Allegheny Power 2015 Annual Report Download - page 49

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• Fossil operatingcosts decreased$73millionprimarily duetolower contractor, labor andmaterials andequipment costs
resultingfrom previously deactivatedunits andtheOctober 2013Harrison/Pleasants assettransfer.
• Nuclear operatingcosts increased$6millionas aresult of higher labor, contractor, materials andequipment costs. There
weretworefuelingoutages ineachof 2014and2013, however, thedurationof theoutages in2014exceededtheprior year.
• Transmissionexpenses increased$80 millionprimarily duetohigher operatingreserveandmarketbasedancillary costs
associatedwithmarket conditions relatedtoextremeweather events in2014. Additionally, effectiveJune1, 2013, network
expenses associatedwithPOLR sales inPennsylvaniabecametheresponsibility of suppliers.
• General taxes decreased$31millionprimarily duetolower gross receipts taxes resultingfrom reducedretail sales volumes,
lower payroll taxes as a result of lower labor costs noted above, lower property taxes due to the October 2013
Harrison/Pleasants asset transfer, andreducedOhiopersonal property taxes.
• Impairmentsof longlivedassets decreased$473millionduetotheimpairment of twounregulated, coalfired generating
plants recognizedin2013.
• Depreciation expense decreased $52 million primarily due to a reduction in the asset base as a result of the plant
deactivations andtheOctober 2013Harrison/Pleasants asset transfer notedabove.
• PensionandOPEB marktomarket adjustments increased$434millionto$327million, primarily reflectingalower discount
rateandrevisions tomortality assumptions extendingtheexpectedlifeinkey demographics usedtomeasurerelated
obligations in2014.
• Other operatingexpenses increased$55millionprimarily duetoanincreaseinmarktomarket expenses oncommodity
contract positions, andanimpairment of deferredadvertisingcosts of $23millionassociatedwiththeeliminationof future
sellingefforts intheMass Market andcertainDirect sales channels, partially offset by lower retail andmarketingrelated
costs.
Other Expense—
Total other expensein2014decreased$209millioncomparedto2013duetotheabsenceof a$141millionloss ondebt redemptions
in connectionwithsenior notes that wererepurchasedin2013, higher investment incomeprimarily ontheNDT investments, lower
OTTI andlower net interest expenseof $28millionduetodebt redemptions.
Income TaxBenefits—
CES' effectivetax ratewas 34.8% and37.3% for 2014and2013, respectively. Thedecreaseintheeffectivetax rate, whichresulted
in a lower tax benefit on pretax losses, primarily resulted from changes in state apportionment factors and higher valuation
allowances oncertainNOL carryforwards.
DiscontinuedOperations —
Discontinuedoperations increased$69millionin2014comparedtothesameperiodof last year primarily duetoapretaxgain of
approximately $142million($78millionaftertax) associated with the sale of hydro assets inFebruary 2014.
Corporate/Other —2014Comparedwith2013
Financial results from Corporate/Other resultedina$47millionincreaseinnet incomein2014comparedto2013primarily dueto
higher tax benefits, partially offset by $17millionof gains ondebt redemptions in2013. Thehigher tax benefits primarily resultedfrom
anIRSapprovedchangeinaccountingmethodthat increasedthetax basis of certainassets resultinginhigher futuretax deductions,
andtheresolution of state taxbenefitsresulting from the expiration of the statute of limitation on certain state taxpositions. Additional
incometax benefits of $25millionwererecognizedin2014that relatetoprior periods. Theoutofperiodadjustment primarily related
tothecorrectionof amounts includedonFirstEnergy's tax basis balancesheet. Management has determinedthat theseadjustments
arenot material tothecurrent or any prior period. The2013effectivetax ratebenefitedfrom reductions tovaluationallowances
against stateNOL carryforwards, as well as changes instateapportionment factors, whichreduceddeferredtax liabilities.
RegulatoryAssets
Regulatory assets represent incurredcosts that havebeendeferredbecauseof their probable future recovery from customers
through regulated rates. Regulatoryliabilitiesrepresent amountsthat are expected to be credited to customersthrough future
regulatedrates or amounts collectedfrom customers for costs not yet incurred. FirstEnergy andtheUtilities net their regulatory
assets andliabilities basedonfederal andstatejurisdictions. Thefollowingtableprovides informationabout thecompositionof net
regulatory assets as of December 31, 2015andDecember 31, 2014, andthechanges duringtheyear endedDecember 31, 2015:
33
RegulatoryAssets(Liabilities)bySource
December31,
2015
December31,
2014
Increase
(Decrease)
(Inmillions)
Regulatorytransitioncosts
$
185
$
240
$
(55
)
Customerreceivablesforfutureincometaxes
355
370
(15
)
Nucleardecommissioningandspentfueldisposalcosts
(272
)
(305
)
33
Assetremovalcosts
(372
)
(254
)
(118

)
Deferredtransmissioncosts
115
90
25
Deferredgenerationcosts
243
281
(38
)
Deferreddistributioncosts
335
182
153
Contractvaluations
186
153
33
Stormrelatedcosts
403
465
(62
)
Other
170
189
(19
)
NetRegulatoryAssetsincludedontheConsolidatedBalanceSheets
$
1,348
$
1,411
$
(63
)
Regulatoryassetsthatdonotearnacurrentreturntotaledapproximately$148millionand$488millionasofDecember31,2015and
2014, respectively, primarilyrelatedtostormdamagecosts.JCP&L'sregulatoryassetrelatedto2011and2012stormdamagecosts
beganearningareturnonApril1,2015.EffectivewiththeapprovedsettlementonApril9,2015,associatedwiththeirgeneralbase
ratecase,thePennsylvaniaCompaniestransferredthenetbookvalueoflegacymetersfromplantinservicetoregulatoryassets,
whichisbeingrecoveredoverfiveyears.
AsofDecember31,2015 andDecember31,2014,FirstEnergyhadapproximately$116millionand$243million ofnetregulatory
liabilitiesthatareprimarilyrelatedtoassetremovalcosts.Netregulatoryliabilitiesareclassifiedwithinothernoncurrentliabilitieson
theConsolidatedBalanceSheets.
CAPITALRESOURCESANDLIQUIDITY
FirstEnergyexpectsitsexistingsourcesofliquiditytoremainsufficienttomeetitsanticipatedobligationsandthoseofitssubsidiaries.
FirstEnergy’sbusinessiscapitalintensive,requiringsignificantresourcestofundoperatingexpenses,constructionexpenditures,
scheduleddebtmaturitiesandinterestpayments,dividendpayments,andcontributionstoitspensionplan.During2015,FirstEnergy
received$630millionofcashdividendsandcapitalreturnedfromitssubsidiariesandpaid$607millionincashdividendstocommon
shareholders.Inadditiontointernalsourcestofundliquidityandcapitalrequirementsfor2016andbeyond,FirstEnergyexpectsto
relyonexternalsourcesoffunds.Shorttermcashrequirementsnotmetbycashprovidedfromoperationsaregenerallysatisfied
throughshorttermborrowings.Longtermcashneedsmaybemetthroughtheissuanceoflongtermdebtand/orequity.FirstEnergy
expectsthatborrowingcapacityundercreditfacilitieswillcontinuetobeavailabletomanageworkingcapitalrequirementsalongwith
continuedaccesstolongtermcapitalmarkets.Additionally,FirstEnergyalsoexpectstoissuelongtermdebtatcertainUtilitiesand
certainothersubsidiariesto,amongotherthings,refinanceshorttermandmaturingdebtintheordinarycourse,subjecttomarketand
otherconditions.
Additionallyin2016,FirstEnergyhasminimumrequiredfundingobligationsof $381milliontoitsqualifiedpensionplan,ofwhich$160
millionhasbeencontributedtodate.FirstEnergyexpectstomakefuturecontributionstothequalifiedpensionplanin2016withcash,
equityoracombinationthereof,dependingon,amongotherthings,marketconditions.
FirstEnergy'slongertermstrategicoutlookforitsregulatedandcompetitivebusinesseswillbedeterminedfollowingresolutionofthe
OhioCompanies'ESPIV, includingthe proposedPPA between FESand the OhioCompanies. OncetheESPIV isfinalized,
FirstEnergyexpectstobeinapositiontomorefullyunderstandthelongertermoutlookofitscompetitivebusinessesandthelonger
termgrowthrateofitsregulatedbusinesses,includingplannedcapitalinvestmentsandanyadditionalequitytofundgrowthinits
regulatedbusinesses.WiththeexceptionofRegulatedTransmission's2016projectedcapitalexpendituresdiscussedbelow,planned
capital expenditures for 2016 for Regulated Distribution, CES, and Corporate/Other will depend on the outcome of the Ohio
Companies'ESPIVandremainsubjecttoBoardapproval.
FirstEnergy's strategy is to focus on investments in its regulated operations. The centerpiece of this strategy is a $4.2 billion
EnergizingtheFutureinvestmentplanthatbeganin2014andwillcontinuethrough2017toupgradeandexpandFirstEnergy's
transmissionsystem.Thisprogramisfocusedonprojectsthatenhancesystemperformance,physicalsecurityandaddoperating
flexibilityandcapacitystartingwiththeATSIsystemandmovingeastacrossFirstEnergy'sserviceterritoryovertime.Through2015,
FirstEnergy'scapitalexpendituresunderthisplanwere$2.4billionandin2016capitalexpendituresunderthisplanarecurrently
projectedtobeapproximately$1billion.Intotal,FirstEnergyhasidentifiedatleast$15billionintransmissioninvestmentopportunities
acrossthe24,000miletransmissionsystem,makingthisacontinuingplatformforinvestmentintheyearsbeyond2017.