main10_q.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 June 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 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 AUGUST 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 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,
·  
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 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
 
 
Results of Operations
1-42
 
Report of Independent Registered Public Accounting Firm
43
 
Consolidated Statements of Income
44
 
Consolidated Statements of Comprehensive Income
45
 
Consolidated Balance Sheets
46
 
Consolidated Statements of Cash Flows
47
     
FirstEnergy Solutions Corp.
 
     
 
Management's Narrative Analysis of Results of Operations
48-50
 
Report of Independent Registered Public Accounting Firm
51
 
Consolidated Statements of Income and Comprehensive Income
52
 
Consolidated Balance Sheets
53
 
Consolidated Statements of Cash Flows
54
     
Ohio Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
55-56
 
Report of Independent Registered Public Accounting Firm
57
 
Consolidated Statements of Income and Comprehensive Income
58
 
Consolidated Balance Sheets
59
 
Consolidated Statements of Cash Flows
60
     
The Cleveland Electric Illuminating Company
 
     
 
Management's Narrative Analysis of Results of Operations
61-62
 
Report of Independent Registered Public Accounting Firm
63
 
Consolidated Statements of Income and Comprehensive Income
64
 
Consolidated Balance Sheets
65
 
Consolidated Statements of Cash Flows
66
     
The Toledo Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
67-68
 
Report of Independent Registered Public Accounting Firm
69
 
Consolidated Statements of Income and Comprehensive Income
70
 
Consolidated Balance Sheets
71
 
Consolidated Statements of Cash Flows
72
     

 
i

 

TABLE OF CONTENTS (Cont'd)



Jersey Central Power & Light Company
Pages
     
 
Management's Narrative Analysis of Results of Operations
73-74
 
Report of Independent Registered Public Accounting Firm
75
 
Consolidated Statements of Income and Comprehensive Income
76
 
Consolidated Balance Sheets
77
 
Consolidated Statements of Cash Flows
78
     
Metropolitan Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
79-80
 
Report of Independent Registered Public Accounting Firm
81
 
Consolidated Statements of Income and Comprehensive Income
82
 
Consolidated Balance Sheets
83
 
Consolidated Statements of Cash Flows
84
     
Pennsylvania Electric Company
 
     
 
Management's Narrative Analysis of Results of Operations
85-86
 
Report of Independent Registered Public Accounting Firm
87
 
Consolidated Statements of Income and Comprehensive Income
88
 
Consolidated Balance Sheets
89
 
Consolidated Statements of Cash Flows
90
     
Combined Management’s Discussion and Analysis of Registrant Subsidiaries
91-106
   
Combined Notes to Consolidated Financial Statements
107-140
   
Item 3.       Quantitative and Qualitative Disclosures About Market Risk.
141
     
Item 4.       Controls and Procedures – FirstEnergy.
141
   
Item 4T.     Controls and Procedures – FES, OE, CEI, TE, JCP&L, Met-Ed and Penelec.
141
     
Part II.    Other Information
 
     
Item 1.       Legal Proceedings.
142
     
Item 1A.    Risk Factors.
142
   
Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds.
142
   
Item 4.       Submission of Matters to a Vote of Security Holders.
143-144
   
Item 5.       Other Information.
144
   
Item 6.       Exhibits.
144-145





 
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
 
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
 
     
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
 
AQC
Air Quality Control
 
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"
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”

 
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
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
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
PCAOB
Public Company Accounting Oversight Board
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 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”
 

 
iv

 
GLOSSARY OF TERMS, Cont’d.


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”
SFAS 162
SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”
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 second quarter of 2008 was $263 million, or basic earnings of $0.86 per share of common stock ($0.85 diluted), compared with net income of $338 million, or basic earnings of $1.11 per share of common stock ($1.10 diluted) in the second quarter of 2007. Net income in the first six months of 2008 was $539 million, or basic earnings of $1.77 per share of common stock ($1.75 diluted), compared with net income of $628 million, or basic earnings of $2.03 per share of common stock ($2.01 diluted) in the first six months of 2007.

Change in Basic Earnings Per Share
From Prior Year Periods
 
Three Months Ended June 30
 
Six Months
Ended June 30
 
               
Basic Earnings Per Share – 2007
 
$
1.11
 
$
2.03
 
Gain on non-core asset sales – 2008
   
-
   
0.06
 
Litigation settlement – 2008
   
0.03
   
0.03
 
Saxton decommissioning regulatory asset – 2007
   
-
   
(0.05
)
Trust securities impairment
   
(0.02
)
 
(0.04
)
Revenues
   
0.24
   
0.79
 
Fuel and purchased power
   
(0.40
)
 
(0.82
)
Depreciation and amortization
   
(0.02
)
 
(0.04
)
Deferral of new regulatory assets
   
(0.10
)
 
(0.13
)
General taxes
   
0.02
   
(0.01
)
Corporate-owned life insurance
   
(0.04
)
 
(0.09
)
Other expenses
   
0.04
   
0.01
 
Reduced common shares outstanding
   
-
   
0.03
 
Basic Earnings Per Share – 2008
 
$
0.86
 
$
1.77
 

Regulatory Matters - Ohio

Legislative Process

On May 1, 2008, Governor Strickland signed SB221, which became effective on July 31, 2008. The bill requires all utilities to file an updated rate plan, now called an ESP, with the PUCO. A utility is also permitted to simultaneously file an MRO in which it would have to demonstrate certain objective market criteria. On July 31, 2008, FirstEnergy filed both an ESP and an MRO on behalf of its Ohio Companies. The comprehensive ESP includes supply and pricing for retail generation service for up to a three-year period, in addition to seeking approval of outstanding issues currently pending before the PUCO in the Ohio Companies’ distribution rate case. The MRO filing outlines a CBP for providing retail generation supply if the ESP is not approved and implemented. The CBP would use a “slice-of-system” approach where suppliers bid on tranches (approximately 100 MW) of the Ohio Companies’ total customer load. A PUCO decision on the ESP is required, by SB221, within 150 days and on the MRO within 90 days. New rates under the ESP would be effective for retail customers on January 1, 2009.

On July 2, 2008, and July 23, 2008, the PUCO staff issued proposed rules addressing portions of SB221 for comment. Stakeholder comments on the first set of rules have been submitted for consideration by the PUCO, and comments and reply comments on the second set are due August 12, 2008 and August 22, 2008, respectively. Proposed rules addressing other portions of SB221, including the alternative energy portfolio standard, are expected to be issued in late August. Final rules are expected to be adopted in late September. The rules will then be subject to review by the Joint Committee on Agency Rule Review (a group consisting of five State Representatives and five State Senators).

RCP Fuel Remand

On June 3, 2008, FirstEnergy made a filing on behalf of the Ohio Companies to suspend the procedural schedule in its application to recover the companies’ 2006-2007 deferred fuel costs and associated carrying charges since its ESP filing contains a proposal addressing the recovery of these deferred fuel costs. On June 4, 2008, the PUCO Staff issued a report in accordance with its previously established procedural schedule and on June 11, 2008, the PUCO denied FirstEnergy’s request to suspend proceedings until the ESP case is completed and revised the procedural schedule. Testimony is now due August 29, 2008, and an evidentiary hearing is scheduled for September 29, 2008.
 
 
 
1

 


Regulatory Matters - Pennsylvania

Penn’s Interim Default Service Supply

In April and May 2008, Penn held RFPs to procure its power supply for default service for residential customers for the period June 2008 through May 2009 and a portion of the load for June 2009 through May 2010. The PPUC approved the resulting bids and on May 20, 2008, Penn filed compliance tariffs with the new default service generation rates for residential customers, which the PPUC then certified on May 21, 2008. Penn’s new default service rates were effective June 1, 2008. RFPs for the remainder of the June 2009 through May 2010 residential customers’ load are scheduled for October 2008 and January 2009.

Met-Ed and Penelec Transmission Service Charge Filing

On May 22, 2008, the PPUC approved Met-Ed’s and Penelec’s annual updates to their TSC riders for the period June 1, 2008, through May 31, 2009. The approved TSCs include a component for under-recovery of actual transmission costs incurred during prior periods and future transmission cost projections for June 2008 through May 2009. Met-Ed’s TSC includes a transition approach that will recover past under-recovered costs plus carrying charges through the new TSC, with deferral of a portion of the projected costs plus carrying charges for recovery through future TSCs by December 31, 2010. Various intervenors filed complaints against Met-Ed’s and Penelec’s TSC filings. In addition, the PPUC ordered an investigation to review the reasonableness of Met-Ed’s TSC, while at the same time allowing the company to implement the rider June 1, 2008, subject to refund. On July 15, 2008, the PPUC directed the ALJ to consolidate the complaints against Met-Ed with its investigation, and a litigation schedule was adopted with hearings for both companies scheduled to begin in January 2009.

Generation

Fremont Plant

In January 2008, FGCO acquired a partially complete 707-MW natural gas fired generating plant in Fremont, Ohio from Calpine Corporation for $253.6 million. FGCO completed an engineering study in June 2008, indicating an estimated additional $208 million of capital expenditures will be required to complete the project. Approximately $41 million of the incremental capital is expected to be invested in 2008 with planned commercial operation of the plant expected to begin in December 2009.

Refueling Outage and Power Uprates

On May 22, 2008, the 868-MW Beaver Valley Unit 2 returned to service following its regularly scheduled refueling outage that began on April 14, 2008. Major work activities completed during the outage included replacing approximately one-third of the fuel assemblies in the reactor and the high pressure turbine rotor. During the refueling outage, the final phase of an extended power uprate project was completed. This is the unit’s second uprate in the past 19 months.

On June 30, 2008, the NRC approved a 12 MW uprate at the 893-MW Davis-Besse Nuclear Power Station. These uprates were achieved in support of FirstEnergy’s strategy to maximize the full potential of its existing generation assets.

Financial Matters

New Long-Term Fuel Supply Arrangements

On July 16, 2008, FirstEnergy Ventures Corp., a subsidiary of FirstEnergy, entered into a joint venture with the Boich Companies, a Columbus, Ohio-based coal company, to acquire a majority stake in the Bull Mountain Mine Operations near Roundup, Montana. This transaction is part of FirstEnergy’s strategy to secure high-quality fuel supplies at attractive prices to maximize the capacity of its existing fossil generating plants. FirstEnergy will make a $125 million equity investment in the joint venture. Under an acquisition and development agreement, the joint venture will acquire 80 percent of the Bull Mountain mining operations and 100 percent of the transportation operations, with FirstEnergy owning a 45 percent economic interest and an affiliate of the Boich Companies owning a 55 percent economic interest in the joint venture, with both parties having a 50 percent voting interest in the joint venture. After January 2010, the joint venture will have 18 months to exercise an option to acquire the remaining 20 percent stake in the mining operations. In a related transaction, FirstEnergy has entered into a 15-year agreement to purchase all production up to 10 million tons of bituminous western coal annually from the mine. FirstEnergy also reached tentative agreements with the rail carriers associated with transporting coal from the mine to its generating stations, and it expects to begin taking delivery of the coal in late 2009 or early 2010. The joint venture has the right to resell FirstEnergy’s Bull Mountain coal tonnage not used at FirstEnergy’s facilities and has call rights on such coal above certain levels.


 
2

 


Acquisition of Additional Equity Interests in Beaver Valley Unit 2 and Perry

On May 30, 2008, NGC purchased 56.8 MW of lessor equity interests in the OE 1987 sale and leaseback of the Perry Plant. On June 2, 2008, NGC purchased approximately 43.5 MW of lessor equity interests in the OE 1987 sale and leaseback of Beaver Valley Unit 2. Between June 2, 2008 and June 9, 2008, NGC purchased an additional 158.5 MW of additional lessor equity interests in the TE and CEI 1987 sale and leaseback of Beaver Valley Unit 2, which purchases were undertaken in connection with the previously disclosed exercise of the periodic purchase option provided in the TE and CEI sale and leaseback arrangements. The Ohio Companies continue to lease these MW under the respective sale and leaseback arrangements and the related lease debt remains outstanding.

Refunding of Auction Rate Bonds

In June 2008, FGCO and NGC refunded all of the $455.7 million of PCRBs previously issued on their behalf as auction rate securities and recently repurchased in response to disruptions in the auction rate securities market. The new PCRBs were issued in variable-rate modes supported by bank LOCs. FirstEnergy no longer holds auction rate securities.

New Credit Facility

On May 30, 2008, FirstEnergy and FES entered into a new $300 million, 364-day revolving credit facility. The pricing, terms and conditions are substantially similar to those contained in the current FirstEnergy $2.75 billion revolving credit agreement.

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 June 30
 
Six Months Ended June 30
 
       
Increase
     
Increase
 
   
2008
 
2007
 
(Decrease)
 
2008
 
2007
 
(Decrease)
 
   
(In millions, except per share data)
 
Net Income
                         
By Business Segment:
                         
Energy delivery services
 
$
193
 
$
207
 
$
(14
)
$
372
 
$
425
 
$
(53
)
Competitive energy services
   
66
   
142
   
(76
)
 
153
   
240
   
(87
)
Ohio transitional generation services
   
20
   
30
   
(10
)
 
43
   
53
   
(10
)
Other and reconciling adjustments*
   
(16
)
 
(41
)
 
25
   
(29
)
 
(90
)
 
61
 
Total
 
$
263
 
$
338
 
$
(75
)
$
539
 
$
628
 
$
(89
)
                                       
Basic Earnings Per Share
 
$
0.86
 
$
1.11
 
$
(0.25
)
$
1.77
 
$
2.03
 
$
(0.26
)
Diluted Earnings Per Share
 
$
0.85
 
$
1.10
 
$
(0.25
)
$
1.75
 
$
2.01
 
$
(0.26
)

* 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 – Second Quarter 2008 Compared with Second Quarter 2007

Financial results for FirstEnergy's major business segments in the second quarter of 2008 and 2007 were as follows:
 
               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
Second Quarter 2008 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 2,030     $ 324     $ 670     $ -     $ 3,024  
Other
    152       51       13       5       221  
Internal
    -       704       -       (704 )     -  
Total Revenues
    2,182       1,079       683       (699 )     3,245  
                                         
Expenses:
                                       
Fuel and purchased power
    998       537       555       (704 )     1,386  
Other operating expenses
    413       312       81       (25 )     781  
Provision for depreciation
    104       59       -       5       168  
Amortization of regulatory assets
    235       -       11       -       246  
Deferral of new regulatory assets
    (98 )     -       -       -       (98 )
General taxes
    149       24       2       5       180  
Total Expenses
    1,801       932       649       (719 )     2,663  
                                         
Operating Income
    381       147       34       20       582  
Other Income (Expense):
                                       
Investment income
    40       (8 )     (1 )     (15 )     16  
Interest expense
    (100 )     (38 )     -       (50 )     (188 )
Capitalized interest
    1       10       -       2       13  
Total Other Expense
    (59 )     (36 )     (1 )     (63 )     (159 )
                                         
Income Before Income Taxes
    322       111       33       (43 )     423  
Income taxes
    129       45       13       (27 )     160  
Net Income
  $ 193     $ 66     $ 20     $ (16 )   $ 263  

 
4

 
 

               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
Second Quarter 2007 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 1,933     $ 359     $ 612     $ -     $ 2,904  
Other
    162       39       13       (9 )     205  
Internal
    -       691       -       (691 )     -  
Total Revenues
    2,095       1,089       625       (700 )     3,109  
                                         
Expenses:
                                       
Fuel and purchased power
    879       460       537       (691 )     1,185  
Other operating expenses
    410       277       87       (24 )     750  
Provision for depreciation
    100       51       -       8       159  
Amortization of regulatory assets
    242       -       6       (2 )     246  
Deferral of new regulatory assets
    (93 )     -       (55 )     -       (148 )
General taxes
    155       26       1       7       189  
Total Expenses
    1,693       814       576       (702 )     2,381  
                                         
Operating Income
    402       275       49       2       728  
Other Income (Expense):
                                       
Investment income
    62       5       -       (37 )     30  
Interest expense
    (118 )     (47 )     -       (40 )     (205 )
Capitalized interest
    2       5       -       -       7  
Total Other Expense
    (54 )     (37 )     -       (77 )     (168 )
                                         
Income Before Income Taxes
    348       238       49       (75 )     560  
Income taxes
    141       96       19       (34 )     222  
Net Income
  $ 207     $ 142     $ 30     $ (41 )   $ 338  
                                         
                                         
Changes Between Second Quarter 2008 and
                                 
Second Quarter 2007 Financial Results
                                       
Increase (Decrease)
                                       
                                         
Revenues:
                                       
External
                                       
Electric
  $ 97     $ (35 )   $ 58     $ -     $ 120  
Other
    (10 )     12       -       14       16  
Internal
    -       13       -       (13 )     -  
Total Revenues
    87       (10 )     58       1       136  
                                         
Expenses:
                                       
Fuel and purchased power
    119       77       18       (13 )     201  
Other operating expenses
    3       35       (6 )     (1 )     31  
Provision for depreciation
    4       8       -       (3 )     9  
Amortization of regulatory assets
    (7 )     -       5       2       -  
Deferral of new regulatory assets
    (5 )     -       55       -       50  
General taxes
    (6 )     (2 )     1       (2 )     (9 )
Total Expenses
    108       118       73       (17 )     282  
                                         
Operating Income
    (21 )     (128 )     (15 )     18       (146 )
Other Income (Expense):
                                       
Investment income
    (22 )     (13 )     (1 )     22       (14 )
Interest expense
    18       9       -       (10 )     17  
Capitalized interest
    (1 )     5       -       2       6  
Total Other Expense
    (5 )     1       (1 )     14       9  
                                         
Income Before Income Taxes
    (26 )     (127 )     (16 )     32       (137 )
Income taxes
    (12 )     (51 )     (6 )     7       (62 )
Net Income
  $ (14 )   $ (76 )   $ (10 )   $ 25     $ (75 )
 
 
 
5


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

Net income decreased $14 million to $193 million in the second quarter of 2008 compared to $207 million in the second quarter of 2007, primarily due to higher fuel and purchased power expenses partially offset by increased revenues.

Revenues –

The increase in total revenues resulted from the following sources:

   
Three Months
     
   
Ended June 30
 
Increase
 
Revenues by Type of Service
 
2008
 
2007
 
(Decrease)
 
   
(In millions)
 
Distribution services
 
$
919
 
$
948
 
$
(29
)
Generation sales:
                   
   Retail
   
772
   
756
   
16
 
   Wholesale
   
252
   
148
   
104
 
Total generation sales
   
1,024
   
904
   
120
 
Transmission
   
196
   
194
   
2
 
Other
   
43
   
49
   
(6
)
Total Revenues
 
$
2,182
 
$
2,095
 
$
87
 


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

Electric Distribution KWH Deliveries
     
Residential
   
(5.0
)%
Commercial
   
(2.1
)%
Industrial
   
(0.3
)%
Total Distribution KWH Deliveries
   
(2.4
)%

The decrease in electric distribution deliveries to residential and commercial customers was primarily due to reduced weather-related usage during the second quarter of 2008 compared to the same period of 2007, as cooling and heating degree days decreased 11% and 7%, respectively. In the industrial sector, a decrease in deliveries to automotive manufacturers was nearly offset by an increase in usage by steel and refining customers. The lower distribution revenues primarily resulted from the reduction in sales volume, as unit prices were virtually unchanged from the previous year.

The following table summarizes the price and volume factors contributing to the $120 million increase in generation revenues in the second quarter of 2008 compared to the second quarter of 2007:

Sources of Change in Generation Revenues
 
Increase
(Decrease)
 
   
(In millions)
 
Retail:
       
  Effect of 4.2% decrease in sales volumes
 
$
(32
)
  Change in prices
   
48
 
     
16
 
Wholesale:
       
  Effect of 3.0% increase in sales volumes
   
5
 
  Change in prices
   
99
 
     
104
 
Net Increase in Generation Revenues
 
$
120
 

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 and the weather-related impacts described above. The increase in retail generation prices during the second quarter 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 JCP&L selling additional available power into the PJM market. The increase in prices reflected higher spot market prices for PJM market participants.

Transmission revenues increased $2 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).

 
6

 


Expenses –

The increases in revenues discussed above were offset by a $108 million increase in expenses due to the following:

 
·
Purchased power costs were $122 million higher in the second 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. However, 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
 
$
141
 
Change due to decreased volumes
   
(22
)
     
119
 
Purchases from FES:
       
Change due to decreased unit costs
   
(2
)
Change due to decreased volumes
   
(7
)
     
(9
)
         
Decrease in NUG costs deferred
   
12
 
Net Increase in Purchased Power Costs
 
$
122
 

 
·
Other operating expenses increased $3 million due primarily to the net effects of the following:

-  
an increase in labor expenses of $7 million primarily due to an increase in the number of employees in the second quarter of 2008 compared to 2007 as a result of the segment’s workforce initiatives;

-  
reduced life insurance investment values of $5 million during the second quarter of 2008;

-  
a decrease of $4 million in MISO and PJM transmission expenses, resulting primarily from lower congestion costs; and,

-  
reduced tree trimming expenses of $2 million.

 
·
Amortization of regulatory assets decreased by $7 million compared to the second quarter of 2007, due primarily to the full recovery of certain regulatory costs for JCP&L.

 
·
The deferral of new regulatory assets during the second quarter of 2008 was $5 million higher primarily due to an increase to the societal benefits cost deferral.

                ·  
Depreciation expense increased $4 million due to property additions since the second quarter of 2007.

                ·  
General taxes decreased $6 million due to lower property taxes.

Other Expense –

Other expense increased $5 million in the second quarter of 2008 primarily due to lower investment income ($22 million) resulting from the repayment of notes receivable from affiliates since the second quarter of 2007, partially offset by lower interest expense (net of capitalized interest) of $17 million due to redemptions of pollution control notes and term notes and reduced money pool borrowings.

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

Net income for this segment was $66 million in the second quarter of 2008 compared to $142 million in the same period in 2007. The $76 million reduction in net income reflects a decrease in gross generation margin and higher operating costs partially offset by lower interest expense.

 
7

 


Revenues –

Total revenues decreased $10 million in the second quarter of 2008 due to lower non-affiliated generation sales partially offset by higher unit prices on affiliated generation sales to the Ohio Companies and higher transmission revenues.

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

   
Three Months
     
   
Ended June 30
 
Increase
 
Revenues By Type of Service
 
2008
 
2007
 
(Decrease)
 
   
(In millions)
 
Non-Affiliated Generation Sales:
             
Retail
 
$
154
 
$
185
 
$
(31
)
Wholesale
   
170
   
174
   
(4
)
Total Non-Affiliated Generation Sales
   
324
   
359
   
(35
)
Affiliated Generation Sales
   
704
   
691
   
13
 
Transmission
   
33
   
22
   
11
 
Other
   
18
   
17
   
1
 
Total Revenues
 
$
1,079
 
$
1,089
 
$
(10
)

The lower retail revenues resulted from decreased sales in the PJM market due primarily to lower contract renewals for commercial and industrial customers. Lower non-affiliated wholesale revenues resulted from the effect of reduced generation available for sale to that market as total generation output declined by 8% from the second quarter of 2007. An increase in prices for non-affiliated wholesale sales, reflecting higher spot market prices, partially offset the decline in volume.

The increased affiliated company generation revenues were due to higher unit prices for sales to the Ohio Companies, partially offset by reduced volumes and lower unit prices for the Pennsylvania 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 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).

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 16.4% decrease in sales volumes
 
$
(30
)
Change in prices
   
(1
)
     
(31
)
Wholesale:
       
Effect of 15.3% decrease in sales volumes
   
(27
)
Change in prices
   
23
 
     
(4
)
Net Decrease in Non-Affiliated Generation Revenues
 
$
(35
)


Source of Change in Affiliated Generation Revenues
 
Increase (Decrease)
 
   
(In millions)
 
Ohio Companies:
       
Effect of 2.6% decrease in sales volumes
 
$
(14
)
Change in prices
   
37
 
     
23
 
Pennsylvania Companies:
       
Effect of 4.3% decrease in sales volumes
   
(7
)
Change in prices
   
(3
)
     
(10
)
Net Increase in Affiliated Generation Revenues
 
$
13
 

Transmission revenues increased $11 million due primarily to an increase in transmission prices in the PJM market.

 
8

 


Expenses -

Total expenses increased $118 million in the second quarter of 2008 due to the following factors:

·  
Fossil fuel costs increased $14 million due primarily to higher unit prices ($58 million) partially offset by lower generation volumes ($44 million). The increased unit prices primarily reflect higher coal transportation costs (including surcharges for increased diesel fuel prices) in the second quarter of 2008. Nuclear fuel expense increased $4 million due to increased generation.

 
           ·
Purchased power costs increased $59 million due primarily to higher market rates, partially offset by reduced volume requirements.

·  
Other operating expenses were higher by $35 million due, in part, to an increase in scheduled outage activity for fossil units ($24 million), a decrease in gains from the sale of excess emission allowances ($7 million), the assignment of CEI’s and TE’s leasehold interests in the Bruce Mansfield Plant to FGCO in the fourth quarter of 2007 ($12 million) and reduced life insurance investment values during the second quarter of 2008 ($4 million).

 
           ·
Higher depreciation expense of $8 million was due to property additions since the second quarter of 2007.

Partially offsetting the higher costs were:

 
           ·
Nuclear operating costs decreased $8 million, as expenses associated with this year’s Beaver Valley Unit 2 refueling outage were comparatively less than the Perry outage in the second quarter of 2007. In 2007, Perry’s outage extended 11 days beyond the original plan.

·  
Transmission expense declined $4 million due to reduced PJM congestion charges of $17 million partially offset by increased MISO transmission expense of $13 million.

 
           ·
Lower general taxes of $2 million resulted from lower property taxes.

Other Expense –

Total other expense in the second quarter of 2008 was $1 million lower than the second quarter of 2007, primarily due to a decrease in interest expense (net of capitalized interest) of $14 million from the repayment of notes payable to affiliates since the second quarter of 2007, partially offset by a $13 million decrease in earnings from nuclear decommissioning trust investments, which included a $12 million increase in securities impairments.

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

Net income for this segment decreased to $20 million in the second quarter of 2008 from $30 million in the same period of 2007. Higher purchased power expenses and lower cost deferrals were only partially offset by higher generation revenues.

Revenues –

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

   
Three Months
     
   
Ended June 30
     
Revenues by Type of Service
 
2008
 
2007
 
Increase
 
   
(In millions)
 
Generation sales:
             
Retail
 
$
587
 
$
544
 
$
43
 
Wholesale
   
3
   
2
   
1
 
Total generation sales
   
590
   
546
   
44
 
Transmission
   
93
   
79
   
14
 
Total Revenues
 
$
683
 
$
625
 
$
58
 


 
9

 


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 2.5% decrease in sales volumes
 
$
(14
)
Change in prices
   
57
 
 Net Increase in Retail Generation Revenues
 
$
43
 

The decrease in generation sales was primarily due to lower weather-related usage in the second quarter of 2008 compared to the same period of 2007 partially offset by reduced customer shopping. Cooling degree days in OE’s, CEI’s and TE’s service territories decreased by 26%, 16% and 33%, 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 to 14.7% in the second quarter of 2008 from 15.2% in the same period in 2007.

Increased transmission revenue resulted from a PUCO-approved transmission tariff increase that became effective July 1, 2007.

Expenses -

Purchased power costs were $18 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 decreased unit costs
 
$
(1
)
Change due to decreased volumes
   
(3
)
     
(4
)
Purchases from FES:
       
Change due to increased unit costs
   
36
 
Change due to decreased volumes
   
(14
)
     
22
 
Net Increase in Purchased Power Costs
 
$
18
 

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 decreased $6 million due primarily to lower 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.

The deferral of new regulatory assets decreased by $55 million in the second quarter of 2008 as compared to the same period in 2007. MISO transmission deferrals and RCP fuel deferrals each decreased $28 million as more transmission and generation costs were recovered from customers through PUCO-approved riders.

Other – Second Quarter 2008 Compared with Second Quarter 2007

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 $25 million increase in FirstEnergy’s net income in the second quarter of 2008 compared to the same period in 2007. The increase primarily resulted from a $15 million litigation settlement relating to formerly-owned international assets, $6 million of interest income related to the settlement and a $9 million reduction of interest expense associated with the revolving credit facility.
.

 
10

 


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

Financial results for FirstEnergy's major business segments in the first six months of 2008 and 2007 were as follows:
 
               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
First Six Months 2008 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 4,080     $ 613     $ 1,361     $ -     $ 6,054  
Other
    314       91       29       34       468  
Internal
    -       1,480       -       (1,480 )     -  
Total Revenues
    4,394       2,184       1,390       (1,446 )     6,522  
                                         
Expenses:
                                       
Fuel and purchased power
    1,981       1,070       1,143       (1,480 )     2,714  
Other operating expenses
    858       621       158       (56 )     1,581  
Provision for depreciation
    210       112       -       10       332  
Amortization of regulatory assets
    484       -       20       -       504  
Deferral of new regulatory assets
    (198 )     -       (5 )     -       (203 )
General taxes
    322       56       3       14       395  
Total Expenses
    3,657       1,859       1,319       (1,512 )     5,323  
                                         
Operating Income
    737       325       71       66       1,199  
Other Income (Expense):
                                       
Investment income
    85       (14 )     -       (38 )     33  
Interest expense
    (203 )     (72 )     -       (92 )     (367 )
Capitalized interest
    1       17       -       3       21  
Total Other Expense
    (117 )     (69 )     -       (127 )     (313 )
                                         
Income Before Income Taxes
    620       256       71       (61 )     886  
Income taxes
    248       103       28       (32 )     347  
Net Income
  $ 372     $ 153     $ 43     $ (29 )   $ 539  

 
11

 

 
               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
First Six Months 2007 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 3,808     $ 635     $ 1,226     $ -     $ 5,669  
Other
    327       84       19       (17 )     413  
Internal
    -       1,404       -       (1,404 )     -  
Total Revenues
    4,135       2,123       1,245       (1,421 )     6,082  
                                         
Expenses:
                                       
Fuel and purchased power
    1,722       907       1,081       (1,404 )     2,306  
Other operating expenses
    819       575       138       (33 )     1,499  
Provision for depreciation
    199       102       -       14       315  
Amortization of regulatory assets
    487       -       11       (1 )     497  
Deferral of new regulatory assets
    (217 )     -       (75 )     -       (292 )
General taxes
    320       55       2       15       392  
Total Expenses
    3,330       1,639       1,157       (1,409 )     4,717  
                                         
Operating Income
    805       484       88       (12 )     1,365  
Other Income (Expense):
                                       
Investment income
    132       8       1       (78 )     63  
Interest expense
    (227 )     (100 )     (1 )     (62 )     (390 )
Capitalized interest
    4       8