Organization, Basis of Presentation and Significant Accounting Policies

12 Months Ended

Dec. 31, 2014

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. FE’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, FET and its principal subsidiaries (ATSI and TrAIL), and AESC. In addition, FE holds all of the outstanding common stock of other direct subsidiaries including: FirstEnergy Properties, Inc., FEV, FENOC, FELHC, Inc., GPU Nuclear, Inc., and AE Ventures, Inc.

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 necessarily 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.

For the years ended December 31, 2014, 2013 and 2012, capitalized financing costs on FirstEnergy's Consolidated Statements of Income include $49 million, $28 million and $18 million, respectively, of allowance for equity funds used during construction and $69 million, $75 million and $72 million, respectively, of capitalized interest.

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

ACCOUNTING FOR THE EFFECTS OF REGULATION

FirstEnergy accounts for the effects of regulation through the application of regulatory accounting to the Utilities, AGC, 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, 2014 and December 31, 2013, and the changes during the year ended December 31, 2014:



Regulatory Assets by Source	December 31, 2014			December 31, 2013			Increase (Decrease)
	(In millions)
Regulatory transition costs	$	240		$	266		$	(26	)
Customer receivables for future income taxes	370			518			(148		)
Nuclear decommissioning and spent fuel disposal costs	(305		)	(198		)	(107		)
Asset removal costs	(254		)	(362		)	108
Deferred transmission costs	90			112			(22		)
Deferred generation costs	281			346			(65		)
Deferred distribution costs	182			194			(12		)
Contract valuations	153			260			(107		)
Storm-related costs	465			455			10
Other	189			263			(74		)
Net Regulatory Assets included in the Consolidated Balance Sheet	$	1,411		$	1,854		$	(443	)

Regulatory assets that do not earn a current return totaled approximately $488 million and $477 million as of December 31, 2014 and 2013, respectively, primarily related to storm damage costs of which approximately $360 million relates to JCP&L for which the recovery period is subject to current rate and regulatory proceedings (see Note 14, Regulatory Matters).

As of December 31, 2014 and December 31, 2013, FirstEnergy had approximately $243 million and $440 million of net regulatory liabilities that are primarily related to asset removal costs and are classified within other noncurrent liabilities on the Consolidated Balance Sheets, as opposed to being included in the net regulatory assets shown above.

REVENUES AND RECEIVABLES

The Utilities' principal business is providing electric service to customers in Ohio, Pennsylvania, West Virginia, New Jersey and Maryland. FES' 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, FirstEnergy accrues the estimated unbilled amount as revenue and reverses 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. There was no material concentration of receivables as of December 31, 2014 and 2013 with respect to any particular segment of FirstEnergy’s customers. Billed and unbilled customer receivables as of December 31, 2014 and 2013 are shown below.



Customer Receivables	FirstEnergy		FES
	(In millions)
December 31, 2014
Billed	$	914	$	239
Unbilled	640		176
Total	$	1,554	$	415

December 31, 2013
Billed	$	1,010	$	301
Unbilled	710		238
Total	$	1,720	$	539

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	2014		2013		2012
	(In millions, except per share amounts)

Income from continuing operations	$	213	$	375	$	755
Less: Income attributable to noncontrolling interest	—		—		1
Income from continuing operations available to common shareholders	213		375		754
Discontinued operations (Note 19)	86		17		16
Earnings available to FirstEnergy Corp.	$	299	$	392	$	770

Weighted average number of basic shares outstanding	420		418		418
Assumed exercise of dilutive stock options and awards⁽¹⁾	1		1		1
Weighted average number of diluted shares outstanding	421		419		419

Earnings per share:
Basic earnings per share:
Continuing operations	$	0.51	$	0.90	$	1.81
Discontinued operations (Note 19)	0.20		0.04		0.04
Earnings per basic share	$	0.71	$	0.94	$	1.85

Diluted earnings per share:
Continuing operations	$	0.51	$	0.90	$	1.80
Discontinued operations (Note 19)	0.20		0.04		0.04
Earnings per diluted share	$	0.71	$	0.94	$	1.84


⁽¹⁾	For the years ended December 31, 2014 and 2013, approximately two 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 was not significant for the year ending December 31, 2012.

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 ($2 billion included in net plant) is capitalized within the CES segment's Property, plant and equipment and charged to fuel expense using the specific identification method. Net plant in service balances by segment as of December 31, 2014 and 2013 were as follows:



	December 31, 2014							December 31, 2013
Property, Plant and Equipment	In Service		Accum. Depr.			Net Plant		In Service		Accum. Depr.			Net Plant
	(In millions)
Regulated Distribution	$	23,973	$	(6,759	)	$	17,214	$	23,098	$	(6,514	)	$	16,584
Regulated Transmission	6,634		(1,595		)	5,039		5,564		(1,511		)	4,053
Competitive Energy Services⁽¹⁾	16,442		(5,598		)	10,844		15,206		(5,088		)	10,118
Corporate/Other	435		(198		)	237		360		(167		)	193
Total	$	47,484	$	(14,150	)	$	33,334	$	44,228	$	(13,280	)	$	30,948

⁽¹⁾Primarily consists of generating assets.

The major classes of property, plant and equipment are largely consistent with the segment disclosures above, with the exception of Regulated Distribution which has approximately $2 billion of regulated generation net plant in service.

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 2014, 2013 and 2012 are shown in the following table:



	Annual Composite Depreciation Rate
	2014		2013		2012
FirstEnergy	2.5	%	2.6	%	2.5	%
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 3,003 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 $686 million representing AGC's share in this facility as of December 31, 2014. 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.

Conditional retirement obligations associated with tangible long-lived assets are recognized at fair value in the period in which they are incurred if a reasonable estimate can be made, even though there may be uncertainty about timing or method of settlement. When settlement is conditional on a future event occurring, it is reflected in the measurement of the liability, not the timing of the liability recognition.

AROs as of December 31, 2014, are described further in Note 13, 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.

On October 9, 2013, MP sold its approximate 8% share of Pleasants at its fair market value of $73 million to AE Supply, and AE Supply sold its approximate 80% share of Harrison to MP at its book value of $1.2 billion. The transaction resulted in AE Supply receiving net consideration of $1.1 billion and MP's assumption of a $73.5 million pollution control note. In connection with the closing, in the fourth quarter of 2013, MP recorded a pre-tax impairment charge of approximately $322 million to reduce the net book value of the Harrison Power Station to the amount that was permitted to be included in jurisdictional rate base. Additionally, MP recognized a regulatory liability of approximately $23 million in the fourth quarter of 2013 representing refunds to customers associated with the excess purchase price received by MP above the net book value of MP's minority interest in the Pleasants Power Station. The impairment charge is included within the results of the Regulated Distribution segment.

On July 8, 2013, officers of FirstEnergy and AE Supply committed to deactivating the Hatfield's Ferry, generating Units 1-3, and Mitchell, generating units 2-3. As a result of this decision, in the second quarter of 2013, FirstEnergy recorded a pre-tax impairment of approximately $473 million to continuing operations, which also includes pre-tax impairments of $13 million related to excessive inventory at these facilities. The impairment charge is included within the results of the CES segment. On October 9, 2013, Hatfield's Ferry Units 1-3 and Mitchell Units 2-3 were deactivated.

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, and CES. The following table presents goodwill by reporting unit:



Goodwill	Regulated Distribution		Regulated Transmission		Competitive Energy Services		Consolidated
	(In millions)
Balance as of December 31, 2014	$	5,092	$	526	$	800	$	6,418

There were no changes in goodwill for any reporting unit during 2014. As of December 31, 2014 and 2013, total goodwill recognized by FES was $23 million. Neither FirstEnergy nor FES has accumulated impairment charges as of December 31, 2014.

Annual impairment testing is conducted as of July 31 of each year and for 2014, 2013 and 2012, the analysis indicated no impairment of goodwill. FirstEnergy performed a quantitative assessment for the Regulated Distribution, Regulated Transmission and CES 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 CES 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 CES 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 pollution and other environmental regulation, 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.

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 2014, 2013 and 2012, FirstEnergy recognized $37 million, $90 million and $16 million, respectively, of OTTI. During the same periods, FES recognized OTTI of $33 million, $79 million and $14 million, respectively. The fair values of FirstEnergy’s investments are disclosed in Note 9, Fair Value Measurements.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued 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, the accounting for costs to obtain or fulfill a contract with a customer is specified and disclosure requirements for revenue recognition are expanded. 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.