RECENT DEVELOPMENTS
Share Repurchase Program
On January 30, 2007, FirstEnergy's Board of Directors authorized a new share repurchase program for up to 16 million shares, or 5% of outstanding common stock. At management’s discretion, shares may be acquired on the open market or through privately negotiated transactions, subject to market conditions and other factors. The Board’s authorization of the repurchase program does not require the company to purchase any additional shares and the program may be terminated at any time. The new program supersedes the prior repurchase program approved in June 2006. When combined with the approximately 10.6 million shares repurchased in August 2006 under the prior program, this new program provides FirstEnergy the opportunity to repurchase approximately 8% of its total shares outstanding as of July 2006.
Common Stock Dividend Increase
On December 19, 2006, FirstEnergy’s Board of Directors declared a quarterly dividend of $0.50 per share on outstanding common stock, an 11% increase, to be payable March 1, 2007. The new indicated annual dividend will be $2.00 per share. This action brings FirstEnergy’s total dividend increase over the past 2 years to 33%, and is consistent with our policy, which targets sustainable annual dividend growth and a payout that is appropriate for our level of earnings.
Record Generation Output
FirstEnergy set a new annual generation output record of 82.0 million megawatt-hours, which represented a 2.2% increase over the prior record established in 2005. The increase in generation output was primarily driven by the performance of FirstEnergy’s fossil units, which set a new annual output record of 53.0 million megawatt-hours.
Power Uprates
Beaver Valley Unit 2 and Bruce Mansfield Unit 2 experienced power uprates of 10 MW and 50 MW, respectively, during the fourth quarter of 2006 after returning to service following outages for refueling or other maintenance. These uprates were achieved in support of FirstEnergy’s operating strategy to maximize the full potential of its existing generation assets. This brings the total amount of generating capacity added through power uprates during 2006 to 99 MW.
Voluntary Pension Plan Contribution
On January 2, 2007, following the enactment of the Pension Protection Act of 2006, FirstEnergy made a voluntary $300 million contribution to its pension plan. The net after-tax cash outlay was approximately $193 million. This funding is expected to be accretive to annual earnings by approximately $0.05 per share beginning in 2007, and increases the plan’s Projected Benefit Obligation funded status to approximately 105%. Since 2004, the company has made voluntary contributions totaling $1.3 billion.
Transfer of Pollution Control Revenue Bonds
In December 2006, FirstEnergy transferred approximately $878 million of pollution control revenue bonds (PCRB) from Ohio Edison (OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE), and Pennsylvania Power Company (PP) to FirstEnergy Generation Corp. and FirstEnergy Nuclear Generation Corp. This transaction brings the total amount of debt transferred from the utilities to the generating companies to approximately $1.4 billion, with approximately $700 million remaining to be transferred. These PCRB transfers support the intra-system generation asset transfer that was completed in 2005, where the fossil and nuclear generating assets, excluding those that are subject to sale and leaseback arrangements with non-affiliates, were transferred from the utilities to the generation companies.
FirstEnergy Corp. Senior Note Redemption
On November 15, 2006, FirstEnergy paid at maturity the remaining $600 million of its $1.0 billion, 5.5% Senior Notes, Series A. This retirement was primarily funded with short-term debt and the proceeds of share repurchases by subsidiaries TE and CEI enabled by their new Senior Note issuances. The initial $400 million of principal was redeemed via a make-whole call provision in July 2006.
Rating Agency Update
On February 2, 2007, Fitch Ratings upgraded the Issuer Default Rating of FirstEnergy and its subsidiaries Jersey Central Power & Light (JCP&L), CEI, and TE. At the same time, Fitch affirmed the ratings of OE and its subsidiary PP. The rating outlook is positive for CEI and TE, and stable for FirstEnergy and the other rated subsidiaries. Fitch indicated that the rating changes reflect the improved operating performance of the generating fleet, balance sheet de-leveraging, and relatively constructive regulatory environments.
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 776 MW portion of Bruce Mansfield Unit 1. If consummated as currently contemplated, FirstEnergy expects the after-tax proceeds of this transaction to be approximately $1.2 billion, which are anticipated to be used to fund the recently authorized share repurchase program and the repayment of short-term debt, including amounts incurred in connection with the recent pension contribution. The Company is currently targeting a close in the second quarter of 2007.
JCP&L Non-Utility Generation Clause (NGC) Settlement
On December 6, 2006, the New Jersey Board of Public Utilities approved a stipulation of settlement in an NGC rate proceeding allowing JCP&L to recover $165 million of deferred costs over an 18-month period. The costs were incurred by JCP&L during the period August 1, 2003, through December 31, 2005 to meet a portion of customers’ generation needs with mandated non-utility generation (NUG) supply contracts. The approved stipulation increases JCP&L’s cash flow, but is earnings neutral.
Met-Ed and Penelec Rate Transition Plan Update
On January 11, 2007, the PPUC issued its order in the Metropolitan Edison (Met-Ed) and Pennsylvania Electric Company (Penelec) Rate Transition Plan cases, approving overall rate increases for Met-Ed of 5% ($59 million) and Penelec of 4.5% ($50 million). As a result of the failure to obtain adequate rate relief, Met-Ed recorded a goodwill impairment charge of $358 million in the fourth quarter of 2006. The goodwill at Met-Ed resulted from the November 2001 merger between FirstEnergy and GPU, Inc., Met-Ed's former parent company. No adjustment to the consolidated goodwill of Met-Ed's parent, FirstEnergy, will be made since the fair value of its regulated segment (which represents FirstEnergy's reporting unit to evaluate goodwill) continues to exceed the carrying value of its investment in the segment.
Several parties to the proceeding, including Met-Ed and Penelec, filed Petitions for Reconsideration of the Order with the Pennsylvania Public Utility Commission (PPUC). Parties have until 30 days after the PPUC rules on the Petitions to file appeals with the Commonwealth Court.
2007 Non-GAAP Earnings Guidance
On January 31, 2007, FirstEnergy issued 2007 non-GAAP earnings guidance of $4.05 to $4.25 per share. On a GAAP basis, 2007 earnings are expected to be $4.10 to $4.30 per share, which includes a $0.05 per share benefit for new regulatory assets authorized by the PPUC in January 2007 that apply to prior years.
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, fines or other enforcement actions and remedies) of governmental investigations and oversight, including by the Securities and Exchange Commission, the Nuclear Regulatory Commission and the various state public utility commissions as disclosed in our Securities and Exchange Commission filings, generally, and heightened scrutiny at the Perry Nuclear Power Plant in particular, 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, 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, the successful implementation of the newly-approved share repurchase program announced on January 31, 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, 2005, and other similar factors. Dividends declared from time to time during any annual period may in aggregate vary from the indicated amounts due to circumstances considered by the Board at the time of the actual declarations. We expressly disclaim any current intention to update any forward-looking statements contained herein as a result of new information, future events, or otherwise.
