Allegheny Power 2014 Annual Report Download

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ANNUAL REPORT
2014

Table of contents

  • Page 1
    2014 ANNUAL REPORT

  • Page 2
    ...our distribution business • Repositioned our competitive generation business to reduce risk and better capture market opportunities • Moved forward with our program to install 2 million new smart meters in Pennsylvania by mid-2019 • Efforts to ensure competitive energy markets adequately value...

  • Page 3
    ... in Ohio, Pennsylvania, New Jersey and West Virginia, we're focused on ensuring our electric rates are better aligned with the cost of maintaining and upgrading our system to meet the increasing energy needs of customers. We also set a new course for our competitive generation business that is...

  • Page 4
    ...hang wires on a tower during construction of a 115-mile transmission line connecting the Bruce Mansfield Plant in Shippingport, Pa., with our new Glenwillow Substation near Cleveland. Lower Right: New steam generators were installed at our Davis-Besse Nuclear Power Station near Toledo, Ohio, helping...

  • Page 5
    ... W.Va., will support an existing gas processing plant and help reinforce the regional grid, and a planned transmission substation near Burgettstown, Pa., will serve a facility that separates natural gas into dry and liquid components while benefiting more than 40,000 customers of West Penn Power. We...

  • Page 6
    ... position, enabling us to assess market conditions and participate when, and where, opportunities are most promising. Our new Waldo Run transmission substation in Doddridge County, W.Va., supports the area's Marcellus shale gas industry and enhances service reliability for Mon Power customers. 4

  • Page 7
    ... the value of a diverse and dependable generating fleet. Top Right: Projects underway at our Fort Martin Power Station in Maidsville, W.Va., are designed to enhance the plant's performance and prepare it to meet new environmental requirements. Lower Right: This environmental control equipment...

  • Page 8
    ... steps we took during 2014 will help deliver greater financial stability, build shareholder value, and better position your company for future success. We are continuously evolving to meet the energy needs of our customers who rely on electricity to power their businesses and everyday lives...

  • Page 9
    ... generation, transmission and distribution of electricity. Our 10 utility operating companies form one of the nation's largest investorowned electric systems based on 6 million customers served within a nearly 65,000-square-mile area of Ohio, Pennsylvania, New Jersey, West Virginia, Maryland and New...

  • Page 10
    ...shareholder interests are represented independently and thoughtfully. Based on our confidence in your company's prospects, your Board provided an annual dividend rate of $1.44 per share in 2014. In keeping with our historical approach, we will continue to review the dividend on a quarterly basis. On...

  • Page 11
    2014 ANNUAL REPORT CONTENTS i...Glossary of Terms 1 ...Selected Financial Data 5...Management's Discussion and Analysis of Financial Condition and Results of Operations 58...Management Reports 59...Report of Independent Registered Public Accounting Firm 60...Consolidated Statements of Income 61 ......

  • Page 12
    L i i

  • Page 13
    LL ii ii

  • Page 14
    LLL iii

  • Page 15
    LY iv

  • Page 16
    ... per Share of Common Stock: Basic - Continuing Operations Basic - Discontinued Operations (Note 19) Basic - Earnings Available to FirstEnergy Corp. Diluted - Continuing Operations Diluted - Discontinued Operations (Note 19) Diluted - Earnings Available to FirstEnergy Corp. 2014 2013 2012 2011...

  • Page 17
    ... common stock as of December 31, 2014 and January 31, 2015, respectively. Information regarding retained earnings available for payment of cash dividends is given in Note 11, Capitalization of the Combined Notes to Consolidated Financial Statements. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON...

  • Page 18
    ... investment plan, pending transmission and distribution rate cases and the effectiveness of our repositioning strategy to reflect a more regulated business profile. Changes in assumptions regarding economic conditions within our territories, assessment of the reliability of our transmission system...

  • Page 19
    ... to make additional contributions sooner, or in amounts that are larger than currently anticipated. The impact of changes to material accounting policies. The ability to access the public securities and other capital and credit markets in accordance with our announced financial plans, the...

  • Page 20
    ...Pennsylvania, West Virginia, Maryland, New Jersey and New York, and purchases power for its POLR, SOS, SSO and default service requirements in Ohio, Pennsylvania, New Jersey and Maryland. This segment also includes regulated electric generation facilities located primarily in West Virginia, Virginia...

  • Page 21
    ...coal-fired power plants in the state. Rate case applications in Pennsylvania filed in August 2014, with a current settlement agreement in place that, if approved by the PPUC, would result in an increase in current distribution revenues of approximately $293 million, annually, across ME, PN, Penn and...

  • Page 22
    ... in 2014 versus a credit of $256 million in 2013. The 2013 impairment charges resulted from CES's deactivation of the Hatfield and Mitchell generating units and Regulated Distribution's impairment resulting from the Harrison/Pleasants asset transfer reducing the net book value of the Harrison plant...

  • Page 23
    ... investment plan. This program is focused on a large number of small projects within the existing 24,000 mile service territory that improve service to customers. The projects within the program are either regulatory required or support reliability enhancement. Regulatory required projects include...

  • Page 24
    ... in 2011 and 2012. Increased depreciation and property taxes as a result of a higher rate base for the Regulated Distribution and Regulated Transmission businesses. Increased operation and maintenance expenses resulting from higher Regulated Distribution expenses and three planned nuclear outages in...

  • Page 25
    ... - 2014 Compared with 2013 Financial results for FirstEnergy's business segments in 2014 and 2013 were as follows: Competitive Energy Services (In millions) Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power Other operating expenses Pension and...

  • Page 26
    ... Continuing Operations Before Income Taxes (Benefits) Income taxes (benefits) Income (Loss) From Continuing Operations Discontinued Operations, net of tax Net Income (Loss) $ $ Regulated Distribution Regulated Transmission Competitive Energy Services (In millions) Corporate/Other and Reconciling...

  • Page 27
    ... Continuing Operations Before Income Taxes (Benefits) Income taxes (benefits) Income (Loss) From Continuing Operations Discontinued Operations, net of tax Net Income (Loss) $ $ Regulated Distribution Regulated Transmission Competitive Energy Services (In millions) Corporate/Other and Reconciling...

  • Page 28
    ... paper customers. Distribution deliveries in 2015 are expected to increase to approximately 151 million MWHs primarily reflecting an increase in the industrial sector resulting from shale gas related activity and remain flat in both the commercial and residential sectors as compared to 2014 levels...

  • Page 29
    ... market price volatility for electricity and natural gas throughout PJM. Eight of the ten highest winter demands for electricity on the PJM system occurred in January 2014. The difference between wholesale generation revenues, primarily associated with MP's regulated generation, and certain energy...

  • Page 30
    ...programs for the Pennsylvania Companies ($67 million), Lower default generation service and NUG cost recovery in Pennsylvania ($48 million), Increased deferral of West Virginia vegetation management expenses ($33 million) and customer refunds associated with the gain on the Pleasants plant resulting...

  • Page 31
    ... primarily resulted from changes in state apportionment factors, an increase in state flow through income tax benefits and other realized tax benefits. In 2015, the Regulated Distribution segment anticipates an effective tax rate of approximately 37% to 38%. Regulated Transmission - 2014 Compared...

  • Page 32
    transfers, and higher capacity revenues from higher auction prices. Additionally, operating results were impacted by a $78 million after-tax gain on the sale of certain hydro facilities in February 2014. Revenues - Total revenues decreased $209 million in 2014, compared to 2013, primarily due to ...

  • Page 33
    ... results. Increased customer demand that was unhedged and replacement power requirements due to the timing of unplanned outages and derates contributed to purchasing additional volumes at these higher prices. Furthermore, in order to maintain system reliability, PJM incurred higher ancillary service...

  • Page 34
    ...asset transfer and the deactivation of certain power plants in 2013, partially offset by lower contract sales as described above. The increase in unit prices was primarily a result of market conditions related to extreme weather events in January 2014, partially offset by lower losses on financially...

  • Page 35
    ... to increase in future periods as a result of higher capital expenditures for projects such as MATS compliance and the Davis-Besse steam generator replacement completed in mid-2014. Pension and OPEB mark-to-market adjustments increased $434 million primarily reflecting a lower discount rate and...

  • Page 36
    ... - 2013 Compared with 2012 Financial results for FirstEnergy's business segments in 2013 and 2012 were as follows: Competitive Energy Services (In millions) Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power Other operating expenses Pension and OPEB...

  • Page 37
    2012 Financial Results Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power Other operating expenses Pension and OPEB mark-to-market Provision for depreciation Amortization of regulatory assets, net General taxes Total Operating Expenses Operating Income...

  • Page 38
    ... Income taxes (benefits) Income (Loss) From Continuing Operations Discontinued Operations, net of tax Net Income (Loss) Income attributable to noncontrolling interest Earnings (Losses) Available to FirstEnergy Corp. $ $ Regulated Distribution Regulated Transmission Competitive Energy Services (In...

  • Page 39
    ... compared to 2012. In 2013, the Regulated Distribution segment recognized an impairment charge of $322 million related to the October 2013 Harrison/Pleasants asset transfer and impairment charges of $305 million on regulatory assets associated with the recovery of marginal transmission losses for...

  • Page 40
    ... to increased generation at Fort Martin as a result of planned and forced outages in 2012 and the asset transfer between MP and AE Supply of the Harrison Power Station effective October 9, 2013. Purchased power costs were $493 million lower in 2013 primarily due to a decrease in volumes required as...

  • Page 41
    ... • decreased energy efficiency program expenses of $40 million resulting from the completion of certain initiatives in Ohio and Pennsylvania, which are recoverable through rates; lower distribution operating and maintenance expenses of $363 million due to lower storm related maintenance activities...

  • Page 42
    ... Hatfield and Mitchell plants and a $149 million loss on debt redemptions were partially offset by lower Pension and OPEB mark-to-market adjustments of $322 million. Excluding these charges, year over year earnings were impacted by lower capacity revenue as a result of lower auction clearing prices...

  • Page 43
    ... offset by reduced losses on financially settled contracts ($239 million) and lower capacity expenses ($126 million). The increase in rate primarily resulted from higher on-peak prices compared to 2012. The increase in purchased power volumes relates to the overall increase in sales volumes and...

  • Page 44
    ... (Liabilities) by Source Regulatory transition costs Customer receivables for future income taxes Nuclear decommissioning and spent fuel disposal costs Asset removal costs Deferred transmission costs Deferred generation costs Deferred distribution costs Contract valuations Storm-related costs Other...

  • Page 45
    ... extent available, employee benefit plans, and the projected $320 million annually in cash preserved as a result of the dividend action taken in January 2014. In 2014, FirstEnergy issued $83 million in equity through the stock investment plan and share-based employee benefit plans. The Utilities and...

  • Page 46
    ...debt and short-term borrowings. Currently payable long-term debt as of December 31, 2014, included the following: Currently Payable Long-Term Debt PCRBs supported by bank LOCs (1) FMBs Unsecured PCRBs (1) Collateralized lease obligation bonds Sinking fund requirements Other notes $ (1) (In millions...

  • Page 47
    ... from the FERC under existing market-based rate tariffs. Includes amounts which may be borrowed under the regulated companies' money pool. The entire amount of the FES/AE Supply Facility, $600 million of the FE Facility and $225 million of the FET Facility, subject to each borrower's sub...

  • Page 48
    ... the unregulated companies' money pool. Pollution Control Revenue Bonds As of December 31, 2014, FirstEnergy's currently payable long-term debt included approximately $92 million of FES variable interest rate PCRBs, the bondholders of which are entitled to the benefit of irrevocable direct pay bank...

  • Page 49
    ... during 2013 and $2,320 million during 2012. Cash flows from operations increased $51 million in 2014 compared with 2013 primarily due to: • • • An increase in Regulated Distribution and Regulated Transmission sales associated with higher weather-related usage as well as improving economic...

  • Page 50
    ... 2014, ATSI issued $400 million of 5% senior notes due 2044. Proceeds received from the issuance of the senior notes were used: (i) to fund capital expenditures, including capital expenditures related to its transmission investment plans; and (ii) for working capital needs and other general business...

  • Page 51
    ... of the Utilities and under which they procure the power supply necessary to provide generation service to their customers who do not choose an alternative supplier. Although actual amounts will be determined by future customer behavior and consumption levels, management currently estimates these...

  • Page 52
    ... deferred income taxes and investment tax credits since cash payments for income taxes are determined based primarily on taxable income for each applicable fiscal year. NUCLEAR INSURANCE The Price-Anderson Act limits the public liability which can be assessed with respect to a nuclear power plant to...

  • Page 53
    ... that require posting of collateral. Based on FES' power portfolio exposure as of December 31, 2014, FES has posted collateral of $175 million and AE Supply has posted no collateral. The Regulated Distribution segment has posted collateral of $1 million. These credit-risk-related contingent...

  • Page 54
    ... under the facility. FirstEnergy receives a fee for providing its guaranty, payable semiannually, which accrued at a rate of 4% through December 31, 2012, and accrues at a rate of 5% from January 1, 2013 through October 18, 2015, which amends the rate in the prior agreement, in each case based upon...

  • Page 55
    ... and an estimate of related price volatility. FirstEnergy uses these results to develop estimates of fair value for financial reporting purposes and for internal management decision making (see Note 9, Fair Value Measurements, of the Combined Notes to Consolidated Financial Statements). Sources of...

  • Page 56
    ..., which serve residential, commercial and industrial companies. Retail credit risk results when customers default on contractual obligations or fail to pay for service rendered. This risk represents the loss that may be incurred due to the nonpayment of customer accounts receivable balances, as well...

  • Page 57
    ... commercial and residential customers. All New Jersey EDCs participate in this competitive BGS procurement process and recover BGS costs directly from customers as a charge separate from base rates. In an order issued July 31, 2012, the NJBPU ordered JCP&L to file a base rate case using a historical...

  • Page 58
    ... to non-shopping customers at a market-based price set through an auction process; • Continuing Rider DCR that allows continued investment in the distribution system for the benefit of customers; • Continuing commitment not to recover from retail customers certain costs related to transmission...

  • Page 59
    ... updates to electric service regulations and tariffs to reflect regulatory orders, administrative rule changes, and current practices. Under Ohio's energy efficiency standards (SB221 and SB310), and the Ohio Companies' filing of amended energy efficiency plans, the Ohio Companies are required to...

  • Page 60
    ... (Act 129 of 2008), the PPUC was charged with reviewing the cost effectiveness of energy efficiency and peak demand reduction programs. The PPUC found the energy efficiency programs to be cost effective and directed all of the electric utilities in Pennsylvania to submit by November 15, 2012...

  • Page 61
    ...2011, announced new policies regarding transmission planning and transmission cost allocation, requiring the submission of a compliance filing by PJM and the PJM transmission owners demonstrating that the cost allocation methodology for new transmission projects directed by the PJM Board of Managers...

  • Page 62
    ... projects in PJM approved before ATSI joined PJM could be charged to transmission customers in the ATSI zone. The amount to be paid, and the question of derived benefits, is pending before FERC as a result of the Seventh Circuit's June 25, 2014 order described above under PJM Transmission Rates...

  • Page 63
    PATH Transmission Project On August 24, 2012, the PJM Board of Managers canceled the PATH project, a proposed transmission line from West Virginia through Virginia and into Maryland which PJM had previously suspended in February 2011. As a result of PJM canceling the project, approximately $62 ...

  • Page 64
    ..., the filing included: (i) shifting the VRR curve one percentage point to the right, which would increase the amount of capacity supply that is procured in the RPM auctions and the clearing price; and (ii) a change to the index used for calculating the generation plant construction costs of the 49

  • Page 65
    ... with SO2 and NOx emission reduction requirements under the CAA and SIP(s) by burning lower-sulfur fuel, utilizing combustion controls and post-combustion controls, generating more electricity from lower or non-emitting plants and/or using emission allowances. CAIR requires reductions of NOx and SO2...

  • Page 66
    ... and Armstrong plants in Pennsylvania and the coal-fired Fort Martin and Willow Island plants in West Virginia. The EPA's NOV alleges equipment replacements during maintenance outages triggered the pre-construction permitting requirements under the NSR and PSD programs. On June 29, 2012, January 31...

  • Page 67
    ...per KWH of electricity generated by FirstEnergy is lower than many of its regional competitors due to its diversified generation sources, which include low or non-CO2 emitting gas-fired and nuclear generators. Clean Water Act Various water quality regulations, the majority of which are the result of...

  • Page 68
    ... and reporting procedures to assure the safe disposal of CCRs from electric generating plants. Depending on how the final rules are ultimately implemented, the future costs of compliance with such CCR regulations may require material capital expenditures. The PA DEP filed a 2012 complaint against...

  • Page 69
    ... plant modifications and upgrades at FENOC's nuclear facilities. ICG Litigation On December 28, 2006, AE Supply and MP filed a complaint in the Court of Common Pleas of Allegheny County, Pennsylvania against ICG, Anker WV, and Anker Coal for failure to supply coal required by a long term CSA. A non...

  • Page 70
    ... last meter reading is estimated and a corresponding accrual for unbilled sales is recognized. The determination of unbilled sales and revenues requires management to make estimates regarding electricity available for retail load, transmission and distribution line losses, demand by customer class...

  • Page 71
    ...BB2D resulted in an increase to the projected benefit obligation of $373 million and $21 million for the pension and OPEB plans, respectively, and was included in the 2014 pension and OPEB mark-to-market adjustment. Based on discount rates of 4.25% for pension, 4.00% for OPEB and an estimated return...

  • Page 72
    ... Distribution and Regulated Transmission discounted cash flow analysis requiring significant management judgment included: discount rates, growth rates, projected operating income, changes in working capital, projected capital expenditures, projected funding of pension plans, expected results...

  • Page 73
    ... public accounting firm, has expressed an unqualified opinion on the Company's 2014 consolidated financial statements as stated in their audit report included herein. The Company's internal auditors, who are responsible to the Audit Committee of the Company's Board of Directors, review the results...

  • Page 74
    ..., on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and...

  • Page 75
    FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME (In millions) REVENUES: Electric utilities Unregulated businesses Total revenues* OPERATING EXPENSES: Fuel Purchased power Other operating expenses Pension and OPEB mark-to-market adjustment Provision for depreciation Amortization (deferral) of ...

  • Page 76
    ... INCOME (LOSS): Pension and OPEB prior service costs Amortized gains (losses) on derivative hedges Change in unrealized gain on available-for-sale securities Other comprehensive loss Income tax benefits on other comprehensive loss Other comprehensive loss, net of tax COMPREHENSIVE INCOME...

  • Page 77
    ... CURRENT LIABILITIES: Currently payable long-term debt Short-term borrowings Accounts payable Accrued taxes Accrued compensation and benefits Derivatives Other CAPITALIZATION: Common stockholders' equityCommon stock, $0.10 par value, authorized 490,000,000 shares - 421,102,570 and 418,628,559 shares...

  • Page 78
    ... of income taxes Pension and OPEB, net of $23 million of income tax benefits (Note 3) Stock-based compensation Cash dividends declared on common stock Stock issuance - employee benefits Balance, December 31, 2014 2,474,011 421,102,570 $ 42 $ 412,122 418,628,559 42 418,216,437 42 Number of Shares 418...

  • Page 79
    ... Lease payments on sale and leaseback transaction Income from discontinued operations (Note 19) Changes in current assets and liabilitiesReceivables Materials and supplies Prepayments and other current assets Accounts payable Accrued taxes Accrued interest Accrued compensation and benefits Cash...

  • Page 80
    ...+HOGIRU6DOH 6XPPDU\RI4XDUWHUO\)LQDQFLDO'DWD 8QDXGLWHG 66  71  74  80  83  89  90  91  93  99  104  109  111  112  121  128  129  138  140  141  65 

  • Page 81
    ... the related regulations, orders, policies and practices prescribed by the SEC, FERC, and, as applicable, the PUCO, the PPUC, the MDPSC, the NYPSC, the WVPSC, the VSCC and the NJBPU. The preparation of financial statements in conformity with GAAP requires management to make periodic estimates and...

  • Page 82
    ...AND RECEIVABLES The Utilities' principal business is providing electric service to customers in Ohio, Pennsylvania, West Virginia, New Jersey and Maryland. FES' principal business is supplying electric power to end-use customers through retail and wholesale arrangements, including affiliated company...

  • Page 83
    ... for planned major maintenance projects as they are incurred. The cost of nuclear fuel ($2 billion included in net plant) is capitalized within the CES segment's Property, plant and equipment and charged to fuel expense using the specific identification method. Net plant in service balances by...

  • Page 84
    ..., hydroelectric station in Bath County, Virginia, operated by the 60% owner, Virginia Electric and Power Company, a non-affiliated utility. Net Property, plant and equipment includes $686 million representing AGC's share in this facility as of December 31, 2014. AGC is obligated to pay its share of...

  • Page 85
    ... to customers associated with the excess purchase price received by MP above the net book value of MP's minority interest in the Pleasants Power Station. The impairment charge is included within the results of the Regulated Distribution segment. On July 8, 2013, officers of FirstEnergy and AE Supply...

  • Page 86
    ... the distribution, transmission and generation plant materials, net of reserve for excess and obsolete inventory. Materials are generally charged to inventory at weighted average cost when purchased and expensed or capitalized, as appropriate, when used or installed. Fuel inventory is accounted for...

  • Page 87
    ...Benefit Pension & OPEB Plans Total (In millions) AOCI Balance, January 1, 2012 Other comprehensive income before reclassifications (1) Amounts reclassified from AOCI Net other comprehensive income (loss) AOCI Balance, December 31, 2012...other comprehensive loss AOCI Balance, December 31, 2014 (1) $...

  • Page 88
    ...31 2014 2013 (In millions) 2012 Affected Line Item in Consolidated Statements of Income Gains & losses on cash flow hedges Commodity contracts Long-term debt $ (10) $ 8 (2) 1 $ Unrealized gains on AFS securities Realized gains on sales of securities $ $ Defined benefit pension and OPEB plans Prior...

  • Page 89
    ...table with projection scale BB2D was utilized to determine the 2014 benefit cost and obligation as of December 31, 2014 for the FirstEnergy pension and OPEB plans. The impact of using the RP2000 mortality table with projection scale BB2D resulted in an increase in the projected benefit obligation of...

  • Page 90
    ... 1 Service cost Interest cost Plan participants' contributions Plan amendments Medicare retiree drug subsidy Actuarial (gain) loss Benefits paid Benefit obligation as of December 31 Change in fair value of plan assets: Fair value of plan assets as of January 1 Actual return on plan assets Company...

  • Page 91
    ... 2013 13 37 (34) (207) (129) (320) $ $ 2012 12 47 (37) (203) 140 (41) Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31 Weighted-average discount rate Expected long-term return on plan assets Rate of compensation increase Pension 2014 5.00% 7.75% 4.20% 2013 4.25...

  • Page 92
    ... of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table. The following table provides a reconciliation of changes in the fair value of pension investments classified as Level 3 in the fair value hierarchy during 2014 and 2013...

  • Page 93
    ...In millions) $ 230 3 233 Excludes $(9) million as of December 31, 2014 of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table. December 31, 2013 Level 1 Cash and short-term securities Equity investment Domestic International...

  • Page 94
    ... 2 23 1-PercentagePoint Decrease $ $ (1) (22) (in millions) Taking into account estimated employee future service, FirstEnergy expects to make the following benefit payments from plan assets and other payments, net of participant contributions: OPEB Pension 2015 2016 2017 2018 2019 Years 2020-2024...

  • Page 95
    ...(8) FES' share of the net periodic pension and OPEB costs (credits) for the three years ended December 31, 2014 was as follows: Pension 2014 Net Periodic Costs (Credits) $ 150 $ 2013 (30) $ 2012 78 $ 2014 (24) $ (In millions) (40) $ (11) OPEB 2013 2012 4. STOCK-BASED COMPENSATION PLANS FirstEnergy...

  • Page 96
    ...-based awards grant the right to receive, at the end of the period of restriction, a number of shares of common stock equal to the number of stock units set forth in the agreement subject to adjustment based on FirstEnergy's performance relative to financial and operational performance targets. 2014...

  • Page 97
    ... participants' accounts. In 2013 and 2012, approximately 708,000 and 543,600 shares of FE common stock, respectively, were purchased on the market and contributed to participants' accounts. EDCP Under the EDCP, covered employees can direct a portion of their compensation, including annual incentive...

  • Page 98
    ... allocation is accounted for as a capital contribution to the company receiving the tax benefit. On December 19, 2014, the President signed into law the Tax Increase Prevention Act of 2014 (the Act). The Act, among other things, extended retroactively the R&D tax credit until December 31, 2014, and...

  • Page 99
    ... State Investment tax credit amortization Total provision for income taxes (benefits) FES Currently payable (receivable)Federal State Deferred, netFederal State Investment tax credit amortization Total provision for income taxes (benefits) (1) 2014 2013 (In millions) 2012 $ (132) $ (72...

  • Page 100
    ... at statutory rate (35%) Increases (reductions) in taxes resulting fromAmortization of investment tax credits State income taxes, net of federal tax benefit Medicare Part D Effectively settled tax items, including interest ESOP dividend Change in accounting method Tax basis balance sheet adjustments...

  • Page 101
    ... All other Net deferred income tax liability FES Property basis differences Deferred sale and leaseback gain Pension and OPEB Lease market valuation liability Nuclear decommissioning activities Asset retirement obligations Loss carryforwards and AMT credits Loss carryforward valuation reserve All...

  • Page 102
    ... as a result of the statute of limitations expiring, all of which would affect FirstEnergy's effective tax rate. The following table summarizes the changes in unrecognized tax positions for the years ended 2014, 2013 and 2012: FirstEnergy Balance, January 1, 2012 Current year increases Current year...

  • Page 103
    General Taxes 2014 FirstEnergy KWH excise State gross receipts Real and personal property Social security and unemployment Other Total general taxes FES State gross receipts Real and personal property Social security and unemployment Other Total general taxes $ $ 69 39 17 3 128 $ $ 77 40 19 2 138 $ ...

  • Page 104
    ... have the right to purchase the facilities at the expiration of the basic lease term or any renewal term at a price equal to the fair market value of the facilities. The basic rental payments are adjusted when applicable federal tax law changes. In 2007, FG completed a sale and leaseback transaction...

  • Page 105
    ... expense for these coal contracts is excluded from table above. FES acquired certain customer contract rights which were capitalized as intangible assets. These rights allow FES to supply electric generation to customers, and the recorded value is being amortized ratably over the term of the...

  • Page 106
    ..., phase-in recovery property owned by the SPEs (i.e. the right to impose, charge and collect irrevocable non-bypassable usagebased charges payable by retail electric customers in the service territories of the Ohio Companies) and the bondholder has no recourse to the general credit of FirstEnergy or...

  • Page 107
    ...an estimated amount for an adverse power purchase commitment related to the NUG entity wherein WP may hold a variable interest, for which WP has taken the scope exception. On November 20, 2012, WP entered into an agreement to terminate the adverse power purchase commitment and accrued a pre-tax loss...

  • Page 108
    ... are financial instruments that entitle the holder to a stream of revenues (or charges) based on the hourly dayahead congestion price differences across transmission paths. FTRs are acquired by FirstEnergy in the annual, monthly and long-term RTO auctions and are initially recorded using the auction...

  • Page 109
    ... at the end of the reporting period. There were no transfers between levels during the years ended December 31, 2014 and 2013. The following tables set forth the recurring assets and liabilities that are accounted for at fair value by level within the fair value hierarchy: FirstEnergy Recurring Fair...

  • Page 110
    ... that are classified as Level 3 in the fair value hierarchy for the period ended December 31, 2014: Fair Value, Net (In millions) FTRs NUG Contracts $ $ 25 (151) Valuation Technique Model Model Significant Input RTO auction clearing prices Generation Regional electricity prices Range ($7.20) to...

  • Page 111
    ...44 million and $9 million as of December 31, 2014 and December 31, 2013, respectively, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table. Rollforward of Level 3 Measurements The following table provides a reconciliation of...

  • Page 112
    ... of assets including private or direct placements, warrants, securities of FirstEnergy, investments in companies owning nuclear power plants, financial derivatives, securities convertible into common stock and securities of the trust funds' custodian or managers and their parents or subsidiaries...

  • Page 113
    ... 2014, and $636 million as of December 31, 2013, are excluded from the amounts reported above. During 2012, FE increased its ownership interest in a cost method investment. The increased investment triggered a change in the investment accounting from the cost method to the equity method. As a result...

  • Page 114
    ...2 in the fair value hierarchy as of December 31, 2014 and December 31, 2013. 10. DERIVATIVE INSTRUMENTS FirstEnergy is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity, natural gas, coal and energy transmission. To manage the...

  • Page 115
    ... exposures when it makes economic sense to do so, including circumstances where the hedging relationship does not qualify for hedge accounting. Electricity forwards are used to balance expected sales with expected generation and purchased power. Natural gas futures are entered into based on expected...

  • Page 116
    ...derivative instruments on FirstEnergy's Consolidated Balance Sheets: Derivative Assets Fair Value December 31, 2014 Current Assets Derivatives Commodity Contracts FTRs $ 121 38 159 $ 162 4 166 Noncurrent Liabilities Adverse Power Contract Liability Deferred Charges and Other Assets - Other Commodity...

  • Page 117
    ...Not Offset in Consolidated Balance Sheet December 31,...Received)/Pledged Net Fair Value (In millions) The following table summarizes the volumes associated with FirstEnergy's outstanding derivative transactions as of December 31, 2014: Purchases Power Contracts FTRs NUGs Natural Gas 21 43 6 40 Sales...

  • Page 118
    ... for commodity contracts and $67 million for FTRs associated with FES. Realized losses on financially settled wholesale sales contracts of $252 million resulting from higher market prices were netted in purchased power. Includes $365 million for commodity contracts associated with FES. Includes ($43...

  • Page 119
    ... of business conditions, results of operations, financial condition and other factors. On January 20, 2015 the Board of Directors declared a quarterly dividend of $0.36 per share to be paid in the first quarter of 2015. In addition to paying dividends from retained earnings, OE, CEI, TE, Penn, JCP...

  • Page 120
    PREFERRED AND PREFERENCE STOCK FirstEnergy and the Utilities were authorized to issue preferred stock and preference stock as of December 31, 2014, as follows: Preferred Stock Shares Authorized FirstEnergy OE OE Penn CEI TE TE JCP&L ME PN MP PE WP 5,000,000 6,000,000 8,000,000 1,200,000 4,000,000 3,...

  • Page 121
    ... debt expense as a result of the amendments, included in Loss on Debt Redemptions in the Consolidated Statement of Income for the year ended December 31, 2014. On March 31, 2014, FE executed, and fully utilized, a new $1 billion variable rate term loan credit agreement with a maturity date...

  • Page 122
    ...bonds were used to construct environmental control facilities. The special purpose limited liability companies own the irrevocable right to collect non-bypassable environmental control charges from all customers who receive electric delivery service in MP's and PE's West Virginia service territories...

  • Page 123
    ... various mortgage indentures amounted to payments of $8 million in 2014, all of which relate to Penn. Penn expects to meet its 2014 annual sinking fund requirement with a replacement credit under its mortgage indenture. As of December 31, 2014, FirstEnergy's currently payable long-term debt included...

  • Page 124
    ... Certain PCRBs are entitled to the benefit of irrevocable bank LOCs, to pay principal of, or interest on, the applicable PCRBs. To the extent that drawings are made under the LOCs, FG is entitled to a credit against its obligation to repay those bonds. FG pays annual fees based on the amounts of the...

  • Page 125
    ... from the FERC under existing market-based rate tariffs. Excluding amounts which may be borrowed under the regulated companies' money pool. The entire amount of the FES/AE Supply Facility, $600 million of the FE Facility and $225 million of the FET Facility, subject to each borrower's sub...

  • Page 126
    ... billion variable rate term loan entered into on March 31, 2014 and FE's existing revolving credit facility, including the same consolidated debt to total capitalization ratio requirement. As of December 31, 2014, FE was in compliance with the financial covenants associated with the applicable debt...

  • Page 127
    ... regulate rates of a public utility, subject to appeal to the PUCO if not acceptable to the utility. As competitive retail electric suppliers serving retail customers primarily in Ohio, Pennsylvania, Illinois, Michigan, New Jersey and Maryland, FES and AE Supply are subject to state laws applicable...

  • Page 128
    ... commercial and residential customers. All New Jersey EDCs participate in this competitive BGS procurement process and recover BGS costs directly from customers as a charge separate from base rates. In an order issued July 31, 2012, the NJBPU ordered JCP&L to file a base rate case using a historical...

  • Page 129
    ... updates to electric service regulations and tariffs to reflect regulatory orders, administrative rule changes, and current practices. Under Ohio's energy efficiency standards (SB221 and SB310), and the Ohio Companies' filing of amended energy efficiency plans, the Ohio Companies are required to...

  • Page 130
    ...has not been scheduled for oral argument. Ohio law requires electric utilities and electric service companies in Ohio to serve part of their load from renewable energy resources measured by an annually increasing percentage amount through 2024, except 2015 and 2016 that remain at the 2014 level. The...

  • Page 131
    ... (Act 129 of 2008), the PPUC was charged with reviewing the cost effectiveness of energy efficiency and peak demand reduction programs. The PPUC found the energy efficiency programs to be cost effective and directed all of the electric utilities in Pennsylvania to submit by November 15, 2012...

  • Page 132
    ...2011, announced new policies regarding transmission planning and transmission cost allocation, requiring the submission of a compliance filing by PJM and the PJM transmission owners demonstrating that the cost allocation methodology for new transmission projects directed by the PJM Board of Managers...

  • Page 133
    ... projects in PJM approved before ATSI joined PJM could be charged to transmission customers in the ATSI zone. The amount to be paid, and the question of derived benefits, is pending before FERC as a result of the Seventh Circuit's June 25, 2014 order described above under PJM Transmission Rates...

  • Page 134
    ... or estimate the possible loss or range of loss. PATH Transmission Project On August 24, 2012, the PJM Board of Managers canceled the PATH project, a proposed transmission line from West Virginia through Virginia and into Maryland which PJM had previously suspended in February 2011. As a result of...

  • Page 135
    ... with market-based rate authorization, filed a complaint asking FERC to issue an order requiring the removal of all portions of the PJM Tariff allowing or requiring DR to be included in the PJM capacity market, with a refund effective date of May 23, 2014. FESC also requested that the results of...

  • Page 136
    ...the clearing price; and (ii) a change to the index used for calculating the generation plant construction costs of the Net CONE formula for the future years between triennial reviews. On November 28, 2014, FERC accepted the PJM Tariff amendments as proposed, subject to a minor compliance requirement...

  • Page 137
    ... that require posting of collateral. Based on FES' power portfolio exposure as of December 31, 2014, FES has posted collateral of $175 million and AE Supply has posted no collateral. The Regulated Distribution segment has posted collateral of $1 million. These credit-risk-related contingent...

  • Page 138
    ... with SO2 and NOx emission reduction requirements under the CAA and SIP(s) by burning lower-sulfur fuel, utilizing combustion controls and post-combustion controls, generating more electricity from lower or non-emitting plants and/or using emission allowances. CAIR requires reductions of NOx and SO2...

  • Page 139
    ... and Armstrong plants in Pennsylvania and the coal-fired Fort Martin and Willow Island plants in West Virginia. The EPA's NOV alleges equipment replacements during maintenance outages triggered the pre-construction permitting requirements under the NSR and PSD programs. On June 29, 2012, January 31...

  • Page 140
    ...per KWH of electricity generated by FirstEnergy is lower than many of its regional competitors due to its diversified generation sources, which include low or non-CO2 emitting gas-fired and nuclear generators. Clean Water Act Various water quality regulations, the majority of which are the result of...

  • Page 141
    ... and reporting procedures to assure the safe disposal of CCRs from electric generating plants. Depending on how the final rules are ultimately implemented, the future costs of compliance with such CCR regulations may require material capital expenditures. The PA DEP filed a 2012 complaint against...

  • Page 142
    ... plant modifications and upgrades at FENOC's nuclear facilities. ICG Litigation On December 28, 2006, AE Supply and MP filed a complaint in the Court of Common Pleas of Allegheny County, Pennsylvania against ICG, Anker WV, and Anker Coal for failure to supply coal required by a long term CSA. A non...

  • Page 143
    ... current allocation or assignment formulas used and their bases include multiple factor formulas: each company's proportionate amount of FirstEnergy's aggregate direct payroll, number of employees, asset balances, revenues, number of customers, other factors and specific departmental charge ratios...

  • Page 144
    ... for FG. The Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended December 31, 2014, 2013, and 2012, Condensed Consolidating Balance Sheets as of December 31, 2014 and December 31, 2013, and Condensed Consolidating Statements of Cash Flows for the...

  • Page 145
    ... Ended December 31, 2014 STATEMENTS OF INCOME (LOSS) REVENUES OPERATING EXPENSES: Fuel Purchased power from affiliates Purchased power from non-affiliates Other operating expenses Pension and OPEB mark-to-market adjustments Provision for depreciation General taxes Total operating expenses OPERATING...

  • Page 146
    ... 31, 2013 STATEMENTS OF INCOME REVENUES OPERATING EXPENSES: Fuel Purchased power from affiliates Purchased power from non-affiliates Other operating expenses Pension and OPEB mark-to-market adjustments Provision for depreciation General taxes Total operating expenses OPERATING INCOME (LOSS) OTHER...

  • Page 147
    ... 31, 2012 STATEMENTS OF INCOME REVENUES OPERATING EXPENSES: Fuel Purchased power from affiliates Purchased power from non-affiliates Other operating expenses Pension and OPEB mark-to-market adjustments Provision for depreciation General taxes Total operating expenses OPERATING INCOME (LOSS) OTHER...

  • Page 148
    ... income tax benefits Customer intangibles Goodwill Property taxes Unamortized sale and leaseback costs Derivatives Other $ LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES: Currently payable long-term debt Short-term borrowingsAffiliated companies Other Accounts payableAffiliated companies Other...

  • Page 149
    ... income tax benefits Customer intangibles Goodwill Property taxes Unamortized sale and leaseback costs Derivatives Other $ LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES: Currently payable long-term debt Short-term borrowingsAffiliated companies Other Accounts payableAffiliated companies Other...

  • Page 150
    ... CASH FLOWS FROM INVESTING ACTIVITIES: Property additions Nuclear fuel Proceeds from asset sales Sales of investment securities held in trusts Purchases of investment securities held in trusts Loans to affiliated companies, net Other Net cash used for investing activities Net change in cash and cash...

  • Page 151
    ... FROM INVESTING ACTIVITIES: Property additions Nuclear fuel Proceeds from asset sales Sales of investment securities held in trusts Purchases of investment securities held in trusts Loans to affiliated companies, net Other Net cash provided from (used for) investing activities Net change in cash and...

  • Page 152
    ... FROM INVESTING ACTIVITIES: Property additions Nuclear fuel Proceeds from asset sales Sales of investment securities held in trusts Purchases of investment securities held in trusts Loans to affiliated companies, net Dividends received Other Net cash provided from (used for) investing activities...

  • Page 153
    ...Pennsylvania, West Virginia, Maryland, New Jersey and New York, and purchases power for its POLR, SOS, SSO and default service requirements in Ohio, Pennsylvania, New Jersey and Maryland. This segment also includes regulated electric generation facilities located primarily in West Virginia, Virginia...

  • Page 154
    Segment Financial Information Competitive Energy Services For the Years Ended December 31, Regulated Distribution Regulated Transmission Corporate / Other Reconciling Adjustments Consolidated (In millions) 2014 External revenues Internal revenues Total revenues Depreciation Amortization of ...

  • Page 155
    ... Pennsylvania, Virginia and West Virginia to subsidiaries of Harbor Hydro, a subsidiary of LS Power. The asset purchase agreement was entered into on August 23, 2013, and amended and restated as of September 4, 2013. On February 12, 2014, the sale of the hydroelectric power plants to LS Power closed...

  • Page 156
    ... of 2014, income tax benefits of $16 million were recorded that related to prior periods. The out-of-period adjustment primarily related to the correction of amounts included in the Company's tax basis balance sheet. Management has determined that this adjustment is not material to the current or...

  • Page 157
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  • Page 158
    ... Stock Investment Plan, visit AST's website at www.amstock.com/company/firstenergy.asp or contact AST toll-free at 1-800-736-3402. DIRECT DIVIDEND DEPOSIT Registered shareholders can have their dividend payments automatically deposited to checking, savings or credit union accounts at any financial...

  • Page 159
    PRESORTED STD U.S. POSTAGE PAID AKRON, OH PERMIT No. 561 76 South Main Street, Akron, Ohio 44308-1890