TAXES

FirstEnergy records income taxes in accordance with the liability method of accounting. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recognized for tax purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. Deferred income tax liabilities related to temporary tax and accounting basis differences and tax credit carryforward items are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Deferred tax assets are recognized based on income tax rates expected to be in effect when they are settled.

FES and the Utilities are party to an intercompany income tax allocation agreement with FirstEnergy and its other subsidiaries that provides for the allocation of consolidated tax liabilities. Net tax benefits attributable to FirstEnergy, excluding any tax benefits derived from interest expense associated with acquisition indebtedness from the merger with GPU, are reallocated to the subsidiaries of FirstEnergy that have taxable income. That allocation is accounted for as a capital contribution to the company receiving the tax benefit.

On December 19, 2014, the President signed into law the Tax Increase Prevention Act of 2014 (the Act). The Act, among other things, extended retroactively the R&D tax credit until December 31, 2014, and also extended accelerated depreciation of qualified capital investments placed into service before January 1, 2015. FirstEnergy and FES recorded the effects of the Act in the fourth quarter of 2014. The retroactive extension of the tax benefits did not have a significant impact to the effective tax rate.



PROVISION FOR INCOME TAXES (BENEFITS)⁽¹⁾	2014			2013			2012
	(In millions)
FirstEnergy
Currently payable (receivable)-
Federal	$	(132	)	$	(118	)	$	(130	)
State	(72		)	70			28
	(204		)	(48		)	(102		)
Deferred, net-
Federal	214			305			580
State	(42		)	(54		)	78
	172			251			658
Investment tax credit amortization	(10		)	(8		)	(11		)
Total provision for income taxes (benefits)	$	(42	)	$	195		$	545

FES
Currently payable (receivable)-
Federal	$	(222	)	$	(300	)	$	(128	)
State	(13		)	(3		)	17
	(235		)	(303		)	(111		)
Deferred, net-
Federal	25			317			209
State	(14		)	(4		)	9
	11			313			218
Investment tax credit amortization	(4		)	(4		)	(4		)
Total provision for income taxes (benefits)	$	(228	)	$	6		$	103

⁽¹⁾Provision for Income Taxes (Benefits) on Income from Continuing Operations. Currently payable (receivable) in 2014 excludes $106 million and $12 million of federal and state taxes, respectively, associated with discontinued operations. Deferred, net in 2014 excludes $44 million and $5 million of federal and state tax benefits, respectively, associated with discontinued operations.

FirstEnergy and FES tax rates are affected by permanent items, such as AFUDC equity and other flow-through items as well as discrete items that may occur in any given period, but are not consistent from period to period. The following tables provide a reconciliation of federal income tax expense at the federal statutory rate to the total provision for income taxes on continuing operations for the three years ended December 31, 2014:



	2014			2013			2012
	(In millions)
FirstEnergy
Income from Continuing Operations before provision for income taxes	$	171		$	570		$	1,299
Federal income tax expense at statutory rate (35%)	$	60		$	199		$	455
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits	(10		)	(8		)	(11		)
State income taxes, net of federal tax benefit	12			10			79
Medicare Part D	—			—			32
Effectively settled tax items, including interest	(35		)	(2		)	(20		)
ESOP dividend	(6		)	(9		)	—
Change in accounting method	(27		)	—			—
Tax basis balance sheet adjustments	(25		)	—			—
AFUDC equity and other flow-through	(13		)	(7		)	—
Other, net	2			12			10
Total provision for income taxes (benefits)	$	(42	)	$	195		$	545
Effective income tax rate	(24.6		)%	34.2		%	42.0		%

FES
Income (loss) from Continuing Operations before provision for income taxes (benefits)	$	(588	)	$	52		$	276
Federal income tax expense (benefit) at statutory rate (35%)	$	(206	)	$	18		$	97
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits	(4		)	(4		)	(4		)
State income taxes, net of federal tax benefit	(14		)	(5		)	17
Effectively settled tax items	—			—			(11		)
ESOP dividend	(1		)	(2		)	—
Other, net	(3		)	(1		)	4
Total provision for income taxes (benefits)	$	(228	)	$	6		$	103
Effective income tax rate	38.8		%	11.5		%	37.3		%

In 2014, FirstEnergy’s effective tax rate was (24.6)% compared to 34.2% in 2013. The decrease in the effective tax rate year over year relates primarily to a $399 million decrease in income from continuing operations, tax benefits associated with an IRS approved change in accounting method for costs associated with the refurbishment of meters and transformers ($27 million), and additional tax benefits on uncertain state tax positions due to expiration of the statute of limitations ($33 million). Additionally, during 2014, income tax benefits of $25 million were recorded that related to prior periods. The out-of-period adjustment primarily related to the correction of amounts included in the Company’s tax basis balance sheet. Management has determined that this adjustment is not material to the current or any prior period. These benefits were partially offset by higher valuation allowances recorded in 2014 on state and municipal NOL carryforwards that the Company believes are no longer realizable and the absence of tax benefits recorded in 2013 for changes in state apportionment factors as well as a decrease in deferred tax liabilities associated with the elimination of business nexus in certain state jurisdictions.

In 2014, FES’ effective tax rate (on a loss from continuing operations) was 38.8% compared to 11.5% (on income from continuing operations) in 2013. During 2014, FES' effective tax rate benefited from changes to state apportionment factors but was offset by valuation allowances recorded on state and municipality NOL carryforwards.

Accumulated deferred income taxes as of December 31, 2014 and 2013 are as follows:



	2014			2013
	(In millions)
FirstEnergy
Property basis differences	$	9,354		$	8,734
Deferred sale and leaseback gain	(381		)	(401		)
Pension and OPEB	(1,433		)	(972		)
Nuclear decommissioning activities	458			460
Asset retirement obligations	(641		)	(651		)
Regulatory asset/liability	768			750
Loss carryforwards and AMT credits	(1,932		)	(1,598		)
Loss carryforward valuation reserve	174			125
All other	172			155
Net deferred income tax liability	$	6,539		$	6,602

FES
Property basis differences	$	1,749		$	1,354
Deferred sale and leaseback gain	(356		)	(370		)
Pension and OPEB	(373		)	(66		)
Lease market valuation liability	75			54
Nuclear decommissioning activities	489			470
Asset retirement obligations	(486		)	(439		)
Loss carryforwards and AMT credits	(631		)	(354		)
Loss carryforward valuation reserve	32			27
All other	(15		)	40
Net deferred income tax liability	$	484		$	716

FirstEnergy has tax returns that are under review at the audit or appeals level by the IRS and state taxing authorities. FirstEnergy's tax returns for all state jurisdictions are open from 2010-2013. In April 2014, the IRS completed its examination of FirstEnergy’s 2011 and 2012 federal income tax returns and issued Revenue Agent Reports for those years. In addition, in January 2015, the IRS completed its examination of the 2013 federal income tax return and issued a Revenue Agent Report. For tax years 2011-2013 there were no material impacts to FirstEnergy's effective tax rate associated with these examinations. Tax year 2014 is currently under review by the IRS.

FirstEnergy has recorded as deferred income tax assets the effect of NOLs and tax credits that will more likely than not be realized through future operations and through the reversal of existing temporary differences. As of December 31, 2014, the deferred income tax assets, before any valuation allowances, consisted of $1.5 billion of Federal NOL carryforwards that expire from 2030 to 2034, Federal AMT credits of $25 million that have an indefinite carryforward period, and $413 million of state and local NOL carryforwards that will begin to expire in 2015.

The table below summarizes pre-tax NOL carryforwards for state and local income tax purposes of approximately $9.9 billion for FirstEnergy, of which approximately $5.6 billion is expected to be utilized based on current estimates and assumptions. The ultimate utilization of these NOLs may be impacted by statutory limitations on the use of NOLs imposed by state and local tax jurisdictions, changes in statutory tax rates, and changes in business which, among other things, impact both future profitability and the manner in which future taxable income is apportioned to various state and local tax jurisdictions.



Expiration Period	FirstEnergy				FES
	(In millions)
	State		Local		State		Local
2015-2019	$	63	$	2,524	$	—	$	1,874
2020-2024	1,813		646		182		—
2025-2029	1,704		—		88		—
2030-2034	3,172		—		1,001		—
	$	6,752	$	3,170	$	1,271	$	1,874

FirstEnergy accounts for uncertainty in income taxes recognized in its financial statements. A recognition threshold and measurement attribute is utilized for financial statement recognition and measurement of tax positions taken or expected to be taken on a company's tax return. As of December 31, 2014 and 2013, FirstEnergy's total unrecognized income tax benefits were approximately $34 million and $48 million, respectively. All $34 million of unrecognized income tax benefits as of December 31, 2014, would impact the effective tax rate if ultimately recognized in future years. As of December 31, 2014, it is reasonably possible that approximately $10 million of unrecognized tax benefits may be resolved during 2015 as a result of the statute of limitations expiring, all of which would affect FirstEnergy's effective tax rate.

The following table summarizes the changes in unrecognized tax positions for the years ended 2014, 2013 and 2012:



	FirstEnergy			FES
	(In millions)
Balance, January 1, 2012	$	117		$	45
Current year increases	2			—
Current year decreases	(7		)	—
Prior years increases	6			6
Prior years decreases	(37		)	(13		)
Decrease for settlements	(38		)	(35		)
Balance, December 31, 2012	$	43		$	3
Prior years increases	10			—
Prior years decreases	(5		)	—
Balance, December 31, 2013	$	48		$	3
Current year increases	4			—
Prior years increases	5			—
Prior years decreases	(23		)	—
Balance, December 31, 2014	$	34		$	3

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 federal income tax return. FirstEnergy includes net interest and penalties in the provision for income taxes. FirstEnergy's reversal of accrued interest associated with unrecognized tax benefits reduced FirstEnergy's effective tax rate in 2014 and 2012 by approximately $6 million and $4 million, respectively. There was no reversal of accrued interest for the year ended December 31, 2013.

The following table summarizes the net interest expense (income) for the three years ended December 31, 2014 and the cumulative net interest payable as of December 31, 2014 and 2013:



	Net Interest Expense (Income) For the Years Ended December 31,								Net Interest Payable As of December 31,
	2014			2013		2012			2014		2013
	(In millions)								(In millions)
FirstEnergy	$	(6	)	$	1	$	(4	)	$	2	$	9
FES	—			—		(4		)	—		1

General Taxes



	2014		2013		2012
	(In millions)
FirstEnergy
KWH excise	$	194	$	219	$	230
State gross receipts	226		240		251
Real and personal property	393		368		328
Social security and unemployment	112		110		126
Other	37		41		49
Total general taxes	$	962	$	978	$	984

FES
State gross receipts	$	69	$	77	$	77
Real and personal property	39		40		35
Social security and unemployment	17		19		20
Other	3		2		4
Total general taxes	$	128	$	138	$	136