Allegheny Power 2014 Annual Report Download - page 22

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The CES segment economically hedges exposure to price risk on a ratable basis, which is intended to reduce the near-term financial
impact of market price volatility. As of December 31, 2014, committed contract sales for calendar year 2015, 2016 and 2017 are
approximately 63 million MWHs, 36 million MWHs and 20 million MWHs, respectively. On average, CES expects to produce
approximately 75 - 80 million MWHs of electricity annually, with an additional 5 million MWHs related to purchased power agreements
for wind, solar and its entitlement to OVEC.
FirstEnergy has also reduced the size and shifted the mix of its generating assets, while reducing operating expenses and capital
expenditures, including the deactivation of certain plants and the 2014 sale of certain hydro assets for approximately $394 million
in February 2014. As a result, the remaining competitive fleet is more cost-effective, efficient and environmentally sound. FirstEnergy
is on track to exceed benchmarks established by MATS and other environmental regulations. Several new opportunities to lower
costs were identified in 2014, and FirstEnergy’s total cost for MATS compliance is expected to be approximately $370 million ($178
million at CES and $192 million at Regulated Distribution), of which $133 million has been spent through 2014 ($56 million at CES
and $77 million at Regulated Distribution).
In other generation matters, the replacement of two steam generators was successfully completed during a refueling outage at the
Davis-Besse Nuclear Power Station during the spring of 2014. At the Beaver Valley Nuclear Power Station, the company deferred
from 2017 to 2020 a planned Unit 2 reactor head and steam generator replacement after determining the unit can operate safely
and reliably until that time. Additionally, at the Bruce Mansfield Power Station, while the plant continues to operate, if market reforms
prove unsatisfactory and market conditions remain unfavorable, FirstEnergy may continue to minimize certain capital expenditures
at the plant, including a delay of the new water treatment upgrades necessary for the continued operation of the plant after the LBR
CCR Impoundment closes on December 31, 2016.
FirstEnergy’s net income in 2014 was $299 million, or basic earnings of $0.71 per share of common stock ($0.71 diluted), compared
with $392 million, or $0.94 per share of common stock ($0.94 diluted) in 2013, and $771 million, or $1.85 per share of common
stock ($1.84 diluted) in 2012.
Increase (Decrease)
2014 2013 2012 2014 vs 2013 2013 vs 2012
Basic earnings per share:
Continuing operations $ 0.51 $ 0.90 $ 1.81 $ (0.39) $ (0.91)
Discontinued operations 0.20 0.04 0.04 0.16 —
Earnings per basic share $ 0.71 $ 0.94 $ 1.85 $ (0.23) $ (0.91)
Diluted earnings per share:
Continuing operations $ 0.51 $ 0.90 $ 1.80 $ (0.39) $ (0.90)
Discontinued operations 0.20 0.04 0.04 0.16 —
Earnings per diluted share $ 0.71 $ 0.94 $ 1.84 $ (0.23) $ (0.90)
In 2014, FirstEnergy’s revenues increased $157 million as compared to 2013. The increase is primarily attributable to a $331 million
increase in wholesale generation sales at Regulated Distribution resulting from the October 2013 Harrison/Pleasants asset transfer
whereby MP acquired 1,476 MWs of generation from AE Supply. Additionally, Regulated Transmission’s revenues increased $38
million, or 5%, year over year resulting from incremental cost of service and rate base recovery. Partially offsetting these increases
was a decrease in CES revenues of approximately $209 million. As discussed above, in 2014 CES began to reduce its exposure
to weather sensitive load and eliminate load obligations that do not adequately cover risk premiums. This change in strategy resulted
in a 9% decrease in MWH sales compared to 2013. Going forward, CES expects to target 65 to 75 million MWHs in contract sales
with a projected target portfolio mix of approximately 10 to 15 million MWHs in Governmental Aggregation sales, 0 to 10 million
MWHs of POLR sales, 0 to 20 million MWHs in large commercial and industrial sales (Direct),10 to 20 million MWHs in block
wholesale sales, including Structured sales, and 10 to 20 million MWHs of spot wholesale sales. The target portfolio mix of contract
sales and wholesale sales is consistent with CES' expected annual generation of 80-85 million MWHs.
Operating expenses increased $677 million in 2014 as compared to 2013. This increase includes a $1.1 billion increase in
FirstEnergy's Pension and OPEB mark-to-market adjustment partially offset by the absence of impairment charges on regulatory
assets and long lived assets of $1.1 billion recognized in 2013. FirstEnergy immediately recognizes in the fourth quarter of each
year (or when a plan is determined to qualify for re-measurement) the change in fair value of plan assets and net actuarial gains
and losses. Given the decline in the current interest rate environment and its impact on discount rates and revisions to mortality
assumptions extending the expected life in key demographics, FirstEnergy's Pension and OPEB mark-to-market adjustment was
$835 million 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 to the amount permitted to be included in rate base.