FE-03.31.2013-10Q


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

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

For the quarterly period ended March 31, 2013

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
 
 
 
 
 
 
 
000-53742
 
FIRSTENERGY SOLUTIONS CORP.
 
31-1560186
 
 
(An Ohio 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 þ No o
 
FirstEnergy Corp. and 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 þ No o
 
FirstEnergy Corp. and FirstEnergy Solutions Corp.
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 þ
FirstEnergy Corp.
 
 
Accelerated Filer o
N/A
 
 
Non-accelerated Filer (Do not check
if a smaller reporting company)
þ
FirstEnergy Solutions Corp.
 
 
Smaller Reporting Company o
N/A
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
 
FirstEnergy Corp. and FirstEnergy Solutions Corp.
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 6, 2013
FirstEnergy Corp., $0.10 par value
 
418,216,437

FirstEnergy Solutions Corp., no par value
 
7

FirstEnergy Corp. is the sole holder of FirstEnergy Solutions Corp. common stock.
This combined Form 10-Q is separately filed by FirstEnergy Corp. and FirstEnergy Solutions Corp. 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 FirstEnergy Solutions Corp. is also attributed to FirstEnergy Corp.
FirstEnergy Web Site and Other Social Media Sites and Applications
Each of the registrants’ Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also made available free of charge on or through the "Investors" page of FirstEnergy’s Internet web site at www.firstenergycorp.com.
These SEC filings are posted on the web site as soon as reasonably practicable after they are electronically filed with the SEC. Additionally, the registrants routinely post additional important information including press releases, investor presentations and notices of upcoming events, under the "Investors" section of FirstEnergy’s Internet web site and recognize FirstEnergy’s Internet web site as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under SEC Regulation FD. Investors may be notified of postings to the web site by signing up for email alerts and RSS feeds on the "Investors" page of FirstEnergy's Internet web site or through push alerts from FirstEnergy Investor Relations apps for Apple Inc.'s iPad and iPhone devices, which can be installed for free at the Apple online store. FirstEnergy also uses Twitter as an additional channel of distribution to reach public investors and as a supplemental means of disclosing material non-public information for complying with its disclosure obligations under SEC Regulation FD. Information contained on FirstEnergy’s Internet web site or its Twitter site, and any corresponding applications of those sites, shall not be deemed incorporated into, or to be part of, this report.
OMISSION OF CERTAIN INFORMATION
FirstEnergy Solutions Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is 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, in general, and the retail sales market in particular.
The impact of the regulatory process on the pending matters before FERC and in the various states in which we do business including, but not limited to, matters related to rates and pending rate cases.
The uncertainties of various cost recovery and cost allocation issues resulting from ATSI's realignment into PJM.
Economic or weather conditions affecting future sales and margins.
Regulatory outcomes associated with Hurricane Sandy.
Changing energy, capacity and commodity market prices including, but not limited to, coal, natural gas and oil, and availability and their impact on retail margins.
The continued ability of our regulated utilities to recover their costs.
Operation and maintenance costs being higher than anticipated.
Other legislative and regulatory changes, and revised environmental requirements, including possible GHG emission, water discharge, water intake and coal combustion residual regulations, the potential impacts of CAIR, and any laws, rules or regulations that ultimately replace CAIR, and the effects of the EPA's MATS rules including our estimated costs of compliance.
The uncertainty of the timing and amounts of the capital expenditures that may arise in connection with any litigation, including NSR litigation or potential regulatory initiatives or rulemakings (including that such expenditures could result in our decision to deactivate or idle certain generating units).
The uncertainties associated with the deactivation of certain older unscrubbed regulated and competitive fossil units, including the impact on vendor commitments, and the timing thereof as they relate to, among other things, the RMR arrangements and the reliability of the transmission grid.
Adverse regulatory or legal decisions and outcomes with respect to our nuclear operations (including, but not limited to the revocation or non-renewal of necessary licenses, approvals or operating permits by the NRC or as a result of the incident at Japan's Fukushima Daiichi Nuclear Plant).
Adverse legal decisions and outcomes related to ME's and PN's ability to recover certain transmission costs through their TSC riders.
The impact of future changes to the operational status or availability of our generating units.
The risks and uncertainties associated with litigation, arbitration, mediation and like proceedings, including, but not limited to, any such proceedings related to vendor commitments.
Replacement power costs being higher than anticipated or inadequately hedged.
The ability to comply with applicable state and federal reliability standards and energy efficiency and peak demand reduction mandates.
Changes in customers' demand for power, including but not limited to, changes resulting from the implementation of state and federal energy efficiency and peak demand reduction mandates.
The ability to accomplish or realize anticipated benefits from strategic and financial goals including, but not limited to, the ability to reduce costs and to successfully complete our announced financial plans designed to improve our credit metrics and strengthen our balance sheet, including but not limited to, proposed capital raising and debt reduction initiatives, the proposed West Virginia asset transfer and potential sale of non-core hydro assets.
Our ability to improve electric commodity margins and the impact of, among other factors, the increased cost of fuel and fuel transportation on such margins.
The ability to experience growth in the Regulated Distribution segment and to continue to successfully implement our direct retail sales strategy in the Competitive Energy Services segment.
Changing market conditions that could affect the measurement of liabilities and the value of assets held in our NDTs, pension trusts and other trust funds, and cause us and our subsidiaries 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 plan, the cost of such capital and overall condition of the capital and credit markets affecting us and our subsidiaries.
Actions that may be taken by credit rating agencies that could negatively affect us and our subsidiaries' access to financing, increase the costs thereof, and increase requirements to post additional collateral to support outstanding commodity positions, LOCs and other financial guarantees.
Changes in national and regional economic conditions affecting us, our subsidiaries and our major industrial and commercial customers, and other counterparties including fuel suppliers, with which we do business.
Issues concerning the stability of domestic and foreign financial institutions and counterparties with which we do business.
The risks and other factors discussed from time to time in our SEC filings, and other similar factors.





Dividends declared from time to time on FE's common stock during any annual period may in the aggregate vary from the indicated amount due to circumstances considered by FE's Board of Directors at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
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 FirstEnergy's 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, except as required by law, any forward-looking statements contained herein as a result of new information, future events or otherwise.




TABLE OF CONTENTS
 
Page
 
 
Part I. Financial Information
 
 
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
FirstEnergy Corp. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
Item 4. Mine Safety Disclosures
 
 
Item 5. Other Information
 
 


i



GLOSSARY OF TERMS
The following abbreviations and acronyms are used in this report to identify FirstEnergy Corp. and its current and former subsidiaries:

AE
Allegheny Energy, Inc., a Maryland utility holding company that merged with a subsidiary of FirstEnergy on February 25, 2011
AE Supply
Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of AE
AGC
Allegheny Generating Company, a generation subsidiary of AE Supply
Allegheny
Allegheny Energy, Inc., together with its consolidated subsidiaries
Allegheny Utilities
MP, PE and WP
ATSI
American Transmission Systems, Incorporated, formerly a direct subsidiary of FE that became a subsidiary of FET in April 2012, which owns and operates transmission facilities.
CEI
The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary
FE
FirstEnergy Corp., a public utility holding company
FENOC
FirstEnergy Nuclear Operating Company, which operates nuclear generating facilities
FES
FirstEnergy Solutions Corp., which provides energy-related products and services
FESC
FirstEnergy Service Company, which provides legal, financial and other corporate support services
FET
FirstEnergy Transmission, LLC, formerly known as Allegheny Energy Transmission, LLC, a subsidiary of AE, which is the parent of ATSI and TrAIL and has a joint venture in PATH.
FEV
FirstEnergy Ventures Corp., which invests in certain unregulated enterprises and business ventures
FG
FirstEnergy Generation, LLC, a subsidiary of FES, which owns and operates non-nuclear generating facilities
FirstEnergy
FirstEnergy Corp., together with its consolidated subsidiaries
Global Holding
Global Mining Holding Company, LLC, a joint venture between FEV, WMB Marketing Ventures, LLC and Pinesdale LLC
Global Rail
A subsidiary of Global Holding that owns coal transportation operations near Roundup, Montana
JCP&L
Jersey Central Power & Light Company, a New Jersey electric utility operating subsidiary
ME
Metropolitan Edison Company, a Pennsylvania electric utility operating subsidiary
MP
Monongahela Power Company, a West Virginia electric utility operating subsidiary of AE
NG
FirstEnergy Nuclear Generation, LLC, a subsidiary of FES, which owns nuclear generating facilities
OE
Ohio Edison Company, an Ohio electric utility operating subsidiary
Ohio Companies
CEI, OE and TE
PATH
Potomac-Appalachian Transmission Highline, LLC, a joint venture between Allegheny and a subsidiary of AEP
PATH-Allegheny
PATH Allegheny Transmission Company, LLC
PATH-WV
PATH West Virginia Transmission Company, LLC
PE
The Potomac Edison Company, a Maryland electric utility operating subsidiary of AE
Penn
Pennsylvania Power Company, a Pennsylvania electric utility operating subsidiary of OE
Pennsylvania Companies
ME, PN, Penn and WP
PN
Pennsylvania Electric Company, a Pennsylvania electric utility operating subsidiary
PNBV
PNBV Capital Trust, a special purpose entity created by OE in 1996
Shippingport
Shippingport Capital Trust, a special purpose entity created by CEI and TE in 1997
Signal Peak
An indirect subsidiary of Global Holding that owns mining operations near Roundup, Montana
TE
The Toledo Edison Company, an Ohio electric utility operating subsidiary
TrAIL
Trans-Allegheny Interstate Line Company, a subsidiary of FET, which owns and operates transmission facilities
Utilities
OE, CEI, TE, Penn, JCP&L, ME, PN, MP, PE and WP
WP
West Penn Power Company, a Pennsylvania electric utility operating subsidiary of AE
 
 
The following abbreviations and acronyms are used to identify frequently used terms in this report:
AEP
American Electric Power Company, Inc.
AFS
Available-for-sale
ALJ
Administrative Law Judge
AMP
American Municipal Power, Inc.
Anker WV
Anker West Virginia Mining Company, Inc.
Anker Coal
Anker Coal Group, Inc.
AOCI
Accumulated Other Comprehensive Income
ARO
Asset Retirement Obligation

ii



GLOSSARY OF TERMS, Continued

ARR
Auction Revenue Right
ASLB
Atomic Safety and Licensing Board
BGS
Basic Generation Service
BTU
British Thermal Units
CAA
Clean Air Act
CAIR
Clean Air Interstate Rule
CBP
Competitive Bid Process
CCB
Coal Combustion By-products
CDWR
California Department of Water Resources
CERCLA
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
CFR
Code of Federal Regulations
CO2
Carbon Dioxide
CSAPR
Cross-State Air Pollution Rule
CWA
Clean Water Act
DCR
Delivery Capital Recovery
DOE
United States Department of Energy
DOJ
United States Department of Justice
DSP
Default Service Plan
EDC
Electric Distribution Company
EE&C
Energy Efficiency and Conservation
EGS
Electric Generation Supplier
EIS
Environmental Impact Statement
ENEC
Expanded Net Energy Cost
EPA
United States Environmental Protection Agency
ERO
Electric Reliability Organization
ESP
Electric Security Plan
FERC
Federal Energy Regulatory Commission
Fitch
Fitch Ratings
FMB
First Mortgage Bond
FPA
Federal Power Act
FTR
Financial Transmission Right
GAAP
Accounting Principles Generally Accepted in the United States of America
GHG
Greenhouse Gases
GWH
Gigawatt-hour
HCL
Hydrochloric Acid
ICC
Illinois Commerce Commission

ICE
IntercontinentalExchange, Inc.
ICG
International Coal Group Inc.
ILP
Integrated License Application Process
kV
Kilovolt
KWH
Kilowatt-hour
LBR
Little Blue Run
LCAPP
Long-Term Capacity Agreement Pilot Program
LOC
Letter of Credit
LSE
Load Serving Entity
MATS
Mercury and Air Toxics Standards
MDPSC
Maryland Public Service Commission
MISO
Midwest Independent Transmission System Operator, Inc.
Moody’s
Moody’s Investors Service, Inc.
MOPR
Minimum Offer Price Rule
MTEP
MISO Regional Transmission Expansion Plan

iii



GLOSSARY OF TERMS, Continued

MVP
Multi-value Project
MW
Megawatt
MWH
Megawatt-hour
NDT
Nuclear Decommissioning Trust
NEPA
National Environmental Policy Act
NERC
North American Electric Reliability Corporation
NJBPU
New Jersey Board of Public Utilities
NNSR
Non-Attainment New Source Review
NOV
Notice of Violation
NOx
Nitrogen Oxide
NPDES
National Pollutant Discharge Elimination System
NRC
Nuclear Regulatory Commission
NSR
New Source Review
NUG
Non-Utility Generation
NYPSC
New York State Public Service Commission
NYSEG
New York State Electric and Gas
OCC
Ohio Consumers' Counsel
OCI
Other Comprehensive Income
OPEB
Other Post-Employment Benefits
OTTI
Other Than Temporary Impairments
OVEC
Ohio Valley Electric Corporation
PA DEP
Pennsylvania Department of Environmental Protection
PCB
Polychlorinated Biphenyl
PCRB
Pollution Control Revenue Bond
PJM
PJM Interconnection LLC
PM
Particulate Matter
POLR
Provider of Last Resort
PPUC
Pennsylvania Public Utility Commission
PSA
Power Supply Agreement
PSD
Prevention of Significant Deterioration
PUCO
Public Utilities Commission of Ohio
PURPA
Public Utility Regulatory Policies Act of 1978
REC
Renewable Energy Credit
RFC
ReliabilityFirst Corporation
RFP
Request for Proposal
RGGI
Regional Greenhouse Gas Initiative
RMR
Reliability Must-Run
RPM
Reliability Pricing Model
RTEP
Regional Transmission Expansion Plan
RTO
Regional Transmission Organization
S&P
Standard & Poor’s Ratings Service
SAIDI
System Average Interruption Duration Index
SAIFI
System Average Interruption Frequency Index
SAMA
Severe Accident Mitigation Alternatives
SB221
Amended Substitute Senate Bill 221
SBC
Societal Benefits Charge
SEC
United States Securities and Exchange Commission
SIP
State Implementation Plan(s) Under the Clean Air Act
SMIP
Smart Meter Implementation Plan
SO2
Sulfur Dioxide
SOS
Standard Offer Service

iv



GLOSSARY OF TERMS, Continued

SREC
Solar Renewable Energy Credit
SSO
Standard Service Offer
TDS
Total Dissolved Solid
TMI-2
Three Mile Island Unit 2
TSC
Transmission Service Charge
UWUA
Utility Workers Union of America
VIE
Variable Interest Entity
VSCC
Virginia State Corporation Commission
WVDEP
West Virginia Department of Environmental Protection
WVPSC
Public Service Commission of West Virginia
 

v



PART I. FINANCIAL INFORMATION

ITEM I.         Financial Statements

FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 

Three Months Ended March 31
 
(In millions, except per share amounts)
 
2013
 
2012
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
Electric utilities
 
$
2,388

 
$
2,540

 
Unregulated businesses
 
1,341

 
1,450

 
Total revenues*
 
3,729

 
3,990

 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
Fuel
 
630

 
541

 
Purchased power
 
943

 
1,259

 
Other operating expenses
 
884

 
818

 
Provision for depreciation
 
294

 
279

 
Amortization of regulatory assets, net
 
59

 
75

 
General taxes
 
265

 
272

 
Total operating expenses
 
3,075

 
3,244

 
 
 
 
 
 
 
OPERATING INCOME
 
654

 
746

 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
Loss on debt redemptions
 
(119
)
 

 
Investment income
 
18

 
11

 
Interest expense
 
(256
)
 
(246
)
 
Capitalized interest
 
15

 
17

 
Total other expense
 
(342
)
 
(218
)
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
312

 
528

 
 
 
 
 
 
 
INCOME TAXES
 
116

 
222

 
 
 
 
 
 
 
NET INCOME
 
$
196

 
$
306

 
 
 
 
 
 
 
EARNINGS PER SHARE OF COMMON STOCK:
 
 
 
 
 
Basic
 
$
0.47

 
$
0.73

 
Diluted
 
$
0.47

 
$
0.73

 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
 
 
 
 
 
Basic
 
418

 
418

 
Diluted
 
419

 
420

 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
 
$
0.55

 
$
0.55

 

*
Includes excise tax collections of $114 million and $121 million in the three months ended March 31, 2013 and 2012, respectively.

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


1



FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended March 31
 
(In millions)
 
2013
 
2012
 
 
 
 
 
 
 
NET INCOME
 
$
196

 
$
306

 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS):
 
 

 
 

 
Pensions and OPEB prior service costs
 
(46
)
 
(53
)
 
Amortized losses (gains) on derivative hedges
 
1

 
(2
)
 
Change in unrealized gain on available-for-sale securities
 
5

 
10

 
Other comprehensive loss
 
(40
)
 
(45
)
 
Income tax benefits on other comprehensive loss
 
(16
)
 
(24
)
 
Other comprehensive loss, net of tax
 
(24
)
 
(21
)
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
172

 
$
285

 
 
 
 
 
 
 

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.



2



FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In millions, except share amounts)
 
March 31,
2013
 
December 31,
2012
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
67

 
$
172

Receivables-
 
 

 
 

Customers, net of allowance for uncollectible accounts of $41 in 2013 and $40 in 2012
 
1,631

 
1,614

Other, net of allowance for uncollectible accounts of $3 in 2013 and $4 in 2012
 
227

 
315

Materials and supplies, at average cost
 
835

 
861

Prepaid taxes
 
252

 
119

Derivatives
 
183

 
160

Accumulated deferred income taxes
 
90

 
319

Other
 
214

 
208

 
 
3,499

 
3,768

PROPERTY, PLANT AND EQUIPMENT:
 
 

 
 

In service
 
43,748

 
43,210

Less — Accumulated provision for depreciation
 
12,823

 
12,600

 
 
30,925

 
30,610

Construction work in progress
 
2,361

 
2,293

 
 
33,286

 
32,903

INVESTMENTS:
 
 

 
 

Nuclear plant decommissioning trusts
 
2,227

 
2,204

Investments in lease obligation bonds
 
54

 
54

Other
 
934

 
936

 
 
3,215

 
3,194

DEFERRED CHARGES AND OTHER ASSETS:
 
 

 
 

Goodwill
 
6,447

 
6,447

Regulatory assets
 
2,312

 
2,375

Other
 
1,665

 
1,719

 
 
10,424

 
10,541

 
 
$
50,424

 
$
50,406

LIABILITIES AND CAPITALIZATION

 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Currently payable long-term debt
 
$
2,296

 
$
1,999

Short-term borrowings
 
2,150

 
1,969

Accounts payable
 
982

 
1,599

Accrued taxes
 
392

 
543

Accrued compensation and benefits
 
240

 
331

Derivatives
 
126

 
126

Other
 
946

 
1,038

 
 
7,132

 
7,605

CAPITALIZATION:
 
 

 
 

Common stockholders’ equity-
 
 

 
 

Common stock, $0.10 par value, authorized 490,000,000 shares - 418,216,437 shares outstanding
 
42

 
42

Other paid-in capital
 
9,739

 
9,769

Accumulated other comprehensive income
 
361

 
385

Retained earnings
 
2,854

 
2,888

Total common stockholders’ equity
 
12,996

 
13,084

Noncontrolling interest
 
4

 
9

Total equity
 
13,000

 
13,093

Long-term debt and other long-term obligations
 
15,814

 
15,179

 
 
28,814

 
28,272

NONCURRENT LIABILITIES:
 
 

 
 

Accumulated deferred income taxes
 
6,542

 
6,616

Retirement benefits
 
3,070

 
3,080

Asset retirement obligations
 
1,767

 
1,599

Deferred gain on sale and leaseback transaction
 
883

 
892

Adverse power contract liability
 
465

 
506

Other
 
1,751

 
1,836

 
 
14,478

 
14,529

COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 11)
 


 


 
 
$
50,424

 
$
50,406


The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


3



FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Three Months Ended March 31
 
(In millions)
 
2013
 
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net Income
 
$
196

 
$
306

 
Adjustments to reconcile net income to net cash from operating activities-
 
 
 
 
 
Provision for depreciation
 
294

 
279

 
Amortization of regulatory assets, net
 
59

 
75

 
Nuclear fuel and lease amortization
 
53

 
58

 
Deferred purchased power and other costs
 
(25
)
 
(107
)
 
Deferred income taxes and investment tax credits, net
 
134

 
265

 
Investment impairments
 
7

 
4

 
Deferred rents and lease market valuation liability
 
37

 
(23
)
 
Retirement benefits
 
(64
)
 
(39
)
 
Commodity derivative transactions, net (Note 8)
 
4

 
(64
)
 
Pension trust contributions
 

 
(600
)
 
Cash collateral, net
 
(1
)
 
(28
)
 
Loss on debt redemptions
 
119

 

 
Decrease (increase) in operating assets-
 
 
 
 
 
Receivables
 
(34
)
 
59

 
Materials and supplies
 
26

 
(118
)
 
Prepayments and other current assets
 
(159
)
 
(19
)
 
Increase (decrease) in operating liabilities-
 
 
 
 
 
Accounts payable
 
(385
)
 
(256
)
 
Accrued taxes
 
(126
)
 
(116
)
 
Accrued interest
 
53

 
70

 
Accrued compensation and benefits
 
(91
)
 
(123
)
 
Other
 
(47
)
 
(36
)
 
Net cash provided from (used for) operating activities
 
50

 
(413
)
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
New Financing-
 
 
 
 
 
Long-term debt
 
1,800

 

 
Short-term borrowings, net
 
181

 
1,075

 
Redemptions and Repayments-
 
 
 
 
 
Long-term debt
 
(956
)
 
(16
)
 
Common stock dividend payments
 
(230
)
 
(230
)
 
Other
 
(23
)
 
(10
)
 
Net cash provided from financing activities
 
772

 
819

 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Property additions
 
(826
)
 
(517
)
 
Nuclear fuel
 
(27
)
 
(72
)
 
Sales of investment securities held in trusts
 
539

 
251

 
Purchases of investment securities held in trusts
 
(565
)
 
(266
)
 
Cash investments
 
6

 
78

 
Other
 
(54
)
 
(8
)
 
Net cash used for investing activities
 
(927
)
 
(534
)
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
(105
)
 
(128
)
 
Cash and cash equivalents at beginning of period
 
172

 
202

 
Cash and cash equivalents at end of period
 
$
67

 
$
74

 
    
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


4



FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended March 31
 
(In millions)
 
2013
 
2012
 
 
 
 
 
 
 
STATEMENTS OF INCOME
 
 
 
 
 
REVENUES:
 
 
 
 
 
Electric sales to non-affiliates
 
$
1,299

 
$
1,332

 
Electric sales to affiliates
 
156

 
121

 
Other
 
75

 
63

 
Total revenues
 
1,530

 
1,516

 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
Fuel
 
300


295


Purchased power from affiliates
 
132


117


Purchased power from non-affiliates
 
505


487


Other operating expenses
 
380


295


Provision for depreciation
 
76


63


General taxes
 
37


37


Total operating expenses
 
1,430


1,294


 
 
 
 
 
 
OPERATING INCOME
 
100


222


 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
Loss on debt redemptions
 
(73
)
 

 
Investment income
 
17


6


Miscellaneous income
 
2


4


Interest expense — affiliates
 
(1
)

(2
)

Interest expense — other
 
(50
)

(41
)

Capitalized interest
 
9


9


Total other expense
 
(96
)

(24
)

 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
4


198


 
 
 
 
 
 
INCOME TAXES
 
2


76


 
 
 
 
 
 
NET INCOME
 
$
2


$
122


 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
2


$
122


 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Pensions and OPEB prior service costs
 
(6
)

(5
)

Amortized loss on derivative hedges
 
(1
)

(5
)

Change in unrealized gain on available-for-sale securities
 
5


10


Other comprehensive loss
 
(2
)



Income taxes (benefits) on other comprehensive income (loss)
 
(1
)
 
2

 
Other comprehensive loss, net of tax
 
(1
)
 
(2
)
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
1


$
120



The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


5



FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share amounts)
 
March 31,
2013
 
December 31,
2012
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
3


$
3

Receivables-
 
 

 
 

Customers, net of allowance for uncollectible accounts of $15 in 2013 and $16 in 2012
 
489


483

Affiliated companies
 
496


379

Other, net of allowance for uncollectible accounts of $3 in 2013 and $2 in 2012
 
145


91

Notes receivable from affiliated companies
 


276

Materials and supplies
 
477


505

Derivatives
 
183


158

Prepayments and other
 
106


87

 
 
1,899


1,982

PROPERTY, PLANT AND EQUIPMENT:
 
 

 
 

In service
 
12,336


11,997

Less — Accumulated provision for depreciation
 
4,508


4,408

 
 
7,828


7,589

Construction work in progress
 
1,089


1,141

 
 
8,917


8,730

INVESTMENTS:
 
 

 
 

Nuclear plant decommissioning trusts
 
1,306


1,283

Other
 
13


12

 
 
1,319


1,295

DEFERRED CHARGES AND OTHER ASSETS:
 
 

 
 

Customer intangibles
 
107


110

Goodwill
 
24


24

Property taxes
 
36


36

Unamortized sale and leaseback costs
 
147


119

Derivatives
 
87


99

Other
 
238


253

 
 
639


641

 
 
$
12,774


$
12,648

LIABILITIES AND CAPITALIZATION
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Currently payable long-term debt
 
$
1,516


$
1,102

Short-term borrowings-
 
 
 
 
Affiliated companies
 
702

 

Other
 
4

 
4

Accounts payable-
 
 

 
 

Affiliated companies
 
495


726

Other
 
199


159

Accrued taxes
 
68


171

Derivatives
 
125


124

Other
 
208


280

 
 
3,317


2,566

CAPITALIZATION:
 
 

 
 

Common stockholder's equity-
 
 

 
 

Common stock, without par value, authorized 750 shares- 7 shares outstanding
 
1,581

 
1,573

Accumulated other comprehensive income
 
71

 
72

Retained earnings
 
2,120

 
2,118

Total common stockholder's equity
 
3,772


3,763

Long-term debt and other long-term obligations
 
2,226


3,118

 
 
5,998


6,881

NONCURRENT LIABILITIES:
 
 

 
 

Deferred gain on sale and leaseback transaction
 
883


892

Accumulated deferred income taxes
 
591


515

Asset retirement obligations
 
1,121


965

Retirement benefits
 
245


241

Derivatives
 
53

 
37

Other
 
566


551

 
 
3,459


3,201

COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 11)
 


 


 
 
$
12,774


$
12,648


The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


6



FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Three Months Ended March 31
 
(In millions)
 
2013
 
2012
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net Income
 
$
2

 
$
122

 
Adjustments to reconcile net income to net cash from operating activities-
 
 
 
 
 
Provision for depreciation
 
76

 
63

 
Nuclear fuel and lease amortization
 
53

 
57

 
Deferred rents and lease market valuation liability
 
21

 
(47
)
 
Deferred income taxes and investment tax credits, net
 
56

 
83

 
Investment impairments
 
7

 
3

 
Retirement benefits
 
(4
)
 
(1
)
 
Pension trust contribution
 

 
(209
)
 
Commodity derivative transactions, net
 
3

 
(52
)
 
Cash collateral, net
 
38

 
(25
)
 
Loss on debt redemptions
 
73

 

 
Decrease (increase) in operating assets-
 
 
 
 
 
Receivables
 
(177
)
 
28

 
Materials and supplies
 
28

 
(59
)
 
Prepayments and other current assets
 
(55
)
 
14

 
Increase (decrease) in operating liabilities-
 
 
 
 
 
Accounts payable
 
(191
)
 
17

 
Accrued taxes
 
(78
)
 
(155
)
 
Accrued compensation and benefits
 
(16
)
 
(9
)
 
Other
 
(31
)
 
(8
)
 
Net cash used for operating activities
 
(195
)
 
(178
)
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
New financing-
 
 
 
 
 
Short-term borrowings, net
 
702

 

 
Redemptions and repayments-
 
 
 
 
 
Long-term debt
 
(543
)
 

 
Other
 
(1
)
 
(3
)
 
Net cash provided from (used for) financing activities
 
158

 
(3
)
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Property additions
 
(217
)
 
(109
)
 
Nuclear fuel
 
(27
)
 
(72
)
 
Proceeds from asset sales
 
17

 

 
Sales of investment securities held in trusts
 
252

 
83

 
Purchases of investment securities held in trusts
 
(265
)
 
(90
)
 
Loans to affiliated companies, net
 
276

 
371

 
Other
 
1

 
(2
)
 
Net cash provided from investing activities
 
37

 
181

 
 
 
 
 
 
 
Net change in cash and cash equivalents
 

 

 
Cash and cash equivalents at beginning of period
 
3

 
7

 
Cash and cash equivalents at end of period
 
$
3

 
$
7

 

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


7



FIRSTENERGY CORP. AND SUBSIDIARIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note
Number
 
Page
Number
 
 
 
 
 
 
Earnings Per Share of Common Stock
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
Income Taxes
 
 
 
Variable Interest Entities
 
 
 
Fair Value Measurements
 
 
 
Derivative Instruments
 
 
 
Asset Retirement Obligations
 
 
 
Regulatory Matters
 
 
 
Commitments, Guarantees and Contingencies
 
 
 
Supplemental Guarantor Information
 
 
 
13
Segment Information



8



COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Terms.

FE is a diversified energy holding company that holds, directly or indirectly, all of the outstanding common stock of its principal subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), JCP&L, ME, PN, FENOC, AE and its principal subsidiaries (AE Supply, AGC, MP, PE, WP and FET), FES and its principal subsidiaries (FG and NG) and FESC.

These interim financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 2012.

FirstEnergy follows GAAP and complies with 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 accompanying interim financial statements are unaudited, but reflect all adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair presentation of the financial statements. The preparation of financial statements in conformity with GAAP requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The reported results of operations are not indicative of results of operations for any future period. FE and its subsidiaries have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

FE and its subsidiaries consolidate all majority-owned subsidiaries over which they exercise control and, when applicable, entities for which they have a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation. FE and its subsidiaries consolidate a VIE when it is determined that it is the primary beneficiary (see Note 6, Variable Interest Entities). Investments in affiliates over which FE and its subsidiaries have the ability to exercise significant influence, but with respect to which they are not the primary beneficiary and do not exercise control, follow the equity method of accounting. Under the equity method, the interest in the entity is reported as an investment in the Consolidated Balance Sheets and the percentage share of the entity’s earnings is reported in the Consolidated Statements of Income and Comprehensive Income. These Notes to the Consolidated Financial Statements are combined for FirstEnergy and FES.

Certain prior year amounts have been reclassified to conform to the current year presentation.
New Accounting Pronouncements

New accounting pronouncements not yet effective are not expected to have a material effect on the financial statements of FE or its subsidiaries.
2. EARNINGS PER SHARE OF COMMON STOCK

Basic earnings per share of common stock are computed using the weighted average number of common shares outstanding during the relevant period as the denominator. The denominator for diluted earnings per share of common stock reflects the weighted average of common shares outstanding plus the potential additional common shares that could result if dilutive securities and other agreements to issue common stock were exercised.



9



The following table reconciles basic and diluted earnings per share of common stock:

(In millions, except per share amounts)
 
Three Months Ended March 31
 
Reconciliation of Basic and Diluted Earnings per Share of Common Stock
 
2013
 
2012
 
 
 
 
 
Weighted average number of basic shares outstanding
 
418

 
418

 
Assumed exercise of dilutive stock options and awards(1)
 
1

 
2

 
Weighted average number of diluted shares outstanding
 
419

 
420

 
 
 
 
 
 
 
Net Income
 
$
196

 
$
306

 
 
 
 
 
 
 
Basic earnings per share of common stock
 
$
0.47

 
$
0.73

 
Diluted earnings per share of common stock
 
$
0.47

 
$
0.73

 

(1) 
The number of potentially dilutive securities not included in the calculation of diluted shares outstanding due to their antidilutive effect were not significant for the three months ended March 31, 2013 and 2012.
3. PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS

The components of the consolidated net periodic cost for pensions and OPEB (including amounts capitalized) were as follows:

Components of Net Periodic Benefit Costs (Credits)
 
Pensions
OPEB
For the Three Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
 
 
(In millions)
Service costs
 
$
49

 
$
40

 
$
3

 
$
3

Interest costs
 
93

 
97

 
9

 
12

Expected return on plan assets
 
(125
)
 
(121
)
 
(8
)
 
(9
)
Amortization of prior service costs (credits)
 
3

 
3

 
(50
)
 
(51
)
Net periodic costs (credits)
 
$
20

 
$
19

 
$
(46
)
 
$
(45
)

Pension and OPEB obligations are allocated to FE's subsidiaries employing the plan participants. The net periodic pension and OPEB costs (net of amounts capitalized) recognized in earnings by FE and its subsidiaries were as follows:

Net Periodic Benefit Expense (Credit)
 
Pensions
 
OPEB
For the Three Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
 
 
(In millions)
FirstEnergy
 
$
11

 
$
13

 
$
(30
)
 
$
(30
)
FES
 
3

 
3

 
(3
)
 
(4
)


10



4. ACCUMULATED OTHER COMPREHENSIVE INCOME

FirstEnergy adopted the expanded disclosure requirements for reclassifications from AOCI. The changes in AOCI, net of tax, in the three months ended March 31, 2013 and 2012, for FE and FES are shown in the following tables:
 
FirstEnergy
 
 
 
 
 
 
 
 
 
 
Gains & Losses on Cash Flow Hedges
 
Unrealized Gains on AFS Securities
 
Defined Benefit Pension & OPEB Plans
 
Total
 
 
(in millions)
AOCI Balance as of January 1, 2013
 
$
(38
)
 
$
15

 
$
408

 
$
385

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 
15

 

 
15

Amounts reclassified from AOCI
 
1

 
(12
)
 
(28
)
 
(39
)
Net other comprehensive income (loss)
 
1

 
3

 
(28
)
 
(24
)
 
 
 
 
 
 
 
 
 
AOCI Balance as of March 31, 2013
 
$
(37
)
 
$
18

 
$
380

 
$
361

 
 
 
 
 
 
 
 
 
AOCI Balance as of January 1, 2012
 
$
(39
)
 
$
19

 
$
446

 
$
426

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 
9

 
5

 
14

Amounts reclassified from AOCI
 
(3
)
 
(3
)
 
(29
)
 
(35
)
Net other comprehensive income (loss)
 
(3
)
 
6

 
(24
)
 
(21
)
 
 
 
 
 
 
 
 
 
AOCI Balance as of March 31, 2012
 
$
(42
)
 
$
25

 
$
422

 
$
405



FES
 
 
 
 
 
 
 
 
 
 
Gains & Losses on Cash Flow Hedges
 
Unrealized Gains on AFS Securities
 
Defined Benefit Pension & OPEB Plans
 
Total
 
 
(in millions)
AOCI Balance as of January 1, 2013
 
$
3

 
$
13

 
$
56

 
$
72

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 
14

 

 
14

Amounts reclassified from AOCI
 
(1
)
 
(10
)
 
(4
)
 
(15
)
Net other comprehensive income (loss)
 
(1
)
 
4

 
(4
)
 
(1
)
 
 
 
 
 
 
 
 
 
AOCI Balance as of March 31, 2013
 
$
2

 
$
17

 
$
52

 
$
71

 
 
 
 
 
 
 
 
 
AOCI Balance as of January 1, 2012
 
$
8

 
$
16

 
$
52

 
$
76

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 
9

 

 
9

Amounts reclassified from AOCI
 
(4
)
 
(3
)
 
(4
)
 
(11
)
Net other comprehensive income (loss)
 
(4
)
 
6

 
(4
)
 
(2
)
 
 
 
 
 
 
 
 
 
AOCI Balance as of March 31, 2012
 
$
4

 
$
22

 
$
48

 
$
74




11



The following amounts were reclassified from AOCI in the three months ended March 31, 2013 and 2012:

FirstEnergy
 
Three Months Ended March 31
 
Affected Line Item in Consolidated Statements of Income
Reclassifications from AOCI (b)
 
2013
 
2012
 
 
 
(in millions)
 
 
Gains & losses on cash flow hedges
 
 
 
 
 
 
Power contracts
 
$
(3
)
 
$
(5
)
 
Other operating expenses
Long-term debt
 
4

 
2

 
Interest expense ($2) and Loss on debt redemptions ($2) in 2013 and interest expense ($2) in 2012
 
 
1

 
(3
)
 
Total before taxes
 
 

 

 
Income tax expense
 
 
$
1

 
$
(3
)
 
Net of tax
 
 
 
 
 
 
 
Unrealized gains on AFS securities
 
 
 
 
 
 
Realized gains on sales of securities
 
$
(19
)
 
$
(5
)
 
Investment income
 
 
(7
)
 
(2
)
 
Income tax expense
 
 
$
(12
)
 
$
(3
)
 
Net of tax
 
 
 
 
 
 
 
Defined benefit pension and OPEB plans
 
 
 
 
 
 
Prior-service costs
 
$
(47
)
 
$
(48
)
 
(a)
 
 
(19
)
 
(19
)
 
Income tax expense
 
 
$
(28
)
 
$
(29
)
 
Net of tax
 
 
 
 
 
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 3, Pensions and Other Postemployment Benefits for additional details.
(b) Parenthesis represent credits from AOCI
 
 
 
 
 
 




12



FES
 
Three Months Ended March 31
 
Affected Line Item in Consolidated Statements of Income
Reclassifications from AOCI (b)
 
2013
 
2012
 
 
 
(in millions)
 
 
Gains & losses on cash flow hedges
 
 
 
 
 
 
Power contracts
 
$
(3
)
 
$
(5
)
 
Other operating expenses
Long-term debt
 
2

 

 
Loss on debt redemptions
 
 
(1
)
 
(5
)
 
Total before taxes
 
 

 
(1
)
 
Income tax expense
 
 
$
(1
)
 
$
(4
)
 
Net of tax
 
 
 
 
 
 
 
Unrealized gains on AFS securities
 
 
 
 
 
 
Realized gains on sales of securities
 
$
(16
)
 
$
(4
)
 
Investment income
 
 
(6
)
 
(1
)
 
Income tax expense
 
 
$
(10
)
 
$
(3
)
 
Net of tax
 
 
 
 
 
 
 
Defined benefit pension and OPEB plans
 
 
 
 
 
 
Prior-service costs
 
$
(5
)
 
$
(5
)
 
(a)
 
 
(1
)
 
(1
)
 
Income tax expense
 
 
$
(4
)
 
$
(4
)
 
Net of tax
 
 
 
 
 
 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 3, Pensions and Other Postemployment Benefits for additional details.
(b) Parenthesis represent credits from AOCI
 
 
 
 
 
 
5. INCOME TAXES

FirstEnergy accounts for uncertainty in income taxes recognized in its financial statements. Significant judgment is required in determining FirstEnergy's income taxes and in evaluating tax positions taken or expected to be taken on its tax returns. There were no material changes to FirstEnergy's unrecognized income tax benefits during the first three months of 2013 or 2012.

As of March 31, 2013, it is reasonably possible that approximately $4 million of unrecognized income tax benefits may be resolved within the next twelve months, all of which, if recognized, would affect FirstEnergy's effective tax rate.

FirstEnergy recognizes interest expense or income related to uncertain tax positions. That amount is computed by applying the applicable statutory interest rate to the difference between the tax position recognized and the amount previously taken or expected to be taken on the tax return. FirstEnergy includes net interest and penalties in the provision for income taxes. During the first three months of 2013 and 2012, there were no material changes to the amount of accrued interest. The net amount of interest accrued as of March 31, 2013 and December 31, 2012 was approximately $8 million.
As of December 31, 2012, FirstEnergy had a current federal deferred tax asset of approximately $319 million. The American Taxpayer Relief Act of 2012 (Act) was enacted in January 2013 and provides 50% accelerated (bonus) depreciation for qualifying expenditures made in 2013. As a result of the availability of 50% bonus depreciation for 2013, approximately $229 million of the current federal deferred tax asset as of December 31, 2012, will not be realized in 2013, but will be available for future years and therefore has been reclassified to a long-term federal deferred tax asset as of March 31, 2013. It is not anticipated that FES will realize any of the current federal deferred tax asset in 2013.

6. VARIABLE INTEREST ENTITIES

FirstEnergy performs qualitative analyses to determine whether a variable interest gives FirstEnergy a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. FirstEnergy consolidates a VIE when it is determined that it is the primary beneficiary.

VIEs included in FirstEnergy’s consolidated financial statements are: FEV's joint venture in the Signal Peak mining and coal transportation operations, the PNBV capital trust that was created to refinance debt originally issued in connection with sale and


13



leaseback transactions; wholly owned limited liability companies of JCP&L created to sell transition bonds to securitize the recovery of JCP&L’s bondable stranded costs and special purpose limited liability companies created to issue environmental control bonds that were used to construct environmental control facilities.

The caption "noncontrolling interest" within the consolidated financial statements is used to reflect the portion of a VIE that FirstEnergy consolidates, but does not own. The change in noncontrolling interest within the Consolidated Balance Sheets during the three months ended March 31, 2013, was primarily due to $5 million of distributions to owners.

In order to evaluate contracts for consolidation treatment and entities for which FirstEnergy has an interest, FirstEnergy aggregates variable interests into the following categories based on similar risk characteristics and significance.

Mining Operations

FEV holds a 33-1/3% equity ownership in Global Holding, the holding company for a joint venture in the Signal Peak mining and coal transportation operations. FEV is not the primary beneficiary of the joint venture, as it does not have control over the significant activities affecting the joint venture's economic performance. FEV's ownership interest is subject to the equity method of accounting.

Trusts

FirstEnergy's consolidated financial statements include PNBV. FirstEnergy used debt and available funds to purchase the notes issued by PNBV for the purchase of lease obligation bonds. Ownership of PNBV includes a 3% equity interest by an unaffiliated third party and a 3% equity interest held by OES Ventures, a wholly owned subsidiary of OE.

PATH-WV

PATH is a series limited liability company that is comprised of multiple series, each of which has separate rights, powers and duties regarding specified property and the series profits and losses associated with such property. A subsidiary of AE owns 100% of the Allegheny Series (PATH-Allegheny) and 50% of the West Virginia Series (PATH-WV), which is a joint venture with a subsidiary of AEP. FirstEnergy is not the primary beneficiary of PATH-WV, as it does not have control over the significant activities affecting the economics of the portion of the PATH project that was to be constructed by PATH-WV.

On August 24, 2012, PJM removed the PATH project from its long-range expansion plans. See Note 10, Regulatory Matters, for additional information on the abandonment of PATH.

Power Purchase Agreements

FirstEnergy evaluated its power purchase agreements and determined that certain NUG entities may be VIEs to the extent that they own a plant that sells substantially all of its output to the applicable utilities and the contract price for power is correlated with the plant’s variable costs of production. FirstEnergy maintains 19 long-term power purchase agreements with NUG entities that were entered into pursuant to PURPA. FirstEnergy was not involved in the creation of, and has no equity or debt invested in, any of these entities.

FirstEnergy has determined that for all but two of these NUG entities, it does not have variable interests in the entities or the entities do not meet the criteria to be considered a VIE. FirstEnergy may hold variable interests in the remaining two entities; however, it applied the scope exception that exempts enterprises unable to obtain the necessary information to evaluate entities.

Because FirstEnergy has no equity or debt interests in the NUG entities, its maximum exposure to loss relates primarily to the above-market costs incurred for power. FirstEnergy expects any above-market costs incurred to be recovered from customers, except as described further below. Purchased power costs related to the contracts that may contain a variable interest were $49 million and $60 million during the three months ended March 31, 2013 and 2012, respectively.
  
Sale and Leaseback

FirstEnergy has variable interests in certain sale and leaseback transactions. FirstEnergy is not the primary beneficiary of these interests as it does not have control over the significant activities affecting the economics of the arrangement.

During 2012, NG repurchased lessor equity interests in OE's existing sale and leaseback of Beaver Valley Unit 2 for $129 million. In 2012, FG acquired certain equity and other lessor interests in connection with the 1987 Bruce Mansfield Plant sale and leaseback transactions for approximately $262 million and in March of 2013, FG acquired the remaining interests for approximately $221 million.

FES, and other FE subsidiaries are exposed to losses under their applicable sale and leaseback agreements upon the occurrence of certain contingent events. The maximum exposure under these provisions represents the net amount of casualty value payments due upon the occurrence of specified casualty events. Net discounted lease payments would not be payable if the casualty loss


14



payments were made. The following table discloses each company’s net exposure to loss based upon the casualty value provisions as of March 31, 2013:

 
Maximum
Exposure
 
Discounted Lease
Payments, net(1)
 
Net
Exposure
 
(In millions)
FES
$
1,345

 
$
1,132

 
$
213

Other FE subsidiaries
811

 
624

 
187


(1) 
The net present value of FirstEnergy’s consolidated sale and leaseback operating lease commitments is $1.2 billion.
7. FAIR VALUE MEASUREMENTS

RECURRING AND NONRECURRING FAIR VALUE MEASUREMENTS

Authoritative accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The three levels of the fair value hierarchy and a description of the valuation techniques are as follows:

Level 1
-
Quoted prices for identical instruments in active market
 
 
 
Level 2
-
Quoted prices for similar instruments in active market