelec's 1998 rate restructuring plan orders. The PPUC required fits to ratepayers, JCP&L would need to record a corresponding charge Met-Ed and Penelec to seek an IRS ruling regarding the return of to income of approximately $25 million; there would be no effect to certain unamortized investment tax credits and excess deferred FirstEnergy's net income as the contingency existed prior to the merger. income tax benefits to ratepayers. Similar to JCP&L's situation, if JCP&L has an obligation to provide basic generation service (BGS), the IRS ruling ultimately supports returning these tax benefits to that is, it must act as provider of last resort (PLR) to non-shopping ratepayers, Met-Ed and Penelec would then reduce stranded costs customers as a result of the NJBPU's restructuring plans. JCP&L by approximately $12 million and $25 million, respectively, plus obtains its supply of electricity to meet its BGS obligation to non interest, and record a corresponding charge to income. Similar to shopping customers almost entirely from contracted and open JCP&L, there would be no effect to FirstEnergy's net income.

market purchases. JCP&L is permitted to defer for future collection As a result of their generating asset divestitures, Met-Ed and from customers the amounts by which its costs of supplying BGS to Penelec obtain their supply of electricity to meet their PLR obliga non-shopping customers and costs incurred under nonutility genera tions almost entirely from contracted and open market purchases.

tion (NUG) agreements exceed amounts collected through BGS and During 2000, their purchased power costs substantially exceeded MTC rates. As of December 31, 2001, the accumulated deferred cost the amounts they could recover under their capped generation rates balance totaled approximately $300 million, after giving effect to the which are in effect for varying periods, pursuant to their 1998 rate reduction discussed below. The Final Order provided for the ability to restructuring plans. In November 2000, Met-Ed and Penelec filed a securitize stranded costs associated with the divested Oyster Creek petition with the PPUC seeking permission to defer for future recov Nuclear Generation Station. In February 2002, JCP&L received NJBPU ery their energy costs in excess of amounts reflected in their capped authorization to issue $320 million of transition bonds to securitize generation rates. In January 2001, the PPUC consolidated this the recovery of these costs. The NJBPU order also provides for a petition with the FirstEnergy/GPU merger proceeding (see Note 2 usage-based non-bypassable transition bond charge and for the - Merger) for consideration and resolution in accordance with the transfer of the bondable transition property to another entity. JCP&L merger procedural schedule.

plans to sell transition bonds in the second quarter of 2002 which In June 2001, Met-Ed, Penelec and FirstEnergy entered into a will be recognized on the Consolidated Balance Sheet. The Final Settlement Stipulation with all of the major parties in the combined Order also allows for additional securitization of JCP&L's deferred bal merger and rate relief proceedings, that, in addition to resolving ance to the extent permitted by law upon application by JCP&L and a certain issues concerning the PPUC's approval of the FirstEnergy/GPU determination by the NJBPU that the conditions of the New Jersey merger, also addressed Met-Ed's and Penelec's request for PLR rate restructuring legislation are met. There can be no assurance as to the relief. On June 20, 2001, the PPUC entered orders approving the extent, if any, that the NJBPU will permit such securitization. Settlement Stipulation, which approved the merger and provided The obligation to provide BGS to non-shopping customers was bid Met-Ed and Penelec PLR rate relief. Met-Ed and Penelec are permit out for the period commencing August 1, 2002. In June 2001, the ted to defer for future recovery the difference between their actual 41

energy costs and those reflected in their capped generation rates, $53 million for OE, CEI and TE, respectively) were recognized as retroactive to January 1, 2001. Deferral accounting will continue for regulatory assets recoverable as transition costs through future such cost differences through December 31, 2005; should energy regulatory cash flows. The following summarizes net assets included costs incurred by Met-Ed and Penelec during that period be below in property, plant and equipment relating to operations for which their respective capped generation rates, the difference would be the application of SFAS 71 was discontinued, compared with the used to reduce their recoverable deferred costs. Met-Ed's and respective company's total assets as of December 31, 2001.

Penelec's PLR obligations have been extended through December 31, 2010. Met-Ed's and Penelec's competitive transition charge (CTC) revenues will be applied first to PLR costs, then to non-NUG stranded SFAS 71 Discontinued Net Assets Total Assets costs and finally to NUG stranded costs through December 31, 2010. (Inmillions)

Met-Ed and Penelec would be permitted to recover any remaining CE $ 984 $7,218 stranded costs through a continuation of the CTC, after December CEI 1,425 5,856 TE 601 2,572 31, 2010, however, such recovery would extend to no later than Penn 88 960 December 31, 2015. Any amounts not expected to be recovered by JCP&L 46 8,040 December 31, 2015 would be written off at the time such non Met-Ed 18 3,607 recovery becomes probable.

Several parties had filed Petitions for Review with the Commonwealth Court of Pennsylvania regarding the PPUC's orders. Property, Plant and Equipment On February 21, 2002, the Court affirmed the PPUC decision Property, plant and equipment reflects original cost (except for the regarding the FirstEnergy/GPU merger, remanding the decision to Ohio Companies' and Penn's nuclear generating units and the former the PPUC only with respect to the issue of merger savings. The GPU companies' properties which were adjusted to fair value), includ Court reversed the PPUC's decision regarding the PLR obligations ing payroll and related costs such as taxes, employee benefits, of Met-Ed and Penelec, and denied the related requests for rate administrative and general costs, and interest costs. In addition to relief by Met-Ed and Penelec. FirstEnergy is considering its response FirstEnergy's wholly-owned facilities, JCP&L holds a 50% ownership to the Court's decision, which could include asking the Pennsylvania interest in Yards Creek Pumped Storage Facility - its net book Supreme Court to review the decision. FirstEnergy is unable to pre value was approximately $21.5 million as of December 31, 2001.

dict the outcome of these matters. FirstEnergy also shares ownership interests in various foreign proper All of the Companies' regulatory assets are expected to continue ties with an aggregate net book value of $1.9 billion, representing to be recovered under provisions of the Ohio transition plan and the the fair value of FirstEnergy's interest.

respective Pennsylvania and New Jersey regulatory plans. Under the The Companies provide for depreciation on a straight-line basis at previous regulatory plan, the PUCO had authorized OE to recognize various rates over the estimated lives of property included in plant in additional capital recovery related to its generating assets (which service. The respective annual composite rates for the Companies' was reflected as additional depreciation expense) and additional electric plant in 2001, 2000 and 1999 (post merger periods only for amortization of regulatory assets during the prior regulatory plan JCP&L, Met-Ed and Penelec) are shown in the following table:

period of at least $2 billion, and the PPUC had authorized Penn to accelerate at least $358 million, more than the amounts that would Annual Composite Depreciation Rate 2001 2000 1999 have been recognized if the prior regulatory plans were not in effect.

These additional amounts were being recovered through rates. OE 2.7% 2.8% 3.0" Under OE's prior regulatory plan, which was terminated at the end CEI 3.2 3.4 3.4 TE 3.5 3.4 3.4 of 2000, and Penn's rate restructuring plan, OE's and Penn's cumula Penn 2.9 2.6 2.5 tive additional capital recovery and regulatory asset amortization JCP&L 3.4 amounted to $1.424 billion. Met-Ed 3.0 The application of Statement of Financial Accounting Standards Penelec 2.9 (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), was discontinued in 1997 with respect to CEI's and TE's nuclear operations; in 1998 with respect to Penn's, Annual depreciation expense in 2001 included approximately Met-Ed's and Penelec's generation operations; in 1999 with respect $128.7 million for future decommissioning costs applicable to the to JCP&L's generation operations and in 2000 with respect to OE's Companies' ownership and leasehold interests in five nuclear generation business and the nonnuclear generation businesses of CEI generating units, a demonstration nuclear reactor owned by a wholly and TE. JCP&L, Met-Ed and Penelec subsequently divested substan owned subsidiary of JCP&L, Met-Ed and Penelec and decommissioning tially all of their generating assets. The Securities and Exchange liabilities for previously divested GPU nuclear generating units. The Commission (SEC) issued interpretive guidance regarding asset 2001 amounts reflected increases of approximately $60 million from impairment measurement, concluding that any supplemental regu implementing the Ohio utilities' transition plan in 2001. The lated cash flows such as a CTC should be excluded from the cash Companies' share of the future obligation to decommission these flows of assets in a portion of the business not subject to regulatory units is approximately $2.5 billion in current dollars and (using a 4.0%

accounting practices. If those assets are impaired, a regulatory asset escalation rate) approximately $5.4 billion in future dollars. The esti should be established if the costs are recoverable through regulatory mated obligation and the escalation rate were developed based on cash flows. Consistent with the SEC guidance, $1.6 billion of site specific studies. Decommissioning of the demonstration nuclear impaired plant investments ($1.2 billion, $304 million and FI RSTE N ERGY 42

reactor is in process and expected to be completed in 2003; payments 2001 include the former GPU companies' pension and other for decommissioning of the nuclear generating units are expected to postretirement benefit costs for the period November 7, 2001 begin in 2014, when actual decommissioning work is expected to through December 31, 2001.

begin. The Companies have recovered approximately $568 million for FirstEnergy provides a minimum amount of noncontributory life decommissioning through their electric rates from customers through insurance to retired employees in addition to optional contributory December 31, 2001. The Companies have also recognized an estimat insurance. Health care benefits, which include certain employee ed liability of approximately $46.5 million related to decontamination deductibles and copayments, are also available to retired employees, and decommissioning of nuclear enrichment facilities operated by their dependents and, under certain circumstances, their survivors.

the United States Department of Energy (DOE), as required by FirstEnergy pays insurance premiums to cover a portion of these the Energy Policy Act of 1992. benefits in excess of set limits; all amounts up to the limits are paid InJuly 2001, the Financial Accounting Standards Board issued by FirstEnergy. FirstEnergy recognizes the expected cost of providing SFAS 143, "Accounting for Asset Retirement Obligations." The new other postretirement benefits to employees and their beneficiaries statement provides accounting treatment for retirement obligations and covered dependents from the time employees are hired until associated with tangible long-lived assets with adoption required by they become eligible to receive those benefits.

January 1, 2003. SFAS 143 requires the fair value of a liability for an The following sets forth the funded status of the plans and asset retirement obligation be recorded in the period in which it is amounts recognized on the Consolidated Balance Sheets as of incurred. The associated asset retirement costs are capitalized as part December 31:

of the carrying amount of the long-lived asset. Over time the capital Other Postretirement ized costs are depreciated and the present value of the asset Benefits Pension Benefits retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the costs to settle the 2001 2000 2001 2000 retirement obligation differ from the carrying amount. Under the (In millions) new standard, additional assets and liabilities relating principally to Change in benefit obligation:

nuclear decommissioning obligations will be recorded, the pattern Benefit obligation as of January 1 $1,506.1 $1,394.1 $ 752.0 $ 608.4 of expense recognition will change and income from the external Service cost 34.9 27.4 18.3 11.3 decommissioning trusts will be recorded as investment income. Interest cost 133.3 104.8 64.4 45.7 FirstEnergy is currently assessing the new standard and has not yet Plan amendments 3.6 41.3 -

quantified the impact on its financial statements. Actuarial loss 123.1 17.3 73.3 121.7 Voluntary early retirement program - 23.4 2.3 Nuclear Fuel GPU acquisition 1,878.3 716.9 Nuclear fuel is recorded at original cost, which includes material, Benefits paid (131.4) (102.2) (45.6) (35.1) enrichment, fabrication and interest costs incurred prior to reactor Benefit obligation as of load. The Companies amortize the cost of nuclear fuel based on December 31 3,547.9 1,506.1 1,581.6 752.0 the rate of consumption.

Change in fair value of plan assets:

Fair value of plan assets Income Taxes as of January 1 1,706.0 1,807.5 23.0 4.9 Details of the total provision for income taxes are shown on the Actual return on plan Consolidated Statements of Taxes. Deferred income taxes result from assets 8.1 0.7 12.7 (0.2) timing differences in the recognition of revenues and expenses for tax Company contribution - - 43.3 18.3 GPU acquisition 1,901.0 - 462.0 and accounting purposes. Investment tax credits, which were (6.0)

Benefits paid (131.4) (102.2) deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for Fair value of plan assets as of December 31 3,483.7 1,706.0 535.0 23.0 deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory Funded status of plan (64.2) 199.9 (1,046.6) (729.0) income tax rates in effect when the liabilities are expected to be paid. Unrecognized actuarial loss (gain) 222.8 (90.9) 212.8 147.3 Unrecognized prior Retirement Benefits service cost 87.9 93.1 17.7 20.9 FirstEnergy's trusteed, noncontributory defined benefit pension Unrecognized net plan covers almost all full-time employees. Upon retirement, transition obligation (asset) - (2.1) 101.6 110.9 employees receive a monthly pension based on length of service Prepaid (accrued) and compensation. On December 31, 2001, the GPU pension benefit cost $ 246.5 $ 200.0 $ (714.5) $(449.9) plans were merged with the FirstEnergy plan. FirstEnergy uses the projected unit credit method for funding purposes and was not Assumptions used required to make pension contributions during the three years as of December 31:

Discount rate 7.25% 7.75% 7.25% 7.75%

ended December 31, 2001. The assets of the pension plan consist Expected long-term return primarily of common stocks, United States government bonds and on plan assets 10.25% 10.25% 10.25% 10.25%

corporate bonds. The FirstEnergy and GPU postretirement benefit Rate of compensation plans are currently separately maintained; the information shown increase 4.00% 4.00% 4.00% 4.00%

below is aggregated as of December 31, 2001. Costs for the year 43

Net pension and other postretirement benefit costs for the three 2001 2000 years ended December 31, 2001 were computed as follows:

Carrying Fair Carrying Fair Value Value Value Value Other Postretirement (In millions)

Pension Benefits Benefits Long-term debt* $12,897 $13,097 $5,853 $6,010 2001 2000 1999 2001 2000 1999 Preferred stock $ 636 $ 626 $ 246 $ 243 (In millions)

Investments other than cash Service cost $ 34.9 $ 27.4 $ 28.3 $ 18.3 $11.3 $ 9.3 Interest cost and cash equivalents:

133.3 104.8 102.0 64.4 45.7 40.7 Debt securities:

Expected return on plan assets (204.8)

Maturity (5-10 years) $ 439 $ 402 $ 460 $ 441 (181.0) (168.1) (9.9) (0.5) (0.4)

Maturity (more than 10 years) 990 1,009 1,026 1,051 Amortization Equity securities 15 15 16 16 of transition All other 1,730 1,734 924 935 obligation (asset) (2.1) (7.9) (7.9) 9.2 9.2 9.2 Amortization of prior $ 3,174 $ 3,160 $2,426 $2,443 service cost 8.8 5.7 5.7 3.2 3.2 3.3 Recognized net *Excluding approximately $1.75 billion of long-term debt in 2001 related to actuarial loss (gain) (9.1) 4.9 pending divestitures Voluntary early retirement program 6.1 17.2 - 2.3 The fair values of long-term debt and preferred stock reflect the Net benefit cost $ (23.8) $ (42.9) $ (40.0) $ 92.4 $ 68.9 $62.1 present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields The composite health care trend rate assumption is approximately assumed were based on securities with similar characteristics offered 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in by corporations with credit ratings similar to the Companies' ratings.

later years. Assumed health care cost trend rates have a significant Long-term debt and preferred stock subject to mandatory redemp effect on the amounts reported for the health care plan. An increase tion of the former GPU companies were recognized at fair value in in the health care trend rate assumption by one percentage point connection with the merger.

would increase the total service and interest cost components by The fair value of investments other than cash and cash equiva

$14.6 million and the postretirement benefit obligation by lents represent cost (which approximates fair value) or the present

$151.2 million. A decrease in the same assumption by one percent value of the cash inflows based on the yield to maturity. The yields age point would decrease the total service and interest cost assumed were based on financial instruments with similar character components by $12.7 million and the postretirement benefit obliga istics and terms. Investments other than cash and cash equivalents tion by $131.3 million. include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recog Supplemental Cash Flows Information nized in the trust investment with a corresponding change to the All temporary cash investments purchased with an initial maturity decommissioning liability. The Companies have no securities held for of three months or less are reported as cash equivalents on the trading purposes.

Consolidated Balance Sheets at cost, which approximates their fair Effective December 31, 1998, FirstEnergy began accounting for market value. Noncash financing and investing activities included the its commodity price derivatives, entered into specifically for trading 2001 FirstEnergy common stock issuance of $2.6 billion for the GPU purposes, on a mark-to-market basis in accordance with Emerging acquisition and capital lease transactions amounting to $3.1 million, Issues Task Force (EITF) Issue No. 98-10, "Accounting for Energy

$89.3 million and $36.2 million for the years 2001, 2000 and 1999, Trading and Risk Management Activities," with gains and losses respectively. Commercial paper transactions of OES Fuel, recognized in the Consolidated Statements of Income.

Incorporated (a wholly owned subsidiary of OE) that have initial On January 1, 2001, FirstEnergy adopted SFAS 133, "Accounting maturity periods of three months or less are reported net within for Derivative Instruments and Hedging Activities", as amended by financing activities under long-term debt and are reflected as cur SFAS 138, "Accounting for Certain Derivative Instruments and rently payable long-term debt on the Consolidated Balance Sheets in Certain Hedging Activities - an amendment of FASB Statement anticipation of the expiration of the related long-term financing No. 133". The cumulative effect to January 1, 2001 was a charge of agreement in March 2002 (see Note 4G). $8.5 million (net of $5.8 million of income taxes) or $.03 per share All borrowings with initial maturities of less than one year are of common stock. The reported results of operations for the years defined as financial instruments under GAAP and are reported on ended December 31, 2000 and 1999 would not have been materi the Consolidated Balance Sheets at cost, which approximates their ally different if this accounting had been in effect during those years.

fair market value. The following sets forth the approximate fair value FirstEnergy is exposed to financial risks resulting from the fluctua and related carrying amounts of all other long-term debt, preferred tion of interest rates and commodity prices, including electricity, stock subject to mandatory redemption and investments other than natural gas and coal. To manage the volatility relating to these expo cash and cash equivalents as of December 31: sures, 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 FIR STE NER Y Y 44

2001 2000 Committee, comprised of executive officers, exercises an independ ent risk oversight function to ensure compliance with corporate risk (Inmillions)

Regulatory transition charge $7,751.5 $3,489.0 management policies and prudent risk management practices.

Customer receivables for future income taxes 433.0 139.9 FirstEnergy uses derivatives to hedge the risk of price, interest 166.6 Societal benefits charge rate and foreign currency fluctuations. FirstEnergy's primary ongoing Loss on reacquired debt 80.0 51.0 hedging activity involves cash flow hedges of electricity, and natural Employee postretirement benefit costs 98.6 15.3 gas purchases. The maximum periods over which the variability of Nuclear decommissioning, decontamination and electricity, and natural gas cash flows are hedged are two and three spent fuel disposal costs 80.2 Provider of last resort costs 116.2 years, respectively. Gains and losses from hedges of commodity price Property losses and unrecovered plant costs 104.1 risks are included in net income when the underlying hedged com Other 82.4 32.5 modities are delivered. FirstEnergy entered into interest rate Total $8,912.6 $3,727.7 derivative transactions during 2001 to hedge a portion of the antici pated interest payments on debt related to the GPU acquisition.

Gains and losses from hedges of anticipated interest payments on 2. Merger:

acquisition debt will be included in net income over the periods that On November 7, 2001, the merger of FirstEnergy and GPU hedged interest payments are made - 5, 10 and 30 years. The cur became effective pursuant to the Agreement and Plan of Merger, rent net deferred loss of $169.4 million included in Accumulated dated August 8, 2000 (Merger Agreement). As a result of the merg Other Comprehensive Loss (AOCL) as of December 31, 2001, for er, GPU's former wholly owned subsidiaries, including JCP&L, Met-Ed derivative hedging activity, as compared to the December 31, 2000 and Penelec (collectively, the Former GPU Companies), became balance of $44.2 million (including the SFAS 133 cumulative adjust wholly owned subsidiaries of FirstEnergy.

ment) in deferred gains, resulted from a $181.1 million reduction Under the terms of the Merger Agreement, GPU shareholders related to current hedging activity and a $32.5 million reduction received the equivalent of $36.50 for each share of GPU common due to net hedge gains included in earnings during the year. stock they owned, payable in cash and/or FirstEnergy common Approximately $40.7 million (after tax) of the current net deferred stock. GPU shareholders receiving FirstEnergy shares received 1.2318 loss on derivative instruments in AOCL is expected to be reclassified shares of FirstEnergy common stock for each share of GPU common to earnings during the next twelve months as hedged transactions stock that they exchanged. The elections by GPU shareholders were occur. However, the fair value of these derivative instruments will subject to proration since the total elections received would have fluctuate from period to period based on various market factors and resulted in more than one-half of the GPU common stock being will generally be more than offset by the margin on related sales exchanged for FirstEnergy shares. FirstEnergy borrowed the funds and revenues. for the cash portion of the merger consideration, approximately

$2.2 billion, through a credit agreement dated as of October 2, Regulatory Assets 2001, from a group of banks led by Barclay's Bank Plc, The Companies recognize, as regulatory assets, costs which the as administrative agent; the borrowings were refinanced with FERC, PUCO, PPUC and NJBPU have authorized for recovery from long-term debt on November 15, 2001. FirstEnergy issued nearly customers in future periods. Without such authorization, the costs 73.7 million shares of its common stock to GPU shareholders for would have been charged to income as incurred. All regulatory assets the share portion of the transaction consideration.

are expected to continue to be recovered from customers under the The merger was accounted for by the purchase method of Companies' respective transition and regulatory plans. Based on accounting and, accordingly, the Consolidated Statements of those plans, the Companies continue to bill and collect cost-based Income include the results of the Former GPU Companies beginning rates for their transmission and distribution services, which remain November 7, 2001. The assets acquired and liabilities assumed regulated; accordingly, it isappropriate that the Companies continue were recorded at estimated fair values as determined by FirstEnergy's the application of SIAS 71 to those operations. OE and Penn recog management based on information currently available and on nized additional cost recovery of $270 million in 2000 and current assumptions as to future operations. The merger purchase

$257 million in 1999, as additional regulatory asset amortization in accounting adjustments, which were recorded in the records of accordance with their prior Ohio and current Pennsylvania regulatory GPU's direct subsidiaries, primarily consist of: (1) revaluation of plans. The Ohio companies and Penn recognized incremental transi GPU's international operations to fair value; (2) revaluation of prop tion cost recovery aggregating $309 million in accordance with the erty, plant and equipment; (3) adjusting preferred stock subject to current Ohio transition plan and Pennsylvania regulatory plan. mandatory redemption and long-term debt to estimated fair value; Net regulatory assets on the Consolidated Balance Sheets are (4) recognizing additional obligations related to retirement benefits; comprised of the following: and (5) recognizing estimated severance and other compensation liabilities. Other assets and liabilities were not adjusted since they remain subject to rate regulation on a historical cost basis. The severance and compensation liabilities are based on anticipated workforce reductions reflecting duplicate positions primarily related to corporate support groups including finance, legal, communica tions, human resources and information technology. The workforce reductions represent the expected reduction of approximately 1,000 employees at a cost of approximately $140 million. Merger related 45

staffing reductions began in late 2001 and the remaining reductions In December 2001, FirstEnergy divested its Australian gas trans are anticipated to occur through 2003 as merger-related transition mission companies through an initial public offering of GasNet's assignments are completed. common stock. The IPO provided net proceeds of $125 million The merger greatly expanded the size and scope of our electric to FirstEnergy and immediately removed $290 million of GasNet business and the goodwill recognized primarily relates to the regu related debt from FirstEnergy's consolidated debt.

lated services segment. On October 18, 2001, FirstEnergy and Aquila, Inc. (formerly The following table summarizes the estimated fair values of the UtiliCorp United) announced that Aquila made an offer to assets acquired and liabilities assumed at the date of acquisition. The FirstEnergy to purchase Avon Energy Partners Holdings, FirstEnergy's allocation of the purchase price is subject to adjustment within one wholly owned holding company of Midlands Electricity plc, for year of the merger. $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 have been received (In millions) by Aquila. One condition of regulatory approval requires that Aquila Current assets $1,027 Goodwill 3,698 include a financial partner in the transaction. The transaction must Regulatory assets 4,352 be completed by April 26, 2002, or either party may terminate the Other 5,595 original agreement. On March 18, 2002, FirstEnergy announced that Total assets acquired 14,672 it finalized terms of the agreement in which Aquila will acquire a 79.9 percent interest in Avon for approximately $1.9 billion (includ Current liabilities (2,615) ing the transfer of $1.7 billion of debt).

Long-term debt (2,992) FirstEnergy and Aquila together will own all of the outstanding Other (4,785) shares of Avon through a jointly owned subsidiary, with each Total liabilities assumed (10,392) company having a 50-percent voting interest.

Net assets acquired pending sale Midlands maintains a defined benefit pension plan covering 566 almost all full-time employees of Midlands. The plan is maintained Net assets acquired $ 4,846 separately from the FirstEnergy plan and will transfer upon completion of the sale. The pension benefit obligations as of the November 7, 2001 merger date and December 31, 2001 were Divestitures- International Operations approximately $1,263 million and $1,264 million, respectively, with Prior to consummation of the GPU merger, FirstEnergy identified the net change primarily due to actuarial gains of $12 million offset certain GPU international operations (see below) for divestiture within by benefits paid of $11 million. The fair values of plan assets as of twelve months of the merger date. These operations constitute individ November 7, 2001 and December 31, 2001, were approximately ual "lines of business" as defined in Accounting Principles Board

$1,313 million and $1,291 million, respectively, with the change Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting including benefits paid of approximately $11 million. The 2001 post the Effects of Disposal of a Segment of a Business, and Extraordinary, merger net periodic benefit income for the last seven weeks of 2001 Unusual and Infrequently Occurring Events and Transactions" with was approximately $3 million. The plan assumptions as of December physically and operationally separable activities. Application of EITF 31, 2001 included a discount rate of 6.0%, an expected return on Issue No. 87-11, "Allocation of Purchase Price to Assets to Be Sold,"

plan assets of 7.0% and a rate of compensation increase of 4.5%.

required that expected, pre-sale cash flows, including incremental As with the other international subsidiaries identified above, interest costs on related acquisition debt, of these operations be con GPU's former Argentina operations, including GPU Empresa sidered part of the purchase price allocation. Accordingly, subsequent Distribuidora Electrica Regional S.A., were identified by FirstEnergy to the merger date, results of operations and incremental interest costs for divestiture within twelve months of the merger date. FirstEnergy related to these international subsidiaries have not been included in is actively pursuing the sale of these operations. FirstEnergy has FirstEnergy's Consolidated Statement of Income. Additionally, assets determined the fair value of the Argentina operations based on the and liabilities of these international operations have been segregated best available information as of the date of the merger. Subsequent under separate captions on the Consolidated Balance Sheet as "Assets to that date, a number of economic events have occurred in Pending Sale" and "Liabilities Related to Assets Pending Sale" (see the Argentina which may have an impact on FirstEnergy's ability to real tables below). The following entities are included in such captions:

ize the estimated fair value of the Argentina operations. These Australia - Gas Transmission (GasNet) events include currency devaluation, restrictions on repatriation of GasNet Pty Ltd. and subsidiaries cash, and the anticipation of future asset sales in that region by GPU GasNet Trading Pty Ltd. (and related trusts) competitors. FirstEnergy has determined that the current economic conditions in Argentina have not eroded the fair value recorded for United Kingdom - Electric Distribution these operations, and as a result, an impairment writedown of this Avon Energy Partners Holdings investment is not warranted as of December 31, 2001. FirstEnergy Avon Energy Partners plc will continue to assess the potential impact of these and other related Midlands Electricity plc events on the realizability of the value recorded for the Argentina Midlands Power International Ltd. operations. Other international companies are being considered for sale; however, as of the merger date those sales were not judged to Argentina - Electric Distribution be probable of occurring within twelve months.

GPU Empresa Distribuidora Electrica Regional S.A. and affiliates FIRSTENERGY 46 46

Post-merger results of operations and incremental interest costs 3. Leases:

for the international operations included in "Assets Pending Sale" The Companies lease certain generating facilities, office space and and "Liabilities Related to Assets Pending Sale" on FirstEnergy's other property and equipment under cancelable and noncancelable Consolidated Balance Sheet as of December 31, 2001, are as follows: leases.

OE sold portions of its ownership interests in Perry Unit 1 and Post-Merger Deferred Results of Operations and Interest Costs Beaver Valley Unit 2 and entered into operating leases on the por International Operations tions sold for basic lease terms of approximately 29 years. CEI and Argentina Total TE also sold portions of their ownership interests in Beaver Valley Australia* United Kingdom Unit 2 and Bruce Mansfield Units 1, 2 and 3 and entered into similar (In millions) operating leases for lease terms of approximately 30 years. During Revenues $4.0 $99.4 $ 28.5 $131.9 2.9 58.3 62.8 124.0 the terms of their respective leases, OE, CEI and TE continue to be Expenses Capitalized incremental responsible, to the extent of their individual combined ownership interest costs 0.5 3.2 1.3 5.0 and leasehold interests, for costs associated with the units including Net interest charges 1.2 20.2 3.2 24.6 construction expenditures, operation and maintenance expenses, Income taxes 0.2 (20.5) (13.1) (33.4) insurance, nuclear fuel, property taxes and decommissioning. They Net income have the right, at the expiration of the respective basic lease terms, (loss) capitalized $0.2 $44.6 $(23.1) $ 21.7 to renew their respective leases. They also have the right to purchase

• Australian operationsdivested in December 2001 the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities.

The basic rental payments are adjusted when applicable federal tax Consolidated Balance Sheets as of December 31, 2001 law changes.

International Operations OES Finance, Incorporated, a wholly owned subsidiary of OE, maintains deposits pledged as collateral to secure reimbursement United Kingdom Argentina Total obligations relating to certain letters of credit supporting OE's obliga (Inmillions) tions to lessors under the Beaver Valley Unit 2 sale and leaseback Assets Pending Sale arrangements. The deposits pledged to the financial institution pro Current assets $ 554 $ 41 $ 595 177 1,915 viding those letters of credit are the sole property of OES Finance. In Property, plant and equipment 1,738 Investments 142 - 142 the event of liquidation, OES Finance, as a separate corporate entity, Deferred charges 691 75 766 would have to satisfy its obligations to creditors before any of its assets could be made available to OE as sole owner of OES Finance Total $3,125 $293 $3,418 common stock.

Liabilities Related to Assets Consistent with the regulatory treatment, the rentals for capital Pending Sale and operating leases are charged to operating expenses on the Current liabilities: Consolidated Statements of Income. Such costs for the three years Currently payable long-term debt $ 316 $ 2 $ 318 27 234 ended December 31, 2001, are summarized as follows:

Short-term debt 207 Other 501 2 503 2001 2000 1999 Long-term debt 1,347 85 1,432 Deferred credits* 455 13 468 (Inmillions)

Operating leases Total $2,826 $129 $2,955 $208.6 Interest element $194.1 $202.4 Other 120.5 111.1 110.3 Net Assets Pending Sale $ 299 $164 $ 463 Capital leases

• United Kingdom and Argentina are net of $3 million and $52 million, Interest element 8.0 12.3 17.5 Other 35.5 64.2 76.1 respectively related to currency translation adjustments.

Total rentals $358.1 $390.0 $412.5 Sale of Generating Assets On November 29, 2001, FirstEnergy reached an agreement to sell four coal-fired power plants (with an aggregate net book value of

$539 million as of December 31, 2001) totaling 2,535 MW to NRG Energy, Inc. (NRG) for $1.5 billion ($1.355 billion in cash and $145 million in debt assumption). The net, after-tax gain from the sale, based on the difference between the sale price of the plants and their market price used in the Ohio restructuring transition plan, will be credited to customers by reducing the transition cost recovery period. FirstEnergy also entered into a power purchase agreement (PPA) with NRG. Under the terms of the PPA, NRG is obligated to sell to FirstEnergy up to 10.5 billion kilowatt-hours of electricity annually, similar to the average annual output of the plants, through 2005. The sale is expected to close in mid-2002.

47

The future minimum lease payments as of December 31, 2001, are: (C) Stock Compensation Plans In 2001, FirstEnergy assumed responsibility for two new stock Operating Leases based plans as a result of the merger with GPU. No further stock Capital Lease Capital based compensation can be awarded under the GPU, Inc. Stock Leases Payments Trusts Option and Restricted Stock Plan for MYR Group Inc. Employees (In millions) (MYR Plan) or the 1990 Stock Plan for Employees of GPU, Inc. and 2002 $ 6.1 $ 322.2 $ 169.5 $ 152.7 Subsidiaries (GPU Plan). All options and restricted stock under both 2003 6.2 332.9 176.5 156.4 Plans have been converted into FirstEnergy options and restricted 2004 6.0 294.9 110.7 184.2 stock. Options under the GPU Plan became fully vested on 2005 5.4 314.6 128.8 185.8 2006 November 7, 2001, and will expire on or before June 1, 2010.

5.4 323.2 140.2 183.0 Years thereafter 9.8 3,131.8 1,095.4 2,036.4 Under the MYR Plan, all options and restricted stock maintained their original vesting periods, which range from one to four years, Total minimum lease payments 38.9 $4,719.6 $1,821.1 $2,898.5 and will expire on or before December 17, 2006.

Executory costs 8.8 Additional stock based plans administered by FirstEnergy include Net minimum lease payments 30.1 the Centerior Equity Plan (CE Plan) and the FirstEnergy Executive and Interest portion 10.7 Director Incentive Compensation Plan (FE Plan). All options are fully Present value of net minimum vested under the CE Plan, and no further awards are permitted.

lease payments 19.4 Outstanding options will expire on or before February 25, 2007.

Less current portion 2.0 Under the FE Plan, total awards cannot exceed 15 million shares of common stock or their equivalent. Only stock options and restricted Noncurrent portion $17.4 stock have been granted, with vesting periods ranging from six months to seven years.

OE invested in the PNBV Capital Trust, which was established to Collectively, the above plans are referred to as the FE Programs.

purchase a portion of the lease obligation bonds issued on behalf of Restricted common stock grants under the FE Programs were as follows:

lessors in OE's Perry Unit 1 and Beaver Valley Unit 2 sale and lease back transactions. CEI and TE established the Shippingport Capital 2001 2000 1999 Trust to purchase the lease obligation bonds issued on behalf of Restricted common shares granted 133,162 208,400 8,000 lessors in their Bruce Mansfield Units 1, 2 and 3 sale and leaseback Weighted average market price $35.68 $26.63 $30.89 transactions. The PNBV and Shippingport capital trust arrangements Weighted average vesting period (years) 3.7 3.8 5.8 Dividends restricted

• Yes Yes effectively reduce lease costs related to those transactions.

FE Plan dividends are paid as restrictedstock on 4,500 shares;

4. Capitalization: MYR Plan dividends arepaid as unrestrictedcash on 128,662 shares (A) Retained Earnings There are no restrictions on retained earnings for payment of cash Stock option activity under the FE Programs was as follows:

dividends on FirstEnergy's common stock.

Number of Weighted Average Stock Option Activity Options Exercise Price (B) Employee Stock Ownership Plan FirstEnergy funds the matching contribution for its 401(k) savings plan Balance, December 31, 1998 364,286 $27.13 through an ESOP Trust. All full-time employees eligible for participation (182,330 options exercisable) 24.44 in the 401(k) savings plan are covered by the ESOP. The ESOP borrowed Options granted 1,811,658 24.90

$200 million from OE and acquired 10,654,114 shares of OE's common Options exercised 22,575 21.42 stock (subsequently converted to FirstEnergy common stock) through Balance, December 31, 1999 2,153,369 25.32 (159,755 options exercisable) 24.87 market purchases. Dividends on ESOP shares are used to service the debt. Shares are released from the ESOP on a pro rata basis as debt Options granted 3,011,584 23.24 service payments are made. In2001, 2000 and 1999, 834,657 shares, Options exercised 90,491 26.00 Options forfeited 52,600 22.20 826,873 shares and 627,427 shares, respectively, were allocated to Balance, December 31, 2000 5,021,862 24.09 employees with the corresponding expense recognized based on the (473,314 options exercisable) 24.11 shares allocated method. The fair value of 5,117,375 shares unallocated Options granted 4,240,273 28.11 as of December 31, 2001, was approximately $179.0 million. Total Options exercised 694,403 24.24 ESOP-related compensation expense was calculated as follows: Options forfeited 120,044 28.07 Balance, December 31, 2001 8,447,688 26.04 2001 2000 1999 (1,828,341 options exercisable) 24.83 (In millions)

It' C 1 It1o "7 Base compensation 1100 Dividends on common stock held by e-.... ...

10 As of December 31, 2001, the weighted average remaining the ESOP and used to service debt (6.1) (6.4) (4.5) contractual life of outstanding stock options was 7.8 years.

$19.0 $12.3 $13.8 Under the Executive Deferred Compensation Plan, covered employ Net expense ees can direct a portion of their Annual Incentive Award and/or Long Term Incentive Award into an unfunded FirstEnergy Stock Account to FIRS. ENE RGY 48

receive vested stock units. An additional 20% premium is received in CEI redeemed, pursuant to redemption provisions of its $42.40 the form of stock units based on the amount allocated to the Series T issue, all 200,000 shares outstanding on February 1, 2002 FirstEnergy Stock Account. Dividends are calculated quarterly on stock at a price of $500 per share.

units outstanding and are paid in the form of additional stock units. Met-Ed's and Penelec's preferred stock authorization consists of 10 Upon withdrawal, stock units are converted to FirstEnergy shares. million and 11.435 million shares, respectively, without par value. No Payout occurs three years from the date of deferral. As of preferred shares are currently outstanding for the two companies.

December 31, 2001, there were 234,558 stock units outstanding. The Companies' preference stock authorization consists of 8 mil FirstEnergy continues to apply APB 25, "Accounting for Stock lion shares without par value for OE; 3 million shares without par Issued to Employees." As required by SFAS 123, "Accounting for value for CEI; and 5 million shares, $25 par value for TE. No prefer Stock-Based Compensation," FirstEnergy has determined pro ence shares are currently outstanding.

forma earnings as though FirstEnergy had accounted for employee stock options under the fair value method. The weighted average (E) Preferred Stock Subject to Mandatory Redemption assumptions used in valuing the options and their resulting fair val Annual sinking fund provisions for the Companies' preferred ues are as follows: stock are as follows:

2001 2000 1999 Redemption Series Shares Price Per Share Valuation assumptions:

CEI $ 7.35 C 10,000 $ 100 Expected option term (years) 8.3 7.6 6.4 90.00 S 17,750 1,000 Expected volatility 23.45% 21.77% 20.03%

JCP&L 8.65% J 83,333 100 Expected dividend yield 5.00"' 6.68% 5.97%

7.52% K 25,000 100 Risk-free interest rate 4.67% 5.28% 5.97%

$3.42 Penn 7.625% 7,500 100 Fair value per option $4.97 $2.86 The following table summarizes the pro forma effect of applying Annual sinking fund requirements for the next five years are fair value accounting to FirstEnergy's stock options. $30 million in 2002, $13 million in each year 2003 and 2004, and

$4 million in each year 2005 and 2006.

2001 2000 1999 Net Income (000) (F) Subsidiary-Obligated Mandatorily Redeemable Preferred As Reported $646,447 $598,970 $568,299 Securities of Subsidiary Trust or Limited Partnership Holding Pro Forma $642,724 $597,378 $567,876 Solely Subordinated Debentures of Subsidiaries Earnings Per Share of Common Stock OE and CEI have each formed statutory business trusts as wholly Basic owned financing subsidiaries for which they own all of the respective As Reported $2.82 $2.69 $2.50 common securities. Each trust sold preferred securities and invested Pro Forma $2.80 $2.69 $2.50 the gross proceeds in subordinated debentures of the applicable par Diluted*

As Reported $2.81 $2.69 $2.50 ent company and the sole assets of each trust are the applicable Pro Forma $2.79 $2.69 $2.50 subordinated debentures. In each case, interest payment provisions of the subordinated debentures match the distribution payment provi

• The denominatorused in the calculation of diluted earnings per share of sions of the trust's preferred securities. In addition, upon redemption common stock includes the weighted averagenumber of common shares or payment at maturity of subordinated debentures, the applicable outstanding (used as the denominatorfor the calculation of basic earnings per share of common stock) plus common stock equivalents resulting from trust's preferred securities will be redeemed on a pro rata basis at the stock-basedcompensation plans discussedabove - including 723,931 their liquidation value. Under certain circumstances, the applicable for options and 194,107 for stock units. subordinated debentures could be distributed to the holders of the outstanding preferred securities of the trust in the event that the trust (D) Preferred and Preference Stock is liquidated. The applicable parent company has effectively provided JCP&L's 7.52% Series K of preferred stock has a restriction which a full and unconditional guarantee of payments due on its trust's pre prevents early redemption prior to June 2002. Penn's 7.75% series ferred securities. Their respective trust preferred securities are has a restriction which prevents early redemption prior to July 2003. redeemable at 100% of their principal amount at the option of OE CEI's $90.00 Series S has no optional redemption provision. All other and, beginning in December 2006, at the option of CEI.

preferred stock may be redeemed by the Companies in whole, or in Met-Ed and Penelec have each also formed statutory business part, with 30-90 days' notice. trusts for substantially similar transactions as OE and CEI. However, TE exercised its option to redeem all outstanding shares of five ownership of the respective Met-Ed and Penelec trusts is through series of preferred stock on February 1, 2002 as follows: separate wholly-owned limited partnerships, of which a wholly owned subsidiary of each company is the sole general partner. In Series Outstanding Shares Call Price these transactions, each trust invested the gross proceeds from the

$ 7.76 150,000 $102.44 sale of its trust preferred securities in the preferred securities of the

$ 7.80 150,000 $101.65 applicable limited partnership, which in turn invested those proceeds

$ 8.32 100,000 $102.46 in the 7.35% and 7.34% subordinated debentures of Met-Ed and

$10.00 190,000 $101.00 Penelec, respectively. In each case, the applicable parent company

$ 2.21 1,000,000 $25.25 has effectively provided a full and unconditional guarantee of its 49

obligations under its trust's preferred securities. The Met-Ed and Sinking fund requirements for first mortgage bonds and maturing Penelec trust preferred securities are redeemable at the option of long-term debt (excluding capital leases and long-term debt included in Met-Ed and Penelec beginning in May 2004 and September 2004, "Liabilities Related to Assets Pending Sale") for the next five years are:

respectively, at 100% of their principal amount.

Additionally, JCP&L has formed a limited partnership for a sub (Inmillions) stantially similar transaction; however, no statutory trust is involved. 2002 $1,654.7 That limited partnership, of which JCP&L is the sole general partner, 2003 928.1 invested the gross proceeds from the sale of its monthly income pre 2004 1,421.1 ferred securities (MIPS) in JCP&L's 8.56% subordinated debentures. 2005 853.3 JCP&L has effectively provided a full and unconditional guarantee of 2006 1,432.5 its obligations under its limited partnership's MIPS. The limited part The Companies' obligations to repay certain pollution control rev nership's MIPS are redeemable at the option of JCP&L at 100% of enue bonds are secured by several series of first mortgage bonds.

their principal amount. In all of these transactions, interest on the Certain pollution control revenue bonds are entitled to the benefit of subordinated debentures (and therefore the distributions on trust irrevocable bank letters of credit of $287.6 million and noncance preferred securities or MIPS) may be deferred for up to 60 months, lable municipal bond insurance policies of $493.9 million to pay but the parent company may not pay dividends on, or redeem or principal of, or interest on, the pollution control revenue bonds. To acquire, any of its cumulative preferred or common stock until the extent that drawings are made under the letters of credit, the deferred payments on its subordinated debentures are paid in full.

Companies are entitled to a credit against their obligation to repay The following table lists the subsidiary trusts and limited partner those bonds. The Companies pay annual fees of 1.00% to 1.375%

ship and information regarding their preferred securities outstanding of the amounts of the letters of credit to the issuing banks and are as of December 31, 2001.

obligated to reimburse the banks for any drawings thereunder.

FirstEnergy had unsecured borrowings of $250 million as of Preferred Securities (a) December 31, 2001, supported by a $500 million long-term revolv Stated Subordinated ing credit facility agreement which expires November 29, 2004. As Maturity Rate Value Debentures of December 31, 2001, FirstEnergy currently pays an annual facility (Inmillions) fee of 0.25% on the total credit facility amount. The fee is subject Ohio Edison Financing Trust (b) 2025 9.00% $120.0 $123.7 to change based on credit agency ratings for FirstEnergy.

Cleveland Electric OE had no unsecured borrowings as of December 31, 2001 Financing Trust I(b) 2031 9.00% $100.0 $103.1 Met-Ed Capital Trust (c) under a $250 million long-term revolving credit facility agreement 2039 7.35% $100.0 $103.1 Penelec Capital Trust (c) 2039 7.34% $100.0 $103.1 which expires November 18, 2002. OE must pay an annual facility JCP&L Capital, L. P (b) 2044 8.56% $125.0 $128.9 fee of 0.20% on the total credit facility amount. In addition, the credit agreement provides that OE maintain unused first mortgage (a) The liquidation value is $25 per security bond capability for the full credit agreement amount under OE's (b) The sole assets of the trust or limited partnershipare the parent indenture as potential security for the unsecured borrowings.

company's subordinateddebentures with the same rate and maturity date as the preferredsecurities. CEI and TE have letters of credit of approximately $222 million in connection with the sale and leaseback of Beaver Valley Unit 2 that (c) The sole assets of the trust are the preferred securitiesof Met-Ed CapitalII, L.R and Penelec Capital II,L.R, respectively whose sole assets are the expire in May 2002. The letters of credit are secured by first mort parentcompany's subordinateddebentures with the same rate and gage bonds of CEI and TE in the proportion of 40% and 60%,

maturity date as the preferred securities. respectively (see Note 3).

OE's and Penn's nuclear fuel purchases are financed through the (G) Long-Term Debt issuance of OES Fuel commercial paper and loans, both of which are The first mortgage indentures and their supplements, which supported by a $141.5 million long-term bank credit agreement secure all of the Companies' first mortgage bonds, serve as direct which expires March 31, 2002. FirstEnergy does not anticipate first mortgage liens on substantially all property and franchises, extending the credit agreement. Accordingly, the commercial paper other than specifically excepted property, owned by the Companies. and loans are reflected as currently payable long-term debt on the Based on the amount of bonds authenticated by the Trustees December 31, 2001 Consolidated Balance Sheet. OES Fuel must pay through December 31, 2001, the Companies' annual sinking and an annual facility fee of 0.20% on the total line of credit and an improvement fund requirements for all bonds issued under the annual commitment fee of 0.0625% on any unused amount.

mortgages amounts to $66.9 million. OE, TE and Penn expect to deposit funds in 2002 that will be withdrawn upon the surrender (H) Comprehensive Income for cancellation of a like principal amount of bonds, which are Comprehensive income includes net income as reported on the specifically authenticated for such purposes against unfunded prop Consolidated Statements of Income and all other changes in com erty additions or against previously retired bonds. This method can mon stockholders' equity except those resulting from transactions result in minor increases in the amount of the annual sinking fund with common stockholders. As of December 31, 2001, accumulated requirement. JCP&L, Met-Ed and Penelec expect to fulfill their sink other comprehensive income (loss) consisted of a minimum liability ing and improvement fund obligation by providing bondable for unfunded retirement benefits of $0.6 million, unrealized gains on property additions and/or retired bonds to the Trustee to meet their investments in securities available for sale of $1.0 million and unreal annual sinking fund requirement. ized losses on derivative instrument hedges of $169.4 million.

FIRSTENERGY so 50

5. Short-Term Borrowings and Bank Lines of Credit: Companies have also obtained approximately $1.2 billion of insur Short-term borrowings outstanding as of December 31, 2001, ance coverage for replacement power costs. Under these policies, consisted of $688.3 million of bank borrowings and $159.8 million the Companies can be assessed a maximum of approximately of OES Capital, Incorporated commercial paper. Total borrowings $71 million for incidents at any covered nuclear facility occurring include $233.8 million related to pending divestitures (see Note 2 during a policy year which are in excess of accumulated funds

- Merger) that are included in "Liabilities Related to Assets Pending available to the insurer for paying losses.

Sale" on the Consolidated Balance Sheet as of December 31, 2001. The Companies intend to maintain insurance against nuclear OES Capital is a wholly owned subsidiary of OE whose borrowings risks as described above as long as it is available. To the extent that are secured by customer accounts receivable. OES Capital can bor replacement power, property damage, decontamination, decommis row up to $170 million under a receivables financing agreement at sioning, repair and replacement costs and other such costs arising rates based on certain bank commercial paper and is required to pay from a nuclear incident at any of the Companies' plants exceed an annual fee of 0.20% on the amount of the entire finance limit. the policy limits of the insurance in effect with respect to that plant, The receivables financing agreement expires in 2002. to the extent a nuclear incident is determined not to be covered by FirstEnergy and its subsidiaries have various credit facilities (includ the Companies' insurance policies, or to the extent such insurance ing a FirstEnergy $1 billion short-term revolving credit facility) with becomes unavailable in the future, the Companies would remain domestic and foreign banks that provide for borrowings of up to at risk for such costs.

$1.291 billion under various interest rate options. OE's short-term borrowings may be made under its lines of credit on its unsecured Environmental Matters notes. To assure the availability of these lines, FirstEnergy and its sub Various federal, state and local authorities regulate the sidiaries are required to pay annual commitment fees that vary from Companies with regard to air and water quality and other environ 0.125% to 0.20%. These lines expire at various times during 2002. mental matters. FirstEnergy estimates additional capital expenditures The weighted average interest rates on short-term borrowings out for environmental compliance of approximately $225 million, which standing as of December 31, 2001 and 2000, were 3.80% and is included in the construction forecast provided under "Capital 7.92%, respectively. Expenditures" for 2002 through 2006.

The Companies are required to meet federally approved sulfur

6. Commitments, Guarantees and Contingencies: dioxide (S02) regulations. Violations of such regulations can result Capital Expenditures in shutdown of the generating unit involved and/or civil or criminal FirstEnergy's current forecast reflects expenditures of approximate penalties of up to $27,500 for each day the unit is in violation. The ly $3.4 billion for property additions and improvements from Environmental Protection Agency (EPA) has an interim enforcement 2002-2006, of which approximately $850 million is applicable to policy for S02 regulations in Ohio that allows for compliance based 2002. Investments for additional nuclear fuel during the 2002-2006 on a 30-day averaging period. The Companies cannot predict what period are estimated to be approximately $536 million, of which action the EPA may take in the future with respect to the interim approximately $54 million applies to 2002. During the same periods, enforcement policy.

the Companies' nuclear fuel investments are expected to be reduced The Companies are in compliance with the current SO2 and nitro by approximately $507 million and $101 million, respectively, as the gen oxide (NOx) reduction requirements under the Clean Air Act nuclear fuel is consumed. Amendments of 1990. SO2 reductions are being achieved by burn ing lower-sulfur fuel, generating more electricity from lower-emitting Stock Repurchase Program plants, and/or using emission allowances. NOx reductions are being On November 17, 1998, the Board of Directors authorized the achieved through combustion controls and the generation of more repurchase of up to 15 million shares of FirstEnergy's common stock electricity at lower-emitting plants. In September 1998, the EPA over a three-year period beginning in 1999. Repurchases were made finalized regulations requiring additional NOx reductions from the on the open market, at prevailing prices, and were funded primarily Companies' Ohio and Pennsylvania facilities. The EPA's NOx through the use of operating cash flows. During 2001, 2000 and Transport Rule imposes uniform reductions of NOx emissions (an 1999, FirstEnergy repurchased and retired 550,000 shares (average approximate 85% reduction in utility plant NOx emissions from pro price of $27.82 per share), 7.9 million shares (average price of jected 2007 emissions) across a region of nineteen states and the

$24.51 per share) and 4.6 million shares (average price of $28.08 District of Columbia, including New Jersey, Ohio and Pennsylvania, per share), respectively. based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. State Nuclear Insurance Implementation Plans (SIP) must comply by May 31, 2004 with The Price-Anderson Act limits the public liability relative to a single individual state NOx budgets established by the EPA. Pennsylvania incident at a nuclear power plant to $9.5 billion. The amount is cov submitted a SIP that requires compliance with the NOx budgets at ered by a combination of private insurance and an industry the Companies' Pennsylvania facilities by May 1, 2003 and Ohio retrospective rating plan. The Companies' maximum potential assess submitted a "draft" SIP that requires compliance with the NOx ment under the industry retrospective rating plan would be budgets at the Companies' Ohio facilities by May 31, 2004. The

$352.4 million per incident but not more than $40 million in any one Companies continue to evaluate their compliance plans and other year for each incident. compliance options.

The Companies are also insured under policies for each nuclear In July 1997, the EPA promulgated changes in the National plant. Under these policies, up to $2.75 billion is provided for prop Ambient Air Quality Standard (NAAQS) for ozone emissions and pro erty damage and decontamination and decommissioning costs. The posed a new NAAQS for previously unregulated ultra-fine particulate 51

matter. In May 1999, the U.S. Court of Appeals found constitutional not believe environmental remediation costs will have a material adverse and other defects in the new NAAQS rules. In February 2001, the effect on its financial condition, cash flows or results of operations.

U.S. Supreme Court upheld the new NAAQS rules regulating ultra fine particulates but found defects in the new NAAQS rules for Other Legal Proceedings ozone and decided that the EPA must revise those rules. The future Various lawsuits, claims and proceedings related to FirstEnergy's cost of compliance with these regulations may be substantial and will normal business operations are pending against FirstEnergy and its depend if and how they are ultimately implemented by the states in subsidiaries. The most significant are described below.

which the Companies operate affected facilities. Unit 2 of the Three Mile Island Nuclear Plant (TMI-2) was acquired In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a by FirstEnergy in 2001 as part of the merger with GPU. As a result Compliance Order to nine utilities covering 44 power plants, includ of the 1979 TMI-2 accident, claims for alleged personal injury ing the W. H.Sammis Plant. In addition, the U.S. Department of against JCP&L, Met-Ed, Penelec and GPU were filed in the U.S.

Justice filed eight civil complaints against various investor-owned utili District Court for the Middle District of Pennsylvania. In 1996, the ties, which included a complaint against OE and Penn in the U.S. District Court granted a motion for summary judgment filed by GPU District Court for the Southern District of Ohio. The NOV and com and dismissed the ten initial "test cases" which had been selected plaint allege violations of the Clean Air Act based on operation and for a test case trial, as well as all of the remaining 2,100 pending maintenance of the Sammis Plant dating back to 1984. The com claims. In November 1999, the U.S. Court of Appeals for the Third plaint requests permanent injunctive relief to require the installation Circuit affirmed the District Court's dismissal of the ten "test cases,"

of "best available control technology" and civil penalties of up to but set aside the dismissal of the additional pending claims, remand

$27,500 per day of violation. Although unable to predict the out ing them to the District Court for further proceedings. In September come of these proceedings, FirstEnergy believes the Sammis Plant is 2000, GPU filed for a summary judgment in the District Court.

in full compliance with the Clean Air Act and the NOV and complaint Meanwhile, the plaintiffs appealed to the Third Circuit for a review are without merit. Penalties could be imposed if the Sammis Plant of the District Court's decision placing limitations on the remaining continues to operate without correcting the alleged violations and a plaintiffs' suits. In April 2001, the Third Circuit affirmed the District court determines that the allegations are valid. The Sammis Plant Court's decision. In July 2001, GPU renewed its motion for a sum continues to operate while these proceedings are pending. mary judgment on the remaining 2,100 claims in the District Court.

In December 2000, the EPA announced it would proceed with the On January 15, 2002, the District Court granted GPU's amended development of regulations regarding hazardous air pollutants from motion for summary judgment. On February 14, 2002 plaintiffs filed electric power plants. The EPA identified mercury as the hazardous air a notice of appeal to the United States Court of Appeals for the pollutant of greatest concern. The EPA established a schedule to pro Third Circuit. In addition to the approximately 2,100 claims for pose regulations by December 2003 and issue final regulations by which summary judgment has been granted, there is other pending December 2004. The future cost of compliance with these regula litigation arising out of the TMI-2 accident. This litigation consists of tions may be substantial. the following: eight personal injury cases that were not consolidated As a result of the Resource Conservation and Recovery Act of with the above-referenced approximately 2,100 claims; two class 1976, as amended, and the Toxic Substances Control Act of 1976, actions brought on behalf of plaintiffs alleging additional injuries federal and state hazardous waste regulations have been promulgat diagnosed after the filing of the complaints in the above-referenced ed. Certain fossil-fuel combustion waste products, such as coal ash, case; a case alleging exposure during the post-accident cleanup of were exempted from hazardous waste disposal requirements pend the TMI-2 plant; and claims by individual businesses for economic ing the EPA's evaluation of the need for future regulation. The EPA loss resulting from the TMI-2 accident. Although unable to predict has issued its final regulatory determination that regulation of coal the outcome of this litigation, FirstEnergy believes that any liability to ash as a hazardous waste is unnecessary. In April 2000, the EPA which it might be subject by reason of the TMI-2 accident will not announced that it will develop national standards regulating disposal exceed its financial protection under the Price-Anderson Act.

of coal ash under its authority to regulate nonhazardous waste. In July 1999, the Mid-Atlantic states experienced a severe heat Various environmental liabilities have been recognized on the storm which resulted in power outages throughout the service terri Consolidated Balance Sheet as of December 31, 2001, based on esti tories of many electric utilities, including the territory of JCP&L. In an mates of the total costs of cleanup, the Companies' proportionate investigation into the causes of the outages and the reliability of the responsibility for such costs and the financial ability of other nonaffili transmission and distribution systems of all four New Jersey electric ated entities to pay. The Companies have been named as "potentially utilities, the NJBPU concluded that there was not a prima facie case responsible parties" (PRPs) at waste disposal sites which may require demonstrating that, overall, JCP&L provided unsafe, inadequate or cleanup under the Comprehensive Environmental Response, improper service to its customers. Two class action lawsuits (subse Compensation and Liability Act of 1980. Allegations of disposal of quently consolidated into a single proceeding) were filed in New hazardous substances at historical sites and the liability involved are Jersey Superior Court in July 1999 against JCP&L, GPU and other often unsubstantiated and subject to dispute. Federal law provides GPU companies seeking compensatory and punitive damages arising that all PRPs for a particular site be held liable on a joint and several from the July 1999 service interruptions in the JCP&L territory. In basis. In addition, JCP&L has accrued liabilities for environmental reme May 2001, the court denied without prejudice the defendants' diation of former manufactured gas plants in New Jersey; those costs motion seeking decertification of the class. Discovery continues in are being recovered by JCP&L through a non-bypassable societal ben the class action, but no trial date has been set. The judge has set a efits charge. The Companies have total accrued liabilities aggregating schedule under which factual legal discovery would conclude in approximately $60 million as of December 31, 2001. FirstEnergy does March 2002, and expert reports would be exchanged by June 2002.

F IRSTENER G2Y 52

In October 2001, the court held argument on the plaintiffs' motion government owned Colombian electric utility with an ownership for partial summary judgment, which contends that JCP&L is bound interest in the project) and the Government of Colombia.

to several findings of the NJBPU investigation. The plaintiffs' motion Moreover, in September 2001, the DIAN (the Colombian national was denied by the Court in November 2001 and the plaintiffs' tax authority) had presented TEBSA with a statement of charges motion to file an appeal of this decision was denied by the New alleging that certain lease payments made under the Lease Jersey Appellate Division. JCP&L has also filed a motion for partial Agreement with Los Amigos Leasing Company (an indirect wholly summary judgement that is currently pending before the Superior owned subsidiary of GPU Power) violated Colombian foreign Court. FirstEnergy is unable to predict the outcome of these matters. exchange regulations and were, therefore, subject to substantial penalties. The DIAN has calculated a statutory penalty amounting to Other Commitments, Guarantees and Contingencies approximately $200 million and gave TEBSA two months to respond GPU had made significant investments in foreign businesses and to the statement of charges. In November 2001, TEBSA filed a facilities through its GPU Electric and GPU Power subsidiaries. formal response to this statement of charges. TEBSA is continuing Although FirstEnergy will attempt to mitigate its risks related to for to review the DIAN's position and has been advised by its Colombian eign investments, it faces additional risks inherent in operating in counsel that the DIAN's position is without substantial legal merit.

such locations, including foreign currency fluctuations. FirstEnergy is unable to predict the outcome of these matters.

GPU Electric, through its subsidiary, Midlands, has a 40% equity interest in a 586 MW power project in Pakistan (the Uch Power 7. Segment Information:

Project), which commenced commercial operations in October 2000. FirstEnergy operates under the following reportable segments: reg GPU Electric's investment in this project as of December 31, 2001 ulated services, competitive services and other (primarily corporate was approximately $38 million, plus a guaranty letter of credit of support services and international operations acquired in the GPU

$3.6 million, and its share of the projected completion costs repre merger). FirstEnergy's primary segment is its regulated services, which sents an additional $4.8 million commitment. Cinergy (the former include eight electric utility operating companies in Ohio, Pennsylvania owner of 50% of Midlands Electricity plc) agreed to fund up to an and New Jersey that formerly provided bundled electric service. Its aggregate of $20 million of the required capital contributions, for a other material business segment consists of the subsidiaries that oper period of one year from July 15, 1999, and "cash losses" which ate unregulated energy and energy-related businesses.

could be incurred on the Uch Power Project, for a period of up to ten The regulated services segment designs, constructs, operates and years from July 15, 1999. Cinergy has reimbursed GPU Electric $4.9 maintains FirstEnergy's regulated transmission and distribution sys million through December 31, 2001, leaving a remaining commit tems. It also provides generation services to regulated franchise ment for future cash losses of up to $15.1 million. Midlands also customers who have not chosen an alternative, competitive genera has a 31% equity interest in a 478 MW power project in Turkey tion supplier. The regulated services segment obtains a portion of its (the Trakya Power Project). Trakya is presently engaged in a foreign required generation through power supply agreements with the currency conversion issue with TETITAS (the state owned electricity competitive services segment.

purchaser). Midlands established a $16.5 million reserve for non The competitive services segment includes all domestic unregulat recovery relating to that issue as of December 31, 2001. These ed energy and energy-related services including commodity sales commitments and contingencies associated with Midlands will (both electricity and natural gas) in the retail and wholesale markets, transfer to the new partnership upon completion of the sale dis marketing, generation and sourcing of commodity requirements, as cussed in Note 2 - Merger, with FirstEnergy being responsible for well as other competitive energy-application services. Competitive its lower proportionate interest. products are increasingly marketed to customers as bundled services.

El Barranquilla, a wholly owned subsidiary of GPU Power, is an 2000 and 1999 financial data are pro forma amounts to represent equity investor in Termobarranquilla S.A., Empresa de Servicios 2001 business segment organizations and operations. Financial data Publicos (TEBSA), which owns a Colombian independent power for these business segments are as follows:

generation project. As of December 31, 2001, GPU Power had an investment of approximately $109.4 million in TEBSA and is committed, under certain circumstances, to make additional standby equity contributions of $21.3 million, which FirstEnergy has guaranteed. The total outstanding senior debt of the TEBSA project is $315 million at December 31, 2001. The lenders include the Overseas Private Investment Corporation, US Export Import Bank and a commercial bank syndicate. GPU had guaranteed the obligations of the operators of the TEBSA project, up to a maxi mum of $5.8 million (subject to escalation) under the project's operations and maintenance agreement.

GPU believed that various events of default have occurred under the loan agreements relating to the TEBSA project. In addition, ques tions have been raised as to the accuracy and completeness of information provided to various parties to the project in connection with the project's formation. FirstEnergy continues to discuss these issues and related matters with the project lenders, CORELCA (the 53

SEGMENT FINANCIAL INFORMATION Regulated Competitive Reconciling Services Services Other Adjustments Consolidated (Inmillions) 2001 External revenues $ 5,729 $2,165 $ 11 $ 94 (a) $ 7,999 Internal revenues 1,480 2,011 350 (3,841) (b)

Total revenues 7,209 4,176 361 (3,747) 7,999 Depreciation and amortization 841 21 28 890 Net interest charges 571 25 74 (114) (b) 556 Income taxes 469 45 (40) 474 Income before cumulative effect of a change in accounting 640 66 (51) 655 Net income 640 57 (51) 646 Total assets 28,054 2,981 6,317 37,352 Property additions 447 375 30 852 2000 External revenues $ 5,415 $1,545 $ 1 $ 68 (a) $ 7,029 Internal revenues 1,364 2,280 306 (3,950) (b)

Total revenues 6,779 3,825 307 (3,882) 7,029 Depreciation and amortization 919 13 2 - 934 Net interest charges 558 10 19 (58) (b) 529 Income taxes 297 95 (15) - 377 Net income 465 137 (3) - 599 Total assets 14,682 2,685 574 - 17,941 Property additions 422 126 40 - 588 1999 External revenues $ 5,448 $ 796 $ 60 $ 16 (a) $ 6,320 Internal revenues 1,274 2,240 184 (3,698) (b)

Total revenues 6,722 3,036 244 (3,682) 6,320 Depreciation and amortization 928 10 938 Net interest charges 613 8 6 (55) (b) 572 Income taxes 288 90 17 395 Net income 414 129 25 568 Total assets 16,792 1,030 402 18,224 Property additions 418 207 625 Reconciling adjustments to segment operatingresults from internal managementreporting to consolidatedexternal financialreporting:

(a) Principallyfuel marketing revenues which are reflected as reductionsto expenses for internalmanagement reportingpurposes.

(b)Eliminationof intersegment transactions.

PRODUCTS AND SERVICES Energy Related Year Electricity Sales Oil & Gas Sales Sales and Services (Inmillions) 2001 $ 6,078 $ 792 $ 693 2000 5,537 582 563 1999 5,253 203 503 2001 GEOGRAPHIC INFORMATION Revenues Assets (Inmillions)

United States $7,991 $32,187 Foreign countries* 8 5,165 Total $7,999 $37,352

• See Note 2 for discussion of planned divestitures of internationaloperations.

FIRSTENE RGY G4 54

8. Summary of Quarterly Financial Data (Unaudited): 9. Pro Forma Combined Condensed FirstEnergy Statements The following summarizes certain consolidated operating results by of Income (Unaudited):

quarter for 2001 and 2000. The following pro forma combined condensed statements of income of FirstEnergy give effect to the FirstEnergy/GPU merger as March 31, June 30, September 30, December 31, if it had been consummated on January 1, 2000, with the purchase Three Months Ended 2001 2001 2001 2001 (a) accounting adjustments actually recognized in the business combina (Inmillions, except per share amounts) tion (see Note 2 - Merger). The pro forma combined condensed Revenues $1,985.7 $1,804.1 $1,951.6 $2,257.9 financial statements have been prepared to reflect the merger under Expenses 1,669.4 1,416.7 1,412.1 1,816.0 the purchase method of accounting with FirstEnergy acquiring GPU.

Income Before Interest Under the purchase method of accounting, tangible and identifiable and Income Taxes 316.3 387.4 539.5 441.9 intangible assets acquired and liabilities assumed are recorded at their Net Interest Charges 126.3 121.0 124.1 184.3 Income Taxes 83.8 120.4 181.3 89.0 estimated fair values. The excess of the purchase price, including esti mated fees and expenses related to the merger, over the net assets Income Before acquired (which included existing goodwill of $1.9 billion) is classified Cumulative Effect of Accounting Change 106.2 146.0 234.1 168.6 as goodwill and amounts to an additional $2.3 billion. In addition, the Cumulative Effect of pro forma adjustments reflect a reduction in debt from application of Accounting Change the proceeds from certain pending divestitures as well as the related (Net of Income Taxes) (Note 1) (8.5) - -

reduction in interest costs.

Net Income $ 97.7 $ 146.0 $ 234.1 $ 168.6 Year Ended December 31, Basic Earnings Per Share 2001 2000 of Common Stock:

Before Cumulative Effect (In millions, except per share amounts) of Accounting Change $49 $.67 $1.07 $.64 Revenues $12,108 $11,703 Cumulative Effect of Expenses 9,768 9,377 Accounting Change (Net of Income Taxes) (Note 1) (.04) - - Income Before Interest and Income Taxes 2,340 2,326 Net Interest Charges 941 977 Basic Earnings Per Share Income Taxes 561 527 of Common Stock $.45 $.67 $1.07 $.64 Net Income $ 838 $ 822 Diluted Earnings Per Share of Common Stock: Earnings per Share of Common Stock $ 2.87 $ 2.77 Before Cumulative Effect of Accounting Change $.49 $.67 $1.06 $.64 Cumulative Effect of Accounting Change (Net of Income Taxes) (Note 1) (.04) - -

Diluted Earnings Per Share of Common Stock $.45 $.67 $1.06 $.64 (a) Results for the former GPUcompanies are included from the November 7, 2001 acquisitiondate through December 31, 2001.

March 31, June 30, September 30, December 31, Three Months Ended 2000 2000 2000 2000 (In millions, except per share amounts)

Revenues $1,607.9 $1,702.1 $1,891.7 $1,827.3 Expenses 1,234.1 1,338.0 1,433.1 1,518.9 Income Before Interest and Income Taxes 373.8 364.1 458.6 308.4 Net Interest Charges 135.0 134.4 131.2 128.5 Income Taxes 97.9 95.1 129.2 54.6 Net Income $ 140.9 $ 134.6 $ 198.2 $ 125.3 Basic and Diluted Earnings per Share of Common Stock $ .63 $ .60 $ .89 $ .57 55

FIRSTENERGY CORP. 2001 CONSOLIDATED FINANCIAL AND PRO FORMA COMBINED OPERATING STATISTICS (UNAUDITED) 2001 2000 1999 1998 1997 1996 1991 GENERAL FINANCIAL INFORMATION (Dollars in thousands)

Revenues $ 7,999,362 $ 7,028,961 $ 6,319,647 $ 5,874,906 $ 2,961,125 $2,521,788 $2,379,555 Net Income $ 646,447 $ 598,970 $ 568,299 $ 410,874 $ 305,774 $ 302,673 $ 240,069 SECRatio of Earnings to Fixed Charges 2.21 2.10 2.01 1.77 2.18 2.38 1.95 Net Property, Plant and Equipment $12,428,429 $ 7,575,076 $ 9,093,341 $ 9,242,574 $ 9,635,992 $5,534,382 $5,992,325 Capital Expenditures $ 887,929 $ 568,711 $ 474,118 $ 305,577 $ 188,145 $ 145,005 $ 235,622 Total Capitalization (a) $21,339,001 $11,204,674 $11,469,795 $11,756,422 $12,124,492 $5,582,989 $6,034,935 Capitalization Ratios (a):

Common Stockholders' Equity 34.7% 41.5% 39.8% 37.9% 34.3% 44.8% 393%

Preferred and Preference Stock:

Not Subject to Mandatory Redemption 2.2 5.8 5.7 5.6 5.5 3.8 5.9 Subject to Mandatory Redemption 2.8 1.4 2.2 2.5 2.7 2.8 1.1 Long-Term Debt 60.3 51.3 52.3 54.0 57.5 48.6 53.7 Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1000%

Average Capital Costs:

Preferred and Preference Stock 7.90% 7.92% 7.99% 8.01% 8.02% 7.59% 7.60%

Long-Term Debt 6.98% 7.84% 7.65% 7.83% 8.02%o 7.76% 8.75%

COMMON STOCK DATA Earnings per Share (b):

Basic $2.85 $2.69 $2.50 $1.95 $1.94 $2.10 $1.60 Diluted $2.84 $2.69 $2.50 $1.95 $1.94 $2.10 $1.60 Return on Average Common Equity (b) 12.9% 13.0% 127% 10.3%/ 11.0% 12.4% 99%

Dividends Paid per Share $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 Dividend Payout Ratio (b) 53% 56% 60% 770% 77%/ 71% 94%0 Dividend Yield 4.3% 4.8% 6.6% 4.6% 5.2% 6.6% 7.3%

Price/Earnings Ratio (b) 12.3 11.7 9.1 16.7 14.9 10.8 12.8 Book Value per Share $25.29 $21.29 $20.22 $19.37 $18.71 $17.35 $15.55 Market Price per Share $34.98 $31.56 $22.69 $32.56 $29.00 $22.75 $20.50 Ratio of Market Price to Book Value 138% 148% 112% 168% 155% 131% 132%

OPERATING STATISTICS (c)

Generation Kilowatt-Hour Sales (Millions):

Residential 32,766 32,519 32,616 31,220 30,653 31,105 28,741 Commercial 32,356 33,139 30,311 31,033 30,149 28,961 26,120 Industrial 33,185 31,140 30,422 36,683 36,531 35,460 33,193 Other 532 522 566 611 612 1,396 1,448 Total Retail 98,839 97,320 93,915 99,547 97,945 96,922 89,502 Total Wholesale 24,166 13,761 14,631 9,910 11,657 12,472 8,296 Total Sales 123,005 111,081 108,546 109,457 109,602 109,394 97,798 Customers Served:

Residential 3,833,013 3,798,716 3,767,534 3,735,308 3,708,760 3,673,009 3,518,799 Commercial 464,053 472,410 455,919 447,087 444,582 436,650 405,838 Industrial 18,652 18,996 19,549 19,902 21,028 21,188 22,044 Other 5,801 6,001 5,992 5,876 5,835 7,671 7,758 Total 4,321,519 4,296,123 4,248,994 4,208,173 4,180,205 4,138,518 3,954,439 Number of Employees 18,700 18,912 19,470 20,392 18,867 19,754 27,056 (a)2001 capitalizationincludes approximately $1.4 billion of long-term debt (excluding long-term debt due to be repaid within one year) included in "Liabilities Related to Assets Pending Sale" on the ConsolidatedBalance Sheet as of December31, 2001.

(b) Before an accounting change in 2001 and an extraordinarycharge in 1998.

(c)Reflects pro forma combined FirstEnergyand GPUstatistics in years 1998 to 2001 and pro forma combined Ohio Edison, Centerior and GPU statistics in years prior to 1998.

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