main_10q.htm


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

FORM 10-Q
(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from
 
to
 

Commission
Registrant; State of Incorporation;
I.R.S. Employer
File Number
Address; and Telephone Number
Identification No.
     
333-21011
FIRSTENERGY CORP.
34-1843785
 
(An Ohio Corporation)
 
 
76 South Main Street
 
 
Akron, OH  44308
 
 
Telephone (800)736-3402
 
     
333-145140-01
FIRSTENERGY SOLUTIONS CORP.
31-1560186
 
(An Ohio Corporation)
 
 
c/o FirstEnergy Corp.
 
 
76 South Main Street
 
 
Akron, OH 44308
 
 
Telephone (800)736-3402
 
     
1-2578
OHIO EDISON COMPANY
34-0437786
 
(An Ohio Corporation)
 
 
c/o FirstEnergy Corp.
 
 
76 South Main Street
 
 
Akron, OH  44308
 
 
Telephone (800)736-3402
 
     
1-2323
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
34-0150020
 
(An Ohio Corporation)
 
 
c/o FirstEnergy Corp.
 
 
76 South Main Street
 
 
Akron, OH  44308
 
 
Telephone (800)736-3402
 
     
1-3583
THE TOLEDO EDISON COMPANY
34-4375005
 
(An Ohio Corporation)
 
 
c/o FirstEnergy Corp.
 
 
76 South Main Street
 
 
Akron, OH  44308
 
 
Telephone (800)736-3402
 
     
1-3141
JERSEY CENTRAL POWER & LIGHT COMPANY
21-0485010
 
(A New Jersey Corporation)
 
 
c/o FirstEnergy Corp.
 
 
76 South Main Street
 
 
Akron, OH  44308
 
 
Telephone (800)736-3402
 
     
1-446
METROPOLITAN EDISON COMPANY
23-0870160
 
(A Pennsylvania Corporation)
 
 
c/o FirstEnergy Corp.
 
 
76 South Main Street
 
 
Akron, OH  44308
 
 
Telephone (800)736-3402
 
     
1-3522
PENNSYLVANIA ELECTRIC COMPANY
25-0718085
 
(A Pennsylvania Corporation)
 
 
c/o FirstEnergy Corp.
 
 
76 South Main Street
 
 
Akron, OH  44308
 
 
Telephone (800)736-3402
 

 
 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X)  No (  )
FirstEnergy Corp., Ohio Edison Company and Pennsylvania Electric Company
Yes (  )  No (X)
FirstEnergy Solutions Corp., The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company and Metropolitan Edison Company

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,” “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer
(X)
 
FirstEnergy Corp.
Accelerated Filer
(  )
 
N/A
Non-accelerated Filer (Do not check if a smaller reporting company)
(X)
FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company

Smaller Reporting Company
(  )
N/A

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes (  ) No (X)
FirstEnergy Corp., FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company, and Pennsylvania Electric Company

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 
OUTSTANDING
CLASS
AS OF MAY 8, 2008
FirstEnergy Corp., $0.10 par value
304,835,407
FirstEnergy Solutions Corp., no par value
7
Ohio Edison Company, no par value
60
The Cleveland Electric Illuminating Company, no par value
67,930,743
The Toledo Edison Company, $5 par value
29,402,054
Jersey Central Power & Light Company, $10 par value
14,421,637
Metropolitan Edison Company, no par value
859,500
Pennsylvania Electric Company, $20 par value
4,427,577

FirstEnergy Corp. is the sole holder of FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company common stock.

This combined Form 10-Q is separately filed by FirstEnergy Corp., FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to any of the FirstEnergy subsidiary registrants is also attributed to FirstEnergy Corp.

OMISSION OF CERTAIN INFORMATION

FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.

 
 

 

Forward-Looking Statements: This Form 10-Q 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 achievement 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, revised environmental requirements, including possible GHG emission regulations,
·  
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 NRC (including, but not limited to, the Demand for Information issued to FENOC on May 14, 2007),
·  
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 Ohio Supreme Court regarding the RSP and RCP, including the deferral of fuel costs)
-  
and Met-Ed’s 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 operate at, or near full capacity,
·  
the changing market conditions that could affect the value of assets held in the registrants’ nuclear decommissioning trusts, pension trusts and other trust funds,
·  
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 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 the registrants’ 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 to predict all such factors, nor assess the impact of any such factor on the registrants’ 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. 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. The registrants expressly disclaim any current intention to update any forward-looking statements contained herein as a result of new information, future events or otherwise.








 
 

 

TABLE OF CONTENTS



   
Pages
Glossary of Terms
iii-v
     
Part I.     Financial Information
 
     
Items 1. and 2. - Financial Statements and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.
 
     
FirstEnergy Corp.
 
     
 
Management's Discussion and Analysis of Financial Condition and
1-32
 
Results of Operations
 
 
Report of Independent Registered Public Accounting Firm
33
 
Consolidated Statements of Income
34
 
Consolidated Statements of Comprehensive Income
35
 
Consolidated Balance Sheets
36
 
Consolidated Statements of Cash Flows
37
     
FirstEnergy Solutions Corp.
 
     
 
Management's Narrative Analysis of Results of Operations
38-40
 
Report of Independent Registered Public Accounting Firm
41
 
Consolidated Statements of Income and Comprehensive Income
42
 
Consolidated Balance Sheets
43
 
Consolidated Statements of Cash Flows
44
     
Ohio Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
45-46
 
Report of Independent Registered Public Accounting Firm
47
 
Consolidated Statements of Income and Comprehensive Income
48
 
Consolidated Balance Sheets
49
 
Consolidated Statements of Cash Flows
50
     
The Cleveland Electric Illuminating Company
 
     
 
Management's Narrative Analysis of Results of Operations
51-52
 
Report of Independent Registered Public Accounting Firm
53
 
Consolidated Statements of Income and Comprehensive Income
54
 
Consolidated Balance Sheets
55
 
Consolidated Statements of Cash Flows
56
     
The Toledo Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
57-58
 
Report of Independent Registered Public Accounting Firm
59
 
Consolidated Statements of Income and Comprehensive Income
60
 
Consolidated Balance Sheets
61
 
Consolidated Statements of Cash Flows
62
     

 
i

 

TABLE OF CONTENTS (Cont'd)



Jersey Central Power & Light Company
Pages
     
 
Management's Narrative Analysis of Results of Operations
63-64
 
Report of Independent Registered Public Accounting Firm
65
 
Consolidated Statements of Income and Comprehensive Income
66
 
Consolidated Balance Sheets
67
 
Consolidated Statements of Cash Flows
68
     
Metropolitan Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
69-70
 
Report of Independent Registered Public Accounting Firm
71
 
Consolidated Statements of Income and Comprehensive Income
72
 
Consolidated Balance Sheets
73
 
Consolidated Statements of Cash Flows
74
     
Pennsylvania Electric Company
 
     
 
Management's Narrative Analysis of Results of Operations
75-76
 
Report of Independent Registered Public Accounting Firm
77
 
Consolidated Statements of Income and Comprehensive Income
78
 
Consolidated Balance Sheets
79
 
Consolidated Statements of Cash Flows
80
     
Combined Management’s Discussion and Analysis of Registrant Subsidiaries
81-94
   
Combined Notes to Consolidated Financial Statements
95-123
   
Item 3.                      Quantitative and Qualitative Disclosures About Market Risk.
124
     
Item 4.                      Controls and Procedures – FirstEnergy.
124
   
Item 4T.                    Controls and Procedures – FES, OE, CEI, TE, JCP&L, Met-Ed and Penelec.
124
     
Part II.   Other Information
 
     
Item 1.                      Legal Proceedings.
125
     
Item 1A.                   Risk Factors.
125
   
Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds.
125
   
Item 6.                      Exhibits.
126





 
ii

 
GLOSSARY OF TERMS


The following abbreviations and acronyms are used in this report to identify FirstEnergy Corp. and its current and former subsidiaries:

ATSI
American Transmission Systems, Inc., owns and operates transmission facilities
 
CEI
The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary
 
Companies
OE, CEI, TE, JCP&L, Met-Ed and Penelec
 
FENOC
FirstEnergy Nuclear Operating Company, operates nuclear generating facilities
 
FES
FirstEnergy Solutions Corp., provides energy-related products and services
 
FESC
FirstEnergy Service Company, provides legal, financial and other corporate support services
 
FGCO
FirstEnergy Generation Corp., owns and operates non-nuclear generating facilities
 
FirstEnergy
FirstEnergy Corp., a public utility holding company
 
GPU
GPU, Inc., former parent of JCP&L, Met-Ed and Penelec, which merged with FirstEnergy on
November 7, 2001
 
JCP&L
Jersey Central Power & Light Company, a New Jersey electric utility operating subsidiary
 
JCP&L Transition
   Funding
JCP&L Transition Funding LLC, a Delaware limited liability company and issuer of transition
   bonds
 
JCP&L Transition
   Funding II
JCP&L Transition Funding II LLC, a Delaware limited liability company and issuer of transition
   bonds
 
Met-Ed
Metropolitan Edison Company, a Pennsylvania electric utility operating subsidiary
 
NGC
FirstEnergy Nuclear Generation Corp., owns nuclear generating facilities
 
OE
Ohio Edison Company, an Ohio electric utility operating subsidiary
 
Ohio Companies
CEI, OE and TE
 
Penelec
Pennsylvania Electric Company, a Pennsylvania electric utility operating subsidiary
 
Penn
Pennsylvania Power Company, a Pennsylvania electric utility operating subsidiary of OE
 
Pennsylvania Companies
Met-Ed, Penelec and Penn
 
PNBV
PNBV Capital Trust, a special purpose entity created by OE in 1996
 
Shippingport
Shippingport Capital Trust, a special purpose entity created by CEI and TE in 1997
 
TE
The Toledo Edison Company, an Ohio electric utility operating subsidiary
 
TEBSA
Termobarranquila S.A. Empresa de Servicios Publicos
 
     
The following abbreviations and acronyms are used to identify frequently used terms in this report:
 
     
AEP
American Electric Power Company, Inc.
 
AOCL
Accumulated Other Comprehensive Loss
 
AQC
Air Quality Control
 
ARB
Accounting Research Bulletin
 
ARO
Asset Retirement Obligation
 
ASM
Ancillary Services Market
 
BGS
Basic Generation Service
 
BPJ
Best Professional Judgment
 
CAA
Clean Air Act
 
CAIR
Clean Air Interstate Rule
 
CAMR
Clean Air Mercury Rule
 
CBP
Competitive Bid Process
 
CO2
Carbon Dioxide
 
DFI
Demand for Information
DOJ
United States Department of Justice
DRA
Division of Ratepayer Advocate
EIS
Energy Independence Strategy
EITF
Emerging Issues Task Force
EMP
Energy Master Plan
EPA
United States Environmental Protection Agency
EPACT
Energy Policy Act of 2005
ESP
Electric Security Plan
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
FIN
FASB Interpretation
FIN 46R
FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities"
FIN 47
FIN 47, "Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB
   Statement No. 143"
FIN 48
FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement
   No. 109”
FirstCom
First Communications, Inc.

 
iii

 
GLOSSARY OF TERMS, Cont’d.


FMB
First Mortgage Bonds
FSP
FASB Staff Position
FSP FAS 157-2
FSP FAS 157-2, “Effective Date of  FASB Statement No. 157”
FTR
Financial Transmission Rights
GAAP
Accounting Principles Generally Accepted in the United States
GHG
Greenhouse Gases
ICE
Intercontinental Exchange
IRS
Internal Revenue Service
ISO
Independent System Operator
kV
Kilovolt
KWH
Kilowatt-hours
LIBOR
London Interbank Offered Rate
LOC
Letter of Credit
MEIUG
Met-Ed Industrial Users Group
MISO
Midwest Independent Transmission System Operator, Inc.
Moody’s
Moody’s Investors Service
MRO
Market Rate Offer
MW
Megawatts
NAAQS
National Ambient Air Quality Standards
NERC
North American Electric Reliability Corporation
NJBPU
New Jersey Board of Public Utilities
NOPR
Notice of Proposed Rulemaking
NOV
Notice of Violation
NOX
Nitrogen Oxide
NRC
Nuclear Regulatory Commission
NSR
New Source Review
NUG
Non-Utility Generation
NUGC
Non-Utility Generation Charge
NYMEX
New York Mercantile Exchange
OCA
Office of Consumer Advocate
OTC
Over the Counter
OVEC
Ohio Valley Electric Corporation
PCRB
Pollution Control Revenue Bond
PICA
Penelec Industrial Customer Alliance
PJM
PJM Interconnection L. L. C.
PLR
Provider of Last Resort
PPUC
Pennsylvania Public Utility Commission
PRP
Potentially Responsible Party
PSA
Power Supply Agreement
PUCO
Public Utilities Commission of Ohio
PUHCA
Public Utility Holding Company Act of 1935
RCP
Rate Certainty Plan
 
RECB
Regional Expansion Criteria and Benefits
 
RFP
Request for Proposal
 
RPM
Reliability Pricing Model
 
RSP
Rate Stabilization Plan
 
RTO
Regional Transmission Organization
 
S&P
Standard & Poor’s Ratings Service
 
SBC
Societal Benefits Charge
 
SEC
U.S. Securities and Exchange Commission
 
SECA
Seams Elimination Cost Adjustment
 
SFAS
Statement of Financial Accounting Standards
 
SFAS 109
SFAS No. 109, “Accounting for Income Taxes”
 
SFAS 123(R)
SFAS No. 123(R), "Share-Based Payment"
 
SFAS 133
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
 
SFAS 141(R)
SFAS No 141(R), “Business Combinations”
 
SFAS 143
SFAS No. 143, “Accounting for Asset Retirement Obligations”
 
SFAS 157
SFAS No. 157, “Fair Value Measurements”
 
SFAS 159
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an
   Amendment of FASB Statement No. 115”
 
SFAS 160
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment
   of ARB No. 51”
 
SFAS 161
SFAS No 161, “Disclosure about Derivative Instruments and Hedging Activities – an Amendment
   of FASB Statement No. 133”
 

 
iv

 
GLOSSARY OF TERMS, Cont’d.


SIP
State Implementation Plan(s) Under the Clean Air Act
SNCR
Selective Non-Catalytic Reduction
SO2
Sulfur Dioxide
TBC
Transition Bond Charge
TMI-1
Three Mile Island Unit 1
TMI-2
Three Mile Island Unit 2
TSC
Transmission Service Charge
VIE
Variable Interest Entity

 
v

 

PART I. FINANCIAL INFORMATION

ITEMS 1. AND 2. FINANCIAL STATEMENTS AND MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


FIRSTENERGY CORP.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


EXECUTIVE SUMMARY

Net income in the first quarter of 2008 was $276 million, or basic earnings of $0.91 per share of common stock ($0.90 diluted), compared with net income of $290 million, or basic and diluted earnings of $0.92 per share in the first quarter of 2007. The decrease in FirstEnergy’s earnings was driven primarily by increased operating expenses, partially offset by increased revenues.

Change in Basic Earnings Per Share
From Prior Year First Quarter
   
     
Basic Earnings Per Share – First Quarter 2007
$ 0.92
 
Gain on non-core asset sales – 2008
   0.06
 
Saxton decommissioning regulatory asset – 2007
   (0.05)
 
Trust securities impairment
   (0.02)
 
Revenues
   0.55
 
Fuel and purchased power
   (0.42)
 
Depreciation and amortization
   (0.03)
 
Deferral of new regulatory assets
   (0.03)
 
Energy Delivery O&M expenses
   (0.03)
 
General taxes
   (0.02)
 
Corporate-owned life insurance
   (0.06)
 
Other expenses
   0.01
 
Reduced common shares outstanding
   0.03
 
Basic Earnings Per Share – First Quarter 2008
$ 0.91
 

Regulatory Matters - Ohio

Legislative Process

On April 22, 2008, an amended version of Substitute Senate Bill 221 (Substitute SB221) was passed by the Ohio House of Representatives and sent back to the Ohio Senate for concurrence. On April 23, 2008, the Ohio Senate approved the House's amendments to Substitute SB221 and forwarded the bill to the Governor for signature, which he signed on May 1, 2008. Amended Substitute SB221 requires all electric distribution utilities to file an RSP, now called an ESP, with the PUCO. An ESP is required to contain a proposal for the supply and pricing of retail generation. A utility could also simultaneously file an MRO in which it would have to demonstrate the following objective market criteria: The utility or its transmission service affiliate belongs to a FERC-approved RTO having a market-monitor function and the ability to mitigate market power, and a published source exists that identifies information for traded electricity and energy products that are contracted for delivery two years into the future. The PUCO would test the ESP and its pricing and all other terms and conditions against the MRO and may only approve the ESP if it is found to be more favorable to customers. As part of an ESP with a plan period longer than three years, the PUCO shall prospectively determine every fourth year of the plan whether it is substantially likely the plan will provide the electric distribution utility a return on common equity significantly in excess of the return likely to be earned by publicly traded companies, including utilities, that face comparable business and financial risk (comparable companies). If so, the PUCO may terminate the ESP. Annually under an ESP, the PUCO shall determine whether an electric distribution utility's earned return on common equity is significantly in excess of returns earned on common equity during the same period by comparable companies, and if so, shall require the utility to return such excess to customers by prospective adjustments. Amended Substitute SB221 also includes provisions dealing with advanced and renewable energy standards and energy efficiency, including requirements to meet annual benchmarks. FirstEnergy is currently evaluating this legislation and expects to file an ESP in the second or third quarter of 2008.


 
1

 

Distribution Rate Request

On February 25, 2008, evidentiary hearings concluded in the distribution rate requests for the Ohio Companies. The requests for $332 million in revenue increases were filed on June 7, 2007. Public hearings were held from March 5, 2008 through March 24, 2008. Main briefs were filed on March 28, 2008, and reply briefs were filed on April 18, 2008. The PUCO is expected to render its decision during the second or third quarter of 2008 (see Outlook – Ohio).

Regulatory Matters - Pennsylvania

Penn’s Interim Default Service Supply

On March 13, 2008, the PPUC approved the residential procurement process in Penn’s Joint Petition for Settlement. This RFP process calls for load-following, full-requirements contracts for default service procurement for residential customers for the period covering June 1, 2008 through May 31, 2011. The PPUC had previously approved the default service procurement processes for commercial and industrial customers. The default service procurement for small commercial customers was conducted through multiple RFPs, while the default service procurement for large commercial and industrial customers will utilize hourly pricing. Bids in the two RFPs for small commercial load were approved by the PPUC on February 22, 2008, and March 20, 2008. On March 28, 2008, Penn filed compliance tariffs with the new default service generation rates based on the approved RFP bids for small commercial customers which the PPUC then certified on April 4, 2008. On April 14, 2008, the first RFP for residential customers’ load was held consisting of tranches for both 12 and 24-month supply. The PPUC approved the bids on April 16, 2008. The second RFP is scheduled to be held on May 14, 2008, after which time the PPUC is expected to approve the new rates to go into effect June 1, 2008.

Met-Ed and Penelec Transmission Service Charge Filing

On April 14, 2008, Met-Ed and Penelec filed annual updates to the TSC rider for the period June 1, 2008, through May 31, 2009. The proposed TSCs include a component for under-recovery of actual transmission costs incurred during the prior period (Met-Ed - $144 million and Penelec - $4 million) and future transmission cost projections for June 2008 through May 2009 (Met-Ed - $258 million and Penelec - $92 million). Met-Ed has proposed a transition approach that would recover past under-recovered costs plus carrying charges through the new TSC over thirty-one months and defer a portion of the projected costs ($92 million) plus carrying charges for recovery through future TSCs by December 31, 2010.

Generation

Generation Output Record

FirstEnergy set a new first quarter generation output record of 20.4 million megawatt-hours, a 1.8% increase over the prior record established in the first quarter of 2006.
 
Refueling Outage

On April 14, 2008, Beaver Valley Unit 2 began its regularly scheduled refueling outage. During the outage, several improvement projects will take place on the 868-MW unit including replacing the high pressure turbine and inspecting the reactor vessel and other plant safety systems. Beaver Valley Unit 2 had operated for 520 consecutive days when it was taken off line for the outage.

Maintenance Outage

On April 14, 2008, the Perry Nuclear Power Plant returned to service following completion of a 10-day planned outage for valve work and other maintenance in preparation for the upcoming summer months.

Financial Matters

Acquisition of Additional Equity Interests in Beaver Valley Unit 2

On March 3, 2008, notice was given to the nine owner trusts that are lessors under sale and leaseback transactions, originally entered into by TE in 1987, that NGC would acquire the related 18.26% undivided interest in Beaver Valley Unit 2 through the exercise of the periodic purchase option provided for in the applicable facility leases. The purchase price to be paid by NGC for the undivided interest will be equal to the higher of a specified casualty value under the applicable facility leases (approximately $239 million in the aggregate for the equity portion of all nine facility leases) and the fair market sales value of such undivided interests. Determination of the fair market sales value may become subject to an appraisal procedure provided for in the lease documentation. An additional payment of approximately $236 million would be required to prepay in full the outstanding principal of, and accrued but unpaid interest on, the lessor notes of the nine owner trusts. Alternatively, this amount would not be paid as part of the aggregate purchase price if the lessor notes are instead assumed at the time of the exercise of the option. If NGC determines to prepay the notes, it is possible that the proceeds from such prepayment may not be sufficient to pay the principal of, and interest on, the bonds as they become due. If that is the case, NGC would provide a mechanism to address any such potential shortfall in a timely manner.

 
2

 


Repurchase and Remarketing of Auction Rate Bonds

Between February 27, 2008 and April 2, 2008, FirstEnergy’s subsidiaries repurchased all of their tax-exempt long-term PCRBs originally sold at auction rates ($530 million) in response to disruptions in the auction rate securities market. In February 2008, FGCO, NGC, Met-Ed and Penelec elected to convert all of their then outstanding auction rate PCRBs to a weekly rate mode, which required their mandatory purchase of these PCRBs on the applicable conversion dates. The companies initially funded the repurchase with short-term debt. On April 22, 2008, Met-Ed ($28.5 million) and Penelec ($45 million) successfully marketed their converted PCRBs in a variable-rate mode. Subject to market conditions, FGCO and NGC plan to remarket their converted PCRBs later in 2008, either in fixed-rate or variable-rate modes.

Non-Core Asset Sale

On March 7, 2008, FirstEnergy sold substantially all of the assets of FirstEnergy Telecom Services, Inc. to FirstCom for $45 million in cash, with FirstCom also assuming related liabilities. The sale resulted in an after-tax gain of approximately $0.06 per share. FirstEnergy is a 15.6% shareholder in FirstCom.

FIRSTENERGY’S BUSINESS

FirstEnergy is a diversified energy company headquartered in Akron, Ohio, that operates primarily through three core business segments (see Results of Operations).

·  
Energy Delivery Services transmits and distributes electricity through FirstEnergy’s eight utility operating companies, serving 4.5 million customers within 36,100 square miles of Ohio, Pennsylvania and New Jersey and purchases power for its PLR and default service requirements in Pennsylvania and New Jersey. This business segment derives its revenues principally from the delivery of electricity within FirstEnergy’s service areas at regulated rates, cost recovery of regulatory assets and the sale of electric generation service to retail customers who have not selected an alternative supplier (default service) in its Pennsylvania and New Jersey franchise areas. The segment’s net income reflects the commodity costs of securing electricity from FirstEnergy’s competitive energy services segment under partial requirements purchased power agreements with FES and from non-affiliated power suppliers, including, in each case, associated transmission costs.

·  
Competitive Energy Services supplies the electric power needs of end-use customers through retail and wholesale arrangements, including associated company power sales to meet all or a portion of the PLR and default service requirements of FirstEnergy’s Ohio and Pennsylvania utility subsidiaries and competitive retail sales to customers primarily in Ohio, Pennsylvania, Maryland and Michigan. This business segment owns or leases and operates 19 generating facilities with a net demonstrated capacity of approximately 13,664 MW and also purchases electricity to meet sales obligations. The segment's net income is primarily derived from affiliated company power sales and non-affiliated electric generation sales revenues less the related costs of electricity generation, including purchased power and net transmission and ancillary costs charged by PJM and MISO to deliver energy to the segment’s customers.

·  
Ohio Transitional Generation Services supplies the electric power needs of non-shopping customers under the default service requirements of the Ohio Companies. The segment's net income is primarily derived from electric generation sales revenues less the cost of power purchased from the competitive energy services segment through a full-requirements PSA arrangement with FES, including net transmission and ancillary costs charged by MISO to deliver energy to retail customers.

 
3

 


RESULTS OF OPERATIONS

The financial results discussed below include revenues and expenses from transactions among FirstEnergy's business segments. A reconciliation of segment financial results is provided in Note 13 to the consolidated financial statements. Net income by major business segment was as follows:

 
Three Months Ended
     
 
March 31,
 
Increase
 
 
2008
 
2007
 
(Decrease)
 
Net Income
(In millions, except per share data)
 
By Business Segment
           
Energy delivery services
  $ 179     $ 218     $ (39 )
Competitive energy services
    87       98       (11 )
Ohio transitional generation services
    23       24       (1 )
Other and reconciling adjustments*
    (13 )     (50 )     37  
Total
  $ 276     $ 290     $ (14 )
                         
Basic Earnings Per Share
  $ 0.91     $ 0.92     $ (0.01 )
Diluted Earnings Per Share
  $ 0.90     $ 0.92     $ (0.02 )

* Consists primarily of interest expense related to holding company debt, corporate support services revenues and expenses, telecommunications services and elimination of intersegment transactions.

Summary of Results of Operations – First Quarter 2008 Compared with First Quarter 2007

Financial results for FirstEnergy's major business segments in the first three months of 2008 and 2007 were as follows:


               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
First Quarter 2008 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 2,050     $ 289     $ 691     $ -     $ 3,030  
Other
    162       40       16       29       247  
Internal
    -       776       -       (776 )     -  
Total Revenues
    2,212       1,105       707       (747 )     3,277  
                                         
Expenses:
                                       
Fuel and purchased power
    983       533       588       (776 )     1,328  
Other operating expenses
    445       309       77       (31 )     800  
Provision for depreciation
    106       53       -       5       164  
Amortization of regulatory assets
    249       -       9       -       258  
Deferral of new regulatory assets
    (100 )     -       (5 )     -       (105 )
General taxes
    173       32       1       9       215  
Total Expenses
    1,856       927       670       (793 )     2,660  
                                         
Operating Income
    356       178       37       46       617  
Other Income (Expense):
                                       
Investment income
    45       (6 )     1       (23 )     17  
Interest expense
    (103 )     (34 )     -       (42 )     (179 )
Capitalized interest
    -       7       -       1       8  
Total Other Income (Expense)
    (58 )     (33 )     1       (64 )     (154 )
                                         
Income Before Income Taxes
    298       145       38       (18 )     463  
Income taxes
    119       58       15       (5 )     187  
Net Income
  $ 179     $ 87     $ 23     $ (13 )   $ 276  
 
 
 
4

 


               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
First Quarter 2007 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 1,875     $ 276     $ 613     $ -     $ 2,764  
Other
    165       45       6       (7 )     209  
Internal
    -       714       -       (714 )     -  
Total Revenues
    2,040       1,035       619       (721 )     2,973  
                                         
Expenses:
                                       
Fuel and purchased power
    844       447       544       (714 )     1,121  
Other operating expenses
    408       300       49       (8 )     749  
Provision for depreciation
    98       51       -       7       156  
Amortization of regulatory assets
    246       -       5       -       251  
Deferral of new regulatory assets
    (124 )     -       (20 )     -       (144 )
General taxes
    165       28       2       8       203  
Total Expenses
    1,637       826       580       (707 )     2,336  
                                         
Operating Income
    403       209       39       (14 )     637  
Other Income (Expense):
                                       
Investment income
    70       3       1       (41 )     33  
Interest expense
    (109 )     (52 )     (1 )     (23 )     (185 )
Capitalized interest
    2       3       -       -       5  
Total Other income (Expense)
    (37 )     (46 )     -       (64 )     (147 )
                                         
Income Before Income Taxes
    366       163       39       (78 )     490  
Income taxes
    148       65       15       (28 )     200  
Net Income
  $ 218     $ 98     $ 24     $ (50 )   $ 290  
                                         
                                         
Changes Between First Quarter 2008 and
                                       
First Quarter 2007 Financial Results
                                       
Increase (Decrease)
                                       
                                         
Revenues:
                                       
External
                                       
Electric
  $ 175     $ 13     $ 78     $ -     $ 266  
Other
    (3 )     (5 )     10       36       38  
Internal
    -       62       -       (62 )     -  
Total Revenues
    172       70       88       (26 )     304  
                                         
Expenses:
                                       
Fuel and purchased power
    139       86       44       (62 )     207  
Other operating expenses
    37       9       28       (23 )     51  
Provision for depreciation
    8       2       -       (2 )     8  
Amortization of regulatory assets
    3       -       4       -       7  
Deferral of new regulatory assets
    24       -       15       -       39  
General taxes
    8       4       (1 )     1       12  
Total Expenses
    219       101       90       (86 )     324  
                                         
Operating Income
    (47 )     (31 )     (2 )     60       (20 )
Other Income (Expense):
                                       
Investment income
    (25 )     (9 )     -       18       (16 )
Interest expense
    6       18       1       (19 )     6  
Capitalized interest
    (2 )     4       -       1       3  
Total Other Income (Expense)
    (21 )     13       1       -       (7 )
                                         
Income Before Income Taxes
    (68 )     (18 )     (1 )     60       (27 )
Income taxes
    (29 )     (7 )     -       23       (13 )
Net Income
  $ (39 )   $ (11 )   $ (1 )   $ 37     $ (14 )
 
 
 
5

 


Energy Delivery Services – First Quarter 2008 Compared with First Quarter 2007

Net income decreased $39 million to $179 million in the first three months of 2008 compared to $218 million in the first three months of 2007, primarily due to higher operating expenses partially offset by increased revenues.

Revenues –

The increase in total revenues resulted from the following sources:

   
Three Months Ended
     
   
March 31,
 
Increase
 
Revenues by Type of Service
 
2008
 
2007
 
(Decrease)
 
   
(In millions)
 
Distribution services
 
$
955
 
$
944
 
$
11
 
Generation sales:
                   
   Retail
   
790
   
720
   
70
 
   Wholesale
   
219
   
132
   
87
 
Total generation sales
   
1,009
   
852
   
157
 
Transmission
   
197
   
183
   
14
 
Other
   
51
   
61
   
(10
)
Total Revenues
 
$
2,212
 
$
2,040
 
$
172
 

The change in distribution deliveries by customer class is summarized in the following table:

Electric Distribution KWH Deliveries
     
Residential
   
2.4
 %
Commercial
   
1.9
 %
Industrial
   
(1.0
)%
Total Distribution KWH Deliveries
   
1.2
 %

The increase in electric distribution deliveries to customers was primarily due to increased weather-related usage in the Ohio Companies’ and Penn’s service territories during the first three months of 2008 compared to the same period of 2007 (heating degree days increased 2.4%). The higher revenues from increased distribution deliveries were partially offset by the residual effects of the distribution rate decreases for Met-Ed and Penelec as a result of a January 11, 2007 PPUC rate decision (see Outlook – State Regulatory Matters – Pennsylvania).

The following table summarizes the price and volume factors contributing to the $157 million increase in generation revenues in the first quarter of 2008 compared to the first quarter of 2007:

Sources of Change in Generation Revenues
 
Increase
(Decrease)
 
   
(In millions)
 
Retail:
       
  Effect of 0.7% decrease in sales volumes
 
$
(5
)
  Change in prices
   
75
 
     
70
 
Wholesale:
       
  Effect of 8.9% increase in sales volumes
   
12
 
  Change in prices
   
75
 
     
87
 
Net Increase in Generation Revenues
 
$
157
 

The decrease in retail generation sales volumes was primarily due to an increase in customer shopping in Penn’s and JCP&L’s service territories in the first three months of 2008. The increase in retail generation prices during the first three months of 2008 reflected increased generation rates for JCP&L resulting from the New Jersey BGS auction process and an increase in NUGC rates authorized by the NJBPU. Wholesale generation sales increased principally as a result of Met-Ed and Penelec selling additional available power into the PJM market. The increase in prices reflected higher spot market prices for PJM market participants.

Transmission revenues increased $14 million primarily due to higher transmission rates for Met-Ed and Penelec resulting from the January 2007 PPUC authorization of transmission cost recovery. Met-Ed and Penelec defer the difference between revenues from their transmission rider and transmission costs incurred with no material effect on current period earnings (see Outlook – State Regulatory Matters – Pennsylvania).

 
6

 


Expenses –

The increases in revenues discussed above were offset by a $219 million increase in expenses due to the following:

 
·
Purchased power costs were $139 million higher in the first three months of 2008 due to higher unit costs and a decrease in the amount of NUG costs deferred. The increased unit costs reflected the effect of higher JCP&L costs resulting from the BGS auction process. JCP&L is permitted to defer for future collection from customers the amounts by which its costs of supplying BGS to non-shopping customers and costs incurred under NUG agreements exceed amounts collected through BGS and NUGC rates and market sales of NUG energy and capacity. The following table summarizes the sources of changes in purchased power costs:

Source of Change in Purchased Power
 
Increase
(Decrease)
 
   
(In millions)
 
Purchases from non-affiliates:
       
Change due to increased unit costs
 
$
84
 
Change due to decreased volumes
   
(18
)
     
66
 
Purchases from FES:
       
Change due to decreased unit costs
   
(4
)
Change due to increased volumes
   
17
 
     
13
 
         
Decrease in NUG costs deferred
   
60
 
Net Increase in Purchased Power Costs
 
$
139
 


 
·
Other operating expenses increased $37 million due primarily to the effects of:

-  
An increase of $15 million in MISO and PJM transmission expenses, resulting primarily from higher congestion costs (see transmission revenues discussion above).

-  
An increase in operation and maintenance expenses of $11 million for storm restoration work during the first quarter of 2008.

-  
An increase in labor expenses of $9 million primarily due to an increase in the number of employees in the first quarter of 2008 compared to 2007 as a result of the segment’s workforce initiatives.

 
·
An increase of $3 million in amortization of regulatory assets compared to 2007 due primarily to recovery of deferred BGS costs through higher NUGC rates for JCP&L.

 
·
The deferral of new regulatory assets during the first three months of 2008 was $24 million lower primarily due to the absence of the deferral in 2007 of decommissioning costs related to the Saxton nuclear research facility.

 
·  
Depreciation expense increased $8 million due to property additions since the first quarter of 2007.

 
·  
General taxes increased $8 million due to higher property taxes and gross receipts taxes.


Other Expense –

Other expense increased $21 million in 2008 compared to the first three months of 2007 primarily due to lower investment income of $25 million resulting from the repayment of notes receivable from affiliates since the first quarter of 2007, partially offset by lower interest expense (net of capitalized interest) of $4 million.

Competitive Energy Services – First Quarter 2008 Compared with First Quarter 2007

Net income for this segment was $87 million in the first three months of 2008 compared to $98 million in the same period in 2007. The $11 million reduction in net income reflects a decrease in gross generation margin and higher operating costs which were partially offset by lower interest expense.


 
7

 

Revenues –

Total revenues increased $70 million in the first three months of 2008 compared to the same period in 2007. This increase primarily resulted from higher unit prices on affiliated generation sales to the Ohio Companies and increased non-affiliated wholesale sales, which were partially offset by lower retail sales.

The increase in reported segment revenues resulted from the following sources:

   
Three Months Ended
     
   
March 31,
 
Increase
 
Revenues by Type of Service
 
2008
 
2007
 
(Decrease)
 
   
(In millions)
 
Non-Affiliated Generation Sales:
             
Retail
 
$
160
 
$
174
 
$
(14
)
Wholesale
   
129
   
103
   
26
 
Total Non-Affiliated Generation Sales
   
289
   
277
   
12
 
Affiliated Generation Sales
   
776
   
714
   
62
 
Transmission
   
33
   
23
   
10
 
Other
   
7
   
21
   
(14
)
Total Revenues
 
$
1,105
 
$
1,035
 
$
70
 


The lower retail revenues resulted from decreased sales in the PJM market, partially offset by increased sales in the MISO market. The decrease in PJM retail sales is primarily the result of lower contract renewals for commercial and industrial customers. The increase in MISO retail sales is primarily the result of capturing more shopping customers in Penn’s service territory, partially offset by lower customer usage. Higher non-affiliated wholesale revenues resulted from the effect of increased generation available for the non-affiliated wholesale market.

The increased affiliated company generation revenues were due to increased sales volumes and higher unit prices for the Ohio Companies, partially offset by lower unit prices for the Pennsylvania Companies. The increase in PSA sales to the Ohio Companies was due to their higher retail generation sales requirements. The higher unit prices reflected increases in the Ohio Companies’ retail generation rates. The higher sales to the Pennsylvania Companies were due to increased Met-Ed and Penelec generation sales requirements. These increases were partially offset by lower sales to Penn due to a 45% increase in customer shopping in the first quarter of 2008 compared to the first quarter of 2007.

The following tables summarize the price and volume factors contributing to changes in revenues from generation sales:

Source of Change in Non-Affiliated Generation Revenues
 
Increase (Decrease)
 
   
(In millions)
 
Retail:
       
Effect of 9.0% decrease in sales volumes
 
$
(16
)
Change in prices
   
2
 
     
(14
)
Wholesale:
       
Effect of 3.5% increase in sales volumes
   
4
 
Change in prices
   
22
 
     
26
 
Net Increase in Non-Affiliated Generation Revenues
 
$
12
 


Source of Change in Affiliated Generation Revenues
 
Increase (Decrease)
 
   
(In millions)
 
Ohio Companies:
       
Effect of 1.2% increase in sales volumes
 
$
6
 
Change in prices
   
44
 
     
50
 
Pennsylvania Companies:
       
Effect of 9.0% increase in sales volumes
   
16
 
Change in prices
   
(4
)
     
12
 
Net Increase in Affiliated Generation Revenues
 
$
62
 


 
8

 

Transmission revenues increased $10 million due to increased retail load in the MISO market and higher transmission rates ($12 million), partially offset by reduced financial transmission rights auction revenue ($2 million). Other revenue decreased $14 million primarily due to lower interest income from short-term investments.

Expenses -

Total expenses increased $101 million in the first three months of 2008 due to the following factors:

 
·  
Fossil fuel costs increased $68 million due to increased generation volumes ($37 million) and higher unit prices ($31 million). The increased unit prices primarily reflect higher coal transportation costs ($24 million) and increased emission allowance costs ($5 million) in the first quarter of 2008.

 
 ·
Purchased power costs increased $20 million due primarily to higher market rates, partially offset by reduced volume requirements due to increased generation from internal resources.

 
 ·
Nuclear operating costs increased $23 million due to this year’s Davis-Besse refueling outage and the preparatory work associated with the Beaver Valley Unit 2 refueling outage scheduled for the second quarter of 2008.

 
·  
Other expense increased $15 million due primarily to the assignment of CEI’s and TE’s leasehold interests in the Bruce Mansfield Plant to FGCO in the fourth quarter of 2007 ($7 million) and reduced earnings on life insurance investments during the first quarter of 2008 ($6 million).

 
 ·
Higher depreciation expenses of $2 million were due to property additions since the first quarter of 2007.

 
 ·
Higher general taxes of $4 million resulted from increased gross receipts taxes and property taxes.

Partially offsetting the higher costs were:

 
 ·
Fossil operating costs were $23 million lower due to fewer outages in 2008 compared to 2007 and increased gains on emission allowance sales.

 
·  
Transmission expense declined $7 million due to reduced PJM congestion charges and a change in MISO revenue sufficiency guarantee settlements.

Other Expense –

Total other expense in the first three months of 2008 was $13 million lower than the first quarter of 2007, primarily due to a decline in interest expense (net of capitalized interest) of $22 million due to the repayment of notes payable to affiliates since the first quarter of 2007 and a $2 million increase in earnings from nuclear decommissioning trust investments, partially offset by an $11 million increase in trust securities impairments.

Ohio Transitional Generation Services – First Quarter 2008 Compared with First Quarter 2007

Net income for this segment decreased to $23 million in the first three months of 2008 from $24 million in the same period of 2007. Higher operating expenses, primarily for purchased power, were almost entirely offset by higher generation revenues.

Revenues –

The increase in reported segment revenues resulted from the following sources:

   
Three Months Ended
     
   
March 31,
     
Revenues by Type of Service
 
2008
 
2007
 
Increase
 
   
(In millions)
 
Generation sales:
             
Retail
 
$
606
 
$
546
 
$
60
 
Wholesale
   
3
   
2
   
1
 
Total generation sales
   
609
   
548
   
61
 
Transmission
   
93
   
71
   
22
 
Other
   
5
   
-
   
5
 
Total Revenues
 
$
707
 
$
619
 
$
88
 


 
9

 


The following table summarizes the price and volume factors contributing to the increase in sales revenues from retail customers:

Source of Change in Retail Generation Revenues
 
Increase
 
   
(In millions)
 
Effect of 1.3% increase in sales volumes
 
$
7
 
Change in prices
   
53
 
 Total Increase in Retail Generation Revenues
 
$
60
 

The increase in generation sales was primarily due to higher weather-related usage in the first three months of 2008 compared to the same period of 2007 and reduced customer shopping. Heating degree days in OE’s, CEI’s and TE’s service territories increased by 2.8%, 1.7% and 3.3%, respectively. Average prices increased primarily due to an increase in the Ohio Companies’ fuel cost recovery rider that became effective in January 2008. The percentage of generation services provided by alternative suppliers to total sales delivered by the Ohio Companies in their service areas decreased by 1.8 percentage points from the same period in 2007.

Increased transmission revenue resulted from higher sales volumes ($7 million) and a PUCO-approved transmission tariff increase ($15 million) that became effective July 1, 2007.

Expenses -

Purchased power costs were $44 million higher due primarily to higher unit costs for power purchased from FES. The factors contributing to the higher costs are summarized in the following table:

Source of Change in Purchased Power
 
Increase
(Decrease)
 
   
(In millions)
 
Purchases from non-affiliates:
       
Change due to increased unit costs
 
$
(5
)
Change due to decreased volumes
   
(1
)
     
(6
)
Purchases from FES:
       
Change due to increased unit costs
   
44
 
Change due to increased volumes
   
6
 
     
50
 
Net Increase in Purchased Power Costs
 
$
44
 


The increase in purchase volumes from FES was due to the higher retail generation sales requirements described above. The higher unit costs reflect the increases in the Ohio Companies’ retail generation rates, as provided for under the PSA with FES.

Other operating expenses increased $28 million due in part to MISO transmission-related expenses ($12 million). The difference between transmission revenues accrued and transmission expenses incurred is deferred, resulting in no material impact to current period earnings. The remainder of the increase resulted from lower associated company cost reimbursements related to the Ohio Companies’ generation leasehold interests.

Other – First Quarter 2008 Compared with First Quarter 2007

FirstEnergy’s financial results from other operating segments and reconciling items, including interest expense on holding company debt and corporate support services revenues and expenses, resulted in a $37 million increase in FirstEnergy’s net income in the first three months of 2008 compared to the same period in 2007. The increase resulted from the sale of telecommunication assets ($19 million, net of taxes), reduced short-term disability costs ($8 million) and reduced interest expense ($11 million) associated with FirstEnergy’s revolving credit facility.

CAPITAL RESOURCES AND LIQUIDITY

FirstEnergy’s business is capital intensive, requiring significant resources to fund operating expenses, construction expenditures, scheduled debt maturities and interest and dividend payments. In 2008 and in subsequent years, FirstEnergy expects to satisfy these requirements with a combination of cash from operations and funds from the capital markets. FirstEnergy also expects that borrowing capacity under credit facilities will continue to be available to manage working capital requirements during those periods.

 
10

 


As of March 31, 2008, FirstEnergy’s net deficit in working capital (current assets less current liabilities) was principally due to the initial short-term funding of the repurchase of certain auction rate bonds described below and the classification of certain variable interest rate PCRBs as currently payable long-term debt. The PCRBs currently permit individual debt holders to put the respective debt back to the issuer for purchase prior to maturity.

Changes in Cash Position

FirstEnergy's primary source of cash required for continuing operations as a holding company is cash from the operations of its subsidiaries. FirstEnergy and certain of its subsidiaries also have access to $2.75 billion of short-term financing under a revolving credit facility which expires in 2012. Under the terms of the facility, FirstEnergy is permitted to have up to $1.5 billion in outstanding borrowings at any time, subject to the facility cap of $2.75 billion of aggregate outstanding borrowings by it and its subsidiaries that are also parties to such facility. In the first three months of 2008, FirstEnergy received $88 million of cash dividends from its subsidiaries and paid $168 million in cash dividends to common shareholders. With the exception of Met-Ed, which is currently in an accumulated deficit position, there are no material restrictions on the payment of cash dividends by the subsidiaries of FirstEnergy.

As of March 31, 2008, FirstEnergy had $70 million of cash and cash equivalents compared with $129 million as of December 31, 2007. The major sources of changes in these balances are summarized below.

Cash Flows From Operating Activities

FirstEnergy's consolidated net cash from operating activities is provided primarily by its energy delivery services and competitive energy services businesses (see Results of Operations above). Net cash provided from operating activities was $356 million in the first three months of 2008 compared to $57 million used for operating activities in the first three months of 2007, as summarized in the following table:

   
Three Months Ended
 
   
March 31,
 
Operating Cash Flows
 
2008
 
2007
 
   
(In millions)
 
Net income
 
$
276
 
$
290
 
Non-cash charges
   
203
   
125
 
Pension trust contribution
   
-
   
(300
)
Working capital and other
   
(123
)
 
(172
)
   
$
356
 
$
(57
)


Net cash provided from operating activities increased by $413 million in the first three months of 2008 compared to the first three months of 2007 primarily due to the absence of a $300 million pension trust contribution in 2007, a $78 million increase in non-cash charges and a $49 million increase from working capital and other changes, partially offset by a $14 million decrease in net income (see Results of Operations above). The increase in non-cash charges is primarily due to lower deferrals of new regulatory assets and deferred purchased power costs. The deferral of new regulatory assets decreased primarily as a result of the absence of the deferral of decommissioning costs related to the Saxton nuclear research facility in the first quarter of 2007. Deferred purchased power costs decreased as a result of lower deferred NUG costs. The changes in working capital and other primarily resulted from a $149 million change in the collection of receivables and an $85 million change in the settlement of accounts payable, partially offset by increased tax payments compared to the first three months of 2007.

Cash Flows From Financing Activities

In the first three months of 2008, cash provided from financing activities was $227 million compared to $346 million in the first three months of 2007. The decrease was primarily due to lower short-term borrowings and debt issuances in the first quarter of 2008, partially offset by redemption of common stock in the first quarter of 2007. The following table summarizes security issuances and redemptions.

 
11

 



   
Three Months Ended
 
   
March 31,
 
Securities Issued or Redeemed
 
2008
 
2007
 
   
(In millions)
 
New issues
         
Unsecured notes
 
$
-
 
$
250
 
               
Redemptions
             
Pollution control notes(1)
 
$
362
 
$
-
 
Senior secured notes
   
6
   
13
 
Common stock
   
-
   
891
 
   
$
368
 
$
904
 
               
Short-term borrowings, net
 
$
746
 
$
1,139
 
               
(1) Includes the repurchase of certain auction rate PCRBs described below,
    which were extinguished from FirstEnergy’s consolidated balance sheet.
 
 

FirstEnergy had approximately $1.6 billion of short-term indebtedness as of March 31, 2008 compared to approximately $903 million as of December 31, 2007. Available bank borrowing capability as of March 31, 2008 included the following:

Borrowing Capability (In millions)
     
Short-term credit facilities(1)
 
$
2,870
 
Accounts receivable financing facilities
   
550
 
Utilized
   
(1,646
)
LOCs
   
(60
)
Net available capability
 
 $
1,714
 
         
(1) Includes the  $2.75 billion revolving credit facility described below, a $100 million revolving credit facility that expires in December 2009 and a $20 million uncommitted line of credit.

As of March 31, 2008, the Ohio Companies and Penn had the aggregate capability to issue approximately $3.4 billion of additional FMB on the basis of property additions and retired bonds under the terms of their respective mortgage indentures. The issuance of FMB by OE, CEI and TE is also subject to provisions of their senior note indentures generally limiting the incurrence of additional secured debt, subject to certain exceptions that would permit, among other things, the issuance of secured debt (including FMB) (i) supporting pollution control notes or similar obligations, or (ii) as an extension, renewal or replacement of previously outstanding secured debt. In addition, these provisions would permit OE, CEI and TE to incur additional secured debt not otherwise permitted by a specified exception of up to $573 million, $449 million and $121 million, respectively, as of March 31, 2008.

The applicable earnings coverage tests in the respective charters of OE, TE, Penn and JCP&L are currently inoperative. In the event that any of them issues preferred stock in the future, the applicable earnings coverage test will govern the amount of preferred stock that may be issued. CEI, Met-Ed and Penelec do not have similar restrictions and could issue up to the number of preferred shares authorized under their respective charters.

As of March 31, 2008, FirstEnergy had approximately $1.0 billion of remaining unused capacity under an existing shelf registration statement filed with the SEC in 2003 to support future securities issuances. The shelf registration expires in December 2008 and provides the flexibility to issue and sell various types of securities, including common stock, debt securities, and share purchase contracts and related share purchase units. As of March 31, 2008, OE had approximately $400 million of remaining unused capacity under a shelf registration for unsecured debt securities filed with the SEC in 2006 that expires in April 2009.

FirstEnergy and certain of its subsidiaries are party to a $2.75 billion five-year revolving credit facility (included in the borrowing capability table above). FirstEnergy has the capability to request an increase in the total commitments available under this facility up to a maximum of $3.25 billion. Commitments under the facility are available until August 24, 2012, unless the lenders agree, at the request of the borrowers, to an unlimited number of additional one-year extensions. Generally, borrowings under the facility must be repaid within 364 days. Available amounts for each borrower are subject to a specified sub-limit, as well as applicable regulatory and other limitations.

 
12

 


The following table summarizes the borrowing sub-limits for each borrower under the facility, as well as the limitations on short-term indebtedness applicable to each borrower under current regulatory approvals and applicable statutory and/or charter limitations:

   
Revolving
 
Regulatory and
 
   
Credit Facility
 
Other Short-Term
 
Borrower
 
Sub-Limit
 
Debt Limitations(1)
 
   
(In millions)
 
FirstEnergy
 
$
2,750
 
$
-
(2)
OE
   
500
   
500
 
Penn
   
50
   
39
(3)
CEI
   
250
(4)
 
500
 
TE
   
250
(4)
 
500
 
JCP&L
   
425
   
428
(3)
Met-Ed
   
250
   
300
(3)
Penelec
   
250
   
300
(3)
FES
   
1,000
   
-
(2)
ATSI
   
-
(5)
 
50
 
               
(1)As of March 31, 2008.
(2)No regulatory approvals, statutory or charter limitations applicable.
(3)Excluding amounts which may be borrowed under the regulated companies’ money pool.
(4)Borrowing sub-limits for CEI and TE may be increased to up to $500 million by delivering notice to the administrative agent that such borrower has senior unsecured debt ratings of at least BBB by S&P and Baa2 by Moody’s.
 (5)The borrowing sub-limit for ATSI may be increased up to $100 million by delivering notice to the administrative agent that either (i) ATSI has senior unsecured debt ratings of at least BBB- by S&P and Baa3 by Moody’s or (ii) FirstEnergy has guaranteed ATSI’s obligations of such borrower under the facility.
 

The revolving credit facility, combined with an aggregate $550 million (unused as of March 31, 2008) of accounts receivable financing facilities for OE, CEI, TE, Met-Ed, Penelec and Penn, are intended to provide liquidity to meet working capital requirements and for other general corporate purposes for FirstEnergy and its subsidiaries.

Under the revolving credit facility, borrowers may request the issuance of LOCs expiring up to one year from the date of issuance. The stated amount of outstanding LOCs will count against total commitments available under the facility and against the applicable borrower’s borrowing sub-limit.

The revolving credit facility contains financial covenants requiring each borrower to maintain a consolidated debt to total capitalization ratio of no more than 65%, measured at the end of each fiscal quarter. As of March 31, 2008, FirstEnergy’s and its subsidiaries' debt to total capitalization ratios (as defined under the revolving credit facility) were as follows:

Borrower
   
FirstEnergy
 
58
%
OE
 
43
%
Penn
 
25
%
CEI
 
57
%
TE
 
42
%
JCP&L
 
30
%
Met-Ed
 
47
%
Penelec
 
49
%
FES
 
61
%

The revolving credit facility does not contain provisions that either restrict the ability to borrow or accelerate repayment of outstanding advances as a result of any change in credit ratings. Pricing is defined in “pricing grids”, whereby the cost of funds borrowed under the facility is related to the credit ratings of the company borrowing the funds.

 
13

 

FirstEnergy's regulated companies also have the ability to borrow from each other and the holding company to meet their short-term working capital requirements. A similar but separate arrangement exists among FirstEnergy's unregulated companies. FESC administers these two money pools and tracks surplus funds of FirstEnergy and the respective regulated and unregulated subsidiaries, as well as proceeds available from bank borrowings. Companies receiving a loan under the money pool agreements must repay the principal amount of the loan, together with accrued interest, within 364 days of borrowing the funds. The rate of interest is the same for each company receiving a loan from their respective pool and is based on the average cost of funds available through the pool. The average interest rate for borrowings in the first three months of 2008 was 3.62% for the regulated companies’ money pool and 3.55% for the unregulated companies’ money pool.

FirstEnergy’s access to capital markets and costs of financing are influenced by the ratings of its securities. The following table displays FirstEnergy’s, FES’ and the Companies’ securities ratings as of March 31, 2008. S&P’s outlook of FirstEnergy and its subsidiaries remains negative and Moody’s outlook for FirstEnergy and its subsidiaries remains stable.

Issuer
 
Securities
 
S&P
 
Moody’s
             
FirstEnergy
 
Senior unsecured
 
BBB-
 
Baa3
             
FES
 
Senior unsecured
 
BBB
 
Baa2
             
OE
 
Senior unsecured
 
BBB-
 
Baa2
             
CEI
 
Senior secured
 
BBB+
 
Baa2
   
Senior unsecured
 
BBB-
 
Baa3
             
TE
 
Senior unsecured
 
BBB-
 
Baa3
             
Penn
 
Senior secured
 
A-
 
Baa1
             
JCP&L
 
Senior unsecured
 
BBB
 
Baa2
             
Met-Ed
 
Senior unsecured
 
BBB
 
Baa2
             
Penelec
 
Senior unsecured
 
BBB
 
Baa2

Between February 27, 2008 and April 2, 2008, FirstEnergy’s subsidiaries repurchased all of their tax-exempt long-term PCRBs originally sold at auction rates ($530 million) in response to disruptions in the auction rate securities market. In February 2008, FGCO, NGC, Met-Ed and Penelec elected to convert all of their then outstanding auction rate PCRBs to a weekly rate mode, which required their mandatory purchase of these PCRBs on the applicable conversion dates. The companies initially funded the repurchase with short-term debt. On April 22, 2008, Met-Ed ($28.5 million) and Penelec ($45 million) successfully marketed their converted PCRBs in a variable-rate mode. Subject to market conditions, FGCO and NGC plan to remarket their converted PCRBs later in 2008, either in fixed-rate or variable-rate modes.
 
Cash Flows From Investing Activities

Net cash flows used in investing activities resulted principally from property additions. Energy delivery services property additions primarily include expenditures related to transmission and distribution facilities. Capital spending by the competitive energy services segment are principally generation-related. The following table summarizes investing activities for the three months ended March 31, 2008 and 2007 by business segment:

Summary of Cash Flows
 
Property
             
Provided from (Used for) Investing Activities
 
Additions
 
Investments
 
Other
 
Total
 
Sources (Uses)
 
(In millions)
 
Three Months Ended March 31, 2008
                 
Energy delivery services
 
$
(255
)
$
33
 
$
2
 
$
(220
)
Competitive energy services
   
(462
)
 
(3
)
 
(19
)
 
(484
)
Other
   
(12
)
 
68
   
-
   
56
 
Inter-Segment reconciling items
   
18
   
(12
)
 
-
   
6
 
Total
 
$
(711
)
$
86
 
$
(17
)
$
(642
)
                           
Three Months Ended March 31, 2007
                         
Energy delivery services
 
$
(155
)
$
44
 
$
10
 
$
(101
)
Competitive energy services
   
(124
)
 
(9
)
 
(4
)
 
(137
)
Other
   
(1
)
 
(16
)
 
(4
)
 
(21
)
Inter-Segment reconciling items
   
(16
)
 
(15
)
 
-
   
(31
)
Total
 
$
(296
)
$
4
 
$
2
 
$
(290
)

 
14

 


Net cash used for investing activities in the first quarter of 2008 increased by $352 million compared to the first quarter of 2007. The increase was principally due to a $415 million increase in property additions, which reflects AQC system expenditures and the acquisition of a partially completed natural gas fired generating plant in Fremont, Ohio. Partially offsetting the increase in property additions were cash proceeds from the sale of telecommunication assets.

During the remaining three quarters of 2008, capital requirements for property additions and capital leases are expected to be approximately $1.4 billion. FirstEnergy and the Companies have additional requirements of approximately $328 million for maturing long-term debt during the remainder of 2008. These cash requirements are expected to be satisfied from a combination of internal cash, short-term credit arrangements and funds raised in the capital markets.

FirstEnergy's capital spending for the period 2008-2012 is expected to be approximately $7.6 billion (excluding nuclear fuel), of which approximately $2.0 billion applies to 2008. Investments for additional nuclear fuel during the 2008-2012 period are estimated to be approximately $1.4 billion, of which about $150 million applies to 2008. During the same period, FirstEnergy's nuclear fuel investments are expected to be reduced by approximately $949 million and $111 million, respectively, as the nuclear fuel is consumed.

GUARANTEES AND OTHER ASSURANCES

As part of normal business activities, FirstEnergy enters into various agreements on behalf of its subsidiaries to provide financial or performance assurances to third parties. These agreements include contract guarantees, surety bonds and LOCs. Some of the guaranteed contracts contain collateral provisions that are contingent upon FirstEnergy’s credit ratings.

As of March 31, 2008, FirstEnergy’s maximum exposure to potential future payments under outstanding guarantees and other assurances approximated $4.4 billion, as summarized below:

   
Maximum
 
Guarantees and Other Assurances
 
Exposure
 
   
(In millions)
 
FirstEnergy Guarantees of Subsidiaries
     
Energy and Energy-Related Contracts (1)
 
$
441
 
LOC (long-term debt) – interest coverage (2)
   
6
 
Other (3)
   
503
 
     
950
 
         
Subsidiaries’ Guarantees
       
Energy and Energy-Related Contracts
   
86
 
LOC (long-term debt) – interest coverage (2)
   
6
 
Other (4)
   
2,641
 
     
2,733
 
         
Surety Bonds
   
66
 
LOC (long-term debt) – interest coverage (2)
   
5
 
LOC (non-debt) (5)(6)
   
679
 
     
750
 
Total Guarantees and Other Assurances
 
$
4,433
 

(1)
Issued for open-ended terms, with a 10-day termination right by FirstEnergy.
(2)
Reflects the interest coverage portion of LOCs issued in support of floating-rate
pollution control revenue bonds with various maturities. The principal amount of
floating-rate pollution control revenue bonds of $1.6 billion is reflected in debt on
FirstEnergy’s consolidated balance sheets.
(3)
Includes guarantees of $300 million for OVEC obligations and $80 million for nuclear
decommissioning funding assurances.
(4)
Includes FES’ guarantee of FGCO’s obligations under the sale and leaseback of Bruce
Mansfield Unit 1.
(5)
Includes $60 million issued for various terms pursuant to LOC capacity available under
FirstEnergy’s revolving credit facility.
(6)
Includes approximately $194 million pledged in connection with the sale and leaseback
of Beaver Valley Unit 2 by CEI and TE, $291 million pledged in connection with the sale a
nd leaseback of Beaver Valley Unit 2 by OE and $134 million pledged in connection with
the sale and leaseback of Perry Unit 1 by OE.

 
15

 


FirstEnergy guarantees energy and energy-related payments of its subsidiaries involved in energy commodity activities principally to facilitate normal physical transactions involving electricity, gas, emission allowances and coal. FirstEnergy also provides guarantees to various providers of credit support for the financing or refinancing by subsidiaries of costs related to the acquisition of property, plant and equipment. These agreements legally obligate FirstEnergy to fulfill the obligations of those subsidiaries directly involved in energy and energy-related transactions or financings where the law might otherwise limit the counterparties' claims. If demands of a counterparty were to exceed the ability of a subsidiary to satisfy existing obligations, FirstEnergy’s guarantee enables the counterparty's legal claim to be satisfied by other FirstEnergy assets. The likelihood is remote that such parental guarantees will increase amounts otherwise paid by FirstEnergy to meet its obligations incurred in connection with ongoing energy and energy-related activities.

While these types of guarantees are normally parental commitments for the future payment of subsidiary obligations, subsequent to the occurrence of a credit rating downgrade or “material adverse event”, the immediate posting of cash collateral or provision of an LOC may be required of the subsidiary. As of March 31, 2008, FirstEnergy’s maximum exposure under these collateral provisions was $440 million.

Most of FirstEnergy’s surety bonds are backed by various indemnities common within the insurance industry. Surety bonds and related guarantees provide additional assurance to outside parties that contractual and statutory obligations will be met in a number of areas including construction contracts, environmental commitments and various retail transactions.

FirstEnergy has guaranteed