VARIABLE INTEREST ENTITIES

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

VIEs included in FirstEnergy's consolidated financial statements are: FEV's joint venture in the Signal Peak mining and coal transportation operations, a portion of which was sold on October 18, 2011, and resulted in deconsolidation; the PNBV and Shippingport bond trusts that were created to refinance debt originally issued in connection with sale and leaseback transactions; wholly owned limited liability companies of JCP&L created to sell transition bonds to securitize the recovery of JCP&L's bondable stranded costs associated with the previously divested Oyster Creek Nuclear Generating Station and JCP&L's supply of BGS, of which $287 million was outstanding as of December 31, 2011; and special purpose limited liabilities companies of MP and PE created to issue environmental control bonds that were used to construct environmental control facilities, of which $513 million was outstanding as of December 31, 2011.

FirstEnergy and its subsidiaries reflect the portion of VIEs not owned by them in the caption noncontrolling interest within the consolidated financial statements. The change in noncontrolling interest on the Consolidated Balance Sheets is primarily due to equity contributions from owners of $27 million and the deconsolidation of Signal Peak for $45 million, partially offset by net losses attributable to noncontrolling interests of $16 million and an equity distribution to owners of $5 million during the year ended December 31, 2011.

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

Mining Operations

In 2008, FEV entered into a joint venture in the Signal Peak mining and coal transportation operations near Roundup, Montana. FEV made equity investments totaling $133.5 million in exchange for a 50% economic interest in the joint venture. On October 18, 2011, a subsidiary of Gunvor Group, Ltd purchased a one-third interest in the Signal Peak joint venture in which FEV held a 50% interest. As part of the transaction, FirstEnergy received $257.5 million in proceeds and retained a 33-1/3% equity ownership in the joint venture. The sale resulted in a pre-tax gain of approximately $569 million ($370 million after-tax), which includes $378.6 million from the remeasurement of FEV's retained investment. The gain attributed to the retained investment remeasurement will be amortized as coal is extracted from the mine on a units of production method.



(In millions)
Fair value of retained noncontrolling investment	$	400.0
Less: Carrying value of retained interest	21.4
Gain on retained interest	$	378.6

FirstEnergy previously consolidated this joint venture and, as a result of the sale, its retained 33-1/3% interest is accounted for using the equity method of accounting.

Trusts

FirstEnergy’s consolidated financial statements include PNBV and Shippingport - those trusts are included in the consolidated financial statements of OE and CEI, respectively. OE used debt and available funds to purchase the notes issued by PNBV for the purchase of lease obligation bonds. Ownership of PNBV includes a 3% equity interest by an unaffiliated third party and a 3% equity interest held by OES Ventures, a wholly owned subsidiary of OE. CEI and TE used debt and available funds to purchase the notes issued by Shippingport.

PATH-WV

PATH, LLC was formed to construct, through its operating companies, the PATH Project, which is a high-voltage transmission line that was proposed to extend from West Virginia through Virginia and into Maryland, including modifications to an existing substation in Putnam County, West Virginia, and the construction of new substations in Hardy County, West Virginia and Frederick County, Maryland as directed by PJM. PATH, LLC is a series limited liability company that is comprised of multiple series, each of which has separate rights, powers and duties regarding specified property and the series profits and losses associated with such property. A subsidiary of AE owns 100% of the Allegheny Series and 50% of the West Virginia Series (PATH-WV), which is a joint venture with a subsidiary of AEP. FirstEnergy is not the primary beneficiary of PATH-WV, as it does not have control over the significant activities affecting the economics of the portion of the PATH Project to be constructed by PATH-WV.

Because of the nature of PATH-WV's operations and its FERC approved rate mechanism, FirstEnergy's maximum exposure to loss consists of its equity investment in PATH-WV, which was $29 million as of December 31, 2011.

Power Purchase Agreements

FirstEnergy evaluated its power purchase agreements and determined that certain NUG entities may be VIEs to the extent that they own a plant that sells substantially all of its output to certain of the Utilities if the contract price for power is correlated with the plant's variable costs of production. FirstEnergy, through its subsidiaries JCP&L, Met-Ed, Penelec, PE, WP and MP, maintains 23 long-term power purchase agreements with NUG entities that were entered into pursuant to PURPA. FirstEnergy was not involved in the creation of, and has no equity or debt invested in, these entities.

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

Because JCP&L, PE and WP have no equity or debt interests in the NUG entities, their maximum exposure to loss relates primarily to the above-market costs incurred for power. FirstEnergy expects any above-market costs incurred by its subsidiaries to be recovered from customers, except as described further below. Purchased power costs related to the four contracts that may contain a variable interest that were held by FirstEnergy subsidiaries during the year ended December 31, 2011 were $176 million, $101.6 million and $48.9 million for JCP&L, PE and WP, respectively. Purchased power costs related to the two contracts that may contain a variable interest that were held by JCP&L during the years ended December 31, 2010 and 2009 were $243 million and $225 million, respectively.

In 1998 the PPUC issued an order approving a transition plan for WP that disallowed certain costs, including an estimated amount for an adverse power purchase commitment related to the NUG entity for which WP may hold a variable interest. As of December 31, 2011, WP's reserve for this adverse purchase power commitment was $53 million, including a current liability of $11 million, and is being amortized over the life of the commitment.

Loss Contingencies

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

FES and the Ohio Companies are exposed to losses under their applicable sale-leaseback agreements upon the occurrence of certain contingent events that each company considers unlikely to occur. The maximum exposure under these provisions represents the net amount of casualty value payments due upon the occurrence of specified casualty events that would render the applicable plant worthless. Net discounted lease payments would not be payable if the casualty loss payments were made. The following table discloses each company’s net exposure to loss based upon the casualty value provisions mentioned above as of December 31, 2011:



	Maximum Exposure		Discounted Lease Payments, net⁽¹⁾		Net Exposure
	(In millions)
FES	$	1,362	$	1,159	$	203
OE	606		416		190
CEI⁽²⁾	587		71		516
TE⁽²⁾	587		309		278


⁽¹⁾	The net present value of FirstEnergy’s sale and leaseback operating lease commitments is $1.6 billion.


⁽²⁾	CEI and TE are jointly and severally liable for the maximum loss amounts under certain sale-leaseback agreements.

See Note 6, Leases, for a discussion of CEI's and TE's assignment of their leasehold interest in the Bruce Mansfield Plant to FGCO.