RECENT DEVELOPMENTS
Ohio Regulatory Update
On July 31, 2008, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company, and The Toledo Edison Company (TE) (collectively, Ohio Companies) filed both an Electric Security Plan (ESP) and Market Rate Offer (MRO) with the Public Utilities Commission of Ohio (PUCO). The comprehensive ESP includes supply and pricing for retail generation service for up to a three-year period, in addition to seeking approval of outstanding issues currently pending before the PUCO in the Ohio Companies’ distribution rate case. A PUCO decision is required within 150 days, with new rates to be effective for customers January 1, 2009. Under the MRO alternative, the Ohio Companies would procure generation supply through a competitive bidding process (CBP). An independent third-party CBP Manager would conduct the bidding process, with oversight by the PUCO. The MRO proposes a portfolio approach to procurement, initially using a staggered bid and subsequently a multi-phased procurement cycle. The PUCO is required to review FirstEnergy’s MRO application within 90 days. The MRO would be implemented if the ESP is not approved by the PUCO.
On July 2, 2008, and July 23, 2008, the PUCO staff issued proposed rules for comment to implement portions of Amended Substitute Senate Bill 221 (Substitute SB 221). FirstEnergy filed written comments on the first set of proposed rules on July 22, 2008, and reply comments are due August 6, 2008. Written comments on the second set are due August 12, 2008, and reply comments are due August 22, 2008. Proposed rules to implement other portions of Substitute SB 221, including the alternative energy portfolio standard, are expected to be issued in late August. Following the comment period, the PUCO will consider input from stakeholders before adopting final rules, which is expected to be in late September. The rules will then be subject to review by the Joint Committee on Agency Rule Review (a group consisting of five State Representatives and five State Senators).
Ohio Supreme Court Remand on Rate Certainty Plan
On June 3, 2008, the Ohio Companies made a filing to suspend the procedural schedule in their application to recover their 2006-2007 deferred fuel costs and associated carrying charges ($220 million balance as of December 31, 2007) since they anticipated that their ESP filing would contain a proposal addressing the recovery of these deferred fuel costs. On June 4, 2008, the PUCO Staff issued its report in accordance with its previously established procedural schedule. On June 11, 2008, the PUCO denied the request to suspend proceedings until the ESP case is completed, but it revised the procedural schedule. Testimony is now due August 29, 2008, and an evidentiary hearing is scheduled for September 29, 2008.
Penn Power Interim Default Service Supply Plan
On May 14, 2008, Pennsylvania Power Company (Penn Power) held its second Request for Proposal (RFP) to procure default service for residential customers for the period June 2008 through May 2009 and a portion of the load for the period June 2009 through May 2010. The Pennsylvania Public Utility Commission (PPUC) approved the second residential RFP on May 16, 2008. On May 20, 2008, Penn Power filed compliance tariffs with the new default service generation rates for residential customers based on the approved RFP bids, which the PPUC certified on May 21, 2008. The average price of the winning bids was $80.48 per MWh, before line losses, administrative fees and gross receipts tax, and will be reflected in Penn Power’s new default service rates that are effective for the period June 2008 through May 2009. RFPs for the remainder of the residential customers’ load for the period June 2009 through May 2010 are scheduled for October 2008 and January 2009.
Met-Ed and Penelec Transmission Service Charge
On May 22, 2008, the PPUC approved Metropolitan Edison Company’s (Met-Ed) and Pennsylvania Electric Company’s (Penelec) annual updates to their transmission service charge riders (TSC) for the period June 1, 2008, through May 31, 2009. The approved TSCs include a component for under-recovery of actual transmission costs incurred during prior periods and transmission costs projected for June 2008 through May 2009. Met-Ed’s TSC includes a transition approach that will recover past under-recovered costs plus carrying charges through the new TSC, with deferral of a portion of the projected costs plus carrying charges for recovery through future TSCs by December 31, 2010. Various intervenors filed complaints against Met-Ed’s and Penelec’s TSC filings.
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In addition, the PPUC ordered an investigation to review the reasonableness of Met-Ed’s TSC, while at the same time allowing the company to implement the rider June 1, 2008, subject to refund. On July 15, 2008, the PPUC directed the Administrative Law Judge to consolidate the complaints against Met-Ed with its investigation. An evidentiary hearing for both companies is scheduled for January 14-15, 2009.
New Long-Term Fuel Supply Arrangements
On July 16, 2008, a subsidiary of FirstEnergy entered into a joint venture with the Boich Companies, a Columbus, Ohio-based coal company, to acquire a majority stake in the Bull Mountain mine operations in Montana. FirstEnergy will make a $125 million equity investment in the joint venture. Under an acquisition and development agreement, the joint venture will acquire 80 percent of the Bull Mountain mining operations, and 100 percent of the rail operations, with FirstEnergy owning a 45 percent economic interest in the joint venture and an affiliate of the Boich Companies owning a 55 percent economic interest, with both parties having a 50 percent voting interest in the joint venture. In January 2010, the joint venture will have the option for 18 months to acquire the remaining 20 percent stake in the mining operations.
In a related transaction, FirstEnergy has entered into a 15-year agreement to purchase up to 10 million tons of bituminous western coal annually from the mine. FirstEnergy also reached tentative agreements with the rail carriers associated with transporting coal from the mine to its generating stations, and it expects to begin taking delivery of the coal in late 2009 or early 2010. The above mentioned joint venture has the right to resell FirstEnergy’s Bull Mountain tonnage not used at FirstEnergy’s facilities and has call rights on such coal above certain levels.
Nuclear Sale and Leaseback Restructuring
On May 30, 2008, FirstEnergy Nuclear Generation Corp. (NGC) purchased 56.8 MW of lessor equity interests in the OE 1987 sale and leaseback of the Perry Plant. On June 2, 2008, NGC purchased approximately 43.5 MW of lessor equity interests in the OE 1987 sale and leaseback of Beaver Valley Unit 2 (BV2). Between June 2, 2008, and June 9, 2008, NGC purchased an additional 158.5 MW of additional lessor equity interests in the TE and CEI 1987 sale and leaseback of BV2, which purchases were undertaken in connection with the previously disclosed exercise of the periodic purchase option provided in the TE and CEI sale and leaseback arrangements. The Ohio Companies continue to lease these MWs under the respective sale and leaseback arrangements and the related lease debt remains outstanding.
New $300 Million Credit Facility
On May 30, 2008, FirstEnergy Corp. and FirstEnergy Solutions Corp. entered into a $300 million, 364-day revolving credit facility. The pricing, terms and conditions are substantially similar to those contained in the current FirstEnergy $2.75 billion revolving credit agreement.
Refunding of Auction Rate Bonds
On June 6, 2008, NGC completed the refunding of $179.5 million of its bonds that previously had been in an auction rate mode into a variable-rate mode supported by a bank letter of credit. On June 30, 2008, FirstEnergy Generation Corp. (FGCO) refunded $276.2 million of its bonds that had previously been in an auction rate mode into a variable-rate mode supported by a bank letter of credit. FirstEnergy no longer holds any auction rate bonds.
Fremont Combined-Cycle Generating Plant
On January 31, 2008, FGCO completed the purchase of a partially complete 707-MW natural gas-fired generating plant in Fremont, Ohio, from Calpine Corporation for $253.6 million. In June 2008, FGCO completed an engineering study indicating an estimated $208 million of capital expenditures would be required to complete the project. Approximately $41 million is expected to be invested in 2008 with planned commercial operation of the plant expected to begin in December 2009.
Nuclear Operations Update
On May 22, 2008, the 868-MW BV2 returned to service following its regularly scheduled refueling outage that began on April 14, 2008. Major work activities completed during the outage included replacing approximately one-third of the fuel assemblies in the reactor and the high pressure turbine rotor. During the outage, BV2 completed the final phase of an extended power uprate project.
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On June 30, 2008, the Nuclear Regulatory Commission approved a 12 MW uprate at the 893-MW Davis-Besse Nuclear Power Station. This power uprate, along with BV2’s, was achieved in support of FirstEnergy’s strategy to maximize the full potential of its existing generation assets.
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, the impact of the PUCO’s rulemaking process on our Ohio utility subsidiaries’ Electric Security Plan and Market Rate Offer filings, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices and availability, 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 impact of the U.S. Court of Appeals’ July 11, 2008 decision to vacate the CAIR rules and the scope of any laws, rules or regulations that may ultimately take their place, 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 Met-Ed and Penelec’s transmission service charge filings with the PPUC (as well as 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 ability 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. 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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