Allegheny Power 2014 Annual Report Download - page 23

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Other changes in operating expenses include the following:
• Lower fuel expense of $216 million, primarily reflected the deactivation of power plants in 2013 and increased outages.
Fuel expense at CES and Regulated Distribution was further impacted by the October 2013 Harrison/Pleasants asset
transfer.
• Purchased power increased $753 million, primarily reflecting higher CES purchases resulting from plant deactivations,
increased outages and the asset transfer discussed above as well as higher unit pricing and capacity expense. The increase
in unit pricing primarily resulted from the extreme weather events in the first quarter of 2014, which included the polar
vortex. These weather events significantly increased the demand for electricity and natural gas throughout the PJM Region
resulting in average prices for electricity nearly double the three-year average at $68 per MWH.
• Other operating expenses increased $369 million primarily resulting from higher costs at Regulated Distribution associated
with transmission expenses, which are deferred for future recovery with no material impact on earnings, increased
vegetation management expenses in West Virginia, which are also deferred for future recovery, as well as higher operating
and maintenance costs of $98 million associated with distribution maintenance activities, storm restoration costs and the
Harrison/Pleasants asset transfer. Although CES other operating expenses were higher year over year, the increase was
primarily attributable to higher transmission costs, which resulted from the extreme market conditions in the first quarter
of 2014, and higher mark-to-market expenses on derivative contracts, partially offset by lower generation operating and
maintenance costs primarily resulting from the deactivation of generating plants and the Harrison/Pleasants asset transfer.
FirstEnergy’s other expenses decreased $121 million year over year, primarily resulting from the absence of a loss on debt
redemptions of $124 million recognized in 2013. Higher interest expense was offset by higher investment income and capitalized
financing costs, which is primarily attributable to Regulated Transmission’s Energizing the Future investment plan.
FirstEnergy’s effective tax rate on income from continuing operations was (24.6%) in 2014 compared to 34.2% in 2013. The decrease
in the effective tax rate was attributable to several tax planning initiatives executed during 2014, including tax benefits associated
with a change in accounting method with the IRS for costs associated with the refurbishment of meters and transformers and the
expiration of the statute of limitations on uncertain state tax positions. Additionally, during 2014, FirstEnergy recognized tax benefits
of $25 million that related to prior periods resulting from adjustments to its tax basis balance sheet.
Finally, in February 2014, CES sold certain hydro generating assets for $394 million and recorded an after-tax gain of approximately
$78 million included in discontinued operations.
STRATEGY AND OUTLOOK
FirstEnergy owns a large and diverse mix of assets managed in an integrated model, featuring an electric distribution service area
and transmission footprint that are among the largest in the nation, as well as a significant competitive generation fleet and competitive
sales business. As the initiatives launched to develop the transmission business, strengthen the regulated utilities, and manage
overall risk within the competitive business are implemented, 2015 is expected be a transformational year for FirstEnergy.
Regulated Transmission
FirstEnergy's strategy is focused on investments in its regulated operations. The centerpiece of this strategy is the $4.2 billion
Energizing the Future 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 those requested by PJM to support grid reliability, generator deactivations, or
shale gas expansion activities. The second category of projects, those that support reliability enhancement, focus on replacing
aging equipment; increasing automation, communication, and security within the system; and increasing load serving capability. In
the initial years of the program, the majority of the projects are located within the ATSI system, with expectations to move east
across FirstEnergy's service territory over time. FirstEnergy currently expects to fund these investments through a combination of
debt and previously announced equity issuances through its stock investment plan, to the extent available, employee benefit plans,
and cash. In 2015, FirstEnergy expects Regulated Transmission capital expenditures of $970 million for regulatory required and
reliability enhancement projects. In total, FirstEnergy has identified approximately $15 billion in transmission investment opportunities
across its system beyond the 2014-2017 period, making this a continuing and sustainable platform for investment. In the future,
FirstEnergy may consider additional equity to fund these capital investments in the Regulated Transmission business.
Regulated Distribution
In the five-state service territory served by FirstEnergy’s Regulated Distribution segment, the economy has begun to recover from
the recession. While residential sales have been relatively flat, commercial and industrial sales have grown consistently over the
past year. The location of the Marcellus and Utica shale gas region has provided a source of this growth and distribution sales in
2015 are forecasted to increase 1% over 2014 to approximately 151 million MWHs and industrial sales through 2019 are forecasted
to increase by approximately 15% from 2013 levels, about half of which are driven by shale related projects. Additionally, FirstEnergy
expects to resolve all of its remaining pending rate case applications during the first half of 2015.