TAXES

Income 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.



PROVISION FOR INCOME TAXES	FirstEnergy			FES			OE			JCP&L
	(In millions)
2012
Currently payable (receivable)-
Federal	$	(122	)	$	(120	)	$	56		$	(120	)
State	28			17			(5		)	(18		)
	(94		)	(103		)	51			(138		)
Deferred, net-
Federal	580			208			8			201
State	78			10			16			44
	658			218			24			245
Investment tax credit amortization	(11		)	(4		)	(1		)	—
Total provision for income taxes	$	553		$	111		$	74		$	107

2011
Currently payable (receivable)-
Federal	$	(243	)	$	(219	)	$	13		$	19
State	19			9			(12		)	7
	(224		)	(210		)	1			26
Deferred, net-
Federal	785			206			65			71
State	24			(3		)	13			20
	809			203			78			91
Investment tax credit amortization	(11		)	(4		)	(1		)	—
Total provision for income taxes	$	574		$	(11	)	$	78		$	117

2010
Currently payable (receivable)-
Federal	$	(23	)	$	(23	)	$	37		$	80
State	35			(2		)	(2		)	36
	12			(25		)	35			116
Deferred, net-
Federal	432			142			41			30
State	27			12			3			1
	459			154			44			31
Investment tax credit amortization	(9		)	(4		)	(1		)	—
Total provision for income taxes	$	462		$	125		$	78		$	147

In December 2012, two subsidiaries of FES, FG and NG, completed a conversion from corporations to limited liability companies (LLCs). For income tax purposes, these LLCs are treated as divisions (i.e., disregarded entities) of their parent company, FES. The LLC conversions, in combination with anticipated future taxable income, will contribute to the realization of certain state deferred tax assets. In 2011, an unregulated subsidiary of FirstEnergy converted to an LLC which, based on anticipated future taxable income, resulted in the partial reversal of a valuation allowance, reducing income tax expense in 2011 by $27 million.

A $50 million valuation allowance was established in 2012 for two unregulated subsidiaries of FirstEnergy based on current judgment as to the realization of certain state deferred tax assets, as impacted by changes in the business and the applicability of certain state law limitations on the long-term utilization of net operating loss carryforwards. The results of operations in 2012 for those companies decreased accumulated deferred income tax liabilities by approximately $50 million.

During 2012, certain FirstEnergy operating companies adopted a new federal tax accounting method (effective for the 2011 consolidated federal tax return) for the deductibility of expenses for repairs to transmission and distribution assets, pursuant to IRS safe harbor guidance. In accordance with the IRS guidance, a cumulative adjustment was made on the 2011 consolidated federal tax return, increasing tax deductions and decreasing taxable income by approximately $417 million. The increased federal tax deductions created a corresponding state tax benefit that reduced FirstEnergy's effective tax rate by approximately $12 million in 2012. The IRS has agreed that the new method of accounting is compliant with the IRS guidance.

As a result of the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act signed into law in March 2010, beginning in 2013 the tax deduction currently available to FirstEnergy will be reduced to the extent that drug costs are reimbursed under the Medicare Part D retiree subsidy program. As retiree healthcare liabilities and related tax impacts under prior law were already reflected in FirstEnergy's consolidated financial statements, the change resulted in a charge to FirstEnergy's earnings in 2010 of approximately $13 million and a reduction in accumulated deferred tax assets associated with these subsidies. This change reflects the anticipated increase in income taxes that will occur as a result of the change in tax law.

In 2010, approximately $325 million of costs were included as a repair deduction on FirstEnergy's 2009 consolidated federal income tax return, which reduced taxable income and increased the amount of tax refunds that were applied to FirstEnergy's 2010 estimated federal tax payments. Due to the flow through of the Pennsylvania state income tax benefit for this change in accounting, FirstEnergy's effective tax rate was reduced by $6 million in 2010. In connection with completing FirstEnergy's 2009 consolidated tax return, FES recognized an $8 million adjustment that increased its income tax expense in 2010.

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.

The following tables provide a reconciliation of federal income tax expense at the federal statutory rate to the total provision for income taxes for the three years ended December 31.



	FirstEnergy			FES			OE			JCP&L
	(In millions)
2012
Book income (loss) before provision for income taxes	$	1,323		$	298		$	175		$	240
Federal income tax expense at statutory rate	$	463		$	104		$	61		$	84
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits	(11		)	(4		)	(1		)	—
State income taxes, net of federal tax benefit	69			18			7			17
Medicare Part D	32			1			6			5
Effectively settled tax items	(20		)	(11		)	(1		)	—
State valuation allowance	60			—			—			—
State apportionment remeasurement	(50		)	—			—			—
Other, net	10			3			2			1
Total provision for income taxes	$	553		$	111		$	74		$	107

2011
Book income (loss) before provision for income taxes	$	1,459		$	(70	)	$	206		$	261
Federal income tax expense at statutory rate	$	511		$	(25	)	$	72		$	91
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits	(11		)	(4		)	(1		)	—
State income taxes, net of federal tax benefit	28			4			1			18
State unitary tax adjustments	33			—			—			—
Manufacturing deduction	16			13			3			—
Medicare Part D	36			4			6			6
Effectively settled tax items	(11		)	(2		)	(3		)	—
State valuation allowance	(19		)	2			—			—
Other, net	(9		)	(3		)	—			2
Total provision for income taxes	$	574		$	(11	)	$	78		$	117

2010
Book income (loss) before provision for income taxes	$	1,204		$	356		$	233		$	330
Federal income tax expense at statutory rate	$	421		$	125		$	82		$	116
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits	(9		)	(4		)	(1		)	—
State income taxes, net of federal tax benefit	40			7			1			24
Medicare Part D	17			1			2			4
Effectively settled tax items	(34		)	(2		)	(9		)	—
Other, net	27			(2		)	3			3
Total provision for income taxes	$	462		$	125		$	78		$	147

Accumulated deferred income taxes as of December 31, 2012 and 2011 are as follows:



	FirstEnergy			FES			OE			JCP&L
	(In millions)
December 31, 2012
Property basis differences	$	7,868		$	1,060		$	728		$	919
Regulatory transition charge	79			—			5			44
Customer receivables for future income taxes	130			—			9			1
Deferred MISO/PJM transmission costs	125			—			—			—
Other regulatory assets — RCP	161			—			80			—
Deferred sale and leaseback gain	(431		)	(384		)	(26		)	(9		)
Non-utility generation costs	5			—			—			(22		)
Unamortized investment tax credits	(67		)	(17		)	(3		)	(2		)
Unrealized losses on derivative hedges	(21		)	2			—			(1		)
Pensions and OPEB	(1,102		)	(105		)	(108		)	(106		)
Lease market valuation liability	(81		)	33			—			—
Oyster Creek securitization (Note 11)	75			—			—			75
Nuclear decommissioning activities	127			111			15			(22		)
Mark-to-market adjustments	30			30			—			—
Deferred gain for asset sales — affiliated companies	—			—			27			—
Loss carryforwards and AMT credits	(1,199		)	(221		)	—			(21		)
Loss carryforward valuation reserve	102			16			—			—
Storm damage	192			—			—			163
Market transition charge	65			—			—			65
All other	239			(22		)	40			4
Net deferred income tax liability	$	6,297		$	503		$	767		$	1,088

December 31, 2011
Property basis differences	$	6,738		$	770		$	673		$	792
Regulatory transition charge	105			—			30			49
Customer receivables for future income taxes	138			—			13			12
Deferred MISO/PJM transmission costs	51			—			—			—
Other regulatory assets — RCP	165			—			82			—
Deferred sale and leaseback gain	(450		)	(398		)	(31		)	(10		)
Non-utility generation costs	36			—			—			(2		)
Unamortized investment tax credits	(72		)	(19		)	(3		)	(2		)
Unrealized losses on derivative hedges	(21		)	5			—			(1		)
Pensions and OPEB	(752		)	(85		)	(76		)	(75		)
Lease market valuation liability	(179		)	(65		)	—			—
Oyster Creek securitization (Note 11)	93			—			—			93
Nuclear decommissioning activities	123			108			15			(7		)
Mark-to-market adjustments	(7		)	(7		)	—			—
Deferred gain for asset sales — affiliated companies	—			—			31			—
Loss carryforwards and ATM credits	(612		)	(34		)	—			—
Loss carryforward valuation reserve	34			12			—			—
Storm damage	55			—			—			42
Market transition charge	17			—			—			17
All other	208			(1		)	53			(49		)
Net deferred income tax liability	$	5,670		$	286		$	787		$	859

As of December 31, 2012, FirstEnergy had a current federal tax asset of approximately $319 million. The American Taxpayer Relief Act of 2012 was enacted in January 2013 (Act) and provides 50% accelerated (bonus) depreciation for qualifying expenditures made in 2013. As a result of the availability of 50% bonus depreciation for 2013, FirstEnergy anticipates that approximately $274 million of the current federal tax asset as of December 31, 2012, will not be realized in 2013 but will be available for future years. Of the $319 million current federal tax asset, approximately $12 million and $1 million is attributed to FES and JCP&L, respectively, which will be realized in future years. It is not anticipated that FES or JCP&L will realize any of this current federal tax asset in 2013.

FirstEnergy accounts for uncertainty in income taxes recognized in its financial statements. Accounting guidance prescribes a recognition threshold and measurement attribute 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, 2011 and 2012, FirstEnergy's total unrecognized income tax benefits were approximately $117 million and $43 million, respectively. All $43 million of unrecognized income tax benefits as of December 31, 2012, would impact the effective tax rate if ultimately recognized in future years. As of December 31, 2012, it is reasonably possible that approximately $4 million of unrecognized tax benefits may be resolved during 2013, all of which would affect FirstEnergy’s effective tax rate.

During the fourth quarter of 2012, FirstEnergy reached a settlement with the IRS on deductions for prior year costs to repair generation assets, permitting the reduction of unrecognized tax benefits by approximately $34 million, with a corresponding adjustment to accumulated deferred income taxes for this temporary tax item, and an overall decrease to FirstEnergy's effective tax rate of approximately $10 million for adjustments to potential interest expense resulting from the settlement. Also during the fourth quarter of 2012, the AE companies reduced reserves for unrecognized tax benefits related to various tax positions, including the IRS's agreement on AE's deduction of merger-related expenses, with a total reduction to the effective tax rate of approximately $7 million.

During 2012, FirstEnergy also submitted a claim for refund to the IRS for up to approximately $1.7 billion of additional accelerated (bonus) depreciation deductions for certain generation property for the 2010 taxable year, which should have an immaterial impact on earnings. The refund claim is under IRS examination. During 2012, FirstEnergy reached a settlement with state authorities related to state apportionment factors in Pennsylvania on an intercompany asset sale, which reduced FirstEnergy's effective tax rate by $3 million. During 2012, based on further IRS guidance related to the tax accounting for costs to repair and maintain fixed assets, the AE companies reduced their amount of unrecognized tax benefits by $21 million, with a corresponding adjustment to accumulated deferred income taxes for this temporary tax item, with no resulting impact to the effective tax rate.

In 2011, FirstEnergy reached a settlement with the IRS on an R&D claim and recognized approximately $30 million of income tax benefits, including $5 million that favorably affected FirstEnergy's effective tax rate in 2011. After reaching settlements on appeal in 2010 related primarily to the capitalization of certain costs for the tax years 2004-2008 and an unrelated federal tax matter related to prior year gains and losses recognized from the disposition of assets, as well as receiving final approval from the Joint Committee on Taxation for several items that were under appeal for tax years 2001-2003, FirstEnergy recognized approximately $78 million of net tax benefits in 2010, including $21 million that favorably affected FirstEnergy’s effective tax rate. The remaining portion of the tax benefit increased FirstEnergy’s accumulated deferred income taxes.

The following table summarizes the changes in unrecognized tax positions for the years ended 2012, 2011 and 2010.



	FirstEnergy			FES			OE			JCP&L
	(In millions)
Balance, January 1, 2010	$	191		$	41		$	77		$	14
Current year increases	10			6			2			—
Prior years increases	2			—			—			—
Prior years decreases	(81		)	(4		)	(19		)	(21		)
Increase (decrease) for settlements	(77		)	(2		)	(58		)	7
Balance, December 31, 2010	$	45		$	41		$	2		$	—
Increase due to merger with AE	97			—			—			—
Prior years increases	10			8			—			—
Prior years decreases	(35		)	(4		)	(2		)	—
Balance, December 31, 2011	$	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		$	—		$	—

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. During 2012, FirstEnergy's reversal of accrued interest associated with unrecognized tax benefits reduced FirstEnergy's effective tax rate by approximately $4 million. The interest associated with the 2011 settlement of a claim favorably affected FirstEnergy's effective tax rate by $7 million in 2011. The reversal of accrued interest associated with the recognized tax benefits reduced FirstEnergy's effective tax rate by $12 million in 2010.

The following table summarizes the net interest expense (income) for the three years ended December 31st and the cumulative net interest payable (receivable) as of December 31, 2012 and 2011:



	Net Interest Expense (Income) For the Years Ended December 31,									Net Interest Payable As of December 31,
	2012			2011			2010			2012		2011
	(In millions)									(In millions)
FirstEnergy	$	(4	)	$	(5	)	$	(10	)	$	8	$	11
FES	(4		)	1			1			—		4
OE	(1		)	(2		)	(3		)	—		1
JCP&L	—			—			(2		)	—		—

FirstEnergy has tax returns that are under review at the audit or appeals level by the IRS (2008-2012) and state tax authorities. FirstEnergy's tax returns for all state jurisdictions are open from 2008-2011. The IRS completed its audit of the 2008 tax year in July 2010, and FirstEnergy subsequently reached a tentative settlement with IRS Appeals on one outstanding issue in December 2012. The IRS's audits of the 2009 and 2010 tax years were completed in April 2011 and July 2012, respectively. Tax years 2011-2012 are under review by the IRS. AE is currently under audit by the IRS for tax years 2009 and 2010. In September 2012, the AE group of companies filed a final federal tax return for the period January-February 2011, which is subject to review. For the remainder of the 2011 taxable year and future years, the AE companies are part of the FirstEnergy federal consolidated group. State tax returns for tax years 2009 through 2011 remain subject to review in Pennsylvania, West Virginia, Maryland and Virginia for certain subsidiaries of AE.

FirstEnergy has recorded as deferred income tax assets the effect of net operating losses 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, 2012, the deferred income tax assets, before any valuation allowances, consisted of $785 million of federal net operating loss carryforwards that expire from 2024 to 2032, federal AMT credits of $25 million that have an indefinite carryforward period, and $389 million of state and local net operating loss carryforwards that begin to expire in 2013.

The table below summarizes pre-tax net operating loss carryforwards for state and local income tax purposes of approximately $15.8 billion for FirstEnergy, of which approximately $13.7 billion is expected to be utilized based on current estimates and assumptions. The ultimate utilization of these net operating losses may be impacted by statutory limitations on the use of net operating losses 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
2013-2017	$	9	$	1,665	$	—	$	904
2018-2022	2,907		—		43		—
2023-2027	6,505		—		45		—
2028-2032	4,728		—		746		—
	$	14,149	$	1,665	$	834	$	904

General Taxes



	FirstEnergy		FES		OE		JCP&L
	(In millions)
2012
KWH excise	$	230	$	—	$	88	$	37
State gross receipts	251		77		15		—
Real and personal property	329		35		80		6
Social security and unemployment	126		20		10		12
Other	49		4		—		—
Total general taxes	$	985	$	136	$	193	$	55
2011
KWH excise	$	244	$	—	$	90	$	50
State gross receipts	264		62		17		—
Real and personal property	299		42		73		6
Social security and unemployment	109		14		9		11
Other	62		6		1		—
Total general taxes	$	978	$	124	$	190	$	67
2010
KWH excise	$	245	$	5	$	92	$	51
State gross receipts	185		17		15		—
Real and personal property	243		53		67		5
Social security and unemployment	86		14		8		9
Other	17		5		1		—
Total general taxes	$	776	$	94	$	183	$	65