RECENT DEVELOPMENTS
Share Repurchase Programs
On March 2, 2007, FirstEnergy repurchased approximately 14.4 million shares, or 4.5 percent of its outstanding common stock, under an accelerated share repurchase (ASR) agreement with an affiliate of Morgan Stanley & Co. Incorporated (Morgan Stanley). The initial purchase price was $900 million, or $62.63 per share. The final purchase price will be adjusted to reflect the volume-weighted average price of our stock during the period of time that Morgan Stanley will acquire the shares (up to approximately one year from inception). The ASR was completed under a January 30, 2007, Board of Directors’ authorization to repurchase up to 16 million shares of outstanding common stock.
On April 2, 2007, an affiliate of J.P. Morgan Securities (J.P. Morgan) completed its acquisition of common shares under FirstEnergy’s prior ASR program of 10.6 million shares, which was executed in August 2006. In settling the transaction, FirstEnergy paid J.P. Morgan approximately $27 million (direct charge to common stockholders’ equity) for a purchase price adjustment and true-up of dividends paid on shares that J.P. Morgan had not repurchased as of the respective record dates.
Under the two ASR programs, FirstEnergy has repurchased approximately 25 million common shares, or 8 percent of the total outstanding as of July 2006.
FirstEnergy Solutions Corp. Credit Ratings
On March 26, 2007, Standard & Poor’s Rating Services (S&P) assigned its corporate credit rating of BBB to FirstEnergy Solutions Corp. (FES), an unregulated subsidiary of FirstEnergy. FES also received an issuer rating of Baa2 from Moody’s Investor Services (Moody’s) on March 27, 2007. FES is the holding company of FirstEnergy Generation Corp. and FirstEnergy Nuclear Generation Corp., the owners of FirstEnergy’s fossil and nuclear generation assets, respectively. Both S&P and Moody’s cited the strength of FirstEnergy’s generation portfolio as a key contributor to the investment grade credit ratings. On April 20, 2007, FirstEnergy filed a Form 8-K with the Securities and Exchange Commission furnishing FES’ audited financial statements for the three years ended December 31, 2006.
The Cleveland Electric Illuminating Company Debt Offering
On March 27, 2007, The Cleveland Electric Illuminating Company (CEI) issued $250 million of 5.70% Senior Notes due 2017. The proceeds from the transaction will be used to meet CEI’s 2007 maturing long-term debt obligations of $120 million and to repay short-term borrowings.
NRC Oversight Update
On March 2, 2007, the Nuclear Regulatory Commission (NRC) returned FirstEnergy’s Perry Nuclear Power Plant to routine agency oversight as a result of sufficient corrective actions that have been taken over the last two-and-a-half years. The Perry Plant had been operating under heightened NRC oversight since August 2004.
Refueling Outage at Perry Nuclear Power Plant
FirstEnergy’s Perry Plant began its regularly scheduled refueling outage on April 2, 2007. Major work activities to be done on the 1,258-megawatt (MW) facility include replacing approximately one-third of the fuel assemblies in the reactor and two of the three low-pressure turbine rotors in the main generator.
Power Uprates
In March 2007, FirstEnergy’s Beaver Valley Unit 1 completed the final phase of an extended power uprate project to add additional capacity to our system. This is its second power uprate in the past 12 months. Capacity testing will be conducted later this year to verify the actual megawatts gained. This power uprate was achieved in support of FirstEnergy’s strategy to maximize the full potential of its existing generation assets.
Consolidated Report to the Financial Community - 1st Quarter 2007
Environmental Update
In March 2007, a selective non-catalytic reduction (SNCR) system was placed in-service at the 597-MW Eastlake Unit 5 upon completion of a scheduled maintenance outage. The SNCR installation is part of FirstEnergy’s overall Air Quality Compliance Strategy and was required under the New Source Review consent decree. The SNCR is expected to reduce NOx emissions and help achieve reductions required by the EPA’s NOx Transport Rule.
Sale and Leaseback of Bruce Mansfield Unit 1
On January 31, 2007, FirstEnergy announced its intention to pursue a sale and leaseback transaction for its owned portion of Bruce Mansfield Unit 1. FirstEnergy anticipates the after-tax proceeds of this proposed transaction to be approximately $1.2 billion. The proceeds are expected to be used to repay short-term borrowings incurred to fund the recently executed ASR program and the recent pension plan contribution. The Company is targeting a second quarter of 2007 closing for the transaction, including related lease debt financing.
Met-Ed and Penelec Rate Transition Plan Update
On January 11, 2007, the Pennsylvania Public Utility Commission (PPUC) issued its order in the Metropolitan Edison (Met-Ed) and Pennsylvania Electric Company (Penelec) Rate Transition Plan cases, approving net T&D rate increases for Met-Ed of 5% ($59 million) and Penelec of 4.5% ($50 million). Several parties to the proceeding, including Met-Ed and Penelec, have filed appeals of the PPUC’s decision to the Pennsylvania Commonwealth Court. The companies appealed the Commission’s decision on the denial of generation rate relief and on a consolidated income tax adjustment related to cost of capital. The appeals are currently pending.
Met-Ed and Penelec NUG Accounting Case Update
A hearing was held on February 21, 2007, in the Met-Ed and Penelec Non-Utility Generation (NUG) accounting case. Met-Ed and Penelec are seeking to modify the NUG purchased power stranded costs accounting methodology to eliminate reductions of the deferred cost balance during periods in which market prices exceeded NUG payments. The value at issue in this request is estimated to be approximately $40 million for the period 1999 through 2006. Legal briefs were filed in March 2007 and the companies are currently awaiting the Administrative Law Judge’s Recommended Decision.
Pennsylvania Power Company Default Service Plan
On May 2, 2007, Pennsylvania Power Company (Penn Power) made a filing with the PPUC proposing how it will procure the power supply needed for default service customers beginning June 1, 2008. Penn Power customers transitioned to a fully competitive market on January 1, 2007, and the default service plan that the Commission previously approved covered a 17-month period through May 31, 2008. The filing proposes that Penn Power procure a full requirements product, by class, through multiple Requests for Proposal with staggered delivery periods extending through May 2011. It also proposes a 3-year phase-out of promotional generation rates. The Company expects the Commission to address the filing later this year.
Forward-looking Statements. This Consolidated Report to the Financial Community includes forward-looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” “believe,” “estimate” and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, replacement power costs being higher than anticipated or inadequately hedged, the continued ability of our regulated utilities to collect transition and other charges or to recover increased transmission costs, maintenance costs being higher than anticipated, legislative and regulatory changes (including revised environmental requirements), and the legal and regulatory changes resulting from the implementation of the Energy Policy Act of 2005 (including, but not limited to, the repeal of the Public Utility Holding Company Act of 1935), the uncertainty of the timing and amounts of the capital expenditures needed to, among other things, implement the Air Quality Compliance Plan (including that such amounts could be higher than anticipated) or levels of emission reductions related to the Consent Decree resolving the New Source Review litigation, adverse regulatory or legal decisions and outcomes (including, but not limited to, the revocation of necessary licenses or operating permits and oversight) by the Nuclear Regulatory Commission and the various state public utility commissions as disclosed in our Securities and Exchange Commission filings, the timing and outcome of various proceedings before the Public Utilities Commission of Ohio (PUCO) (including, but not limited to, the successful resolution of the issues remanded to the PUCO by the Ohio Supreme Court regarding the Rate Stabilization Plan) and the PPUC (including the transition rate plan filings for Met-Ed and Penelec and the Pennsylvania Power Company Default Service Plan filing), the continuing availability and operation of generating units, the ability of generating units to continue to operate at, or near full capacity, the inability to accomplish or realize anticipated benefits from strategic goals (including employee workforce initiatives), the anticipated benefits from voluntary pension plan contributions, the ability to improve electric commodity margins and to experience growth in the distribution business, the ability to access the public securities and other capital markets and the cost of such capital, the outcome, cost and other effects of present and potential legal and administrative proceedings and claims related to the August 14, 2003 regional power outage, the successful structuring and completion of a potential sale and leaseback transaction for Bruce Mansfield Unit 1 currently under consideration by management, any purchase price adjustment under the accelerated share repurchase program announced on March 2, 2007, the risks and other factors discussed from time to time in our Securities and Exchange Commission filings, including our annual report on Form 10-K for the year ended December 31, 2006, and other similar factors. Also, a security rating is not a recommendation to buy, sell or hold securities and it may be subject to revision or withdrawal at any time and each such rating should be evaluated independently of any other rating. We expressly disclaim any current intention to update any forward-looking statements contained herein as a result of new information, future events, or otherwise.
Consolidated Report to the Financial Community - 1st Quarter 2007
