FE- 09.30.2014-10Q


 
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 September 30, 2014

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 Exchange 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 OCTOBER 31, 2014
FirstEnergy Corp., $0.10 par value
 
420,792,515

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 the 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® and Facebook® as additional channels 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® or Facebook® 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,” "forecast," "will," "intend," “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, which may include the following:

The speed and nature of increased competition in the electric utility industry, in general, and the retail sales market in particular.
The ability to experience growth in the Regulated Distribution and Regulated Transmission segments and to successfully implement our revised sales strategy in the Competitive Energy Services segment.
The accomplishment of our regulatory and operational goals in connection with our transmission plan and pending distribution rate cases and the effectiveness of our repositioning strategy.
The impact of the regulatory process on pending matters in the various states in which we do business including, but not limited to, matters related to rates and pending rate cases, and the ESP IV in Ohio.
The impact of the federal regulatory process on FERC-regulated entities and transactions, in particular FERC regulation of wholesale energy and capacity markets, including PJM markets and also FERC-jurisdictional wholesale transactions, FERC regulation of cost-of-service rates, including FERC Opinion No. 531’s revised ROE methodology for FERC-jurisdictional wholesale generation and transmission utility service, and FERC’s compliance and enforcement activity, including compliance and enforcement activity related to NERC’s mandatory reliability standards.
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 such as a polar vortex or other significant weather events, and all associated regulatory events or actions.
Regulatory outcomes associated with storm restoration costs, including but not limited to, Hurricane Sandy, Hurricane Irene and the October snowstorm of 2011.
Changing energy, capacity and commodity market prices including, but not limited to, coal, natural gas and oil, and their availability and impact on margins.
The continued ability of our regulated utilities to recover their costs.
Costs being higher than anticipated and the success of our policies to control costs and to mitigate low energy, capacity and market prices.
Other legislative and regulatory changes, and revised environmental requirements, including, but not limited to, possible GHG emission, water discharge, and CCR regulations, the potential impacts of CSAPR, 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 regulated and competitive fossil units, including the impact on vendor commitments, and the timing thereof as they relate to, among other things, RMR arrangements and the reliability of the transmission grid.
The impact of other future changes to the operational status or availability of our generating units.
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).
Issues arising from the indications of cracking in the shield building at Davis-Besse.
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 not fully 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 continue to reduce costs and successfully execute our announced financial plans designed to improve our credit metrics and strengthen our balance sheet through, among other actions, our previously-implemented dividend reduction and our other proposed capital raising initiatives.
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.
Changing market conditions that could affect the measurement of certain liabilities and the value of assets held in our NDTs, pension trusts and other trust funds, and cause us and/or 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 plans, 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/or 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/or our major industrial and commercial customers and other counterparties with which we do business, including fuel suppliers.
The impact of any changes in tax laws or regulations or adverse tax audit results or rulings.
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 period may in the aggregate vary from prior periods 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
 
 
 
 
 
 
 
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
 
 
 
 
Item 2. Management's Discussion and Analysis of Registrant and Subsidiaries
FirstEnergy Corp. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Management's Narrative Analysis of 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. As of January 1, 2014, AE merged with and into FirstEnergy Corp.
AE Supply
Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary
AGC
Allegheny Generating Company, a generation subsidiary of AE Supply and equity method investee of MP.
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
FELHC
FirstEnergy License Holding Company, Inc.
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 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 wholly-owned 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
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 FE 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
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
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
 
 
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
AFUDC
Allowance for Funds Used During Construction
ALJ
Administrative Law Judge
Anker WV
Anker West Virginia Mining Company, Inc.
Anker Coal
Anker Coal Group, Inc.
AOCI
Accumulated Other Comprehensive Income
Apple®
Apple®, iPad® and iPhone® are registered trademarks of Apple Inc.
ARO
Asset Retirement Obligation
ARR
Auction Revenue Right

ii



GLOSSARY OF TERMS, Continued

ASLB
Atomic Safety and Licensing Board
ASU
Accounting Standards Update
BGS
Basic Generation Service
BRA
PJM RPM Base Residual Auction
CAA
Clean Air Act
CAIR
Clean Air Interstate Rule
CBA
Collective Bargaining Agreement
CCB
Coal Combustion By-products
CCR
Coal Combustion Residuals
CDWR
California Department of Water Resources
CERCLA
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
CFR
Code of Federal Regulations
CO2
Carbon Dioxide
CSA
Coal Sales Agreement
CSAPR
Cross-State Air Pollution Rule
CTA
Consolidated Tax Adjustment
CWA
Clean Water Act
CWIP
Construction Work in Progress
DCR
Delivery Capital Recovery
DOE
United States Department of Energy
DOL
United States Department of Labor
DR
Demand Response
DSP
Default Service Plan
EDC
Electric Distribution Company
EE&C
Energy Efficiency and Conservation
EGS
Electric Generation Supplier
ELPC
Environmental Law & Policy Center
ENEC
Expanded Net Energy Cost
EPA
United States Environmental Protection Agency
ERO
Electric Reliability Organization
ESP
Electric Security Plan
Facebook®
Facebook is a registered trademark of Facebook, Inc.
FASB
Financial Accounting Standards Board
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
IBEW
International Brotherhood of Electrical Workers
ICE
IntercontinentalExchange, Inc.
ICG
International Coal Group Inc.
IRS
Internal Revenue Service
kV
Kilovolt
KWH
Kilowatt-hour
LBR
Little Blue Run
LCAPP
Long-Term Capacity Agreement Pilot Program
LMP
Locational Marginal Price

iii



GLOSSARY OF TERMS, Continued

LOC
Letter of Credit
LSE
Load Serving Entity
MATS
Mercury and Air Toxics Standards
MDPSC
Maryland Public Service Commission
MISO
Midcontinent Independent System Operator, Inc.
MISO LTTR
MISO Long Term Financial Transmission Right
mmBTU
One Million British Thermal Units
Moody’s
Moody’s Investors Service, Inc.
MOPR
Minimum Offer Price Rule
MVP
Multi-Value Project
MW
Megawatt
MWH
Megawatt-hour
NDT
Nuclear Decommissioning Trust
NERC
North American Electric Reliability Corporation
NITS
Network Integration Transmission Service
NJBPU
New Jersey Board of Public Utilities
NMB
Non-Market Based
NNSR
Non-Attainment New Source Review
NOL
Net Operating Loss
NOV
Notice of Violation
NOx
Nitrogen Oxide
NPDES
National Pollutant Discharge Elimination System
NRC
Nuclear Regulatory Commission
NRG
NRG Energy, Inc.
NSR
New Source Review
NUG
Non-Utility Generation
NYISO
New York Independent System Operator, Inc.
NYPSC
New York State Public Service Commission
OATT
Open Access Transmission Tariff
OCC
Ohio Consumers' Counsel
OPEB
Other Post-Employment Benefits
OTTI
Other Than Temporary Impairments
OVEC
Ohio Valley Electric Corporation
PA DEP
Pennsylvania Department of Environmental Protection
PCRB
Pollution Control Revenue Bond
PJM
PJM Interconnection, L.L.C.
PM
Particulate Matter
POLR
Provider of Last Resort
PPUC
Pennsylvania Public Utility Commission
PSA
Power Supply Agreement
PSD
Prevention of Significant Deterioration
PTC
Price-to-Compare
PUCO
Public Utilities Commission of Ohio
PURPA
Public Utility Regulatory Policies Act of 1978
RCRA
Resource Conservation and Recovery Act
REC
Renewable Energy Credit
REIT
Real Estate Investment Trust
RFC
ReliabilityFirst Corporation
RFP
Request for Proposal
RGGI
Regional Greenhouse Gas Initiative
RMR
Reliability Must-Run

iv



GLOSSARY OF TERMS, Continued

ROE
Return on Equity
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
SB221
Amended Substitute Senate Bill No. 221
SB310
Substitute Senate Bill No. 310
SBC
Societal Benefits Charge
SEC
United States Securities and Exchange Commission
SERTP
Southeastern Regional Transmission Planning
SIP
State Implementation Plan(s) Under the Clean Air Act
SO2
Sulfur Dioxide
SOS
Standard Offer Service
SPE
Special Purpose Entity
SREC
Solar Renewable Energy Credit
SSO
Standard Service Offer
TDS
Total Dissolved Solid
TMDL
Total Maximum Daily Load
TMI-2
Three Mile Island Unit 2
TSC
Transmission Service Charge
Twitter®
Twitter is a registered trademark of Twitter, Inc.
U.S. Court of Appeals for the D.C. Circuit
United States Court of Appeals for the District of Columbia Circuit
UWUA
Utility Workers Union of America
VIE
Variable Interest Entity
VRR
Variable Resource Requirement
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 September 30
 
Nine Months Ended September 30
 
(In millions, except per share amounts)
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
 
 
Electric utilities
 
$
2,554

 
$
2,526

 
$
7,542

 
$
7,128

 
Unregulated businesses
 
1,334

 
1,506

 
4,024

 
4,131

 
Total revenues*
 
3,888

 
4,032

 
11,566

 
11,259

 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
Fuel
 
544

 
657

 
1,711

 
1,915

 
Purchased power
 
1,188

 
1,120

 
3,726

 
2,932

 
Other operating expenses
 
858

 
877

 
3,061

 
2,645

 
Provision for depreciation
 
308

 
316

 
904

 
909

 
Amortization of regulatory assets, net
 
35

 
312

 
27

 
443

 
General taxes
 
239

 
242

 
738

 
747

 
Impairment of long-lived assets
 

 

 

 
473

 
Total operating expenses
 
3,172

 
3,524

 
10,167

 
10,064

 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
716

 
508

 
1,399

 
1,195

 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
Gain (loss) on debt redemptions (Note 8)
 

 
9

 
(8
)
 
(132
)
 
Investment income
 
16

 
5

 
67

 
8

 
Interest expense
 
(275
)
 
(257
)
 
(802
)
 
(771
)
 
Capitalized financing costs
 
28

 
21

 
89

 
62

 
Total other expense
 
(231
)
 
(222
)
 
(654
)
 
(833
)
 
 
 
 
 
 
 
 
 
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
 
485

 
286

 
745

 
362

 
 
 
 
 
 
 
 
 
 
 
INCOME TAXES
 
152

 
77

 
226

 
129

 
 
 
 
 
 
 
 
 
 
 
INCOME FROM CONTINUING OPERATIONS
 
333

 
209

 
519

 
233

 
 
 
 
 
 
 
 
 
 
 
Discontinued operations (net of income taxes of $0, $3, $69 and $9, respectively) (Note 14)
 

 
9

 
86

 
17

 
 
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
333

 
$
218

 
$
605

 
$
250

 
 
 
 
 
 
 
 
 
 
 
EARNINGS PER SHARE OF COMMON STOCK:
 
 
 
 
 
 
 
 
 
Basic - Continuing Operations
 
$
0.79

 
$
0.50

 
$
1.24

 
$
0.56

 
Basic - Discontinued Operations (Note 14)
 

 
0.02

 
0.20

 
0.04

 
Basic - Net Earnings per Basic Share
 
$
0.79

 
$
0.52

 
$
1.44

 
$
0.60

 
 
 
 
 
 
 
 
 
 
 
Diluted - Continuing Operations
 
$
0.79

 
$
0.50

 
$
1.24

 
$
0.56

 
Diluted - Discontinued Operations (Note 14)
 

 
0.02

 
0.20

 
0.04

 
Diluted - Net Earnings per Diluted Share
 
$
0.79

 
$
0.52

 
$
1.44

 
$
0.60

 
 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
 
 
 
 
 
 
 
 
 
Basic
 
420

 
418

 
419

 
418

 
Diluted
 
421

 
419

 
420

 
419

 
 
 
 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK**
 
$
0.72

 
$
1.10

 
$
1.44

 
$
1.65

 

*
Includes excise tax collections of $105 million and $117 million in the three months ended September 30, 2014 and 2013, respectively, and $321 million and $346 million in the nine months ended September 30, 2014 and 2013, respectively.
** The nine months ended September 30, 2014 includes a dividend declared of $0.36 per share on each of January 21, 2014; March 18, 2014; July 15, 2014; and September 16, 2014 paid or payable on March 1, 2014; June 1 2014; September 1, 2014; and December 1, 2014, respectively. The nine months ended September 30, 2013 includes a dividend declared of $0.55 per share on each of March 19, 2013; July 16, 2013; and September 17, 2013 paid on June 1, 2013; September 1, 2013; and December 1, 2013, 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 September 30
 
Nine Months Ended September 30
 
(In millions)
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
333

 
$
218

 
$
605

 
$
250

 
 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS):
 
 

 
 

 
 
 
 
 
Pensions and OPEB prior service costs
 
(42
)
 
(47
)
 
(126
)
 
(148
)
 
Amortized gains (losses) on derivative hedges
 

 
2

 
(1
)
 
4

 
Change in unrealized gain on available-for-sale securities
 
(11
)
 
6

 
40

 
3

 
Other comprehensive loss
 
(53
)
 
(39
)
 
(87
)
 
(141
)
 
Income tax benefits on other comprehensive loss
 
(21
)
 
(15
)
 
(35
)
 
(55
)
 
Other comprehensive loss, net of tax
 
(32
)
 
(24
)
 
(52
)
 
(86
)
 
 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
301

 
$
194

 
$
553

 
$
164

 
 
 
 
 
 
 
 
 
 
 

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)
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
109

 
$
218

Receivables-
 
 

 
 

Customers, net of allowance for uncollectible accounts of $63 in 2014 and $52 in 2013
 
1,605

 
1,720

Other, net of allowance for uncollectible accounts of $5 in 2014 and $3 in 2013
 
214

 
198

Materials and supplies, at average cost
 
771

 
752

Prepaid taxes
 
185

 
226

Derivatives
 
180

 
166

Accumulated deferred income taxes
 
327

 
366

Collateral
 
221

 
155

Other
 
173

 
212

 
 
3,785

 
4,013

PROPERTY, PLANT AND EQUIPMENT:
 
 

 
 

In service
 
46,664

 
44,228

Less — Accumulated provision for depreciation
 
14,040

 
13,280

 
 
32,624

 
30,948

Construction work in progress
 
2,301

 
2,304

 
 
34,925

 
33,252

INVESTMENTS:
 
 

 
 

Nuclear plant decommissioning trusts
 
2,365

 
2,201

Other
 
894

 
903

 
 
3,259

 
3,104

 
 
 
 
 
ASSETS HELD FOR SALE
 

 
235

 
 
 
 
 
DEFERRED CHARGES AND OTHER ASSETS:
 
 

 
 

Goodwill
 
6,418

 
6,418

Regulatory assets
 
1,668

 
1,854

Other
 
1,169

 
1,548

 
 
9,255

 
9,820

 
 
$
51,224

 
$
50,424

LIABILITIES AND CAPITALIZATION
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Currently payable long-term debt
 
$
1,386

 
$
1,415

Short-term borrowings
 
1,621

 
3,404

Accounts payable
 
1,190

 
1,250

Accrued taxes
 
489

 
485

Accrued compensation and benefits
 
277

 
351

Derivatives
 
166

 
111

Other
 
850

 
621

 
 
5,979

 
7,637

CAPITALIZATION:
 
 

 
 

Common stockholders’ equity-
 
 

 
 

Common stock, $0.10 par value, authorized 490,000,000 shares - 420,729,105 and 418,628,559 shares outstanding as of September 30, 2014 and December 31, 2013, respectively
 
42

 
42

Other paid-in capital
 
9,836

 
9,776

Accumulated other comprehensive income
 
232

 
284

Retained earnings
 
2,592

 
2,590

Total common stockholders’ equity
 
12,702

 
12,692

Noncontrolling interest
 
2

 
3

Total equity
 
12,704

 
12,695

Long-term debt and other long-term obligations
 
18,531

 
15,831

 
 
31,235

 
28,526

NONCURRENT LIABILITIES:
 
 

 
 

Accumulated deferred income taxes
 
7,188

 
6,968

Retirement benefits
 
2,754

 
2,689

Asset retirement obligations
 
1,755

 
1,678

Deferred gain on sale and leaseback transaction
 
833

 
858

Adverse power contract liability
 
222

 
290

Other
 
1,258

 
1,778

 
 
14,010

 
14,261

COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 11)
 


 


 
 
$
51,224

 
$
50,424


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)

 
 
Nine Months Ended September 30
 
(In millions)
 
2014
 
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net Income
 
$
605

 
$
250

 
Adjustments to reconcile net income to net cash from operating activities-
 
 
 
 
 
Income from discontinued operations (Note 14)
 
(86
)
 
(17
)
 
Provision for depreciation
 
904

 
909

 
Amortization of regulatory assets, net
 
27

 
443

 
Nuclear fuel amortization
 
160

 
156

 
Deferred purchased power and other costs
 
(89
)
 
(61
)
 
Deferred income taxes and investment tax credits, net
 
327

 
114

 
Impairments of long-lived assets
 

 
473

 
Investment impairments
 
10

 
74

 
Deferred rents and lease market valuation liability
 
(56
)
 
(48
)
 
Retirement benefits
 
(60
)
 
(133
)
 
Gain on asset sales
 

 
(21
)
 
Commodity derivative transactions, net (Note 9)
 
60

 
15

 
Loss on debt redemptions (Note 8)
 
8

 
132

 
Make-whole premiums paid on debt redemptions
 

 
(181
)
 
Changes in current assets and liabilities-
 
 
 
 
 
Receivables
 
90

 
(7
)
 
Materials and supplies
 
(19
)
 
117

 
Prepayments and other current assets
 
42

 
(59
)
 
Accounts payable
 
(47
)
 
(279
)
 
Accrued taxes
 
(145
)
 
(146
)
 
Accrued interest
 
66

 
29

 
Accrued compensation and benefits
 
(74
)
 
(43
)
 
Cash collateral, net
 
(71
)
 
(67
)
 
Other
 
85

 
21

 
Net cash provided from operating activities
 
1,737

 
1,671

 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
New Financing-
 
 
 
 
 
Long-term debt
 
3,778

 
2,745

 
Short-term borrowings, net
 

 
1,435

 
Redemptions and Repayments-
 
 
 
 
 
Long-term debt
 
(1,062
)
 
(2,662
)
 
Short-term borrowings, net
 
(1,783
)
 

 
Tender premiums paid on debt redemptions
 

 
(110
)
 
Common stock dividend payments
 
(452
)
 
(690
)
 
Other
 
(37
)
 
(64
)
 
Net cash provided from financing activities
 
444

 
654

 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Property additions
 
(2,473
)
 
(1,960
)
 
Nuclear fuel
 
(98
)
 
(159
)
 
Proceeds from asset sales
 
394

 

 
Sales of investment securities held in trusts
 
1,511

 
1,545

 
Purchases of investment securities held in trusts
 
(1,593
)
 
(1,567
)
 
Cash investments
 
42

 
(12
)
 
Asset removal costs
 
(80
)
 
(125
)
 
Other
 
7

 
3

 
Net cash used for investing activities
 
(2,290
)
 
(2,275
)
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
(109
)
 
50

 
Cash and cash equivalents at beginning of period
 
218

 
172

 
Cash and cash equivalents at end of period
 
$
109

 
$
222

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


4



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

 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(In millions)
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
STATEMENTS OF INCOME (LOSS)
 
 
 
 
 
 
 
 

REVENUES:
 
 
 
 
 
 
 
 

Electric sales to non-affiliates
 
$
1,315

 
$
1,455

 
$
3,989

 
$
4,066

Electric sales to affiliates
 
164

 
186

 
689

 
482

Other
 
42

 
38

 
124

 
107

Total revenues
 
1,521

 
1,679

 
4,802

 
4,655

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 

 
 

Fuel
 
270


304


923

 
936

Purchased power from affiliates
 
64


132


203

 
401

Purchased power from non-affiliates
 
627


724


2,274

 
1,755

Other operating expenses
 
356


339


1,276

 
1,105

Provision for depreciation
 
83


80


236

 
231

General taxes
 
31


35


99

 
106

Total operating expenses
 
1,431


1,614


5,011

 
4,534

 
 
 
 
 
 
 
 
 
OPERATING INCOME (LOSS)
 
90


65


(209
)
 
121

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 

 
 

Loss on debt redemptions (Note 8)
 
(1
)
 

 
(6
)
 
(103
)
Investment income (loss)
 
13


(3
)

57

 
(4
)
Miscellaneous income
 
1


21


5

 
29

Interest expense — affiliates
 
(1
)

(1
)

(5
)
 
(7
)
Interest expense — other
 
(37
)

(35
)

(110
)
 
(126
)
Capitalized interest
 
7


9


27

 
28

Total other expense
 
(18
)

(9
)

(32
)
 
(183
)
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (BENEFITS)
 
72


56


(241
)
 
(62
)
 
 
 
 
 
 
 
 
 
INCOME TAXES (BENEFITS)
 
28


23


(95
)
 
(19
)
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM CONTINUING OPERATIONS
 
44


33

 
(146
)
 
(43
)
 
 
 
 
 
 
 
 
 
Discontinued operations (net of income taxes of $0, $5, $70 and $8, respectively) (Note 14)
 

 
7

 
116

 
14

 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
 
$
44


$
40


$
(30
)
 
$
(29
)
 
 
 
 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
 
$
44


$
40


$
(30
)
 
$
(29
)
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 

 
 

Pensions and OPEB prior service costs
 
(4
)

(5
)

(14
)
 
(16
)
Amortized gain on derivative hedges
 
(2
)

(1
)

(7
)
 
(3
)
Change in unrealized gain on available-for-sale securities
 
(9
)

5


35

 
2

Other comprehensive income (loss)
 
(15
)

(1
)

14

 
(17
)
Income taxes (benefits) on other comprehensive income (loss)
 
(6
)
 
(1
)
 
5

 
(7
)
Other comprehensive income (loss), net of tax
 
(9
)
 

 
9

 
(10
)
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
$
35


$
40


$
(21
)
 
$
(39
)

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)
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
2


$
2

Receivables-
 
 

 
 

Customers, net of allowance for uncollectible accounts of $21 in 2014 and $11 in 2013
 
445


539

Affiliated companies
 
488


1,036

Other, net of allowance for uncollectible accounts of $3 in 2014 and 2013
 
114


81

Notes receivable from affiliated companies
 
214



Materials and supplies
 
471


448

Derivatives
 
168


165

Collateral
 
218

 
136

Prepayments and other
 
98


109

 
 
2,218


2,516

PROPERTY, PLANT AND EQUIPMENT:
 
 

 
 

In service
 
13,745


12,472

Less — Accumulated provision for depreciation
 
5,087


4,755

 
 
8,658


7,717

Construction work in progress
 
688


1,308

 
 
9,346


9,025

INVESTMENTS:
 
 

 
 

Nuclear plant decommissioning trusts
 
1,381


1,276

Other
 
11


11

 
 
1,392


1,287

 
 
 
 
 
ASSETS HELD FOR SALE
 

 
122

 
 
 
 
 
DEFERRED CHARGES AND OTHER ASSETS:
 
 

 
 

Customer intangibles
 
82


95

Goodwill
 
23


23

Property taxes
 
9


41

Unamortized sale and leaseback costs
 
210


168

Derivatives
 
42


53

Other
 
107


172

 
 
473


552

 
 
$
13,429


$
13,502

LIABILITIES AND CAPITALIZATION
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Currently payable long-term debt
 
$
535


$
892

Short-term borrowings-
 
 
 
 
Affiliated companies
 

 
431

Other
 
21

 
4

Accounts payable-
 
 

 
 

Affiliated companies
 
453


765

Other
 
178


290

Accrued taxes
 
167


66

Derivatives
 
166


110

Other
 
170


197

 
 
1,690


2,755

CAPITALIZATION:
 
 

 
 

Common stockholder's equity-
 
 

 
 

Common stock, without par value, authorized 750 shares - 7 shares outstanding as of September 30, 2014 and December 31, 2013
 
3,592

 
3,080

Accumulated other comprehensive income
 
63

 
54

Retained earnings
 
2,148

 
2,178

Total common stockholder's equity
 
5,803


5,312

Long-term debt and other long-term obligations
 
2,631


2,130

 
 
8,434


7,442

NONCURRENT LIABILITIES:
 
 

 
 

Deferred gain on sale and leaseback transaction
 
833


858

Accumulated deferred income taxes
 
741


741

Retirement benefits
 
197


185

Asset retirement obligations
 
1,059


1,015

Derivatives
 
20

 
14

Other
 
455


492

 
 
3,305


3,305

COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 11)
 


 


 
 
$
13,429


$
13,502


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)

 
 
Nine Months Ended September 30
 
(In millions)
 
2014
 
2013
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net loss
 
$
(30
)
 
$
(29
)
 
Adjustments to reconcile net loss to net cash from operating activities-
 
 
 
 
 
Income from discontinued operations (Note 14)
 
(116
)
 
(14
)
 
Provision for depreciation
 
236

 
231

 
Nuclear fuel amortization
 
160

 
156

 
Deferred rents and lease market valuation liability
 
(63
)
 
(61
)
 
Deferred income taxes and investment tax credits, net
 
(15
)
 
205

 
Investment impairments
 
9

 
66

 
Gain on asset sales
 

 
(20
)
 
Commodity derivative transactions, net (Note 9)
 
61

 
15

 
Loss on debt redemptions (Note 8)
 
6

 
103

 
Make-whole premiums paid on debt redemptions
 

 
(31
)
 
Changes in current assets and liabilities-
 
 
 
 
 
Receivables
 
609

 
(214
)
 
Materials and supplies
 
(23
)
 
66

 
Prepayments and other current assets
 
26

 
(22
)
 
Accounts payable
 
(383
)
 
129

 
Accrued taxes
 
7

 
(131
)
 
Accrued compensation and benefits
 
(15
)
 
(5
)
 
Cash collateral, net
 
(82
)
 
(35
)
 
Other
 
41

 
(20
)
 
Net cash provided from operating activities
 
428

 
389

 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
New financing-
 
 
 
 
 
Long-term debt
 
878

 

 
Equity contribution from parent
 
500

 
1,500

 
Redemptions and repayments-
 
 
 
 
 
Long-term debt
 
(749
)
 
(1,179
)
 
Short-term borrowings, net
 
(414
)
 

 
Tender premiums paid on debt redemptions
 

 
(67
)
 
Other
 
(14
)
 
(7
)
 
Net cash provided from financing activities
 
201

 
247

 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Property additions
 
(586
)
 
(477
)
 
Nuclear fuel
 
(98
)
 
(159
)
 
Proceeds from asset sales
 
307

 
21

 
Sales of investment securities held in trusts
 
890

 
650

 
Purchases of investment securities held in trusts
 
(933
)
 
(694
)
 
Loans to affiliated companies, net
 
(214
)
 
22

 
Other
 
5

 

 
Net cash used for investing activities
 
(629
)
 
(637
)
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 

 
(1
)
 
Cash and cash equivalents at beginning of period
 
2

 
3

 
Cash and cash equivalents at end of period
 
$
2

 
$
2

 

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
 
 
 
 
 
 
Goodwill
 
 
 
3
Earnings Per Share of Common Stock
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
Income Taxes
 
 
 
Variable Interest Entities
 
 
 
Fair Value Measurements
 
 
 
Derivative Instruments
 
 
 
Regulatory Matters
 
 
 
Commitments, Guarantees and Contingencies
 
 
 
Supplemental Guarantor Information
 
 
 
13
Segment Information
 
 
 
14
Discontinued Operations
 
 
 
15
Impairment of Long-Lived Assets



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.

FirstEnergy Corp. was organized under the laws of the State of Ohio in 1996. FirstEnergy’s principal business is the holding, directly or indirectly, of all of the outstanding common stock of its principal subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), JCP&L, ME, PN, FESC, FES and its principal subsidiaries (FG and NG), AE Supply, MP, PE, WP and FET and its principal subsidiaries ATSI and TrAIL. In addition, FirstEnergy holds all of the outstanding common stock of other direct subsidiaries including: FirstEnergy Properties, Inc., FEV, FENOC, FELHC, Inc., and GPU Nuclear, Inc.

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, 2013.

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 statement 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 7, 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.

For the three months ended September 30, 2014 and 2013, capitalized financing costs on FirstEnergy's Consolidated Statements of Income includes $14 million and $4 million, respectively, of allowance for equity funds used during construction and $14 million and $17 million, respectively, of capitalized interest. For the nine months ended September 30, 2014 and 2013, capitalized financing costs on FirstEnergy's Consolidated Statements of Income includes $35 million and $11 million, respectively, of allowance for equity funds used during construction, and $54 million and $51 million, respectively, of capitalized interest.

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

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring entities to recognize revenue by applying a five-step model in accordance with the core principle to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU No. 2014-09 specifies the accounting for costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This standard is effective for fiscal years beginning after December 15, 2016, with no early adoption permitted, and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.
2. GOODWILL

In a business combination, the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed is recognized as goodwill. FirstEnergy evaluates goodwill for impairment annually on July 31 and more frequently if indicators of impairment arise.

FirstEnergy’s reporting units are consistent with its reportable segments and consist of Regulated Distribution, Regulated Transmission, Competitive Energy Services and Other/Corporate. The following table presents goodwill by reporting unit (there have been no changes in goodwill for any reporting unit during 2014):


9




Goodwill
 
Regulated Distribution
 
Regulated Transmission
 
Competitive Energy Services
 
Other/Corporate
 
Consolidated
 
 
(In millions)
Balance as of September 30, 2014
 
$
5,092

 
$
526

 
$
800

 
$

 
$
6,418


FirstEnergy performed a quantitative assessment for the Regulated Distribution, Regulated Transmission and Competitive Energy Services reporting units as of July 31, 2014. The fair values for each of the reporting units were calculated using a discounted cash flow analysis and indicated no impairment of goodwill.
 
The fair value of the Competitive Energy Services reporting unit exceeded its carrying value by approximately 10%, impacted by near term weak economic conditions and low energy and capacity prices. Key assumptions incorporated into the Competitive Energy Services discounted cash flow analysis requiring significant management judgment included: discount rates, future energy and capacity pricing, projected operating income, capital expenditures, including the impact of pending carbon and other environmental legislation, and terminal multiples. The July 31, 2014 assessment for this reporting unit included a discount rate of 8.5% and a terminal multiple of 7.0x earnings before, interest, taxes, depreciation, and amortization. Continued weak economic conditions, lower than forecasted power and capacity prices, and revised environmental requirements could have a negative impact on future goodwill assessments.

Key assumptions incorporated in the Regulated 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 of future rate proceedings, and terminal multiples.


10



3. 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.

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

(In millions, except per share amounts)
 
Three Months Ended September 30

Nine Months Ended September 30
Reconciliation of Basic and Diluted Earnings per Share of Common Stock
 
2014

2013

2014

2013
 
 
 
 
 
 
 
Income from continuing operations
 
$
333

 
$
209

 
$
519

 
$
233

Discontinued operations (Note 14)
 

 
9

 
86

 
17

Net income
 
$
333

 
$
218

 
$
605

 
$
250

 
 
 
 
 
 
 
 
 
Weighted average number of basic shares outstanding
 
420

 
418

 
419

 
418

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

 
1

 
1

 
1

Weighted average number of diluted shares outstanding
 
421

 
419

 
420

 
419

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.79

 
$
0.50

 
$
1.24

 
$
0.56

Discontinued operations (Note 14)
 

 
0.02

 
0.20

 
0.04

Net earnings per basic share
 
$
0.79

 
$
0.52

 
$
1.44

 
$
0.60

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.79