Ohio Substitute Senate Bill 221
On October 31, 2007, the Ohio Senate passed Substitute Senate Bill 221 which seeks to revise state energy policy. Among other things, the bill outlines a process for establishing electricity prices for generation beginning in 2009, and includes a requirement that at least 25% of the state’s electricity come from advanced energy technologies by 2025, with at least one-half of the 25% requirement coming from renewable resources.
The Ohio House of Representatives referred the bill to the House Public Utilities Committee which conducted various hearings between November 2007 and February 2008. During the November 14, 2007, hearing, President and Chief Executive Officer Tony Alexander provided testimony on the history and status of deregulation in Ohio. In his remarks, Mr. Alexander indicated that Ohioans should have the opportunity to participate in the competitive electricity marketplace as provided for under Ohio's 1999 deregulation law, Senate Bill 3, which set the stage for long-term price moderation as well as more reliable and responsive service for Ohio's customers. On November 28, 2007, Senior Vice President and General Counsel Leila Vespoli provided testimony on the bill’s alternative options for establishing electric generation pricing in 2009. In her remarks, Ms. Vespoli expressed the industry’s concerns with Substitute Senate Bill 221, saying the legislation should be modified to provide the PUCO with expanded regulatory tools and statutory authority to negotiate rate plans, and to include a true market rate option. On January 16, 2008, Vice President of Rates and Regulatory Affairs David Blank provided testimony on special discounted-rate contracts indicating that the rationale to support their continued use no longer exists.
Ohio Distribution Rate Case Filing
On December 4, 2007, the PUCO Staff issued its Staff Reports containing the results of their investigation into the distribution rate requests for FirstEnergy subsidiaries Ohio Edison Company, The Cleveland Electric Illuminating Company, and The Toledo Edison Company (collectively the Ohio Companies). In its Reports, the PUCO Staff recommended a distribution rate increase of $161 million to $180 million compared to the Ohio Companies’ request of $332 million. However, during the evidentiary hearings, the PUCO Staff submitted testimony decreasing their recommended revenue increase to a range of $114 million to $132 million. The revisions primarily related to property tax, depreciation, and deferred tax corrections, as well as other miscellaneous adjustments. Key differences between the Staff Reports’ recommendation and the Ohio Companies’ request include: matters to be considered in separate proceedings ($115 million), and a recommended return on equity of 10% to 11% versus the Ohio Companies’ request of 11.75% ($16 million to $35 million).
On January 3, 2008, the Ohio Companies and intervening parties filed objections to the Staff Reports and on January 10, 2008, the Ohio Companies filed supplemental testimony, while intervening parties filed their direct testimony. Evidentiary hearings began on January 29 and are expected to conclude in late February 2008. The PUCO is expected to render its decision during the 2nd or 3rd quarter of 2008.
Ohio Supreme Court Remand on Rate Certainty Plan
On January 9, 2008, the PUCO issued its Finding and Order on the Ohio Companies’ application on remand seeking to recover incremental fuel costs deferred in 2006 and 2007, and fuel costs that would otherwise be deferred in 2008, via two generation-related fuel cost tariff riders. The Order approved the implementation of the tariff rider to recover actual incremental fuel costs incurred from January 1, 2008 through December 31, 2008 (estimated to be $167 million), but directed the Ohio Companies to file a separate application with an alternative recovery mechanism to collect the 2006 and 2007 deferred fuel costs and associated carrying charges ($220 million balance as of December 31, 2007). On February 8, 2008, the Ohio Companies filed an application proposing to recover the deferred fuel costs and carrying charges for 2006 and 2007 via a separate fuel rider, with alternative options for the recovery period ranging from 5 to 25 years. This second application is pending before the PUCO.
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Penn Power Default Service Plan
On October 30, 2007, an Administrative Law Judge (ALJ) recommended that the Pennsylvania Public Utility Commission (PPUC) approve the Joint Petition for Settlement for Pennsylvania Power Company’s (Penn Power) Interim Default Service Supply Plan for the period covering June 1, 2008 through May 31, 2011. On December 20, 2007, the PPUC accepted all provisions of the Settlement Agreement except for the provision related to the procurement of default service supply for residential customers, which was remanded to the ALJ for further proceedings. The PPUC encouraged Penn Power to further consider adopting a portfolio approach that incorporates the use of a variety of energy products in lieu of load-following, full requirements contracts for default service procurement for residential customers. Under the terms of the Settlement Agreement, the default service procurement for small commercial customers will be done with multiple requests for proposals (RFPs), while the default service procurement for large commercial and industrial customers will utilize hourly pricing. Bids in the first RFP for small commercial load were received on February 20, 2008. In February 2008, parties filed direct and rebuttal testimony in the remand proceeding for the residential procurement approach. An evidentiary hearing is scheduled for February 26, 2008, and this matter is expected to be presented to the PPUC for its consideration by March 13, 2008.
Met-Ed and Penelec NUG Accounting Case
On November 8, 2007, the PPUC denied Metropolitan Edison Company’s and Pennsylvania Electric Company’s request to modify their Non-Utility Generation (NUG) stranded cost accounting methodology to eliminate reductions of the deferred cost balance during periods in which market prices exceeded NUG payments.
Nuclear Generation Record Output
FirstEnergy Nuclear Operating Company (FENOC) set a new annual generation output record of 30.3 million megawatt-hours, surpassing FENOC’s previous best of 29.9 million megawatt-hours, set in 2004. Top-quartile capability factor performance at Beaver Valley Unit 2 and Davis-Besse of 99.8 percent and 98.6 percent, respectively, along with unit uprates of 43 MW and 24 MW at our Beaver Valley Units 1 and 2, respectively, contributed to this accomplishment.
Nuclear Operations Update
On February 14, 2008, the 893-MW Davis-Besse Nuclear Power Station returned to service following completion of its scheduled refueling outage, which began on December 30, 2007, and replacement of a component on the generator rotor which was damaged during the outage. In addition to replacing 76 of the 177 fuel assemblies, several improvement projects were completed, including rewinding the turbine generator and reinforcing welds on plant equipment.
On December 10, 2007, the 1,258-MW Perry Nuclear Plant returned to service following the completion of repairs to the Digital Feedwater Control and Reactor Core Isolation Cooling systems. The plant experienced an automatic shutdown on November 28 due to two failed power supplies in the Digital Feedwater Control system. A Nuclear Regulatory Commission special inspection team monitored the plant’s repair and restart efforts.
Power Uprates
Mansfield Unit 3 achieved a power uprate of 30 MW during the fourth quarter of 2007 after returning to service following a scheduled maintenance outage. This uprate was 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 in 2007 to 105 MW. Our supply portfolio was also enhanced during the year through the reduction of seasonal derates by 149 MW at our peaking units and through long-term contracts to purchase the output of 115 MW from wind generators.
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Partially Complete Combined-Cycle Generating Plant Acquired
On January 28, 2008, FirstEnergy Generation Corp. (FGCO) entered into definitive agreements to acquire a partially complete 707 MW natural gas fired generating plant in Fremont, Ohio from Calpine Corporation for $253.6 million. Construction of the facility began in September 2001 and aggregate construction costs expended to date are approximately $300 million. The facility includes two combined-cycle combustion turbines and a steam turbine capable of producing 544 MW of load-following capacity and 163 MW of peaking capacity. In court documents, Calpine has estimated that the plant is 70% complete and could become operational within 12 to 18 months. Based on those documents, FGCO estimates the additional expenditures to complete the Facility to be approximately $150 million to $200 million. While FGCO believes these timing and cost estimates to be accurate, the final cost and timeframe for construction are subject to a pending engineering study. The plant is connected to both the Midwest Independent Transmission System Operator and the PJM Interconnection. The acquisition will enhance the diversity of FirstEnergy’s generation fleet and further reduce its average carbon dioxide emission rate.
Common Stock Dividend Increase
On December 18, 2007, FirstEnergy’s Board of Directors declared a quarterly dividend of $0.55 per share on outstanding common stock, a 10% increase, payable March 1, 2008. The new indicated annual dividend is $2.20 per share. This action brings FirstEnergy’s cumulative dividend increase to 47% since the beginning of 2005, and is consistent with FirstEnergy’s policy, which targets sustainable annual dividend growth and a payout that is appropriate for FirstEnergy’s level of earnings.
Share Repurchase Program Completed
On December 10, 2007, Morgan Stanley completed its acquisition of common shares under FirstEnergy’s accelerated share repurchase program for 14.4 million shares executed in March 2007. FirstEnergy subsequently paid Morgan Stanley approximately $51 million for a purchase price adjustment (direct charge to common stockholders’ equity) that resulted in a final purchase price of $942 million, or $65.54 per share.
Extension and Amendment of Credit Facility
On November 20, 2007, FirstEnergy and certain of its subsidiaries, including all of its operating utility subsidiaries, agreed, pursuant to a Consent and Amendment with the lenders under the $2.75 billion credit facility dated as of August 24, 2006, to extend the termination date of the facility for one year to August 24, 2012. The parties also agreed to amendments that will permit the FirstEnergy parties to request an unlimited number of additional one-year extensions of the facility termination date upon shorter notice than provided by the original facility terms, which permitted only two extensions. In addition, the amendments increase FirstEnergy Solutions Corp.’s (FES) borrowing sub-limit under the credit facility to up to $1 billion and remove any requirements for the delivery of a FirstEnergy guaranty of FES’ obligations.
Establishment of the FirstEnergy Fund for Advanced Energy Research
On December 13, 2007, FirstEnergy announced a $2 million pledge to The University of Akron to establish the FirstEnergy Fund for Advanced Energy Research. The fund will be used to create the FirstEnergy Advanced Energy Research Center at the University and support development of carbon capture and coal-based fuel cells. The Advanced Energy Research Center initially will focus on development of carbon capture technologies that could be used by fossil-fueled power plants and the development of coal-based fuel cells for commercial use.
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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 include declarations regarding our, or our management’s, intents, beliefs and current expectations. These statements typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” “believe,” “estimate” and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual results may differ materially due to the speed and nature of increased competition in the electric utility industry and legislative and regulatory changes affecting how generation rates will be determined following the expiration of existing rate plans in Ohio and Pennsylvania, 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 FirstEnergy’s regulated utilities to collect transition and other charges or to recover increased transmission costs, maintenance costs being higher than anticipated, other legislative and regulatory changes including revised environmental requirements and possible greenhouse gas emissions regulation, 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 or other potential regulatory initiatives, 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 including, but not limited to, the Demand for Information issued to FENOC on May 14, 2007) as disclosed in our SEC filings, the timing and outcome of various proceedings before the PUCO (including, but not limited to, the Distribution Rate Cases and the generation supply plan filing for the Ohio Companies and the successful resolution of the issues remanded to the PUCO by the Supreme Court of Ohio regarding the Rate Stabilization Plan and the Rate Certainty Plan, including the deferral of fuel costs) and the PPUC (including the resolution of the Petitions for Review filed with the Commonwealth Court of Pennsylvania with respect to the transition rate plan for Met-Ed and Penelec), the continuing availability of generating units and their ability to continue to operate at or near full capacity, the ability to comply with applicable state and federal reliability standards, the inability to accomplish or realize anticipated benefits from strategic goals (including employee workforce initiatives), the ability to improve electric commodity margins and to experience growth in the distribution business, changing market conditions that could affect the value of assets held in our nuclear decommissioning trust fund, pension fund and other trust funds, the ability to access the public securities and other capital markets and the cost of such capital, the risks and other factors discussed from time to time in our SEC filings, and other similar factors. The foregoing review of factors should not be construed as exhaustive. New factors emerge from time to time, and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. Dividends declared from time to time on FirstEnergy's common stock during any annual period may in aggregate vary from the indicated amounts due to circumstances considered by FirstEnergy's Board of Directors at the time of the actual declarations. 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.
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