FirstEnergy - 10-Q quarterly report FY

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.

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

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.

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 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. A security rating is not a recommendation to buy, sell or hold securities that may be subject to revision or withdrawal at any time by the assigning rating organization. Each 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.

Net income in the second quarter of 2009 was $408 million, or basic and diluted earnings of $1.36 per share of common stock, compared with net income of $263 million, or basic earnings of $0.86 per share of common stock ($0.85 diluted) in the second quarter of 2008. Results in the second quarter of 2009 include a gain of $0.52 per share resulting from the sale of FirstEnergy’s 9% participation interest in OVEC. Net income in the first six months of 2009 was $523 million, or basic and diluted earnings of $1.75 per share of common stock, compared with net income of $540 million, or basic earnings of $1.77 per share of common stock ($1.75 diluted) in the first six months of 2008.

 

Ohio

On May 14, 2009, FirstEnergy announced that an auction to secure generation supply and pricing for the Ohio Companies for the period June 1, 2009 through May 31, 2011, was completed and the results were approved by the PUCO. The auction resulted in an average weighted wholesale price for generation and transmission of 6.15 cents per KWH. FES was a successful bidder for 51% of the Ohio Companies’ PLR generation requirements. Twelve bidders qualified to participate in the auction with nine successful bidders each securing a portion of the Ohio Companies’ load.  Subsequent to the auction FES purchased tranches totaling an additional 11% of the load from other winning bidders. Effective August 1, 2009, FES is supplying 62% of the Ohio Companies’ PLR generation requirements.

On June 17, 2009, the PUCO modified rules that implement the alternative energy portfolio standards created by SB221, including the incorporation of energy efficiency requirements, long-term forecast and greenhouse gas reporting and CO2 control planning. The PUCO filed the rules with the Joint Committee on Agency Rule Review on July 7, 2009, after which begins a 65-day review period. The Ohio Companies and one other party filed applications for rehearing on the rules with the PUCO on July 17, 2009.

Pennsylvania

On May 28, 2009, the PPUC approved Met-Ed’s and Penelec’s annual updates to their TSC riders for the period June 1, 2009 through May 31, 2010, as required in connection with the PPUC’s January 2007 rate order. For Penelec’s customers the new TSC resulted in an approximate 1% decrease in monthly bills, reflecting projected PJM transmission costs as well as a reconciliation for costs previously incurred. The TSC for Met-Ed’s customers increased to recover the additional PJM charges paid by Met-Ed in the previous year and to reflect updated projected costs. In order to gradually transition customers to the higher rate, the PPUC approved Met-Ed’s proposal to continue to recover the prior period deferrals allowed in the PPUC’s May 2008 Order and defer $57.5 million of projected costs to a future TSC to be fully recovered by December 31, 2010. Under this proposal, monthly bills for Met-Ed’s customers are expected to increase approximately 9.4% for the period June 2009 through May 2010.

On February 20, 2009, Met-Ed and Penelec filed with the PPUC a generation procurement plan covering the period January 1, 2011, through May 31, 2013. The companies’ plan is designed to provide adequate and reliable service through a prudent mix of long-term, short-term and spot market generation supply as required by Act 129. The plan proposes a staggered procurement schedule, which varies by customer class. On March 30, 2009, Met-Ed and Penelec filed direct testimony pursuant to the March 5, 2009 case schedule issued by the ALJ. The PPUC is expected to issue a final decision in November 2009.

On June 18, 2009, the PPUC issued standards for the smart meter technology procurement and installation plans required by Act 129 to be filed by the state’s large electric distribution companies by August 14, 2009. The PPUC also provided guidance on the procedures to be followed for submittal, review and approval of all aspects of the smart meter plans. On June 18, 2009, the PPUC also adopted a total resource cost test to analyze the costs and benefits of energy efficiency and conservation plans filed under Act 129. On July 1, 2009, Met-Ed, Penelec and Penn filed energy efficiency and conservation plans in accordance with the requirements of Act 129.

FERC

On July 31, 2009, FirstEnergy announced its intention to withdraw its transmission facilities from MISO and realign them into PJM. The effect of the realignment is to consolidate essentially all of FirstEnergy's generation and transmission operations within a single RTO. FirstEnergy expects to make a filing with the FERC in August 2009 to obtain the necessary regulatory approvals. FirstEnergy plans to integrate its operations into PJM by June 1, 2011. FERC approval will be sought by the end of 2009 in order to allow FirstEnergy's load and generation operations currently in MISO to participate in the PJM capacity auction held in May 2010 for service beginning June 1, 2013.

Recessionary Market Conditions and Weather Impacts

The demand for electricity produced and sold by FirstEnergy’s competitive subsidiary, FES, along with the value of that electricity, is materially impacted by conditions in competitive power markets, global economic activity, economic activity in the Midwest and Mid-Atlantic regions, and weather conditions in FirstEnergy’s service territories. The current recessionary economic conditions, particularly in the automotive and steel industries, compounded by unusually mild regional summertime temperatures, have directly impacted FirstEnergy’s operations and revenues over the last six to nine months.

The level of demand for electricity directly impacts FirstEnergy’s distribution, transmission and generation revenues, the quantity of electricity produced, purchased power expense and fuel expense.  FirstEnergy has taken various actions and instituted a number of changes in operating practices to mitigate these external influences. These actions include employee severances, wage reductions, employee and retiree benefit changes, reduced levels of overtime and the use of fewer contractors. However, the continuation of recessionary economic conditions, coupled with unusually mild weather patterns and the resulting impact on electricity prices and demand could impact FirstEnergy's future operating performance and financial condition and may require further changes in FirstEnergy’s operations.

Refueling Outages

On May 13, 2009, the Perry Plant returned to service after completing its 12th refueling and maintenance outage which began on February 23, 2009. On May 21, 2009, the Beaver Valley Unit 1 returned to service after completing its 19th refueling outage which began on April 20, 2009. Several safety inspections and maintenance projects were completed during the outages which were designed to facilitate the continued safe and reliable operations of the units.

 FES Retail Activities

As of August 1, 2009, FES has signed 50 government aggregation contracts that will provide discounted generation prices to approximately 600,000 residential and small commercial customers. The governmental aggregator may choose between a graduated or flat percentage discount. The graduated discount plan offers savings of 10%, 6%, 5%, and 4% in the years 2009-2012, respectively. The flat percentage contract offers a 6% discount through the end of the contract. Discounts will be based on the generation price customers would have been charged if they purchased electric generation service from their electric utility and will be effective beginning in late summer or early fall.

Union Contracts

On May 21, 2009, 517 Penelec employees, represented by the International Brotherhood of Electrical Workers (IBEW) Local 459, elected to strike. In response, on May 22, 2009, Penelec implemented its work-continuation plan to use nearly 400 non-represented employees with previous line experience and training drawn from Penelec and other FirstEnergy operations to perform service reliability and priority maintenance work in Penelec’s service territory. Penelec's IBEW Local 459 employees ratified a three-year contract agreement on July 19, 2009, and returned to work on July 20, 2009.

On June 26, 2009, FirstEnergy announced that seven of its union locals, representing about 2,600 employees, have ratified contract extensions. These unions include employees from Penelec, Penn, CEI, OE and TE, along with certain power plant employees.

On July 8, 2009, FirstEnergy announced that employees of Met-Ed represented by IBEW Local 777 ratified a two-year contract.  Union members had been working without a contract since the previous agreement expired on April 30, 2009.

Voluntary Early Retirement Program

In June 2009, FirstEnergy offered a Voluntary Enhanced Retirement Option (VERO), which provides additional benefits for qualified employees who elect to retire.  As of July 31, 2009, the VERO was accepted by 382 non-represented employees and 225 employees represented by unions.

Rating Agency Actions

On June 17, 2009, Moody’s issued a report affirming FirstEnergy’s Baa3 and FES’ Baa2 credit ratings and maintained its stable outlook. On July 9, 2009, S&P reaffirmed ratings on FirstEnergy and its subsidiaries, including its BBB corporate credit rating, and maintained its stable outlook.

Financing Activities

On April 24, 2009, TE issued $300 million of 7.25% Senior Secured Notes due 2020 and used the net proceeds to repay short-term borrowings, to fund capital expenditures and for other general corporate purposes.

On June 16, 2009, NGC issued a total of approximately $487.5 million in principal amount of FMBs, of which $107.5 million related to one new refunding series of PCRBs and approximately $380 million related to amendments to existing letter of credit and reimbursement agreements supporting seven other series of PCRBs. Similarly, FGCO issued a total of approximately $395.9 million in principal amount of FMBs, of which $247.7 million related to three new refunding series of PCRBs and approximately $148.2 million related to amendments to existing letter of credit and reimbursement agreements supporting two other series of PCRBs. In addition, on June 16, 2009, NGC issued an FMB in a principal amount of up to $500 million in connection with its guaranty of FES’ obligations to post and maintain collateral under the PSA entered into by FES with the Ohio Companies as a result of the May 13-14, 2009 CBP auction.

On June 30, 2009, NGC issued a total of approximately $273.3 million in principal amount of FMBs, of which approximately $92 million related to three existing series of PCRBs and approximately $181.3 million related to amendments to existing letter of credit and reimbursement agreements supporting three other series of PCRBs. FGCO issued a total of approximately $52.1 million in principal amount of FMBs related to three existing series of PCRBs.

On June 30, 2009, Penn privately placed $100 million of FMBs having a fixed interest rate of 6.09%, and maturing on June 30, 2022. The proceeds were used by Penn to repurchase equity from OE and for capital expenditures.

FirstEnergy is a diversified energy company headquartered in Akron, Ohio, that operates primarily through three core business segments (see 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 11 to the consolidated financial statements. Earnings by major business segment were as follows:

Summary of Results of Operations – Second Quarter 2009 Compared with Second Quarter 2008

Financial results for FirstEnergy's major business segments in the second quarter of 2009 and 2008 were as follows:

 

Energy Delivery Services – Second Quarter 2009 Compared with Second Quarter 2008

Net income decreased $60 million to $133 million in the second quarter of 2009 compared to $193 million in the second quarter of 2008, primarily due to lower revenues and increased amortization of regulatory assets, partially offset by lower purchased power and other operating expenses.

Revenues –

The decrease in total revenues resulted from the following sources:

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

Lower deliveries to residential customers reflected decreased weather-related usage in the second quarter of 2009, as heating and cooling degree days decreased by 2% and 23%, respectively, from the same period in 2008. The decrease in distribution deliveries to commercial and industrial customers was primarily due to economic conditions in FirstEnergy's service territory. In the industrial sector, KWH deliveries declined to major automotive (34.8%) and  steel (50.7%). Transition charges for OE and TE that ceased effective January 1, 2009 with the full recovery of related costs and the Transition rate reduction for CEI effective June 1, 2009, were offset by PUCO-approved distribution rate increases (see Regulatory Matters – Ohio).

The following table summarizes the price and volume factors contributing to the $144 million decrease in generation revenues in the second quarter of 2009 compared to the second quarter of 2008:

The decrease in retail generation sales volumes was primarily due to weakened economic conditions and the lower weather-related usage described above. The increase in retail generation prices during the second quarter of 2009 reflected increased generation rates for JCP&L resulting from the New Jersey BGS auction and for Penn under its RFP process. Wholesale generation sales decreased principally as a result of JCP&L selling less available power from NUGs due to the termination of a NUG purchase contract in October 2008. The decrease in prices reflected lower spot prices for PJM market participants.

Transmission revenues decreased $8 million primarily due to lower PJM transmission revenues partially offset by higher transmission rates for Met-Ed and Penelec resulting from the annual update to their TSC riders in June 2008 and 2009. Met-Ed and Penelec defer the difference between transmission revenues and transmission costs incurred, resulting in no material effect to current period earnings (see Regulatory Matters – Pennsylvania).

Expenses –

Total expenses decreased by $177 million due to the net impact of the following:

Other Expense –

Other expense increased $19 million in the second quarter of 2009 compared to the second quarter of 2008 due to lower investment income of $5 million, reflecting reduced loan balances to the regulated money pool, and higher interest expense (net of capitalized interest) of $14 million, reflecting $600 million of senior notes issuances by JCP&L and Met-Ed in January 2009, and $300 million by TE in April 2009.

Competitive Energy Services – Second Quarter 2009 Compared with Second Quarter 2008

Net income for this segment was $276 million in the second quarter of 2009 compared to $66 million in the same period in 2008. The $210 million increase in net income principally reflects FGCO's $252 million gain from the sale of 9% of its participation in OVEC ($158 million after tax) and an increase in gross sales margins.

Revenues –

Total revenues increased $264 million in the second quarter of 2009 due to the OVEC sale described above and higher unit prices on affiliated generation sales to the Ohio Companies, partially offset by lower non-affiliated generation sales volumes.

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

The lower retail revenues reflect the expiration of certain government aggregation programs in Ohio at the end of 2008 that were supplied by FES, partially offset by the acquisition of new retail customer contracts in the MISO and PJM markets in the second quarter of 2009. As of August 1, 2009, FES has signed new government aggregation contracts with 50 communities that will provide discounted generation prices to approximately 600,000 residential and small commercial customers. The retail sales volumes associated with these new contracts are expected to result in an increased level of retail revenues in the second half of 2009 as compared to results for the period ended June 30, 2009.

Lower non-affiliated wholesale revenues resulted from lower capacity prices and sales volumes in both the PJM and MISO markets. The increased affiliated company generation revenues were due to higher unit prices for sales to the Ohio Companies under a PSA in April and May 2009 and the CBP in June 2009 (see Regulatory Matters – Ohio), partially offset by lower unit prices to the Pennsylvania Companies and a decrease in sales volumes to the Ohio Companies. Increased sales volumes to the Pennsylvania Companies reflect FES’ sales to Met-Ed and Penelec, following the expiration of a third-party supply contract at the end of 2008. While unit prices for each of the Pennsylvania Companies did not change, the mix of sales among the companies caused the composite price to decline. FES supplied 100% of the power for the Ohio Companies’ PLR service in April and May 2009 and approximately 56% of the Ohio Companies' supply needs for June 2009. Subsequent to the Ohio Companies’ CBP, FES purchased additional tranches from other winning bidders and effective August 1, 2009, FES will supply 62% of the Ohio Companies’ PLR generation requirements.

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

Transmission revenues decreased $17 million due primarily to reduced loads following the termination of the government aggregation programs mentioned above. The increase in other revenues reflected NGC's increased rental income associated with its acquisition of additional equity interests in the Perry and Beaver Valley Unit 2 leases.

Expenses -

Total expenses decreased $62 million in the second quarter of 2009 due to the following factors:

Other Expense –

Total other expense in the second quarter of 2009 was $24 million lower than the second quarter of 2008, primarily due to a $16 million decrease in trust securities impairments and a $10 million decrease in interest expense (net of capitalized interest).

Ohio Transitional Generation Services – Second Quarter 2009 Compared with Second Quarter 2008

Net income for this segment increased to $21 million in the second quarter of 2009 from $20 million in the same period of 2008. Higher generation revenues and lower operating expenses were partially offset by higher purchased power costs.

Revenues –

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

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

The increase in generation sales was primarily due to reduced customer shopping as most of the Ohio Companies' customers returned to PLR service in December 2008 following the expiration of certain government aggregation programs in Ohio. Average prices increased primarily due to an increase in the Ohio Companies' fuel cost recovery rider that was effective from January through May 2009. Effective June 1, 2009, the transmission tariff ended and the recovery of transmission costs is included in the generation rate established under the Ohio Companies' CBP.

Decreased transmission revenue of $22 million resulted from the termination of the transmission tariff (as discussed above) and reduced MISO revenues, partially offset by higher sales volumes. The difference between transmission revenues accrued and transmission costs incurred is deferred, resulting in no material impact to current period earnings.

Expenses -

Purchased power costs were $258 million higher due primarily to higher unit costs and volumes. The factors contributing to the higher costs are summarized in the following table:

The increase in purchased volumes was due to the higher retail generation sales requirements described above. The higher unit costs reflect the results of the Ohio Companies' power supply procurement processes for retail customers during the second quarter of 2009 (see Regulatory Matters – Ohio).

Other operating expenses decreased $67 million due to lower MISO transmission-related expenses ($43 million) and increased intersegment credits related to the Ohio Companies' generation leasehold interests. The amortization of regulatory assets increased by $38 million in the second quarter of 2009 due primarily to increased MISO transmission cost amortization. The deferral of new regulatory assets increased by $45 million due to CEI’s deferral of purchased power costs as approved by the PUCO.

Summary of Results of Operations – First Six Months of 2009 Compared with the First Six Months of 2008

Financial results for FirstEnergy's major business segments in the first six months of 2009 and 2008 were as follows: