main_10q.htm


 

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

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

For the quarterly period ended March 31, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes (  ) No (  )
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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,” “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

Smaller Reporting Company
(  )
N/A

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

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

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

 
OUTSTANDING
CLASS
AS OF May 7, 2009
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
 13,628,447
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 regulatory process on the Ohio Companies associated with the distribution rate case or implementing the recently-approved ESP, including the outcome of any competitive generation procurement process in Ohio,
·  
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 potential impact of the U.S. Court of Appeals’ July 11, 2008 decision requiring revisions to 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 that certain generating units may need to be shut down) 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),
·  
Met-Ed’s and Penelec’s transmission service charge filings with the PPUC,
·  
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,
·  
interest rates and any actions taken by credit rating agencies that could negatively affect the registrants’ access to financing or its costs and increase requirements to post additional collateral to support outstanding commodity positions, LOCs and other financial guarantees,
·  
the continuing decline of the national and regional economy and its impact on the registrants’ major industrial and commercial customers,
·  
issues concerning the soundness of financial institutions and counterparties with which the registrants do business, 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. The registrants expressly disclaim any current intention to update any forward-looking statements contained herein as a result of new information, future events or otherwise.

 
 

 

TABLE OF CONTENTS


   
Pages
Glossary of Terms
iii-v
     
Part I.     Financial Information
 
     
Items 1. and 2. - Financial Statements and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.
 
     
FirstEnergy Corp.
 
     
 
Management's Discussion and Analysis of Financial Condition and
1-35
 
Results of Operations
 
 
Report of Independent Registered Public Accounting Firm
36
 
Consolidated Statements of Income
37
 
Consolidated Statements of Comprehensive Income
38
 
Consolidated Balance Sheets
39
 
Consolidated Statements of Cash Flows
40
     
FirstEnergy Solutions Corp.
 
     
 
Management's Narrative Analysis of Results of Operations
41-43
 
Report of Independent Registered Public Accounting Firm
44
 
Consolidated Statements of Income and Comprehensive Income
45
 
Consolidated Balance Sheets
46
 
Consolidated Statements of Cash Flows
47
     
Ohio Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
48-49
 
Report of Independent Registered Public Accounting Firm
50
 
Consolidated Statements of Income and Comprehensive Income
51
 
Consolidated Balance Sheets
52
 
Consolidated Statements of Cash Flows
53
     
The Cleveland Electric Illuminating Company
 
     
 
Management's Narrative Analysis of Results of Operations
54-55
 
Report of Independent Registered Public Accounting Firm
56
 
Consolidated Statements of Income and Comprehensive Income
57
 
Consolidated Balance Sheets
58
 
Consolidated Statements of Cash Flows
59
     
The Toledo Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
60-61
 
Report of Independent Registered Public Accounting Firm
62
 
Consolidated Statements of Income and Comprehensive Income
63
 
Consolidated Balance Sheets
64
 
Consolidated Statements of Cash Flows
65
     

 
i

 

TABLE OF CONTENTS (Cont'd)



Jersey Central Power & Light Company
Pages
     
 
Management's Narrative Analysis of Results of Operations
66-67
 
Report of Independent Registered Public Accounting Firm
68
 
Consolidated Statements of Income and Comprehensive Income
69
 
Consolidated Balance Sheets
70
 
Consolidated Statements of Cash Flows
71
     
Metropolitan Edison Company
 
     
 
Management's Narrative Analysis of Results of Operations
72-73
 
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
     
Pennsylvania Electric Company
 
     
 
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
     
Combined Management’s Discussion and Analysis of Registrant Subsidiaries
84-97
   
Combined Notes to Consolidated Financial Statements
98-127
   
Item 3.                      Quantitative and Qualitative Disclosures About Market Risk.
128
     
Item 4.                      Controls and Procedures – FirstEnergy.
128
   
Item 4T.                    Controls and Procedures – FES, OE, CEI, TE, JCP&L, Met-Ed and Penelec.
128
     
Part II.    Other Information
 
     
Item 1.                      Legal Proceedings.
129
     
Item 1A.                   Risk Factors.
129
   
Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds.
129
   
Item 6.                      Exhibits.
130-131


 


 
ii

 


GLOSSARY OF TERMS

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

ATSI
American Transmission Systems, Inc., owns and operates transmission facilities
CEI
The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary
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
FEV
FirstEnergy Ventures Corp., invests in certain unregulated enterprises and business ventures
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
Shelf Registrants
OE, CEI, TE, JCP&L, Met-Ed and Penelec
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
TE
The Toledo Edison Company, an Ohio electric utility operating subsidiary
Utilities
OE, CEI, TE, Penn, JCP&L, Met-Ed and Penelec
Waverly
The Waverly Power and Light Company, a wholly owned subsidiary of Penelec
   
      The following abbreviations and acronyms are used to identify frequently used terms in this report:
   
AEP
American Electric Power Company, Inc.
ALJ
Administrative Law Judge
AOCL
Accumulated Other Comprehensive Loss
AQC
Air Quality Control
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
CTC
Competitive Transition Charge
DOJ
United States Department of Justice
DPA
Department of the Public Advocate, Division of Rate Counsel
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 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 Bond
FSP
FASB Staff Position
FSP FAS 107-1 and
   APB 28-1
FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”
FSP FAS 115-1
   and SFAS 124-1
FSP FAS 115-1 and SFAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its
    Application to Certain Investments”
FSP FAS 115-2 and
   FAS 124-2
FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
    Impairments”
FSP FAS 132(R)-1
FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”
FSP FAS 157-4
FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or
    Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”
FTR
Financial Transmission Rights
GAAP
Accounting Principles Generally Accepted in the United States
GHG
Greenhouse Gases
ICE
Intercontinental Exchange
IRS
Internal Revenue Service
kV
Kilovolt
KWH
Kilowatt-hours
LED
Light-emitting Diode
LIBOR
London Interbank Offered Rate
LOC
Letter of Credit
MEIUG
Met-Ed Industrial Users Group
MISO
Midwest Independent Transmission System Operator, Inc.
Moody’s
Moody’s Investors Service, Inc.
MRO
Market Rate Offer
MW
Megawatts
MWH
Megawatt-hours
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
OPEB
Other Post-Employment Benefits
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; an electric utility’s obligation to provide generation service to customers
   whose alternative supplier fails to deliver service
PPUC
Pennsylvania Public Utility Commission
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
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

 
iv

 

GLOSSARY OF TERMS Cont’d.

SFAS 115
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
SFAS 133
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
SFAS 157
SFAS No. 157, “Fair Value Measurements”
SFAS 160
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment
   of ARB No. 51”
SIP
State Implementation Plan(s) Under the Clean Air Act
SNCR
Selective Non-Catalytic Reduction
SO2
Sulfur Dioxide
TBC
Transition Bond Charge
TMI-1
Three Mile Island Unit 1
TMI-2
Three Mile Island Unit 2
TSC
Transmission Service Charge
VIE
Variable Interest Entity













 
v

 


PART I. FINANCIAL INFORMATION


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

FIRSTENERGY CORP.

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

EXECUTIVE SUMMARY

Net income in the first quarter of 2009 was $115 million, or basic and diluted earnings of $0.39 per share of common stock, compared with net income of $277 million, or basic earnings of $0.91 per share of common stock ($0.90 diluted) in the first quarter of 2008. The decrease in FirstEnergy’s earnings resulted principally from regulatory charges ($168 million after-tax) recognized in the first quarter of 2009 primarily related to the implementation of the Ohio Companies’ Amended ESP.

Change in Basic Earnings Per Share
From Prior Year First Quarter
 
   
Basic Earnings Per Share – First Quarter 2008
 $ 0.91
Regulatory charges – 2009
   (0.55)
Income tax resolution – 2009
   0.04
Organizational restructuring – 2009
   (0.05)
Gain on non-core asset sales – 2008
   (0.06)
Trust securities impairment
   (0.04)
Revenues
   0.18
Fuel and purchased power
   (0.24)
Amortization / deferral of regulatory assets
   0.13
Other expenses
   0.07
Basic Earnings Per Share – First Quarter 2009
$ 0.39

Regulatory Matters - Ohio

Ohio Regulatory Proceedings

On March 25, 2009, the PUCO issued an order approving the Ohio Companies’ Amended ESP, which includes provisions for establishing a competitive bid process for generation supply and pricing for a two-year period beginning June 1, 2009, freezing distribution rates through December 31, 2011, subject to limited exceptions, and reducing CEI’s recoverable Extended RTC balance as of May 31, 2009 by 50 percent ($216 million). On March 4, 2009, the PUCO issued an order allowing the Ohio Companies to provide electric generation service to their customers from April 1, 2009, through May 31, 2009, from FES at the average rate resulting from the Ohio Companies’ December 31, 2008, RFP. The PUCO also approved the continuation of CEI’s purchased power cost deferral and the process under which the Ohio Companies conducted their December RFP. The Amended ESP resulted from a stipulated agreement reached with the PUCO Staff and nearly all of the intervening parties to the case.

Regulatory Matters - Pennsylvania

Pennsylvania Legislative Process

The Governor of Pennsylvania signed Act 129 of 2008 into law in October 2008, which became effective November 14, 2008, to create an energy efficiency and conservation program with requirements to adopt and implement cost-effective plans to reduce energy consumption and peak demand. On March 26, 2009, the PPUC approved the company-specific energy consumption and peak demand reductions that must be achieved under Act 129, which requires electric distribution companies to reduce electricity consumption by 1% by May 31, 2011 and by 3% by May 31, 2013, and an annual system peak demand reduction of 4.5% by May 31, 2013. Costs associated with achieving the reduction will be recovered from customers. Under Act 129, electric distribution companies must develop and file their energy efficiency and peak load reduction plans for compliance with these requirements by July 1, 2009.

 
1

 


Act 129 also requires electric distribution companies to submit by August 14, 2009, a plan to deploy smart metering technology over a time period not to exceed fifteen years.  The costs of developing and implementing the plan as ultimately approved by the PPUC will be recovered from customers.

Met-Ed and Penelec Transmission Rider Filings

On April 15, 2009, Met-Ed and Penelec filed revised TSCs with the PPUC 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 would result in an approximate 1% decrease in monthly bills, reflecting projected PJM transmission costs as well as a reconciliation for costs already incurred. The TSC for Met-Ed’s customers would increase 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, Met-Ed is proposing to continue to recover the prior period deferrals allowed in the PPUC’s May 2008 Order and defer $57.5 million of projected costs into a future TSC to be fully recovered by December 31, 2010. Under this proposal, monthly bills for Met-Ed’s customers would increase approximately 9.4% for the period June 2009 through May 2010.

On May 22, 2008, the PPUC approved the Met-Ed and Penelec annual updates to their TSC for the period June 1, 2008, through May 31, 2009. The PPUC ordered an investigation to review the reasonableness of Met-Ed’s TSC which included a transition approach that would recover past under-recovered costs of $144 million plus carrying charges over a 31-month period and deferral of a portion ($92 million) of projected costs for recovery over a 19-month period beginning June 1, 2009, through December 31, 2010. Hearings and briefing were concluded in February 2009. On March 4, 2009, MEIUG and PICA filed a Petition to reopen the record. Met-Ed and Penelec filed objections to MEIUG and PICA’s Petition on March 13, 2009, resulting in an April 1, 2009, order denying MEIUG & PICA’s Petition to reopen the record. Met-Ed is awaiting a final PPUC decision.

Met-Ed and Penelec Customer Prepayment Plan and Procurement Plan

On September 25, 2008, Met-Ed and Penelec filed a Voluntary Prepayment Plan with the PPUC that would provide an opportunity for residential and small commercial customers to prepay about 9.6% of their monthly electric bills during 2009 and 2010, which would earn interest at 7.5% and be used to reduce electricity charges in 2011 and 2012. Met-Ed, Penelec, the Office of Consumer Advocate and the Office of Small Business Advocate reached a settlement agreement on the Voluntary Prepayment Plan, which the PPUC approved on February 26, 2009.

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 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 Pennsylvania law. The plan proposes a staggered procurement schedule, which varies by customer class. On March 30, 2009, Met-Ed and Penelec filed written Direct Testimony; hearings are scheduled for July 15-17, 2009. Met-Ed and Penelec have requested PPUC approval of their plan by November 2009.

Met-Ed and Penelec NUG Statement Compliance Filing

On March 31, 2009, Met-Ed and Penelec submitted their 5-year NUG Statement Compliance Filing to the PPUC in accordance with their 1998 Restructuring Settlement. Met-Ed proposed to reduce its CTC rate for the residential class with a corresponding increase in the generation rate and the shopping credit, and Penelec proposed to reduce its CTC rate to zero for all classes with a corresponding increase in the generation rate and the shopping credit. While these changes would result in additional annual generation revenue (Met-Ed - $27 million and Penelec - $51 million), overall rates would remain unchanged. The PPUC must act on this filing within 120 days.

Regulatory Matters – New Jersey

JCP&L Solar Renewable Energy Proposal Approved

On March 27, 2009, the NJBPU approved JCP&L’s proposal to help increase the pace of solar energy project development in the state by establishing long-term agreements to purchase and sell Solar Renewable Energy Certificates, which will provide a stable basis for financing solar generation projects. The plan is expected to support the phase-in of approximately 42 megawatts of solar generating capacity over the next three years to help meet the state’s Renewable Portfolio Standards through 2012.

 
2

 

JCP&L Selected for Smart Grid Demonstration

JCP&L is one of three companies selected as a smart grid demonstration host site by the Electric Power Research Institute to test the integration of smart grid and other technologies into operations of existing systems. The technologies exhibited during this project may be one solution to accomplishing the goals of the New Jersey Energy Master Plan by meeting future electricity demand.

Operational Matters

Generation Outages

On February 23, 2009, the Perry Plant began its 12th scheduled refueling and maintenance outage, in which 280 of the plant’s 748 fuel assemblies will be exchanged, safety inspections will be conducted, and several maintenance projects will be completed, including replacement of the plant’s recirculation pump motor.

On April 20, 2009, Beaver Valley Unit 1 began a scheduled refueling and maintenance outage. During the outage, 62 of the 157 fuel assemblies will be exchanged and safety inspections will be conducted. Also, several projects will be completed to ensure continued safe and reliable operations, including maintenance on the cooling tower and the replacement of a pump motor. The unit operated safely and reliably for 545 consecutive days, beating the previous records of 456 days for Unit 1 and 537 days for Unit 2 set in 2006 and 2005, respectively.
 
FirstEnergy expects generation output for 2009 to be lower than 2008, partly related to three scheduled nuclear refueling outages in 2009 and a number of planned fossil outages in the second half of the year, including the tie in of Sammis Unit 6 as part of FirstEnergy’s air quality control project. FirstEnergy is also re-evaluating its near-term plans for maintenance and capital work and outages scheduled over the next several years and may take advantage of the reduced loads anticipated as a result of economic conditions to undertake additional work on its facilities, including its largest units.

R. E. Burger Plant

On April 1, 2009, FirstEnergy announced plans to retrofit Units 4 and 5 at its R.E. Burger Plant to repower the units with biomass. Retrofitting the Burger Plant will help meet the renewable energy goals set forth in Ohio SB221, utilize much of the existing infrastructure currently in place, preserve approximately 100 jobs and continue positive economic support to Belmont County, making the Burger Plant one of the largest biomass facilities in the United States.

OVEC Participation Interest Sale

On May 1, 2009, FGCO announced the sale of a 9% interest in the output from OVEC to Buckeye Power Generating LLC for $252 million. The sale involves the output of 214 MW from OVEC’s generating facilities in southern Indiana and Ohio. FGCO’s remaining interest in OVEC was reduced to 11.5%. This transaction is expected to increase earnings in the second quarter of 2009 by $159 million.

FirstEnergy Reorganization

On March 3, 2009, FirstEnergy announced it would reduce its management and support staff by 335 employees. This staffing reduction resulted from an effort to enhance efficiencies in response to the economic downturn. The reduction represents approximately four percent of FirstEnergy’s non-union workforce. Severance benefits and career counseling services were provided to eligible employees. Total one-time charges associated with the reorganization were approximately $22 million, or $0.05 per share of common stock.

Financial Matters

On January 20, 2009, Met-Ed issued $300 million of 7.70% Senior Notes due 2019 and used the net proceeds to repay short-term borrowings. On January 27, 2009, JCP&L issued $300 million of 7.35% Senior Notes due 2019 and used the net proceeds to repay short-term borrowings, repurchase equity from FirstEnergy, fund capital expenditures and for other general corporate purposes. 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 February 12, 2009, $153 million of Wachovia LOCs supporting a like amount of NGC’s PCRBs were renewed until March 17, 2014, and on March 10, 2009, $100 million of FGCO’s PCRBs were converted from a variable-rate mode enhanced by Wachovia LOCs to a fixed-rate mode secured by FMBs.

 
3

 


On March 31, 2009, FES and FGCO executed a new $100 million, two-year secured term loan facility with The Royal Bank of Scotland Finance (Ireland) (RBSFI) that replaces an existing $100 million borrowing facility with RBSFI that was expiring in November 2009.

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 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.

·  
Competitive Energy Services supplies the electric power needs of end-use customers through retail and wholesale arrangements, including associated company power sales to meet 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, Michigan and Illinois. This business segment owns or leases and operates 19 generating facilities with a net demonstrated capacity of 13,710 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 FirstEnergy’s Ohio Companies. The segment's net income is primarily derived from electric generation sales revenues less the cost of power purchased through the Ohio Companies’ CBP, including net transmission and ancillary costs charged by MISO to deliver energy to retail customers.

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. Net income by major business segment was as follows:

   
Three Months Ended
     
   
March 31
 
Increase
 
   
2009
 
2008
 
(Decrease)
 
Earnings (Loss)
 
(In millions, except per share data)
 
By Business Segment
             
Energy delivery services
 
$
(42
)
$
179
 
$
(221
)
Competitive energy services
   
155
   
87
   
68
 
Ohio transitional generation services
   
24
   
23
   
1
 
Other and reconciling adjustments*
   
(18
)
 
(13
)
 
(5
)
Total
 
$
119
 
$
276
 
$
(157
)
                     
Basic Earnings Per Share
 
$
0.39
 
$
0.91
 
$
(0.52
)
Diluted Earnings Per Share
 
$
0.39
 
$
0.90
 
$
(0.51
)

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

 
4

 


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

Financial results for FirstEnergy's major business segments in the first three months of 2009 and 2008 were as follows:
 
               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
First Quarter 2009 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 1,959     $ 280     $ 902     $ -     $ 3,141  
Other
    150       55       10       (22 )     193  
Internal
    -       893       -       (893 )     -  
Total Revenues
    2,109       1,228       912       (915 )     3,334  
                                         
Expenses:
                                       
Fuel
    -       312       -       -       312  
Purchased power
    978       160       898       (893 )     1,143  
Other operating expenses
    480       355       18       (26 )     827  
Provision for depreciation
    109       64       -       4       177  
Amortization of regulatory assets
    406       -       5       -       411  
Deferral of new regulatory assets
    (43 )     -       (50 )     -       (93 )
General taxes
    168       32       2       9       211  
Total Expenses
    2,098       923       873       (906 )     2,988  
                                         
Operating Income
    11       305       39       (9 )     346  
Other Income (Expense):
                                       
Investment income (loss)
    29       (29 )     1       (12 )     (11 )
Interest expense
    (111 )     (28 )     -       (55 )     (194 )
Capitalized interest
    1       10       -       17       28  
Total Other Expense
    (81 )     (47 )     1       (50 )     (177 )
                                         
Income Before Income Taxes
    (70 )     258       40       (59 )     169  
Income taxes
    (28 )     103       16       (37 )     54  
Net Income (Loss)
    (42 )     155       24       (22 )     115  
Less: Noncontrolling interest income
    -       -       -       (4 )     (4 )
Earnings (Loss) Available To Parent
  $ (42 )   $ 155     $ 24     $ (18 )   $ 119  

 
5

 


               
Ohio
             
   
Energy
   
Competitive
   
Transitional
   
Other and
       
   
Delivery
   
Energy
   
Generation
   
Reconciling
   
FirstEnergy
 
First Quarter 2008 Financial Results
 
Services
   
Services
   
Services
   
Adjustments
   
Consolidated
 
   
(In millions)
 
Revenues:
                             
External
                             
Electric
  $ 2,050     $ 289     $ 691     $ -     $ 3,030  
Other
    162       40       16       29       247  
Internal
    -       776       -       (776 )     -  
Total Revenues
    2,212       1,105       707       (747 )     3,277  
                                         
Expenses:
                                       
Fuel
    1       327       -       -       328  
Purchased power
    982       206       588       (776 )     1,000  
Other operating expenses
    445       309       77       (32 )     799  
Provision for depreciation
    106       53       -       5       164  
Amortization of regulatory assets
    249       -       9       -       258  
Deferral of new regulatory assets
    (100 )     -       (5 )     -       (105 )
General taxes
    173       32       1       9       215  
Total Expenses
    1,856       927       670       (794 )     2,659  
                                         
Operating Income
    356       178       37       47       618  
Other Income (Expense):
                                       
Investment income
    45       (6 )     1       (23 )     17  
Interest expense
    (103 )     (34 )     -       (42 )     (179 )
Capitalized interest
    -       7       -       1       8  
Total Other Expense
    (58 )     (33 )     1       (64 )     (154 )
                                         
Income Before Income Taxes
    298       145       38       (17 )     464  
Income taxes
    119       58       15       (5 )     187  
Net Income
    179       87       23       (12 )     277  
Less: Noncontrolling interest income
    -       -       -       1       1  
Earnings Available To Parent
  $ 179     $ 87     $ 23     $ (13 )   $ 276  
                                         
Changes Between First Quarter 2009 and
                                       
First Quarter 2008 Financial Results
                                       
Increase (Decrease)
                                       
Revenues:
                                       
External
                                       
Electric
  $ (91 )   $ (9 )   $ 211     $ -     $ 111  
Other
    (12 )     15       (6 )     (51 )     (54 )
Internal
    -       117       -       (117 )     -  
Total Revenues
    (103 )     123       205       (168 )     57  
                                         
Expenses:
                                       
Fuel
    (1 )     (15 )     -       -       (16 )
Purchased power
    (4 )     (46 )     310       (117 )     143  
Other operating expenses
    35       46       (59 )     6       28  
Provision for depreciation
    3       11       -       (1 )     13  
Amortization of regulatory assets
    157       -       (4 )     -       153  
Deferral of new regulatory assets
    57       -       (45 )     -       12  
General taxes
    (5 )     -       1       -       (4 )
Total Expenses
    242       (4 )     203       (112 )     329  
                                         
Operating Income
    (345 )     127       2       (56 )     (272 )
Other Income (Expense):
                                       
Investment income (loss)
    (16 )     (23 )     -       11       (28 )
Interest expense
    (8 )     6       -       (13 )     (15 )
Capitalized interest
    1       3       -       16       20  
Total Other Income (Expense)
    (23 )     (14 )     -       14       (23 )
                                         
Income Before Income Taxes
    (368 )     113       2       (42 )     (295 )
Income taxes
    (147 )     45       1       (32 )     (133 )
Net Income
    (221 )     68       1       (10 )     (162 )
Less: Noncontrolling interest income
    -       -       -       (5 )     (5 )
Earnings Available To Parent
  $ (221 )   $ 68     $ 1     $ (5 )   $ (157 )

 
6

 


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

This segment recognized a net loss of $42 million in the first three months of 2009 compared to net income of $179 million in the first three months of 2008, primarily due to CEI’s $216 million regulatory asset impairment related to the implementation of the Ohio Companies’ Amended ESP and other regulatory charges.

Revenues –

The decrease in total revenues of $103 million resulted from the following sources:

   
Three Months Ended
     
   
March 31
 
Increase
 
Revenues by Type of Service
 
2009
 
2008
 
(Decrease)
 
   
(In millions)
 
Distribution services
 
$
849
 
$
955
 
$
(106
)
Generation sales:
                   
   Retail
   
812
   
790
   
22
 
   Wholesale
   
188
   
219
   
(31
)
Total generation sales
   
1,000
   
1,009
   
(9
)
Transmission
   
208
   
197
   
11
 
Other
   
52
   
51
   
1
 
Total Revenues
 
$
2,109
 
$
2,212
 
$
(103
)

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

Electric Distribution KWH Deliveries
   
Residential
 
--
  %
Commercial
 
(4.1
) %
Industrial
 
(17.5
) %
Total Distribution KWH Deliveries
 
(6.7
) %

The lower revenues from distribution deliveries were driven by the reductions in sales volume. The decrease in electric 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 (28.4%), steel (40.1%), and refinery customers (15.1%). Transition charges for OE and TE that ceased effective January 1, 2009, with the full recovery of related costs, were offset by PUCO-approved distribution rate increases (see Regulatory Matters – Ohio).

The following table summarizes the price and volume factors contributing to the $9 million decrease in generation revenues in the first quarter of 2009 compared to the first quarter of 2008:

Sources of Change in Generation Revenues
 
Increase
(Decrease)
 
   
(In millions)
 
Retail:
       
  Effect of 3.5% decrease in sales volumes
 
$
(27
)
  Change in prices
   
49
 
     
22
 
Wholesale:
       
  Effect of 11.6% decrease in sales volumes
   
(25
)
  Change in prices
   
(6
)
     
(31
)
Net Decrease in Generation Revenues
 
$
(9
)

The decrease in retail generation sales volumes was primarily due to weakened economic conditions partially offset by increased weather-related usage (heating degree days increased by 3.3% in the first quarter of 2009). The increase in retail generation prices during the first three months 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 power from NUGs. The decrease in prices reflected lower spot market prices for PJM market participants.

Transmission revenues increased $11 million primarily due to higher transmission rates for Met-Ed and Penelec resulting from the annual update to their TSC riders in mid-2008. Met-Ed and Penelec defer the difference between revenues from their transmission rider and transmission costs incurred, resulting in no material effect to current period earnings (see Regulatory Matters – Pennsylvania).

 
7

 


Expenses –

The $242 million increase in total expenses was due to the following:

 
·
Purchased power costs were $4 million lower in the first three months of 2009 due to reduced volumes and an increase in the amount of NUG costs deferred, partially offset by increased unit costs. The increased unit costs reflected higher JCP&L costs resulting from the BGS auction. 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
 
$
120
 
Change due to decreased volumes
   
(103
)
     
17
 
Purchases from FES:
       
Change due to decreased unit costs
   
(9
)
Change due to increased volumes
   
22
 
     
13
 
         
Increase in NUG costs deferred
   
(34
)
Net Decrease in Purchased Power Costs
 
$
(4
)


 
·
An increase in other operating expenses of $34 million resulted from economic development obligations, in accordance with the PUCO-approved ESP, and energy efficiency obligations.

                ·  
An increase in employee benefit costs of $30 million and organizational restructuring costs of $5 million were offset by reductions in contractor costs of $19 million, transmission expense of $11 million and materials and supplies costs of $5 million.

 
·
An increase of $157 million in amortization of regulatory assets in 2009 was due to the ESP-related impairment of CEI’s regulatory assets ($216 million), partially offset by the cessation of transition cost amortization for OE and TE ($68 million).

 
·
The deferral of new regulatory assets decreased by $57 million during the first three months of 2009 primarily due to lower PJM transmission cost deferrals ($25 million) and the cessation in 2009 of RCP distribution cost deferrals by the Ohio Companies ($35 million).

                 ·  
Depreciation expense increased $3 million due to property additions since the first quarter of 2008.

                 ·  
General taxes decreased $5 million primarily due to lower gross receipts taxes on reduced revenues.


Other Expense –

Other expense increased $23 million in 2009 compared to the first three months of 2008, due to lower investment income of $16 million resulting from the repayment of notes receivable from affiliates and higher interest expense (net of capitalized interest) of $7 million due to $600 million of senior notes issued by JCP&L and Met-Ed in January 2009.

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

Net income for this segment was $155 million in the first three months of 2009 compared to $87 million in the same period in 2008. The $68 million increase in net income reflected an increase in gross generation margin, partially offset by higher operating costs.


 
8

 

Revenues –

Total revenues increased $123 million in the first three months of 2009 compared to the same period in 2008. This increase primarily resulted from higher unit prices on affiliated generation sales to the Ohio Companies and increased non-affiliated wholesale sales, partially offset by lower retail sales.

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

   
Three Months Ended
     
   
March 31
 
Increase
 
Revenues by Type of Service
 
2009
 
2008
 
(Decrease)
 
   
(In millions)
 
Non-Affiliated Generation Sales:
             
Retail
 
$
91
 
$
160
 
$
(69
)
Wholesale
   
189
   
129
   
60
 
Total Non-Affiliated Generation Sales
   
280
   
289
   
(9
)
Affiliated Generation Sales
   
893
   
776
   
117
 
Transmission
   
25
   
33
   
(8
)
Lease Revenue
   
25
   
-
   
25
 
Other
   
5
   
7
   
(2
)
Total Revenues
 
$
1,228
 
$
1,105
 
$
123
 


The lower retail revenues reflect reduced commercial and industrial contract renewals in the PJM market and the termination of certain government aggregation programs in Ohio. Higher non-affiliated wholesale revenues resulted from higher PJM capacity prices and increased sales volumes in the MISO market, partially offset by lower unit prices and volumes in PJM.

The increased affiliated company generation revenues were due to higher unit prices for sales to the Ohio Companies under their CBP, partially offset by lower unit prices to the Pennsylvania Companies and an overall decrease in affiliated sales volumes. 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 less power to the Ohio Companies in the first quarter of 2009 as one of four winning bidders in the Ohio Companies’ RFP process. The amount of power FES will supply to the Ohio Companies for periods beginning on or after June 1, 2009 will be determined by the extent to which FES is successful in bidding in the upcoming CBP, which is currently scheduled to begin on May 13, 2009.

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 57.0% decrease in sales volumes
 
$
(91
)
Change in prices
   
22
 
     
(69
)
Wholesale:
       
Effect of 33.9% increase in sales volumes
   
44
 
Change in prices
   
16
 
     
60
 
Net Decrease in Non-Affiliated Generation Revenues
 
$
(9
)


Source of Change in Affiliated Generation Revenues
 
Increase (Decrease)
 
   
(In millions)
 
Ohio Companies:
       
Effect of 24.6% decrease in sales volumes
 
$
(142
)
Change in prices
   
246
 
     
104
 
Pennsylvania Companies:
       
Effect of 11.1% increase in sales volumes
   
22
 
Change in prices
   
(9
)
     
13
 
Net Increase in Affiliated Generation Revenues
 
$
117
 


 
9

 

Transmission revenues decreased $8 million due to decreased retail load in the MISO market ($14 million) partially offset by higher PJM congestion revenue ($6 million). Increased lease revenue represents NGC’s acquisition of the equity interests in the OE and TE  Beaver Valley and Perry sale and leaseback transactions.

Expenses -

Total expenses decreased $4 million in the first three months of 2009 due to the following factors:

 
·
Purchased power costs decreased $46 million due primarily to lower unit costs ($15 million) and reduced volume requirements ($31 million).

       ·  
Fossil fuel costs decreased $15 million due to decreased generation volumes ($53 million) partially offset by higher unit prices ($38 million). The increased unit prices primarily reflect increased fuel rates on existing coal contracts in the first quarter of 2009.

       ·  
Fossil operating costs decreased $4 million due to a $6 million decrease in contractor costs as a result of reduced maintenance activities, partially offset by organizational restructuring costs of $2 million.

       ·  
Other operating expenses increased $27 million due primarily to increased intersegment billings for leasehold costs from the Ohio Companies.

       ·  
Nuclear operating costs increased $16 million due to higher expenses associated with the 2009 Perry refueling outage than incurred with the 2008 Davis-Besse refueling outage.

 
·
Higher depreciation expense of $11 million was due to property additions since the first quarter of 2008.

       ·  
Transmission expense increased $7 million due to increased PJM charges.

Other Expense –

Total other expense in the first three months of 2009 was $14 million higher than the first quarter of 2008, primarily due to a $23 million decrease in earnings from nuclear decommissioning trust investments reflecting impairments in the value of securities. This impact was partially offset by a decline in interest expense (net of capitalized interest) of $9 million.

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

Net income for this segment increased to $24 million in the first three months of 2009 from $23 million in the same period of 2008. Higher operating revenues were almost entirely offset by higher operating expenses, primarily for purchased power.

Revenues –

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

   
Three Months Ended
     
   
March 31
     
Revenues by Type of Service
 
2009
 
2008
 
Increase (Decrease)
 
   
(In millions)
 
Generation sales:
             
Retail
 
$
801
 
$
606
 
$
195
 
Wholesale
   
-
   
3
   
(3
)
Total generation sales
   
801
   
609
   
192
 
Transmission
   
110
   
93
   
17
 
Other
   
1
   
5
   
(4
)
Total Revenues
 
$
912
 
$
707
 
$
205
 


 
10

 


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

Source of Change in Retail Generation Revenues
 
Increase
 
   
(In millions)
 
Effect of 5.0% increase in sales volumes
 
$
30
 
Change in prices
   
165
 
 Total Increase in Retail Generation Revenues
 
$
195
 

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 due to the termination of certain government aggregation programs in Ohio. Average prices increased primarily due to an increase in the Ohio Companies’ fuel cost recovery rider that became effective in January 2009.

Increased transmission revenue of $17 million resulted from higher sales volumes and a PUCO-approved transmission tariff increase that was effective in mid-2008. The difference between transmission revenues accrued and transmission expenses incurred is deferred, resulting in no material impact to current period earnings.

Expenses -

Purchased power costs were $310 million higher due primarily to higher unit costs and volumes. The factors contributing to the higher costs are summarized in the following table:

Source of Change in Purchased Power
 
Increase
 
   
(In millions)
 
Purchases:
       
Change due to increased unit costs
 
$
284
 
Change due to increased volumes
   
26
 
&