Organization, Basis of Presentation and Significant Accounting Policies

12 Months Ended

Dec. 31, 2013

Summary of Significant Accounting Policies [Abstract]

ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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, FES and its principal subsidiaries (FG and NG), FESC and during 2013, AE and its principal subsidiaries (AE Supply, AGC, MP, PE, WP, FET and its principal subsidiaries (ATSI, TrAIL and PATH), and AESC). 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. As of January 1, 2014, AE merged with and into FirstEnergy Corp., therefore, AE's direct subsidiaries, AE Supply, MP, PE, WP and FET, became direct subsidiaries of FirstEnergy Corp.

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 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, 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 unless certain regulatory restrictions and rules apply. FE and its subsidiaries consolidate a VIE when it is determined that it is the primary beneficiary (see Note 8, 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. These reclassifications include, but are not limited to, the classification of discontinued operations associated with our sale of hydro assets discussed in additional detail in Note 20, Discontinued Operations and Assets Held for Sale. Additionally, amounts collected in rates above actual charges related to asset removal have been reclassified as a regulatory liability which resulted in an increase to total assets and noncurrent liabilities of approximately $88 million.

ACCOUNTING FOR THE EFFECTS OF REGULATION

FirstEnergy accounts for the effects of regulation through the application of regulatory accounting to the Utilities, ATSI, PATH and TrAIL since their rates are established by a third-party regulator with the authority to set rates that bind customers, are cost-based and can be charged to and collected from customers.

FirstEnergy records regulatory assets and liabilities that result from the regulated rate-making process that would not be recorded under GAAP for non-regulated entities. These assets and liabilities are amortized in the Consolidated Statements of Income concurrent with the recovery or refund through customer rates. FirstEnergy believes that it is probable that its regulatory assets and liabilities will be recovered and settled, respectively, through future rates. FirstEnergy and the Utilities net their regulatory assets and liabilities based on federal and state jurisdictions.

The following table provides information about the composition of net regulatory assets as of December 31, 2013 and December 31, 2012, and the changes during the year ended December 31, 2013:



Regulatory Assets by Source	December 31, 2013			December 31, 2012			Increase (Decrease)
	(In millions)
Regulatory transition costs	$	266		$	293		$	(27	)
Customer receivables for future income taxes	518			505			13
Nuclear decommissioning and spent fuel disposal costs	(198		)	(219		)	21
Asset removal costs	(362		)	(372		)	10
Deferred transmission costs	112			352			(240		)
Deferred generation costs	346			379			(33		)
Deferred distribution costs	194			231			(37		)
Contract valuations	260			463			(203		)
Storm-related costs	455			469			(14		)
Other	263			229			34
Total	$	1,854		$	2,330		$	(476	)

Regulatory assets that do not earn a current return totaled approximately $477 million as of December 31, 2013 primarily related to storm damage costs.

As of December 31, 2013 and December 31, 2012, FirstEnergy had approximately $440 million and $480 million, respectively, of net regulatory liabilities that are primarily related to asset removal costs. Net regulatory liabilities are classified within Other noncurrent liabilities on the Consolidated Balance Sheets.

REVENUES AND RECEIVABLES

The Utilities' principal business is providing electric service to customers in Ohio, Pennsylvania, West Virginia, New Jersey and Maryland. FES' and AE Supply's principal business is supplying electric power to end-use customers through retail and wholesale arrangements, including affiliated company power sales to meet a portion of the POLR and default service requirements of the Ohio and Pennsylvania Companies and competitive retail sales to customers primarily in Ohio, Pennsylvania, Illinois, Michigan, New Jersey and Maryland. Retail customers are metered on a cycle basis.

Electric revenues are recorded based on energy delivered through the end of the calendar month. An estimate of unbilled revenues is calculated to recognize electric service provided from the last meter reading through the end of the month. This estimate includes many factors, among which are historical customer usage, load profiles, estimated weather impacts, customer shopping activity and prices in effect for each class of customer. In each accounting period, the Utilities, FES and AE Supply accrue the estimated unbilled amount receivable as revenue and reverse the related prior period estimate.

Receivables from customers include retail electric sales and distribution deliveries to residential, commercial and industrial customers for the Utilities, and retail and wholesale sales to customers for FES and AE Supply. There was no material concentration of receivables as of December 31, 2013 and 2012 with respect to any particular segment of FirstEnergy’s customers. Billed and unbilled customer receivables as of December 31, 2013 and 2012 are shown below.



Customer Receivables	FirstEnergy		FES
	(In millions)
December 31, 2013
Billed	$	1,010	$	301
Unbilled	710		238
Total	$	1,720	$	539
December 31, 2012
Billed	$	893	$	243
Unbilled	721		240
Total	$	1,614	$	483

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:



Reconciliation of Basic and Diluted Earnings per Share of Common Stock	2013		2012		2011
	(In millions, except per share amounts)

Income from continuing operations	$	375	$	755	$	856
Less: Income attributable to noncontrolling interest	—		1		(16		)
Income from continuing operations available to common shareholders	375		754		872
Discontinued operations (Note 20)	17		16		13
Earnings available to FirstEnergy Corp.	$	392	$	770	$	885

Weighted average number of basic shares outstanding	418		418		399
Assumed exercise of dilutive stock options and awards⁽¹⁾	1		1		2
Weighted average number of diluted shares outstanding	419		419		401

Earnings per share:
Basic earnings per share:
Continuing operations	$	0.90	$	1.81	$	2.19
Discontinued operations (Note 20)	0.04		0.04		0.03
Net earnings per basic share	$	0.94	$	1.85	$	2.22

Diluted earnings per share:
Continuing operations	$	0.90	$	1.80	$	2.18
Discontinued operations (Note 20)	0.04		0.04		0.03
Net earnings per diluted share	$	0.94	$	1.84	$	2.21


⁽¹⁾	For the year ended December 31, 2013, 2 million shares were excluded from the calculation of diluted shares outstanding, as their inclusion would be antidilutive. 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 years ending December 31, 2012 or 2011.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment reflects original cost (net of any impairments recognized), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs incurred to place the assets in service. The costs of normal maintenance, repairs and minor replacements are expensed as incurred. FirstEnergy recognizes liabilities for planned major maintenance projects as they are incurred. The cost of nuclear fuel is capitalized within Property, plant and equipment and charged to fuel expense using the specific identification method. Net plant in service balances as of December 31, 2013 and 2012 were as follows:



	December 31, 2013							December 31, 2012
Property, Plant and Equipment	In Service		Accum. Depr.			Net Plant		In Service		Accum. Depr.			Net Plant
	(In millions)
Regulated Distribution	$	23,098	$	(6,514	)	$	16,584	$	21,473	$	(6,146	)	$	15,327
Regulated Transmission	5,564		(1,511		)	4,053		5,078		(1,451		)	3,627
Competitive	15,206		(5,088		)	10,118		16,338		(4,739		)	11,599
Other/Corporate	360		(167		)	193		321		(131		)	190
Total	$	44,228	$	(13,280	)	$	30,948	$	43,210	$	(12,467	)	$	30,743

FirstEnergy provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The respective annual composite rates for FirstEnergy's and FES' electric plant in 2013, 2012 and 2011 are shown in the following table:



	Annual Composite Depreciation Rate
	2013		2012		2011
FirstEnergy	2.6	%	2.5	%	2.4	%
FES	3.1	%	3.1	%	3.1	%

Jointly Owned Plants

FE, through its subsidiary, AGC, owns an undivided 40% interest (1,200 MWs) in a 3,000 MW pumped storage, hydroelectric station in Bath County, Virginia, operated by the 60% owner, Virginia Electric and Power Company, a non-affiliated utility. Net Property, Plant and Equipment includes $672 million, excluding $28 million of CWIP, representing AGC's share in this facility as of December 31, 2013. AGC is obligated to pay its share of the costs of this jointly-owned facility in the same proportion as its ownership interest using its own financing. AGC's share of direct expenses of the joint plant is included in FE's operating expenses on the Consolidated Statement of Income.

Asset Retirement Obligations

FE recognizes an ARO for the future decommissioning of its nuclear power plants and future remediation of other environmental liabilities associated with all of its long-lived assets. The ARO liability represents an estimate of the fair value of FE's current obligation related to nuclear decommissioning and the retirement or remediation of environmental liabilities of other assets. A fair value measurement inherently involves uncertainty in the amount and timing of settlement of the liability. FE uses an expected cash flow approach to measure the fair value of the nuclear decommissioning and environmental remediation ARO. This approach applies probability weighting to discounted future cash flow scenarios that reflect a range of possible outcomes. The scenarios consider settlement of the ARO at the expiration of the nuclear power plant's current license, settlement based on an extended license term and expected remediation dates. The fair value of an ARO is recognized in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying value of the long-lived asset and are depreciated over the life of the related asset. AROs as of December 31, 2013, are described further in Note 14, Asset Retirement Obligations.

ASSET IMPAIRMENTS

Long-lived Assets

FirstEnergy reviews long-lived assets, including regulatory assets, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The recoverability of a long-lived asset is measured by comparing its carrying value to the sum of undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is greater than the undiscounted cash flows, an impairment exists and a loss is recognized for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. FirstEnergy utilizes the income approach, based upon discounted cash flows to estimate fair value. Impairments of long-lived assets recognized for the year ended December 31, 2013, are described further in Note 11, Impairment of Long-Lived Assets.

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. In evaluating goodwill for impairment, FirstEnergy first assesses qualitative factors to determine whether it is more likely than not (that is, likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value (including goodwill). If FirstEnergy concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing is required. However, if FirstEnergy concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the two-step goodwill impairment test is performed to identify a potential goodwill impairment and measure the amount of impairment to be recognized, if any.

FirstEnergy's reporting units are consistent with its reportable segments and consist of Regulated Distribution, Regulated Transmission, Competitive Energy Services and Other/Corporate. Goodwill is allocated to these reportable segments based on the original purchase price allocation of acquisitions. Total goodwill recognized by segment in FirstEnergy's Consolidated Balance Sheet is as follows:



Goodwill	Regulated Distribution		Regulated Transmission		Competitive Energy Services			Other/Corporate		Consolidated
	(In millions)
Balance as of December 31, 2012	$	5,025	$	526	$	896		$	—	$	6,447
Classification to Assets Held for Sale⁽¹⁾	—		—		(29		)	—		(29		)
West Virginia asset transfer	67		—		(67		)	—		—
Balance as of December 31, 2013	$	5,092	$	526	$	800		$	—	$	6,418


⁽¹⁾	See Note 20, Discontinued Operations and Assets Held for Sale.

As of December 31, 2013 and 2012, total goodwill recognized by FES was $23 million and $24 million, respectively. Neither FirstEnergy nor FES has accumulated impairment charges as of December 31, 2013.

Annual impairment testing is conducted as of July 31 of each year and for 2013, 2012 and 2011, the analysis indicated no impairment of goodwill. FirstEnergy performed a qualitative assessment of the Regulated Distribution and Regulated Transmission segments as of July 31, 2013. FirstEnergy assessed economic, industry and market considerations in addition to overall financial performance of its Regulated Distribution and Regulated Transmission segments. It was determined that the fair values of these segments were, more likely than not, greater than their carrying values.

Due to excess generation supply in the region, which has caused a period of protracted low power and capacity prices impacting Competitive operations, FirstEnergy performed a quantitative assessment of the Competitive Energy Services segment as of July 31, 2013. The fair value of the Competitive Energy Services segment was calculated using a discounted cash flow analysis which included the effects of the potential sale of certain hydroelectric power stations and the West Virginia asset transfer. Assumptions used in the analysis include discount rates, market performance, projected operating and capital cash flows and the fair value of debt. The estimated fair value of the Competitive Energy Services segment exceeded its carrying amount (including goodwill) as of July 31, 2013. Continued weak economic conditions, lower than forecasted power and capacity prices, and revised environmental requirements could have a negative impact on future goodwill assessments.

In October of 2013, in connection with the closing of the West Virginia asset transfer, as discussed in Note 15, Regulatory Matters, FirstEnergy transferred approximately $67 million of goodwill, net from the Competitive Energy Services segment to the Regulated Distribution segment based on the relative fair value of the generating plants to the fair value of the respective segment.

Investments

At the end of each reporting period, FirstEnergy evaluates its investments for OTTI. Investments classified as AFS securities are evaluated to determine whether a decline in fair value below the cost basis is other than temporary. FirstEnergy first considers its intent and ability to hold an equity security until recovery and then considers, among other factors, the duration and the extent to which the security's fair value has been less than its cost and the near-term financial prospects of the security issuer when evaluating an investment for impairment. For debt securities, FirstEnergy considers its intent to hold the securities, the likelihood that it will be required to sell the securities before recovery of its cost basis and the likelihood of recovery of the securities' entire amortized cost basis. If the decline in fair value is determined to be other than temporary, the cost basis of the securities is written down to fair value.

Unrealized gains and losses on AFS securities are recognized in AOCI. However, unrealized losses held in the NDTs of FES, OE and TE are recognized in earnings since the trust arrangements, as they are currently defined, do not meet the required ability and intent to hold criteria in consideration of OTTI. In 2013, 2012 and 2011, FirstEnergy recognized $90 million, $16 million and $19 million, respectively, of OTTI. During the same periods, FES recognized OTTI of $79 million, $14 million and $17 million, respectively. The fair values of FirstEnergy’s investments are disclosed in Note 9, Fair Value Measurements.

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.