Recent Developments
Federal Energy Regulatory Commission (FERC)
On May 11, 2010, FirstEnergy (FE) and Allegheny Energy (AYE) filed an application with FERC for approval of their proposed merger. Under the Federal Power Act, FERC has 180 days to rule on a completed merger application. FE and AYE submitted additional information regarding the merger application on June 21, 2010 in response to a request by FERC. Interventions and protests were filed with FERC on July 12, 2010. On July 27, 2010, FE filed additional information with FERC in response to the interventions. FERC is expected to complete its review in sufficient time to meet the anticipated merger closing schedule in the first half of 2011.
Hart-Scott-Rodino (HSR) Act Filings
On May 25, 2010, FE and AYE made HSR filings with the Department of Justice (DOJ) and Federal Trade Commission. On June 24, 2010, FE and AYE each received a request for additional information from the DOJ. FE and AYE continue to cooperate with the DOJ and expect the DOJ to complete its review in sufficient time to meet the anticipated merger closing schedule.
State Regulatory Filings
On September 9, 2010, the Virginia State Corporation Commission (SCC) approved a petition for the FirstEnergy-Allegheny Energy merger. FE and AYE filed their initial merger applications with the SCC on June 4, 2010.
Shareholder Vote
Both FE’s and AYE’s special shareholder meetings were held on September 14, 2010. FE shareholders approved the issuance of shares of FE common stock in the merger and the other transactions contemplated by the merger agreement and approved the amendment of the articles of incorporation to increase the authorized number of shares of common stock. The total votes cast at the FE special meeting represented approximately 80% of FE’s outstanding shares of common stock, of which 97% voted in favor of the proposals. AYE shareholders approved the merger at their special shareholder meeting. The total votes represented 80% of AYE’s outstanding shares, of which 99% voted in favor of the merger.
Pennsylvania Settlement
On October 25, 2010, FE and AYE filed a comprehensive settlement with the Pennsylvania Public Utility Commission (PPUC) that addresses issues raised by 18 of the parties to the merger. The filing includes additional commitments related to employment levels, including a five-year commitment to maintain at least 800 jobs in Greensburg and Westmoreland County for the first year after the merger close, 675 jobs for the following 12 months, 650 jobs for the next year and 600 jobs for each of the next two years. The settlement also provides nearly $11 million in distribution rate credits for West Penn Power customers, a distribution rate freeze for FE's current Pennsylvania utility customers and support for renewable and sustainable energy and customer choice. The settlement is subject to approval by the PPUC, and does not resolve issues raised by parties who did not join in the settlement.
Dividend
On July 20, 2010, the Board of Directors (BOD) of FE declared an unchanged quarterly dividend of 55 cents per share of outstanding common stock. The dividend was paid September 1, 2010, to shareholders of record as of August 6, 2010.
On September 21, 2010, the FE BOD declared an unchanged quarterly dividend of 55 cents per share of outstanding common stock. The dividend is payable December 1, 2010, to shareholders of record as of November 5, 2010.
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Financing Activities
On August 20, 2010, FES completed the remarketing of $250 million of Pollution Control Revenue Bonds (PCRBs). Of the $250 million, $235 million of PCRBs were successfully converted from a variable interest rate to a fixed interest rate. The interest rate conversion minimizes financial risk by converting the long-term debt into a fixed rate and, as a result, reducing exposure to variable interest rates over the short-term. The remaining $15 million of PCRBs continue at a fixed interest rate mode. The $235 million series now bear a per-annum rate of 2.25% and are subject to mandatory purchase on June 3, 2013. The $15 million now bear a per-annum rate of 1.5% and are subject to mandatory purchase on June 1, 2011.
On October 1, 2010, FES completed the refinancing and remarketing of six series of PCRBs totaling $313 million. These series were converted from a variable interest rate to a fixed interest rate of 3.375% per-annum and are subject to mandatory purchase on July 1, 2015.
On October 22, 2010, Signal Peak Energy and Global Rail Group completed a $350 million Senior Secured Term Loan Facility. The two-year loan is guaranteed by FE and affiliates of the Boich companies. The proceeds from the loan were used to repay bank borrowings and debt owed to FE with the balance to be used for other general purposes.
Ohio Electric Security Plan (ESP)
On August 25, 2010, the Public Utilities Commission of Ohio (PUCO) adopted a Combined Stipulation in the second ESP for Ohio Edison Company, Cleveland Electric Illuminating Company and The Toledo Edison Company (Ohio Utilities) effective June 1, 2011 through May 31, 2014. Under the ESP, among other provisions, the Ohio Utilities will have no overall increase to base distribution rates during the plan period. Generation rates for the annual delivery periods during the plan will be determined through a competitive bid process (CBP) which will be conducted every October and January for generation service through May 31, 2014. The ESP also establishes a Delivery Capital Recovery Rider effective January 1, 2012, through May 31, 2014, provides for recovery of Midwest ISO (MISO) transmission expansion planning charges, and a commitment that c ustomers will not pay certain costs related to transmission projects approved by PJM for the longer of a five-year period from June 1, 2011 through May 31, 2016 or when the amount of cost avoided by customers for certain types of products total $360 million (dependent on the outcome of certain PJM proceedings) for projects approved prior to June 2011.
Ohio Generation Auction
On October 20, 2010, the Ohio Utilities conducted the first in a series of auctions to procure generation for customers who choose not to shop with an alternative supplier for delivery beginning June 1, 2011 through May 31, 2014. The auction consisted of one, two and three-year products. Fifty tranches in total were acquired through this auction. Seventeen tranches of the one-year product were acquired at a clearing price of $54.55 per MWh; seventeen tranches of the two-year product were acquired at a clearing price of $54.10 per MWh; and sixteen tranches of the three-year product were acquired at a clearing price of $56.58 per MWh. There were ten registered bidders that participated in the auction, with four bidders winning tranches in the auction. FES participated and was the winning bidder for ten tranches of the one-year product; seven tranches of the two-year product; and three tranches of the three-year product. The auction consisted of twelve rounds. On October 22, 2010, the PUCO accepted the results of the auction. The next auction is scheduled for January 2011.
Significantly Excessive Earnings Test (SEET)
As required by the PUCO for all electric utilities in the state, the Ohio Utilities filed a SEET application on September 1, 2010. The application requested that the PUCO determine that there were no significantly excessive earnings in 2009. On September 22, 2010 the PUCO issued the procedural schedule with the hearing set to commence on November 3, 2010.
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Met-Ed and Penelec Default Service Plan
On October 20, 2010, the PPUC approved the results of the final of four auctions held to procure the default service requirements for Met-Ed and Penelec customers who choose not to shop with an alternative supplier. For the five-month period of January 1, 2011 to May 31, 2011, the tranche-weighted average prices ($/MWh) for Met-Ed’s residential and commercial classes were $67.10 and $68.28, respectively; Penelec’s tranche-weighted average prices were $55.76 and $58.24 for its residential and commercial classes, respectively. The October 2010 auction is the second of four auctions to procure commercial default service requirements for the 12-month period of June 1, 2011 to May 31, 2012 and residential requirements for the 24-month period of June 1, 2011 to May 31, 2013. For Met-Ed and Penelec comm ercial customers the tranche-weighted average price ($/MWh) was $63.97 and $54.33, respectively, and for residential customers the tranche-weighted average price was $66.66 and $55.74, respectively. In addition, the October 2010 auction procured supply for Met-Ed and Penelec industrial customers opting in to Fixed Price Service. For Met-Ed and Penelec, the average 12-month price ($/MWh) was $95.00 and $83.73, respectively. The remaining two auctions for these products will be conducted in January 2011 and March 2011.
On October 20, 2010, the PPUC also approved the default service Request For Proposal for the Residential Fixed Block On-Peak and Off-Peak energy products. For Penelec, the average price ($/MWh) for On-Peak and Off-Peak was $47.25 and $38.62, respectively. For Met-Ed, the average price ($/MWh) for On-Peak and Off-Peak was $55.07 and $40.81, respectively.
Department of Energy (DOE) Smart Grid Grants
On June 3, 2010, FE and the DOE signed grants totaling $57.4 million that were awarded as part of the American Recovery and Reinvestment Act to introduce smart grid technologies in targeted areas in Pennsylvania, Ohio, and New Jersey. The DOE grants represent 50% of the funding for approximately $115 million FE plans to invest in smart grid technologies. The PPUC and the State of New Jersey Board of Public Utilities previously approved recovery for the remaining portion of smart grid costs, and FE has begun implementing smart grid programs in Pennsylvania and New Jersey. The PUCO issued an order on June 30, 2010, approving FE’s smart grid program, but FE delayed implementation of the Ohio Smart Grid pilot program until there was more certainty regarding cost recovery for the portion of the costs not covered by the gran t. On August 25, 2010 the PUCO approved cost recovery for the Ohio program as part of the ESP.
Pennsylvania Power Company (Penn Power) Default Service Plan
On July 23, 2010, Penn Power filed a settlement for approval of its Default Service Plan for the period of June 1, 2011 through May 31, 2013. The application was initially filed with the PPUC in February of 2010. On October 21, 2010, the PPUC adopted a motion to approve the settlement.
Plant Operational Changes
On August 12, 2010, FirstEnergy Generation Corp. (FGCO) announced that it would be making operational changes to some of its smaller coal-fired units in response to the continued slow economy, the lower demand for electricity and uncertainty related to proposed new federal environmental regulations. The units affected are Bay Shore units 2-4, Eastlake units 1-4, the Lake Shore Plant, and the Ashtabula Plant, which total 1,620 MW of capacity; in 2009 they produced approximately 6.8% of FGCO’s total generation output. From September 2010 through August 2011, the affected units will operate with minimum three-day notice and in response to consumer demand. Beginning in September 2011, the Bay Shore and Eastlake units (1,131 MW) will only be available during summer and winter months, and Ashtabula and Lake Shore will be temporarily idled (489 MW). The proposed changes are subject to review by MISO, PJM and the independent market monitor. FGCO recognized an impairment of $292 million related to these assets in the third quarter of 2010.
Davis-Besse License Renewal
On August 30, 2010, FirstEnergy Nuclear Operating Company (FENOC) submitted an application to the Nuclear Regulatory Commission (NRC) for renewal of the Davis-Besse Nuclear Power Station (908 MW) operating license. By a letter dated October 18, 2010, the NRC determined that the Davis-Besse license renewal application
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was complete and acceptable for docketing and further review. Davis-Besse currently is licensed until 2017; if approved the renewal would extend operations for an additional 20 years, until 2037.
Beaver Valley Refueling
On October 2, 2010, Beaver Valley Nuclear Power Station Unit 1 (911 MW) began its scheduled refueling and maintenance outage. During the outage FENOC plans to exchange 60 of the 157 fuel assemblies, conduct safety inspections, replace one of three reactor cooling pump motors, and perform routine maintenance work. The outage is expected to be completed in late October.
Fremont Plant
During the third quarter, FGCO re-evaluated the schedule for completing the Fremont Plant (707 MW) due to current market conditions and the extension of the tax incentives included in the federal legislation through 2011. As a result, FGCO is extending the plant’s completion beyond 2010 to reduce overtime labor cost and outside contractor spend for the remainder of the project. We expect the extension of the completion schedule to add $33 million to the 2011 capital budget.
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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 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 actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Ac tual 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 Pennsylvania, the impact of the regulatory process on the pending matters in Ohio, Pennsylvania and New Jersey, business and regulatory impacts from American Transmission Systems, Incorporated's realignment into PJM Interconnection, L.L.C., economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices and availability, financial derivative reforms that could increase our liquidity needs and collateral costs, 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, operating and maintenance costs being hi gher than anticipated, other legislative and regulatory changes, revised environmental requirements, including possible greenhouse gas emission and coal combustion regulations, the potential impacts of the U.S. Court of Appeals' July 11, 2008 decision requiring revisions to the Clean Air Interstate 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 that certain generating units may need to be shut down) or levels of emission reductions related to the Consent Decree resolving the New Source Review litigation or other similar potential regulatory initiatives or actions, 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, Metro politan Edison Company's and Pennsylvania Electric Company's transmission service charge filings with the Pennsylvania Public Utility Commission, the continuing availability of generating units and their ability 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, the changing market conditions that could affect the value of assets held in FirstEnergy's nuclear decommissioning trusts, pension trusts and other trust funds, and cause it to make additional contributions sooner, or in an amount that is larger than currently anticipated, the ability to access the public securities and other capital and credit markets in accordance with FirstEnergy's financing plan and the cost of such capital, changes in general economic condit ions affecting the company, the state of the capital and credit markets affecting the company, interest rates and any actions taken by credit rating agencies that could negatively affect FirstEnergy's access to financing or its costs or increase its requirements to post additional collateral to support outstanding commodity positions, letters of credit and other financial guarantees, the continuing decline of the national and regional economy and its impact on the company's major industrial and commercial customers, issues concerning the soundness of financial institutions and counterparties with which FirstEnergy does business, the expected timing and likelihood of completion of the proposed merger with Allegheny Energy, Inc., including the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the proposed merger that could reduce anticipated benefits or cause the parties to abandon the merger, the diversion of management's time and attention from our ongoing busi ness during this time period, the ability to maintain relationships with customers, employees or suppliers as well as the ability to successfully integrate the businesses and realize cost savings and any other synergies and the risk that the credit ratings of the combined company or its subsidiaries may be different from what the companies expect and the risks and other factors discussed from time to time in its Securities and Exchange Commission 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 management to predict all such factors, nor assess the impact of any such factor on FirstEnergy's 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. FirstEnergy expressly disclaims any current intention to update any forward-looking statements contained herein as a result of new infor mation, future events, or otherwise.
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