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 September 30, 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, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company
Yes (  )  No (X)
FirstEnergy Solutions Corp.

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 November 6, 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 achievements expressed or implied by such forward-looking statements.

Actual results may differ materially due to:
·  
the speed and nature of increased competition in the electric utility industry and legislative and regulatory changes affecting how generation rates will be determined following the expiration of existing rate plans in Ohio and Pennsylvania,
·  
the impact of the PUCO’s rulemaking process on the Ohio Companies’ ESP and MRO filings,
·  
economic or weather conditions affecting future sales and margins,
·  
changes in markets for energy services,
·  
changing energy and commodity market prices and availability,
·  
replacement power costs being higher than anticipated or inadequately hedged,
·  
the continued ability of FirstEnergy’s regulated utilities to collect transition and other charges or to recover increased transmission costs,
·  
maintenance costs being higher than anticipated,
·  
other legislative and regulatory changes, revised environmental requirements, including possible GHG emission regulations,
·  
the impact of the U.S. Court of Appeals’ July 11, 2008 decision to vacate the CAIR rules and the scope of any laws, rules or regulations that may ultimately take their place,
·  
the uncertainty of the timing and amounts of the capital expenditures needed to, among other things, implement the Air Quality Compliance Plan (including that such amounts could be higher than anticipated) or levels of emission reductions related to the Consent Decree resolving the NSR 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 ESP and MRO proceedings as well as 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 recovery of deferred fuel costs),
·  
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 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 the registrants’ nuclear decommissioning trusts, pension trusts and other trust funds, and cause FirstEnergy 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 conditions affecting the registrants,
·  
the state of the capital and credit markets affecting the registrants, and
·  
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 for management 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
 
 
Results of Operations
1-46
 
Report of Independent Registered Public Accounting Firm
47
 
Consolidated Statements of Income
48
 
Consolidated Statements of Comprehensive Income
49
 
Consolidated Balance Sheets
50
 
Consolidated Statements of Cash Flows
51
     
FirstEnergy Solutions Corp.
 
     
 
Management's Narrative Analysis of Results of Operations
52-54
 
Report of Independent Registered Public Accounting Firm
55
 
Consolidated Statements of Income and Comprehensive Income
56
 
Consolidated Balance Sheets
57
 
Consolidated Statements of Cash Flows
58
     
Ohio Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
59-60
 
Report of Independent Registered Public Accounting Firm
61
 
Consolidated Statements of Income and Comprehensive Income
62
 
Consolidated Balance Sheets
63
 
Consolidated Statements of Cash Flows
64
     
The Cleveland Electric Illuminating Company
 
     
 
Management's Narrative Analysis of Results of Operations
65-66
 
Report of Independent Registered Public Accounting Firm
67
 
Consolidated Statements of Income and Comprehensive Income
68
 
Consolidated Balance Sheets
69
 
Consolidated Statements of Cash Flows
70
     
The Toledo Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
71-73
 
Report of Independent Registered Public Accounting Firm
74
 
Consolidated Statements of Income and Comprehensive Income
75
 
Consolidated Balance Sheets
76
 
Consolidated Statements of Cash Flows
77
     

 
i

 

TABLE OF CONTENTS (Cont'd)



Jersey Central Power & Light Company
Pages
     
 
Management's Narrative Analysis of Results of Operations
78-79
 
Report of Independent Registered Public Accounting Firm
80
 
Consolidated Statements of Income and Comprehensive Income
81
 
Consolidated Balance Sheets
82
 
Consolidated Statements of Cash Flows
83
     
Metropolitan Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
84-85
 
Report of Independent Registered Public Accounting Firm
86
 
Consolidated Statements of Income and Comprehensive Income
87
 
Consolidated Balance Sheets
88
 
Consolidated Statements of Cash Flows
89
     
Pennsylvania Electric Company
 
     
 
Management's Narrative Analysis of Results of Operations
90-91
 
Report of Independent Registered Public Accounting Firm
92
 
Consolidated Statements of Income and Comprehensive Income
93
 
Consolidated Balance Sheets
94
 
Consolidated Statements of Cash Flows
95
     
Combined Management’s Discussion and Analysis of Registrant Subsidiaries
96-111
   
Combined Notes to Consolidated Financial Statements
112-147
   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
148
     
Item 4.    Controls and Procedures – FirstEnergy.
148
   
Item 4T.          Controls and Procedures – FES, OE, CEI, TE, JCP&L, Met-Ed and Penelec.
148
     
Part II.    Other Information
 
     
Item 1.    Legal Proceedings.
149
     
Item 1A.         Risk Factors.
149
   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
149
   
Item 6.    Exhibits.
150





 
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, Incorporated, owns and operates transmission facilities
 
CEI
The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary
 
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
 
Signal Peak
A joint venture between FirstEnergy Ventures Corp. and Boich Companies, that owns mining and
coal transportation operations near Roundup, Montana, formerly known as Bull Mountain
 
TE
The Toledo Edison Company, an Ohio electric utility operating subsidiary
 
Utilities
OE, CEI, TE, JCP&L, Met-Ed and Penelec
 
     
The following abbreviations and acronyms are used to identify frequently used terms in this report:
 
     
ACO
Administrative Consent Order
 
AEP
American Electric Power Company, Inc.
 
ALJ
Administrative Law Judge
 
AMP-Ohio
American Municipal Power-Ohio, Inc.
 
AOCL
Accumulated Other Comprehensive Loss
 
ARB
Accounting Research Bulletin
 
ARO
Asset Retirement Obligation
 
ASM
Ancillary Services Market
 
BGS
Basic Generation Service
 
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"

 
iii

 
GLOSSARY OF TERMS, Cont’d.


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”
FMB
First Mortgage Bond
FTR
Financial Transmission Rights
GAAP
Accounting Principles Generally Accepted in the United States
GHG
Greenhouse Gases
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
MEW
Mission Energy Westside, Inc.
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
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
 
RTC
Regulatory Transition Charge
 
RTO
Regional Transmission Organization
 
S&P
Standard & Poor’s Ratings Service
 
SB221
Amended Substitute Senate Bill 221
 
SBC
Societal Benefits Charge
 
SEC
U.S. Securities and Exchange Commission
 
SECA
Seams Elimination Cost Adjustment
 
SFAS
Statement of Financial Accounting Standards
 
SFAS 133
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
 

 
iv

 
GLOSSARY OF TERMS, Cont’d.


SFAS 142
SFAS No. 142, “Goodwill and Other Intangible Assets”
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”
SIP
State Implementation Plan(s) Under the Clean Air Act
SNCR
Selective Non-Catalytic Reduction
SO2
Sulfur Dioxide
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 third quarter of 2008 was $471 million, or basic earnings of $1.55 per share of common stock ($1.54 diluted), compared with net income of $413 million, or basic earnings of $1.36 per share of common stock ($1.34 diluted) in the third quarter of 2007. Net income in the first nine months of 2008 was $1.01 billion, or basic earnings of $3.32 per share of common stock ($3.29 diluted), compared with net income of $1.04 billion, or basic earnings of $3.39 per share of common stock ($3.35 diluted) in the first nine months of 2007.

   
Three Months
 
Nine Months
 
Change in Basic Earnings Per Share
 
Ended
 
Ended
 
From Prior Year Periods
 
September 30
 
September 30
 
               
Basic Earnings Per Share – 2007
 
$
1.36
 
$
3.39
 
Gain on non-core asset sales – 2008/2007
   
(0.04
)
 
0.02
 
Litigation settlement – 2008
   
-
   
0.03
 
Saxton decommissioning regulatory asset – 2007
   
-
   
(0.05
)
Trust securities impairment
   
(0.05
)
 
(0.09
)
Revenues
   
0.57
   
1.36
 
Fuel and purchased power
   
(0.34
)
 
(1.16
)
Depreciation and amortization
   
(0.02
)
 
(0.07
)
Deferral of new regulatory assets
   
(0.10
)
 
(0.23
)
Investment Income – decommissioning trusts
  and corporate-owned life insurance
   
0.04
   
(0.05
)
Income tax adjustments
   
0.12
   
0.12
 
Other expense reductions
   
0.01
   
0.02
 
Reduced common shares outstanding
   
-
   
0.03
 
Basic Earnings Per Share – 2008
 
$
1.55
 
$
3.32
 

 
Recent Market Developments

In response to the recent unprecedented volatility in the capital and credit markets, FirstEnergy continues to assess its exposure to counterparty credit risk, its access to funds in the capital and credit markets, and market-related changes in the value of its postretirement benefit trusts, nuclear decommissioning trusts and other investments. FirstEnergy has taken several  steps to strengthen its liquidity position and provide additional flexibility to meet its anticipated obligations and those of its subsidiaries. While FirstEnergy believes its existing sources of liquidity will continue to be available to meet its anticipated obligations, management is reviewing its 2009 plans to determine what adjustments should be made to operating and capital budgets in response to the economic climate to reduce the need for external sources of capital. Although this process is not yet complete, management expects that FirstEnergy's capital expenditures will be reduced from the levels previously anticipated; however, it expects to continue to meet commitments for required capital projects and necessary operational expenditures.

Liquidity

FirstEnergy has access to more than $4 billion of liquidity, of which approximately $1.9 billion was available as of October 31, 2008. FirstEnergy and its subsidiaries have approximately $404 million available under a $2.75 billion revolving credit facility, with no one financial institution having more than 7.3% of the total commitment. An additional $1.1 billion was available through other commitments including: bank credit facilities totaling $420 million; a $300 million term loan with Credit Suisse, discussed below; and $550 million of accounts receivable financing facilities. FirstEnergy had $456 million of cash and cash equivalents as of October 31, 2008.

FirstEnergy’s currently payable long-term debt includes approximately $2.1 billion of variable-rate PCRBs. The interest rates on these PCRBs are reset daily or weekly. Bondholders can tender their PCRBs for mandatory repurchase prior to their maturity with the purchase price payable from remarketing proceeds or, if the PCRBs are not successfully remarketed, by drawings under irrevocable direct pay LOCs. Prior to September 18, 2008, FirstEnergy had not experienced any unsuccessful remarketings of these variable-rate PCRBs.

 
1

 

Coincident with recent disruptions in the variable-rate demand bond and capital markets generally, certain of the PCRBs have been tendered by bondholders to the trustee. As of October 31, 2008, $72.5 million of the PCRBs, all of which are backed by Wachovia Bank LOCs, had been tendered and not yet successfully remarketed. Of these, draws on the applicable LOCs were made for $72.4 million, all of which Wachovia honored. The reimbursement agreements between the subsidiary obligors and Wachovia require reimbursement of outstanding LOC draws by March 2009.

As a further safeguard in the event of future draws on these LOCs, in early October 2008 FirstEnergy negotiated with the banks that have issued the LOCs to extend the term of the respective reimbursement obligations. Approximately $902 million of LOCs that previously required reimbursement of LOC draws within 30 days or less were modified to extend the reimbursement obligations to six months or June 2009, as applicable.

FirstEnergy also enhanced its liquidity position during this period of turmoil in the credit and capital markets by securing, on October 8, 2008, a $300 million secured term loan facility with Credit Suisse. Under the facility, FGCO is the borrower and FES and FirstEnergy are guarantors. Generally, the facility is available to FGCO until October 7, 2009, with a minimum borrowing amount of $100 million and with repayment due 30 days after the borrowing date subject to extension at the end of each quarter until two days after the release of results of operations. Advances under the facility are not available for re-borrowing after they are repaid.

Access to the capital markets and costs of financing are influenced by the ratings of the securities of FirstEnergy and its subsidiaries. On August 1, 2008, S&P changed its outlook for FirstEnergy and its subsidiaries from “negative” to “stable.” Moody’s outlook for FirstEnergy and its subsidiaries remains “stable.” The credit ratings of FirstEnergy or its subsidiaries also govern the collateral provisions of certain contract guarantees. Subsequent to the occurrence of a credit rating downgrade to below investment grade or a “material adverse event,” the immediate posting of cash collateral may be required. As of September 30, 2008, FirstEnergy’s maximum exposure under these collateral provisions was $573 million, consisting of $64 million due to “material adverse event” contractual clauses and $509 million due to a below investment grade credit rating. Stress case conditions of a credit rating downgrade or “material adverse event” and hypothetical adverse price movements in the underlying commodity markets would increase this amount to $648 million, consisting of $58 million due to “material adverse event” contractual clauses and $590 million due to a below investment grade credit rating. FirstEnergy’s 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 these credit ratings although a change in credit rating could increase FirstEnergy’s cost of borrowing. FirstEnergy does not anticipate current market conditions to result in any events that will result in posting additional collateral or that will impact its ability to remain in compliance with its debt covenants.

Long-Term Financing

On October 20, 2008, OE issued $300 million of FMBs, comprised of $275 million 8.25% Series of 2008 due 2038 and $25 million 8.25% Series of 2008 due 2018. OE will use the net proceeds from these offerings to fund capital expenditures and for other general corporate purposes. CEI, TE and Met-Ed each have regulatory authority to issue up to $300 million of long-term debt, and requests are pending before the NJBPU and PPUC for authority to issue up to an aggregate $400 million of additional utility long-term debt. FirstEnergy intends to execute these long-term financings as it deems appropriate and as market conditions permit.

Counterparty Credit Risk

FirstEnergy and its subsidiaries are subject to credit risk, which relates to the ability of counterparties to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. FirstEnergy routinely performs counterparty risk evaluations including monitoring of credit default spreads of counterparties, monitors portfolio trends and uses collateral and contract provisions to mitigate exposure. Recent market events including, but not limited to, the default of Lehman have resulted in a more stringent approach to counterparty credit evaluations resulting in a decrease in the number of approved counterparties. FirstEnergy’s subsidiaries have long-term power and coal contracts with certain counterparties that, in the event of the counterparty’s default, would likely be replaced with contracts having less favorable terms that may negatively impact financial condition and results of operations. FirstEnergy has reviewed its insurance coverage and believes that the availability and cost of liability, property, nuclear risk and other forms of insurance have not been materially impacted by recent events, but will continue to monitor the events and ratings of the companies which provide insurance coverage for FirstEnergy and its subsidiaries.

Investments

Despite recent declines in the value of FirstEnergy’s pension plan investments, contributions to the plan will not be required in 2009. The overall actual investment return as of October 31, 2008 was a loss of 25.4% compared to an assumed 9% positive return. Based on an 8% discount rate assumption, if the ultimate return for 2008 was to remain at a loss of 25.4%, 2009 pre-tax net periodic pension expense would be approximately $145 million, an increase of approximately $180 million compared to the year 2008. If the ultimate return for 2008 was to remain at a loss of 25.4%, FirstEnergy would also not be required to make contributions in 2010. However, if assets were to decline an additional 1% from October 31, 2008 through the end of 2008, contributions of approximately $65 million would be required in 2010.

 
2

 

This information does not consider any actions management may take to mitigate the impact of the asset return shortfalls, including changes in the amount and timing of future contributions. The actuarial assumptions used in the determination of pension and postretirement benefit costs are interrelated and changes in other assumptions could have the impact of offsetting all or a portion of the potential increase in benefit costs set forth above.

Nuclear decommissioning trust funds have been established to satisfy NGC’s and the Utilities’ nuclear decommissioning obligations. As of September 30, 2008, approximately 47% of the funds were invested in equity securities and 53% were invested in fixed income securities, with limitations related to concentration and investment grade ratings.

The decommissioning trusts of JCP&L and the Pennsylvania Companies are subject to regulatory accounting, with unrealized gains and losses recorded as regulatory assets or liabilities, since the difference between investments held in trust and the decommissioning liabilities will be recovered from or refunded to customers. NGC, OE and TE recognize in earnings the unrealized losses on available-for-sale securities held in their nuclear decommissioning trusts. Nuclear decommissioning trust securities impairments totaled $63 million in the first nine months of 2008. FirstEnergy does not expect to make additional cash contributions to the nuclear decommissioning trusts in 2009, other than the required annual TMI-2 trust contribution that is collected through customer rates. However, should the trust funds continue to experience declines in market value, FirstEnergy may be required to take measures, such as providing financial guarantees through letters of credit or parental guarantees or making additional contributions to the trusts to ensure that the trusts are adequately funded and meet minimum NRC funding requirements.

In connection with the decommissioning of TMI-2, Met-Ed, Penelec and JCP&L make a combined annual contribution of approximately $13 million. In connection with the 2005 intra-system generation asset transfer, NGC is required to contribute $80 million to the trust by May 2010. See Note 15 to the Notes to Consolidated Financial Statements within FirstEnergy’s 2007 Annual Report on Form 10-K for additional information regarding the intra-system generation asset transfer.

Economic and Operational Risks

Results in the third quarter of 2008 continued to reflect some adverse effects on the demand for electricity as a result of current economic conditions – particularly with respect to the automotive industry. This condition is expected to continue into 2009 with potentially wider application among the Utilities’ customers. FirstEnergy expects to see the impact of slower economic growth in both sales and distribution revenues. Earlier in the year, FirstEnergy enhanced its collection processes with respect to current customer billings and customer deposits. While these efforts may have a mitigating effect, FirstEnergy expects that there could be resulting increases in uncollectible customer accounts in future periods. In addition, the margin on wholesale and retail generation sales may be reduced as a result of lower demand and the resulting downward pressure on power prices.

Regulatory Matters

Ohio Legislative Process

On July 31, 2008, the Ohio Companies filed both an ESP and MRO with the PUCO. A PUCO decision on the MRO was required by statute within 90 days of the filing and is required on the ESP within 150 days. Under the ESP, new rates would be effective for retail customers on January 1, 2009. Evidentiary hearings concluded on October 31, 2008 and no further hearings are scheduled. The parties are required to submit initial briefs by November 21, 2008, with all reply briefs due by December 12, 2008.

Under the MRO alternative, the Ohio Companies propose to procure generation supply through a CBP. The MRO would be implemented if the ESP is not approved by the PUCO or is changed and not accepted by the Ohio Companies. On September 16, 2008, the PUCO staff filed testimony and evidentiary hearings were held. The PUCO failed to act on October 29, 2008 as required under the statute. The Ohio Companies are unable to predict the outcome of this proceeding.

In July and August 2008, the PUCO staff issued three sets of proposed rules for comment to implement portions of SB221. Written comments and reply comments on the three sets of proposed rules were filed during the third quarter of 2008. Following the comment period, the PUCO considers the input from stakeholders before adopting the final rules. The rules are then subject to review by the Joint Committee on Agency Rule Review, which conducts a 65-day review process. The rules become effective 10 days following the Committee’s review. On September 17, 2008, the PUCO issued a final order adopting the first set of rules. A PUCO order adopting the second set of rules was issued on November 5, 2008.

RCP Fuel Remand

On August 8, 2008, the Ohio Companies submitted a filing to suspend the procedural schedule in their application to recover their 2006-2007 deferred fuel costs and associated carrying charges, as the ESP filing contains a proposal addressing the recovery of these deferred fuel costs. On August 25, 2008, the PUCO ordered that the evidentiary hearing scheduled for September 29, 2008, would be held at a later date. A revised case schedule has yet to be issued.

 
3

 

Pennsylvania Legislative Process

On October 15, 2008, the Governor of Pennsylvania signed House Bill 2200 into law which becomes effective on November 14, 2008, as Act 129 of 2008. The bill addresses issues such as: energy efficiency and peak load reduction; generation procurement; time-of-use rates; and smart meters and alternative energy. Act 129 requires utilities to file with the PPUC an energy efficiency and peak load reduction plan by July 1, 2009, and a smart meter procurement and installation plan by August 14, 2009.

Major provisions of the legislation include:
 
·  
power acquired by utilities to serve customers after rate caps expire will be procured through a competitive procurement process that must include a mix of long-term and short-term contracts and spot market purchases;

·  
the competitive procurement process must be approved by the PPUC and may include auctions, request for proposals, and/or bilateral agreements;

·  
utilities must provide for the installation of smart meter technology within 15 years;

·  
a minimum reduction in peak demand of 4.5% by May 31, 2013;

·  
minimum reductions in energy consumption of 1% and 3% by May 31, 2011 and May 31, 2013, respectively; and

·  
an expanded definition of alternative energy to include additional types of hydroelectric and biomass facilities.

Penn’s Interim Default Service Supply

On October 21, 2008, Penn held its third RFP to procure default service for residential customers for the period June 2009 through May 2010. A fourth RFP for the remainder of residential customers’ load for the period June 2009 through May 2010 is scheduled for January 2009. The results of the four RFPs will be averaged and adjusted for the line losses, administrative fees and gross receipts tax, and will be reflected in Penn’s new default service rates.

Met-Ed and Penelec Rate Cases

Several parties to the Met-Ed and Penelec 2006 rate case proceeding filed Petitions for Review with the Commonwealth Court of Pennsylvania in 2007, asking the Court to review the PPUC’s determination on several issues including: the recovery of transmission costs (including congestion); the transmission deferral; consolidated tax savings; the requested generation increase; and recovery of universal service costs from only the residential rate class. The Commonwealth Court issued its decision on November 7, 2008, which affirmed the PPUC's January 11, 2007 order in all respects, including the deferral and recovery of transmission and congestion related costs.

Met-Ed and Penelec Prepayment Plan

On September 25, 2008, Met-Ed and Penelec filed a voluntary prepayment plan with the PPUC. The plan offers qualified residential and small business customers the option to gradually phase-in future generation price increases by making modest prepayments during the next two years, before rate caps expire at the end of 2010. Each month, customers who elect to participate would prepay an amount equal to approximately 9.6% of their electric bill. Prepayments would earn 7.5% interest and be applied to customers’ billings in 2011 and 2012. Met-Ed and Penelec requested that the PPUC approve the plan by mid-December 2008.

Solar Renewable Energy

On September 30, 2008, JCP&L filed a proposal in response to an NJBPU directive addressing solar project development in the State of New Jersey. Under the proposal, JCP&L would enter into long-term agreements to buy and sell Solar Renewable Energy Certificates (SREC) to provide a stable basis for financing solar generation projects. An SREC represents the solar energy attributes of one megawatt-hour of generation from a solar generation facility that has been certified by the NJBPU Office of Clean Energy. Under this proposal JCP&L would solicit SRECs to satisfy approximately 60%, 50%, and 40% of the incremental SREC purchases needed in its service territory through 2010, 2011 and 2012, respectively, to meet the Renewable Portfolio Standards adopted by the NJBPU in 2006. A schedule for further NJBPU proceedings has not yet been set.

 
4

 


New Jersey Energy Master Plan

On October 22, 2008, the Governor of New Jersey released the details of New Jersey’s EMP, which includes goals to reduce energy consumption by a minimum of 20% by 2020, reduce peak demand by 5,700 MW by 2020, meet 30% of the state's electricity needs with renewable energy by 2020, and examine smart grid technology. The EMP outlines a series of goals and action items to meet set targets, while also continuing to develop the clean energy industry in New Jersey. The Governor will establish a State Energy Council to implement the recommendations outlined in the plan.

Operational Matters

Record Generation Output

FirstEnergy set a new quarterly generation output record of 22.2 million megawatt-hours during the third quarter of 2008, a 3.2% increase over the previous record established in the third quarter of 2006. This generation record reflects a quarterly all-time high for the nuclear fleet.

September Windstorm

On September 14, 2008, the remnants of Hurricane Ike swept through Ohio and western Pennsylvania and produced unexpectedly high winds, reaching nearly 80 mph. More than one million customers of OE, CEI, Penn and Penelec were affected by the windstorm, which produced the largest storm-related outage in the history of any of those companies. Storm expenses totaled approximately $30 million, of which $19 million was recognized as capital and $11 million as O&M expense.  

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.

 
5

 

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 14 to the consolidated financial statements. Net income by major business segment was as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
     
Increase
     
Increase
 
 
2008
 
2007
 
(Decrease)
 
2008
 
2007
 
(Decrease)
 
 
(In millions, except per share data)
 
Net Income
                       
By Business Segment:
                       
Energy delivery services
$
283
 
$
269
 
$
14
 
$
655
 
$
695
 
$
(40
)
Competitive energy services
 
164
   
148
   
16
   
317
   
388
   
(71
)
Ohio transitional generation services
 
19
   
16
   
3
   
62
   
69
   
(7
)
Other and reconciling adjustments*
 
5
   
(20
)
 
25
   
(24)
   
(111
)
 
87
 
Total
$
471
 
$
413
 
$
58
 
$
1,010
 
$
1,041
 
$
(31
)
                                     
Basic Earnings Per Share
$
1.55
 
$
1.36
 
$
0.19
 
$
3.32
 
$
3.39
 
$
(0.07
)
Diluted Earnings Per Share
$
1.54
 
$
1.34
 
$
0.20
 
$
3.29
 
$
3.35
 
$
(0.06
)

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

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

Financial results for FirstEnergy's major business segments in the third quarter of 2008 and 2007 were as follows:
 
               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
Third Quarter 2008 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 2,487     $ 381     $ 781     $ -     $ 3,649  
Other
    170       79       32       (26 )     255  
Internal
    -       786       -       (786 )     -  
Total Revenues
    2,657       1,246       813       (812 )     3,904  
                                         
Expenses:
                                       
Fuel
    -       356       -       -       356  
Purchased power
    1,248       221       623       (786 )     1,306  
Other operating expenses
    430       285       110       (31 )     794  
Provision for depreciation
    99       67       -       2       168  
Amortization of regulatory assets
    263       -       28       -       291  
Deferral of new regulatory assets
    (76 )     -       18       -       (58 )
General taxes
    169       26       1       5       201  
Total Expenses
    2,133       955       780       (810 )     3,058  
                                         
Operating Income
    524       291       33       (2 )     846  
Other Income (Expense):
                                       
Investment income
    48       13       1       (22 )     40  
Interest expense
    (102 )     (44 )     (1 )     (45 )     (192 )
Capitalized interest
    1       13       -       1       15  
Total Other Expense
    (53 )     (18 )     -       (66 )     (137 )
                                         
Income Before Income Taxes
    471       273       33       (68 )     709  
Income taxes
    188       109       14       (73 )     238  
Net Income
  $ 283     $ 164     $ 19     $ 5     $ 471  

 
6

 


               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
Third Quarter 2007 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 2,340     $ 338     $ 716     $ -     $ 3,394  
Other
    180       32       7       28       247  
Internal
    -       806       -       (806 )     -  
Total Revenues
    2,520       1,176       723       (778 )     3,641  
                                         
Expenses:
                                       
Fuel
    2       325       -       -       327  
Purchased power
    1,114       229       631       (806 )     1,168  
Other operating expenses
    436       264       80       (24 )     756  
Provision for depreciation
    102       51       -       9       162  
Amortization of regulatory assets
    279       -       9       -       288  
Deferral of new regulatory assets
    (82 )     -       (25 )     -       (107 )
General taxes
    166       26       1       4       197  
Total Expenses
    2,017       895       696       (817 )     2,791  
                                         
Operating Income
    503       281       27       39       850  
Other Income (Expense):
                                       
Investment income
    58       5       -       (33 )     30  
Interest expense
    (120 )     (44 )     -       (39 )     (203 )
Capitalized interest
    3       5       -       1       9  
Total Other Expense
    (59 )     (34 )     -       (71 )     (164 )
                                         
Income Before Income Taxes
    444       247       27       (32 )     686  
Income taxes
    175       99       11       (12 )     273  
Net Income
  $ 269     $ 148     $ 16     $ (20 )   $ 413  
                                         
                                         
Changes Between Third Quarter 2008 and
                                       
Third Quarter 2007 Financial Results
                                       
Increase (Decrease)
                                       
                                         
Revenues:
                                       
External
                                       
Electric
  $ 147     $ 43     $ 65     $ -     $ 255  
Other
    (10 )     47       25       (54 )     8  
Internal
    -       (20 )     -       20       -  
Total Revenues
    137       70       90       (34 )     263  
                                         
Expenses:
                                       
Fuel
    (2 )     31       -       -       29  
Purchased power
    134       (8 )     (8 )     20       138  
Other operating expenses
    (6 )     21       30       (7 )     38  
Provision for depreciation
    (3 )     16       -       (7 )     6  
Amortization of regulatory assets
    (16 )     -       19       -       3  
Deferral of new regulatory assets
    6       -       43       -       49  
General taxes
    3       -       -       1       4  
Total Expenses
    116       60       84       7       267  
                                         
Operating Income
    21       10       6       (41 )     (4 )
Other Income (Expense):
                                       
Investment income
    (10 )     8       1       11       10  
Interest expense
    18       -       (1 )     (6 )     11  
Capitalized interest
    (2 )     8       -       -       6  
Total Other Expense
    6       16       -       5       27  
                                         
Income Before Income Taxes
    27       26       6       (36 )     23  
Income taxes
    13       10       3       (61 )     (35 )
Net Income
  $ 14     $ 16     $ 3     $ 25     $ 58  

 
7


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

Net income increased $14 million to $283 million in the third quarter of 2008 compared to $269 million in the third quarter of 2007, primarily due to increased revenues partially offset by higher purchased power costs.

Revenues –

The increase in total revenues resulted from the following sources:

   
Three Months
     
   
Ended September 30,
 
Increase
 
Revenues by Type of Service
 
2008
 
2007
 
(Decrease)
 
   
(In millions)
 
Distribution services
 
$
1,100
 
$
1,104
 
$
(4
)
Generation sales:
                   
   Retail
   
986
   
942
   
44
 
   Wholesale
   
286
   
207
   
79
 
Total generation sales
   
1,272
   
1,149
   
123
 
Transmission
   
241
   
219
   
22
 
Other
   
44
   
48
   
(4
)
Total Revenues
 
$
2,657
 
$
2,520
 
$
137
 


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

Electric Distribution KWH Deliveries
   
Residential
 
(1.9)
 %
Commercial
 
(1.1)
 %
Industrial
 
(4.1)
 %
Total Distribution KWH Deliveries
 
(2.3)
 %

The decrease in electric distribution deliveries to residential and commercial customers was primarily due to reduced weather-related usage during the third quarter of 2008 compared to the same period of 2007, as cooling degree days decreased 8.1%. In the industrial sector, a decrease in deliveries to automotive and related manufacturers (23%) and refining customers (15%) was partially offset by an increase in usage by steel customers (4%). The reduction in distribution sales volume was partially offset by an increase in unit prices from the previous year.

The following table summarizes the price and volume factors contributing to the $123 million increase in generation revenues in the third quarter of 2008 compared to the third quarter of 2007:

Sources of Change in Generation Revenues
 
Increase
(Decrease)
 
   
(In millions)
 
Retail:
       
  Effect of 1.9 % decrease in sales volumes
 
$
(18
)
  Change in prices
   
62
 
     
44
 
Wholesale:
       
  Effect of 2.4% decrease in sales volumes
   
(5
)
  Change in prices
   
84
 
     
79
 
Net Increase in Generation Revenues
 
$
123
 

The decrease in retail generation sales volumes was primarily due to an increase in customer shopping in Penn’s, Penelec’s and JCP&L’s service territories and the weather-related impacts described above. The increase in retail generation prices during the third quarter of 2008 was due to higher generation rates for JCP&L resulting from the New Jersey BGS auction process and an increase in NUGC rates authorized by the NJBPU. The increase in wholesale prices reflected higher spot market prices for PJM market participants.

 
8

 


Transmission revenues increased $22 million primarily due to higher transmission rates for Met-Ed and Penelec resulting from the annual update to their TSC riders, which became effective June 1, 2008. 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).

Expenses –

The increases in revenues discussed above were offset by a $116 million increase in expenses due to the following:

 
·
Purchased power costs were $134 million higher in the third quarter 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
 
$
           146
 
Change due to decreased volumes
   
           (45
)
     
           101
 
Purchases from FES:
       
Change due to decreased unit costs
   
            (6
)
Change due to decreased volumes
   
          (10
)
     
          (16
)
         
Decrease in NUG costs deferred
   
             49
 
Net Increase in Purchased Power Costs
 
$
           134
 


 
·
Other operating expenses decreased $6 million due primarily to the net effects of the following:

-  
an increase in storm-related costs (including labor) of $9 million;

-  
an increase in other labor expenses of $3 million primarily due to increased hiring since the third quarter of 2007 as a result of the segment’s workforce initiatives;

-  
a $7 million increase in costs allocated to capital projects;

-  
reduced vegetation management expenses of $5 million;  and

-  
a $4 million decrease in uncollectible expense.

 
·
Amortization of regulatory assets decreased by $16 million due primarily to the full recovery of certain regulatory assets since the third quarter of 2007.

 
·
The deferral of new regulatory assets during the third quarter of 2008 was $6 million lower primarily due to a reduction in the amount of deferred distribution costs.
 
                ·  
Depreciation expense decreased $3 million due to a change in estimate for the asset retirement obligation for OE’s retired Toronto and Gorge plants.

                ·  
General taxes increased $3 million due to higher gross receipts and property taxes.
 
 
 
 
9

 


Other Expense –

Other expense decreased $6 million in the third quarter of 2008 primarily due to lower interest expense (net of capitalized interest) of $16 million due to redemptions of pollution control notes and term notes. Lower investment income of $10 million, resulting from the repayment of notes receivable from affiliates since the third quarter of 2007, partially offset the interest expense reduction.

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

Net income for this segment was $164 million in the third quarter of 2008 compared to $148 million in the same period in 2007. The $16 million increase in net income reflects an increase in gross generation margin and investment income partially offset by higher operating costs.

Revenues –

Total revenues increased $70 million in the third quarter of 2008 due to higher non-affiliated generation sales and transmission revenues, partially offset by reduced volumes on affiliated generation sales.

The net increase in total revenues resulted from the following sources:

   
Three Months Ended
     
   
September 30,
 
Increase
 
Revenues By Type of Service
 
2008
 
2007
 
(Decrease)
 
   
(In millions)
 
Non-Affiliated Generation Sales:
             
Retail
 
$
          171
 
$
189
 
$
         (18
)
Wholesale
   
          210
   
149
   
            61
 
Total Non-Affiliated Generation Sales
   
          381
   
338
   
            43
 
Affiliated Generation Sales
   
          786
   
806
   
         (20
)
Transmission
   
            47
   
26
   
            21
 
Other
   
            32
   
6
   
            26
 
Total Revenues
 
$
       1,246
 
$
1,176
 
$
            70
 

The lower retail revenues resulted from decreased sales in the PJM market due primarily to lower contract renewals for commercial and industrial customers. Higher non-affiliated wholesale revenues resulted from the effect of increased generation available for sale to that market as total generation output increased by 6.4% from the third quarter of 2007. An increase in prices for non-affiliated wholesale sales, reflecting higher capacity prices, also contributed to the revenue increase.

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 14.2% decrease in sales volumes
 
$
(27
)
Change in prices
   
9
 
     
(18
)
Wholesale:
       
Effect of 28.8% increase in sales volumes
   
43
 
Change in prices
   
18
 
     
61
 
Net Increase in Non-Affiliated Generation Revenues
 
$
43
 


 
10

 


Source of Change in Affiliated Generation Revenues
 
Increase (Decrease)
 
   
(In millions)
 
Ohio Companies:
       
Effect of 3.6% decrease in sales volumes
 
$
(22
)
Change in prices
   
19
 
     
(3
)
Pennsylvania Companies:
       
Effect of 5.9% decrease in sales volumes
   
(11
)
Change in prices
   
(6
)
     
(17
)
Net Decrease in Affiliated Generation Revenues
 
$
(20
)

The decreased affiliated company generation revenues were due to reduced volumes partially offset by higher unit prices for the Ohio Companies. The higher unit prices reflected increases in the Ohio Companies’ retail generation rates. The reduction in PSA sales volume to the Ohio and Pennsylvania Companies was due to the milder weather and industrial sales changes discussed above and reduced default service requirements in Penn’s service territory as a result of its RFP process (see Outlook – State Regulatory Matters – Pennsylvania).

Transmission revenues increased $21 million due primarily to an increase in transmission prices in the MISO and PJM markets. Other revenues increased by $26 million due to NGC’s purchase of certain lessor equity interests in the sale and leaseback of Perry and Beaver Valley Unit 2 that continue to be leased to OE and TE.

Expenses -

Total expenses increased $60 million in the third quarter of 2008 due to the following factors:

       ·  
Fossil fuel costs increased $50 million due to higher unit prices and increased generation volumes. The increased unit prices primarily reflect higher western coal transportation costs (including surcharges for increased diesel fuel prices) in the third quarter of 2008. The increase in fossil fuel costs was partially offset by a $25 million adjustment resulting from the annual coal inventory that reduced expense. Nuclear fuel expense increased $6 million due to increased generation;

 
·
Purchased power costs decreased $8 million due to reduced volume requirements partially offset by higher market prices;

       ·  
Other operating expenses were $21 million higher due primarily to a $13 million charge associated with a cancelled fossil project, an increase in nuclear operating costs of $5 million and a $5 million increase in uncollectible expense, partially offset by a $5 million reduction in transmission expense.

 
·
Higher depreciation expense of $16 million was due to the assignment of the Bruce Mansfield Plant leasehold interests to FGCO and NGC’s purchase of certain lessor equity interests in the sale and leaseback of Perry and Beaver Valley Unit 2.

Other Expense –

Total other expense in the third quarter of 2008 was $16 million lower than the third quarter of 2007, primarily due to a $9 million increase in net earnings from nuclear decommissioning trust investments and higher capitalized interest of $8 million due to a higher level of fossil capital projects in progress.

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

Net income for this segment increased to $19 million in the third quarter of 2008 from $16 million in the same period of 2007. Higher generation revenues were partially offset by higher operating expenses and lower deferrals of new regulatory assets.

 
11

 

Revenues –

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

   
Three Months Ended
     
   
September 30,
     
Revenues by Type of Service
 
2008
 
2007
 
Increase
 
   
(In millions)
 
Generation sales:
             
Retail
 
$
675
 
$
622
 
$
53
 
Wholesale
   
4
   
3
   
1
 
Total generation sales
   
679
   
625
   
54
 
Transmission
   
134
   
98
   
36
 
Total Revenues
 
$
813
 
$
723
 
$
90
 

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

Source of Change in Retail Generation Revenues
 
Increase (Decrease)
 
   
(In millions)
 
Effect of 3.1% decrease in sales volumes
 
$
(19
)
Change in prices
   
72
 
 Total Increase in Retail Generation Revenues
 
$
53
 

The decrease in generation sales volume was primarily due to lower weather-related usage in the third quarter of 2008 compared to the same period of 2007, partially offset by reduced customer shopping. In the industrial sector, a decrease in generation sales to automotive and related manufacturers (23%) and refining customers (15%) was partially offset by an increase in usage by steel customers (2%). The percentage of generation services provided by alternative suppliers to total sales delivered by the Ohio Companies in their service areas decreased to 15.2% in the third quarter of 2008 from 15.5% in the same period in 2007. Average prices increased primarily due to an increase in the Ohio Companies’ fuel cost recovery rider that became effective in January 2008.

Increased transmission revenue resulted from a PUCO-approved transmission tariff increase that became effective July 1, 2008, and higher MISO transmission revenue.

Expenses -

Purchased power costs were $8 million lower in the third quarter of 2008 due primarily to reduced volume requirements. The factors contributing to the net decrease are summarized in the following table:

Source of Change in Purchased Power
 
Increase
(Decrease)
 
   
(In millions)
 
Purchases from non-affiliates:
       
Change due to decreased unit costs
 
$
            (1
)
Change due to decreased volumes
   
            (3
)
     
            (4
)
Purchases from FES:
       
Change due to increased unit costs
   
             19
 
Change due to decreased volumes
   
          (23
)
     
            (4
)
Net Decrease in Purchased Power Costs
 
$
            (8
)

The decrease in purchase volumes from FES was due to the lower 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 $30 million due primarily to higher MISO transmission-related expenses. The difference between transmission revenues accrued and transmission expenses incurred is deferred, resulting in no material impact to current period earnings.

 
12

 


The deferral of new regulatory assets decreased by $43 million and the amortization of regulatory assets increased $19 million in the third quarter of 2008 as compared to the same period in 2007. MISO transmission deferrals and RCP fuel deferrals each decreased as more transmission and generation costs were recovered from customers through PUCO-approved riders.

Other – Third Quarter 2008 Compared with Third Quarter 2007

Financial results from other operating segments and reconciling items resulted in a $25 million increase in FirstEnergy’s net income in the third quarter of 2008 compared to the same period in 2007. The increase resulted primarily from income tax benefits associated with the settlement of tax positions taken on federal returns in prior years, and from lower taxes payable upon filing the 2007 federal income tax return in 2008 compared to the amount initially estimated last year. The income tax benefits were partially offset by the absence of the gain from the sale of First Communications ($13 million, net of taxes) in 2007.

Summary of Results of Operations – First Nine Months of 2008 Compared with the First Nine Months of 2007

Financial results for FirstEnergy's major business segments in the first nine months of 2008 and 2007 were as follows:
 
               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
First Nine Months 2008 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 6,567     $ 994     $ 2,142     $ -     $ 9,703  
Other
    484       170       61       8       723  
Internal
    -       2,266       -       (2,266 )     -  
Total Revenues
    7,051       3,430       2,203       (2,258 )     10,426  
                                         
Expenses:
                                       
Fuel
    1       999       -       -       1,000  
Purchased power
    3,228       648       1,766       (2,266 )     3,376  
Other operating expenses
    1,288       906       268       (87 )     2,375  
Provision for depreciation
    309       179       -       12       500  
Amortization of regulatory assets
    747       -       48       -       795  
Deferral of new regulatory assets
    (274 )     -       13       -       (261 )
General taxes
    491       82       4       19       596  
Total Expenses
    5,790       2,814       2,099       (2,322 )     8,381  
                                         
Operating Income
    1,261       616       104       64       2,045  
Other Income (Expense):
                                       
Investment income
    133       (1 )     1       (60 )     73  
Interest expense
    (305 )     (116 )     (1 )     (137 )     (559 )
Capitalized interest
    2       30       -       4       36  
Total Other Expense
    (170 )     (87 )     -       (193 )     (450 )
                                         
Income Before Income Taxes
    1,091       529       104       (129 )     1,595  
Income taxes
    436       212       42       (105 )     585  
Net Income
  $ 655     $ 317     $ 62     $ (24 )   $ 1,010  

 
13

 


               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
First Nine Months 2007 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 6,148     $ 973     $ 1,942     $ -     $ 9,063  
Other
    507       116       26       11       660  
Internal
    -       2,210       -       (2,210 )     -  
Total Revenues
    6,655       3,299       1,968       (2,199 )     9,723  
                                         
Expenses:
                                       
Fuel
    4       883       -       -       887  
Purchased power
    2,834       578       1,712       (2,210 )     2,914  
Other operating expenses
    1,255       839       218       (57 )     2,255  
Provision for depreciation
    301       153       -       23       477  
Amortization of regulatory assets
    765       -       20       -       785  
Deferral of new regulatory assets
    (299 )     -       (100 )     -       (399 )
General taxes
    486       81       3       19       589  
Total Expenses
    5,346       2,534       1,853       (2,225 )     7,508