Allegheny Power 2012 Annual Report Download

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ANNUAL
REPORT
20
12

Table of contents

  • Page 1
    20 12 ANNUAL REPORT

  • Page 2
    ... to the pension plan • Achieved a 42 percent increase in the number of retail customers served by our competitive subsidiary, FirstEnergy Solutions (FES) • Grew competitive sales by 10 percent, to nearly 100 million megawatt-hours • Improved distribution reliability FINANCIALS AT A GLANCE...

  • Page 3
    ...grade credit rating at each of our operating companies. BUILDING ON A SOUND BUSINESS STRATEGY I'm confident we're pursuing the right strategy for your company. By achieving strong performance in our three core businesses - generation, distribution and transmission - we can deliver greater financial...

  • Page 4
    ... Power Station, we took advantage of a scheduled outage to install new low-pressure turbines that are expected to enhance plant efficiency, lower costs and increase output. In addition, we opened new Emergency Operations Facilities for our Perry, Beaver Valley and Davis-Besse nuclear power stations...

  • Page 5
    ... of our Ohio utilities' Electric Security Plan through May 31, 2016, which will enable us to continue offering market-based prices to our customers during the next three years. To improve plant efficiency, new low-pressure turbines were installed during a planned refueling outage at Unit 2 of...

  • Page 6
    ... Mon Power and Potomac Edison utilities submitted a proposal to the Public Service Commission that, if approved, would transfer full ownership of the Harrison Power Station to Mon Power. The move would help ensure a continued supply of reliable, low-cost power to West Virginia customers, using coal...

  • Page 7
    ... with American Municipal Power, Inc. (AMP) to build a low-emitting natural gas peaking facility at our Eastlake Plant. We would supervise construction of the four combustion turbine units, while AMP would provide construction financing and own 75 percent of the generation output. This project...

  • Page 8
    ..., weak demand for electricity and increased costs related to government regulations to continue in 2013, our dedicated employees are prepared to meet these challenges and remain focused on safety, reliable operations and serving our customers. I'm confident the steps we took during 2012 and the...

  • Page 9
    ... energyrelated services. Our 10 utility operating companies form one of the nation's largest investorowned electric systems based on 6 million customers served within a nearly 65,000-square-mile area of Ohio, Pennsylvania, Maryland, West Virginia, New Jersey and New York. Our generation subsidiaries...

  • Page 10
    ..., FirstEnergy Solutions Corp. and Allegheny Energy Supply Company, LLC michael J. dowling Senior Vice President, External Affairs Bennett L. gaines Senior Vice President, Corporate Services and Chief Information Officer James F. pearson Senior Vice President and Chief Financial Officer Harvey...

  • Page 11
    ...Discussion and Analysis of Financial Condition and Results of Operations 64...Management Reports 65...Report of Independent Registered Public Accounting Firm 66...Consolidated Statements of Income 67...Consolidated Statements of Comprehensive Income 68...Consolidated Balance Sheets 69...Consolidated...

  • Page 12
    ... Company, which operates nuclear generating facilities FirstEnergy Solutions Corp., which provides energy-related products and services FirstEnergy Service Company, which provides legal, financial and other corporate support services FirstEnergy Transmission, LLC, formerly known as Allegheny Energy...

  • Page 13
    ...Efficiency and Conservation Electric Generation Supplier Environmental Impact Statement Expanded Net Energy Cost United States Environmental Protection Agency Electric Power Research Institute Electric Reliability Organization Employee Stock Ownership Plan Electric Security Plan Financial Accounting...

  • Page 14
    ... Board of Public Utilities Non-Market Based Non-Attainment New Source Review Notice of Violation Nitrogen Oxide National Pollutant Discharge Elimination System Nuclear Regulatory Commission New Source Review Non-Utility Generation New York State Public Service Commission New York State Electric...

  • Page 15
    ... Service Solar Renewable Energy Credit Transition Bond Charge Total Dissolved Solid Three Mile Island Unit 2 Transmission Service Charge Utility Workers Union of America Variable Interest Entity Virginia State Corporation Commission West Virginia Department of Environmental Protection Public Service...

  • Page 16
    ...PRICE RANGE OF COMMON STOCK The common stock of FirstEnergy Corp. is listed on the New York Stock Exchange under the symbol "FE" and is traded on other registered exchanges. 2012... $ 2.44 2.42 $ $ 2.87 2.85 $ $ 2.05 2.03 $ $ 2012 15,303 770 $ $ 2011 16,147 885 $ $ 2010 13,339 742 $ $ 2009 12,973 872 $...

  • Page 17
    ...'s common stock as of December 31, 2012 and January 31, 2013, respectively. Information regarding retained earnings available for payment of cash dividends is given in Note 11, Capitalization of the Combined Notes to Consolidated Financial Statements. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON...

  • Page 18
    ... sales and margins. • Regulatory outcomes associated with Hurricane Sandy. • Changing energy, capacity and commodity market prices including, but not limited to, coal, natural gas and oil, and availability and their impact on retail margins. • Financial derivative reforms that could increase...

  • Page 19
    ... to update, except as required by law, any forward-looking statements contained herein as a result of new information, future events or otherwise. See Item 1A. Risk Factors for additional information regarding risks that may impact our business, financial condition and results of operations. 4

  • Page 20
    ...Basic Earnings Per Share - Prior Year Segment operating results Regulated Distribution Regulated Transmission Competitive Energy Services Regulatory charges Merger-related costs Merger accounting - commodity contracts Net merger accretion (1)(2) (1) 2012 $ 2.22 (0.03) - (0.22) (0.03) 0.36 0.11 0.01...

  • Page 21
    ... projects. On June 14, 2012, JCP&L announced that it plans to begin work on 17 transmission construction projects over the next six months. These projects are part of a multi-year, $200 million LITE program, which began in 2011, to address New Jersey's growing demand for electricity and provide key...

  • Page 22
    ... period at the levels established in the existing ESP; • Providing Percentage of Income Payment Plan customers with a 6% generation rate discount; • Continuing to provide power to shopping and to non-shopping customers as part of the market-based price set through an auction process; and...

  • Page 23
    ... generation resources, as a result of the net addition of 1,476 MW, eliminating the need to make additional electricity and capacity purchases from the spot market, which is expected to result in greater rate stability for MP's customers. Lower Fuel Costs, Lower Rates for FirstEnergy's West Virginia...

  • Page 24
    ... purchases power for its POLR, SOS and default service requirements in Ohio, Pennsylvania, New Jersey and Maryland. This segment also includes regulated electric generation facilities in West Virginia and New Jersey that MP and JCP&L, respectively, own or contractually control. Its results reflect...

  • Page 25
    ...segment is exposed to various market and financial risks, including the risk of price fluctuations in the wholesale power markets. Wholesale power prices may be impacted by the prices of other commodities, including coal and natural gas, and energy efficiency and demand response programs, as well as...

  • Page 26
    ... 2013 results of operations and financial condition. • Regulated Distribution segment sales of 148.5 million MWH in 2013 compared to 146.6 million MWH in 2012. • Regulated Transmission segment revenue decrease of approximately $35 million compared to 2012, primarily due to lower TrAIL rate base...

  • Page 27
    ... in 2012. The decrease reflects lower expenditures by our Ohio distribution companies in 2013 partially offset by higher expenditures for transmission reliability improvements related to the deactivations of generating plants in northern Ohio. Expenditures for major projects are expected to increase...

  • Page 28
    ..., Segment Information, of the Combined Notes to Consolidated Financial Statements. Earnings available to FirstEnergy by business segment were as follows: Increase (Decrease) 2012 Earnings (Loss) By Business Segment: Regulated Distribution Regulated Transmission Competitive Energy Services Other and...

  • Page 29
    ...- 2012 Compared with 2011 Financial results for FirstEnergy's business segments in 2012 and 2011 were as follows: Regulated Distribution Regulated Transmission Competitive Energy Services (In millions) Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power...

  • Page 30
    2011 Financial Results Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power Other operating expenses Pension and OPEB mark-to-market Provision for depreciation Deferral of storm costs Amortization of other regulatory assets, net General taxes Impairment ...

  • Page 31
    Changes Between 2012 and 2011 Financial Results Increase (Decrease) Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power Other operating expenses Pension and OPEB mark-to-market Provision for depreciation Deferral of storm costs Amortization of other ...

  • Page 32
    ... sources: For the Years Ended December 31, Revenues by Type of Service Pre-merger companies: Distribution services Generation sales: Retail Wholesale Total generation sales Transmission Other Total pre-merger companies Allegheny Utilities(1) Total Revenues (1) Increase (Decrease) 2012 2011...

  • Page 33
    ... Allegheny Utilities, were $890 million lower in 2012 due primarily to a decrease in volumes required from increased customer shopping, the impact of milder weather and lower unit power supply costs during 2012 compared to 2011 as a result of lower auction prices. Source of Change in Purchased Power...

  • Page 34
    ... the Allegheny merger. Merger-related costs decreased $60 million in 2012 compared to 2011. Pension and OPEB mark-to-market charges increased $87 million, reflecting lower discount rates to measure related obligations in 2012. Depreciation expense increased by $27 million due to a higher asset base...

  • Page 35
    ... generating plants. In addition, higher operating expenses were partially offset by increased direct and governmental aggregation sales and the inclusion of two additional months of earnings from the Allegheny companies in 2012. Results of operations for the year ended December 31, 2011, include...

  • Page 36
    ...39.8 % 12.4 % Allegheny results include 12 months in 2012 and 10 months in 2011. The increase in direct and governmental aggregation revenues of $445 million resulted from the acquisition of new residential, commercial and industrial customers. This segment's customer base increased to 2.6 million...

  • Page 37
    .... Volumes decreased as a result of the deactivation of fossil generating units, the temporary reduction in operations at the Sammis Plant in September 2012 and an increase in economic purchases of power. Purchased power costs decreased $36 million due to lower unit prices ($310 million) and reduced...

  • Page 38
    ...111 1,588 Allegheny results include 12 months in 2012 and 10 months in 2011. Fuel expenses increased due to higher generation levels and fuel prices. The purchased power expense decreased due to lower volumes purchased and lower capacity expenses. Transmission expense declined as a result of lower...

  • Page 39
    ... - 2012 Compared with 2011 Financial results from other operating segments and reconciling items, including interest expense on holding company debt and corporate support services revenues and expenses, resulted in a $37 million decrease in earnings available to FirstEnergy Corp. in 2012 compared to...

  • Page 40
    ... 2010 Financial results for FirstEnergy's major business segments in 2011 and 2010 were as follows: Competitive Energy Services (In millions) Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power Other operating expenses Pensions and OPEB mark-to-market...

  • Page 41
    2010 Financial Results Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power Other operating expenses Pensions and OPEB mark-to-market Provision for depreciation Deferral of storm costs Amortization of other regulatory assets, net General taxes Impairment...

  • Page 42
    Changes Between 2011 and 2010 Financial Results Increase (Decrease) Revenues: External Electric Other Internal Total Revenues Operating Expenses: Fuel Purchased power Other operating expenses Pensions and OPEB mark-to-market Provision for depreciation Deferral of storm costs Amortization of other ...

  • Page 43
    ... with lower purchased power expenses. Revenues - The increase in total revenues resulted from the following sources: For the Years Ended December 31, Revenues by Type of Service Pre-merger companies: Distribution services Generation sales: Retail Wholesale Total generation sales Transmission Other...

  • Page 44
    ... the Ohio Companies, and to 52% from 10% in ME's, PN's and Penn's service territories. The increase in retail prices is the result of higher generation charges in Pennsylvania due to the removal of generation rate caps for ME and PN beginning on January 1, 2011, and the inclusion of transmission as...

  • Page 45
    ... FES: Change due to increased unit costs Change due to decreased volumes $ Increase (Decrease) (In millions) (826) 515 (311) 165 (1,606) (1,441) Total pre-merger companies Purchases by Allegheny companies Net Decrease in Purchased Power Costs • $ (1,752) 1,146 (606) Other operating expenses...

  • Page 46
    ... companies resulted in the inclusion of the following operating expenses in 2011: Operating Expenses - Allegheny Purchased power Fuel Transmission Deferral of storm costs Amortization of other regulatory assets, net Pensions and OPEB mark-to-market adjustment Other operating expenses General taxes...

  • Page 47
    ... structured sales. The increase in reported segment revenues resulted from the following sources: Revenues by Type of Service Pre-merger Companies Direct and Governmental Aggregation POLR and Structured Wholesale Transmission RECs Sale of OVEC participation interest Other Allegheny companies Intra...

  • Page 48
    ... reflects lower generation needed to satisfy sales requirements. Lower fossil fuel expenses were partially offset by a $22 million increase in nuclear fuel costs, which rose principally due to higher nuclear fuel unit prices following the refueling outages that occurred in 2010 and 2011. $ $ $ 319...

  • Page 49
    ...as shown in the following table: Source of Operating Expense Changes Allegheny Companies Fuel Purchased power Fossil operation and maintenance Transmission Pensions and OPEB mark-to-market adjustment Other mark-to-market Depreciation General taxes Other Total operating expenses Other Expense - Total...

  • Page 50
    ... 31, 2011, and the changes during the year ended December 31, 2012: Regulatory Assets by Source Regulatory transition costs Customer receivables for future income taxes Nuclear decommissioning and spent fuel disposal costs Asset removal costs Deferred transmission costs Deferred generation costs...

  • Page 51
    ... in the competitive generation markets, operational excellence, business plan execution, wellpositioned generation fleet, no speculative trading operations, appropriate long-term commodity hedging positions, manageable capital expenditure program, adequately funded pension plan, minimal near-term...

  • Page 52
    ... event of any change in credit ratings of the borrowers. Pricing is defined in "pricing grids," whereby the cost of funds borrowed under the Facilities is related to the credit ratings of the company borrowing the funds, other than the FET Facility, which is based on its subsidiaries' credit ratings...

  • Page 53
    ... direct pay LOCs. The subsidiary obligor is required to reimburse the applicable LOC bank for any such drawings or, if the LOC bank fails to honor its LOC for any reason, must itself pay the purchase price. The LOCs for FirstEnergy's variable interest rate PCRBs outstanding as of December 31, 2012...

  • Page 54
    ... activities was provided by its regulated distribution, regulated transmission and competitive energy services businesses (see Results of Operations above). Net cash provided from operating activities was $2,320 million during 2012, $3,063 million during 2011 and $3,076 million during 2010, as...

  • Page 55
    ... from lower collections from customers during 2012 primarily as a result of the effects of milder weather described in Results of Operations above. • $148 million of increased asset removal costs charged to income primarily related to hurricane Sandy. • $64 million from materials and supplies...

  • Page 56
    ... of the Utilities and under which they procure the power supply necessary to provide generation service to their customers who do not choose an alternative supplier. Although actual amounts will be determined by future customer behavior and consumption levels, management currently estimates these...

  • Page 57
    ... of business, FirstEnergy and its subsidiaries routinely enter into physical or financially settled contracts for the sale and purchase of electric capacity, energy, fuel, and emission allowances. Certain bilateral agreements and derivative instruments contain provisions that require FirstEnergy...

  • Page 58
    ..., in each case based upon the average daily outstanding aggregate commitments under the facility for such semiannual period. OFF-BALANCE SHEET ARRANGEMENTS FES and certain of the Ohio Companies have obligations that are not included on their Consolidated Balance Sheets related to sale and leaseback...

  • Page 59
    ... to financial risks resulting from fluctuating commodity prices, including prices for electricity, natural gas, coal and energy transmission. FirstEnergy's Risk Management Committee is responsible for promoting the effective design and implementation of sound risk management programs and oversees...

  • Page 60
    ... companies. Retail credit risk results when customers default on contractual obligations or fail to pay for service rendered. This risk represents the loss that may be incurred due to the nonpayment of customer accounts receivable balances, as well as the loss from the resale of energy previously...

  • Page 61
    ...interested stakeholders, that create specific requirements related to a utility's obligation to address service interruptions, downed wire response, customer communication, vegetation management, equipment inspection, and annual reporting. The bill requires that the MDPSC consider cost-effectiveness...

  • Page 62
    ... extension period at levels established in the existing ESP; • Providing Percentage of Income Payment Plan customers with a 6% generation rate discount; • Continuing to provide power to shopping and to non-shopping customers as part of the market-based price set through an auction process; and...

  • Page 63
    ... their existing energy efficiency programs and related cost recovery until the new plans are approved. This motion was approved on December 12, 2012. Additionally, under SB221, electric utilities and electric service companies in Ohio were required to serve part of their load in 2011 from renewable...

  • Page 64
    ... to achieve the required reductions in consumption and peak demand. The Pennsylvania Companies submitted a final report on November 15, 2011, in which they reported on their compliance with statutory May 31, 2011, energy efficiency benchmarks. ME, PN and Penn achieved the 2011 benchmarks; however WP...

  • Page 65
    ... utility that purchases electric energy and capacity under an electric power purchase agreement with a Qualifying Facility under PURPA owns the RECs associated with that purchase. The RECs are being used for compliance purposes. The West Virginia Supreme Court issued an Order on June 11, 2012...

  • Page 66
    ... and directing electric utilities to file a vegetation management plan within six months and to propose a cost recovery mechanism. This Order also requires MP and PE to file a status report regarding improvements to their storm response procedures by the same date. The West Virginia ENEC fuel case...

  • Page 67
    ... No. 1000, issued by FERC on July 21, 2011, required the submission of a compliance filing by PJM or the PJM transmission owners demonstrating that the cost allocation methodology for new transmission projects directed by the PJM Board of Managers satisfied the principles set forth in the order. To...

  • Page 68
    ... the construction of new substations in Hardy County, West Virginia and Frederick County, Maryland. PJM initially authorized construction of the PATH project in June 2007. On August 24, 2012, the PJM Board of Managers canceled the PATH project, which it had originally suspended in February 2011. All...

  • Page 69
    ... when the use of the units for RMR purposes is no longer required. On January 22, 2013, ATSI requested clarification or, in the alternative, rehearing with respect to a statement in the FERC order authorizing the transfer that ATSI's current formula rate does not include the accounts and components...

  • Page 70
    ... on the hourly congestion price differences across a specific transmission path in the PJM Day-ahead Energy Market. However, due to certain language in the PJM tariff, the funds that are set aside to pay FTRs can be diverted to other uses, resulting in "underfunding" of FTR payments. Since June of...

  • Page 71
    ... of an existing facility results in an increase in emissions. In September 2007, AE received a NOV from the EPA alleging NSR and PSD violations under the CAA, as well as Pennsylvania and West Virginia state laws at the coal-fired Hatfield's Ferry and Armstrong plants in Pennsylvania and the coal...

  • Page 72
    ...could require significant capital and other expenditures or result in changes to its operations. The CO2 emissions per KWH of electricity generated by FirstEnergy is lower than many of its regional competitors due to its diversified generation sources, which include low or non-CO2 emitting gas-fired...

  • Page 73
    ... Based on the stringency of the TMDL, AE Supply may incur significant costs to reduce sulfate discharges into the Monongahela River from the coal-fired Hatfield's Ferry and Mitchell Plants in Pennsylvania and the coal-fired Fort Martin Plant in West Virginia. In May 2011, the West Virginia Highlands...

  • Page 74
    ... In December 2012, FirstEnergy Corp. entered into an additional $11 million parental guaranty in support of the decommissioning of the spent fuel storage facilities located at its Davis-Besse and Perry nuclear facilities. On October 1, 2011, Davis-Besse was safely shut down for a scheduled outage to...

  • Page 75
    ... are likely to result in additional material costs from plant modifications and upgrades at FENOC's nuclear facilities. On February 16, 2012, the NRC issued a request for information to the licensed operators of 11 nuclear power plants, including Beaver Valley Power Station Units 1 and 2, with...

  • Page 76
    ... of unbilled sales and revenues requires management to make estimates regarding electricity available for retail load, transmission and distribution line losses, demand by customer class, applicable billing demands, weather-related impacts, number of days unbilled and tariff rates in effect...

  • Page 77
    ...The gains or losses generated as a result of the difference between expected and actual returns on plan assets will increase or decrease future net periodic pension and OPEB cost as the difference is recognized annually in the fourth quarter of each fiscal year. Based on discounts rates of 4.25% for...

  • Page 78
    ... in the provision for income taxes. 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. Goodwill is evaluated for impairment at least annually and more frequently if indicators...

  • Page 79
    ... opinion on the Company's 2012 consolidated financial statements as stated in their audit report included herein. The Company's internal auditors, who are responsible to the Audit Committee of the Company's Board of Directors, review the results and performance of operating units within the...

  • Page 80
    ..., on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and...

  • Page 81
    FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share amounts) REVENUES: Electric utilities Unregulated businesses Total revenues* OPERATING EXPENSES: Fuel Purchased power Other operating expenses Pensions and OPEB mark-to-market adjustment Provision for depreciation ...

  • Page 82
    ... COMPREHENSIVE INCOME AVAILABLE TO FIRSTENERGY CORP. $ (115) 1 (6) (120) (79) (41) 730 1 729 $ (90) 23 19 (48) (49) 1 870 (16) 886 $ (220) 36 8 (176) (74) (102) 616 (24) 640 $ 2012 771 $ 2011 869 $ 2010 718 The accompanying Combined Notes to Consolidated Financial Statements are an integral part of...

  • Page 83
    ... accounts of $4 in 2012 and $3 in 2011 Materials and supplies, at average cost Prepaid taxes Derivatives Accumulated deferred income taxes Other PROPERTY, PLANT AND EQUIPMENT: In service Less - Accumulated provision for depreciation Construction work in progress INVESTMENTS: Nuclear plant...

  • Page 84
    ... net of $7 million of income taxes Pensions and OPEB, net of $64 million of income tax benefits (Note 2) Stock-based compensation Allegheny merger Cash dividends declared on common stock Balance, December 31, 2011 Earnings available to FirstEnergy Corp. Change in unrealized loss on derivative hedges...

  • Page 85
    ... additions Nuclear fuel Proceeds from asset sales Sales of investment securities held in trusts Purchases of investment securities held in trusts Customer acquisition costs Cash investments Cash received in Allegheny merger Asset removal costs Other Net cash used for investing activities Net change...

  • Page 86
    ... 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 and expenses and disclosure of contingent assets and...

  • Page 87
    ... 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...

  • Page 88
    ... liabilities for planned major maintenance projects as they are incurred. Property, plant and equipment balances as of December 31, 2012 and 2011 were as follows: December 31, 2012 Property, Plant and Equipment In service Less - Accumulated depreciation Net plant in service $ Unregulated $ 16...

  • Page 89
    ... County, Virginia, operated by the 60% owner, Virginia Electric and Power Company, a non-affiliated utility. Net Property, Plant and Equipment includes $447 million, excluding $19 million of CWIP, representing AGC's share in this facility as of December 31, 2012. AGC is obligated to pay its share...

  • Page 90
    ... is as follows: Regulated Distribution $ 5,551 - (526) $ 5,025 $ Regulated Transmission $ - - 526 526 $ Competitive Energy Services (In millions) Balance as of December 31, 2011 Purchase Accounting Adjustment Segment Reorganization(1) Balance as of December 31, 2012 (1) Goodwill Other/ Corporate...

  • Page 91
    ... OPEB costs. FirstEnergy uses a December 31 measurement date for its pension and OPEB plans. The fair value of the plan assets represents the actual market value as of the measurement date. As a result of the merger with AE, FirstEnergy assumed Allegheny's pension and OPEB plans. Subsequent to the...

  • Page 92
    ... Recognized on the Balance Sheet: Current liabilities Noncurrent liabilities Net liability as of December 31 Amounts Recognized in AOCI: Prior service cost (credit) Assumptions Used to Determine Benefit Obligations (as of December 31) Discount rate Rate of compensation increase Assumed Health Care...

  • Page 93
    ... pension financial assets that are accounted for at fair value by level within the fair value hierarchy. See Note 8, Fair Value Measurements, for a description of each level of the fair value hierarchy. There were no significant transfers between levels during 2012 and 2011. December 31, 2012 Level...

  • Page 94
    ... of changes in the fair value of pension investments classified as Level 3 in the fair value hierarchy during 2012 and 2011: Private Equity Funds Balance as of January 1, 2011 Actual return on plan assets: Unrealized gains Realized gains Purchases, sales and settlements Transfers in (out) Balance as...

  • Page 95
    As of December 31, 2012 and 2011, the OPEB trust investments measured at fair value were as follows: December 31, 2012 Level 1 Cash and short-term securities Equity investment Domestic International Mutual funds Fixed income U.S. treasuries Government bonds Corporate bonds High yield debt Mortgage-...

  • Page 96
    ... 31, 2011 Actual return on plan assets: Unrealized gains Realized gains (losses) Purchases, sales and settlements Transfers in (out) Balance as of December 31, 2012 $ (1) - - (2 2) 5 - - 3 1 (3) 7 $ 3 $ Real Estate Funds 9 (in millions) FirstEnergy follows a total return investment approach using...

  • Page 97
    ...) (94) OPEB 2011 FES' OE's and JCP&L's shares of the net periodic pensions and OPEB costs for the three years ended December 31, 2012 were as follows: Pensions Net Periodic Costs FES OE JCP&L 3. STOCK-BASED COMPENSATION PLANS FirstEnergy has four stock-based compensation programs - LTIP, ESOP, EDCP...

  • Page 98
    ...-based awards grant the right to receive, at the end of the period of restriction, a number of shares of common stock equal to the number of stock units set forth in the agreement subject to adjustment based on FirstEnergy's performance relative to financial and operational performance targets. 2012...

  • Page 99
    ...period. During that time, dividend equivalents are converted into additional shares. The final account value may be adjusted based on the ranking of FE stock performance to a composite of peer companies. Compensation expense (credits) recognized for performance shares during 2012, 2011 and 2010, net...

  • Page 100
    ... the DCPD, members of the Board of Directors can elect to allocate all or a portion of their cash retainers, meeting fees and chair fees to deferred stock or deferred cash accounts. DCPD expenses of $4 million were recognized in each of the years 2012, 2011 and 2010. The net liability recognized...

  • Page 101
    ... recognized based on income tax rates expected to be in effect when they are settled. PROVISION FOR INCOME TAXES 2012 Currently payable (receivable)Federal State Deferred, netFederal State Investment tax credit amortization Total provision for income taxes 2011 Currently payable (receivable)Federal...

  • Page 102
    ... 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...

  • Page 103
    ... for income taxes 2011 Book income (loss) before provision for income taxes Federal income tax expense at statutory rate Increases (reductions) in taxes resulting fromAmortization of investment tax credits State income taxes, net of federal tax benefit State unitary tax adjustments Manufacturing...

  • Page 104
    ... transition charge Customer receivables for future income taxes Deferred MISO/PJM transmission costs Other regulatory assets - RCP Deferred sale and leaseback gain Non-utility generation costs Unamortized investment tax credits Unrealized losses on derivative hedges Pensions and OPEB Lease market...

  • Page 105
    ...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...

  • Page 106
    ... 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...

  • Page 107
    ... their respective leases. They also have the right to purchase the facilities at the expiration of the basic lease term or any renewal term at a price equal to the fair market value of the facilities. The basic rental payments are adjusted when applicable federal tax law changes. In 2007, CEI and TE...

  • Page 108
    ... or other interests in connection with the 1987 Bruce Mansfield Plant sale and leaseback transactions for $262.2 million. Rentals for capital and operating leases for 2012, 2011 and 2010, are summarized as follows: FirstEnergy 2012 Operating leases Capital leases Interest element Other Total rentals...

  • Page 109
    ... a regulatory offset and the amortization does not impact earnings. FES acquired certain customer contract rights which were capitalized as intangible assets. These rights allow FES to supply electric generation to customers, and the recorded value is being amortized ratably over the term of the...

  • Page 110
    ... Oyster Creek Nuclear Generating Station and JCP&L's supply of BGS, of which $243 million was outstanding as of December 31, 2012; and special purpose limited liability companies created to issue environmental control bonds that were used to construct environmental control facilities, of which...

  • Page 111
    ... applied prospectively and expanded disclosure requirements for fair value measurements, particularly for Level 3 measurements, among other changes. Authoritative accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the...

  • Page 112
    ..., significant increases or decreases in inputs in isolation could result in a higher or lower fair value measurement. LCAPP contracts are financially settled agreements that allow eligible generators to receive payments from, or make payments to, JCP&L pursuant to an annually calculated load...

  • Page 113
    ... MLP Index. Primarily consists of short-term cash investments. Excludes $110 million and $(52) million as of December 31, 2012 and December 31, 2011, respectively, of receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table. 98

  • Page 114
    ... as Level 3 in the fair value hierarchy for the period ended December 31, 2012: Fair Value as of December 31, 2012 (In millions) FTRs NUG Contracts LCAPP Contracts $ $ $ (1) (254) (144) Valuation Technique Model Model Model Significant Input RTO auction clearing prices Generation Electricity...

  • Page 115
    ... and $(58) million as of December 31, 2012 and December 31, 2011, respectively, of receivables, payables, taxes and accrued income associated with the financial instruments reflected within the fair value table. Rollforward of Level 3 Measurements The following table provides a reconciliation of...

  • Page 116
    ... $1 million as of December 31, 2012 and 2011, of receivables, payables, taxes and accrued income associated with the financial instruments reflected within the fair value table. JCP&L Recurring Fair Value Measurements Level 1 Assets Corporate debt securities Derivative assets - NUG contracts...

  • Page 117
    ...securities of FirstEnergy, investments in companies owning nuclear power plants, financial derivatives, preferred stocks, securities convertible into common stock and securities of the trust funds' custodian or managers and their parents or subsidiaries. Available-For-Sale Securities FES, OE and JCP...

  • Page 118
    ... cost basis, unrealized gains (there were no unrealized losses) and fair values of investments held in NDT, nuclear fuel disposal and NUG trusts as of December 31, 2012 and December 31, 2011: December 31, 2012(1) Cost Basis Debt securities FirstEnergy FES OE JCP&L Equity securities FirstEnergy FES...

  • Page 119
    ... as Level 2 in the fair value hierarchy as of December 31, 2012 and December 31, 2011. 9. DERIVATIVE INSTRUMENTS FirstEnergy is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity, natural gas, coal and energy transmission. To...

  • Page 120
    ... in New Jersey during 2011 to promote the construction of qualified electric generation facilities. JCP&L maintains two LCAPP contracts, which are financially settled agreements that allow eligible generators to receive payments from, or make payments to, JCP&L pursuant to an annually calculated...

  • Page 121
    ... Fair Value December 31, 2012 December 31, 2011 (In millions) (In millions) The following table summarizes the volumes associated with FirstEnergy's outstanding derivative transactions as of December 31, 2012: Purchases Power Contracts FTRs NUGs LCAPP Natural Gas 23 46 15 408 25 Sales 44...

  • Page 122
    ... in a Hedging Relationship 2012 Unrealized Gain (Loss) Recognized in: Other Operating Expense Realized Gain (Loss) Reclassified to: Purchased Power Expense Revenues Other Operating Expense Fuel Expense Interest Expense 2011 Unrealized Gain (Loss) Recognized in: Purchased Power Expense Revenues Other...

  • Page 123
    ... to operate, or not operate, a generating plant. If wholesale power prices represent a lower cost option, FirstEnergy may elect to fulfill its load obligation through purchasing electricity in the wholesale market as opposed to operating a generating plant. The effect of this decision on its results...

  • Page 124
    ... result of the recoverability evaluation, FirstEnergy recorded an impairment charge of $11 million to operating income in the first quarter of 2011. On July 28, 2011, FirstEnergy completed the sale of Fremont Energy Center to American Municipal Power, Inc. Peaking Facilities During 2011, FirstEnergy...

  • Page 125
    ... of 2012. The amount and timing of all dividend declarations are subject to the discretion of the Board of Directors and its consideration of business conditions, results of operations, financial condition and other factors. In addition to paying dividends from retained earnings, OE, CEI, TE, Penn...

  • Page 126
    ...-term debt and other long-term obligations JCP&L: Secured notes - fixed rate Unsecured notes - fixed rate Unamortized debt discounts Currently payable long-term debt Total long-term debt See Note 5, Leases for additional information related to capital leases. $ 2013 - 2021 2016 - 2037 5.410% - 6.160...

  • Page 127
    ...bonds were used to construct environmental control facilities. The special purpose limited liability companies own the irrevocable right to collect non-bypassable environmental control charges from all customers who receive electric delivery service in MP's and PE's West Virginia service territories...

  • Page 128
    .... To the extent that drawings are made under the LOCs, FG, NG and the applicable Utilities are entitled to a credit against their obligation to repay those bonds. FG, NG and the applicable Utilities pay annual fees based on the amounts of the LOCs to the issuing banks and are obligated to reimburse...

  • Page 129
    ... Liquidity 776 2,488 - 15 3,279 61 3,340 (In millions) FES / AE Supply (1) (2) FE and the Utilities Includes FET, ATSI and TrAIL as subsidiary borrowers Revolving Credit Facilities FirstEnergy and FES / AE Supply Facilities FirstEnergy and certain of its subsidiaries participate in two five-year...

  • Page 130
    ... (1) (In millions) No limitations. No limitation based upon blanket financing authorization from the FERC under existing open market tariffs. Excluding amounts which may be borrowed under the regulated companies' money pool. The entire amount of the FES/AE Supply Facility and $700 million of the...

  • Page 131
    ...law, municipalities may regulate rates of a public utility, subject to appeal to the PUCO if not acceptable to the utility. As competitive retail electric suppliers serving retail customers primarily in Ohio, Pennsylvania, Illinois, Michigan, New Jersey and Maryland, FES and AE Supply are subject to...

  • Page 132
    ...interested stakeholders, that create specific requirements related to a utility's obligation to address service interruptions, downed wire response, customer communication, vegetation management, equipment inspection, and annual reporting. The bill requires that the MDPSC consider cost-effectiveness...

  • Page 133
    ... extension period at levels established in the existing ESP; • Providing Percentage of Income Payment Plan customers with a 6% generation rate discount; • Continuing to provide power to shopping and to non-shopping customers as part of the market-based price set through an auction process; and...

  • Page 134
    ... their existing energy efficiency programs and related cost recovery until the new plans are approved. This motion was approved on December 12, 2012. Additionally, under SB221, electric utilities and electric service companies in Ohio were required to serve part of their load in 2011 from renewable...

  • Page 135
    ... to achieve the required reductions in consumption and peak demand. The Pennsylvania Companies submitted a final report on November 15, 2011, in which they reported on their compliance with statutory May 31, 2011, energy efficiency benchmarks. ME, PN and Penn achieved the 2011 benchmarks; however WP...

  • Page 136
    ... utility that purchases electric energy and capacity under an electric power purchase agreement with a Qualifying Facility under PURPA owns the RECs associated with that purchase. The RECs are being used for compliance purposes. The West Virginia Supreme Court issued an Order on June 11, 2012...

  • Page 137
    ...need to make unhedged electricity and capacity purchases from the spot market, which is expected to result in greater rate stability for MP's customers. The plan is expected to remedy MP's capacity and energy shortfalls, which are projected to worsen due to a projected increase in annual load growth...

  • Page 138
    ... No. 1000, issued by FERC on July 21, 2011, required the submission of a compliance filing by PJM or the PJM transmission owners demonstrating that the cost allocation methodology for new transmission projects directed by the PJM Board of Managers satisfied the principles set forth in the order. To...

  • Page 139
    ... the construction of new substations in Hardy County, West Virginia and Frederick County, Maryland. PJM initially authorized construction of the PATH project in June 2007. On August 24, 2012, the PJM Board of Managers canceled the PATH project, which it had originally suspended in February 2011. All...

  • Page 140
    ... certain other intervenors have asked FERC to redefine the "project boundary" of the hydroelectric plant to include the dam and reservoir facilities operated by the U.S. Army Corps of Engineers. On May 16, 2011, FirstEnergy filed a Petition for Declaratory Order with FERC seeking an order to exclude...

  • Page 141
    ... on the hourly congestion price differences across a specific transmission path in the PJM Day-ahead Energy Market. However, due to certain language in the PJM tariff, the funds that are set aside to pay FTRs can be diverted to other uses, resulting in "underfunding" of FTR payments. Since June of...

  • Page 142
    ... of business, FirstEnergy and its subsidiaries routinely enter into physical or financially settled contracts for the sale and purchase of electric capacity, energy, fuel, and emission allowances. Certain bilateral agreements and derivative instruments contain provisions that require FirstEnergy...

  • Page 143
    ...NOx reduction requirements under the CAA and SIP(s) by burning lower-sulfur fuel, utilizing combustion controls and postcombustion controls, generating more electricity from lower or non-emitting plants and/or using emission allowances. In July 2008, three complaints representing multiple plaintiffs...

  • Page 144
    ... of an existing facility results in an increase in emissions. In September 2007, AE received a NOV from the EPA alleging NSR and PSD violations under the CAA, as well as Pennsylvania and West Virginia state laws at the coal-fired Hatfield's Ferry and Armstrong plants in Pennsylvania and the coal...

  • Page 145
    ...could require significant capital and other expenditures or result in changes to its operations. The CO2 emissions per KWH of electricity generated by FirstEnergy is lower than many of its regional competitors due to its diversified generation sources, which include low or non-CO2 emitting gas-fired...

  • Page 146
    ... Based on the stringency of the TMDL, AE Supply may incur significant costs to reduce sulfate discharges into the Monongahela River from the coal-fired Hatfield's Ferry and Mitchell Plants in Pennsylvania and the coal-fired Fort Martin Plant in West Virginia. In May 2011, the West Virginia Highlands...

  • Page 147
    ... In December 2012, FirstEnergy Corp. entered into an additional $11 million parental guaranty in support of the decommissioning of the spent fuel storage facilities located at its Davis-Besse and Perry nuclear facilities. On October 1, 2011, Davis-Besse was safely shut down for a scheduled outage to...

  • Page 148
    ... are likely to result in additional material costs from plant modifications and upgrades at FENOC's nuclear facilities. On February 16, 2012, the NRC issued a request for information to the licensed operators of 11 nuclear power plants, including Beaver Valley Power Station Units 1 and 2, with...

  • Page 149
    ... and MP filed a complaint in the Court of Common Pleas of Allegheny County, Pennsylvania against ICG, Anker WV, and Anker Coal. Anker WV entered into a long term Coal Sales Agreement with AE Supply and MP for the supply of coal to the Harrison generating facility. Prior to the time of trial, ICG was...

  • Page 150
    ... requirements. The primary affiliated company transactions for FES and the Registrant Utilities during the three years ended December 31, 2012 are as follows: 2012 Revenues: Electric sales to affiliates Ground lease with ATSI Other Expenses: Purchased power from affiliates Fuel Support services...

  • Page 151
    ... current allocation or assignment formulas used and their bases include multiple factor formulas: each company's proportionate amount of FirstEnergy's aggregate direct payroll, number of employees, asset balances, revenues, number of customers, other factors and specific departmental charge ratios...

  • Page 152
    ... December 31, 2012 STATEMENTS OF INCOME REVENUES OPERATING EXPENSES: Fuel Purchased power from affiliates Purchased power from non-affiliates Other operating expenses Pensions and OPEB mark-to-market adjustments Provision for depreciation General taxes Total operating expenses OPERATING INCOME (LOSS...

  • Page 153
    ... the Year Ended December 31, 2011 STATEMENTS OF INCOME REVENUES OPERATING EXPENSES: Fuel Purchased power from affiliates Purchased power from non-affiliates Other operating expenses Pensions and OPEB mark-to-market adjustments Provision for depreciation General taxes Impairment of long-lived assets...

  • Page 154
    ...Year Ended December 31, 2010 STATEMENTS OF INCOME REVENUES OPERATING EXPENSES: Fuel Purchased power from affiliates Purchased power from non-affiliates Other operating expenses Pensions and OPEB mark-to-market adjustments Provision for depreciation General taxes Impairment of long-lived assets Total...

  • Page 155
    ... provision for depreciation Construction work in progress INVESTMENTS: Nuclear plant decommissioning trusts Investment in affiliated companies Other DEFERRED CHARGES AND OTHER ASSETS: Accumulated deferred income tax benefits Customer intangibles Goodwill Property taxes Unamortized sale and leaseback...

  • Page 156
    ... provision for depreciation Construction work in progress INVESTMENTS: Nuclear plant decommissioning trusts Investment in affiliated companies Other DEFERRED CHARGES AND OTHER ASSETS: Accumulated deferred income tax benefits Customer intangibles Goodwill Property taxes Unamortized sale and leaseback...

  • Page 157
    ...: Property additions Nuclear fuel Proceeds from asset sales Sales of investment securities held in trusts Purchases of investment securities held in trusts Loans to affiliated companies, net Customer acquisition costs Dividend received Other Net cash used for investing activities Net change in cash...

  • Page 158
    ... ACTIVITIES: Property additions Nuclear fuel Proceeds from asset sales Sales of investment securities held in trusts Purchases of investment securities held in trusts Loans to affiliated companies, net Customer acquisition costs Other Net cash used for investing activities Net change in cash and...

  • Page 159
    ... additions Nuclear fuel Proceeds from asset sales Sales of investment securities held in trusts Purchases of investment securities held in trusts Loans to affiliated companies, net Customer acquisition costs Leasehold improvement payments to associated companies Other Net cash used for investing...

  • Page 160
    ... purchases power for its POLR, SOS and default service requirements in Ohio, Pennsylvania, New Jersey and Maryland. This segment also includes regulated electric generation facilities in West Virginia and New Jersey that MP and JCP&L, respectively, own or contractually control. Its results reflect...

  • Page 161
    Segment Financial Information Regulated Distribution Regulated Transmission Competitive Energy Services Other/ Corporate Reconciling Adjustments For the Years Ended December 31, Consolidated (In millions) 2012 External revenues Internal revenues Total revenues Depreciation, amortization and ...

  • Page 162
    ...purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill. The Allegheny delivery, transmission and unregulated generation businesses have been assigned to the Regulated Distribution, Regulated Transmission and Competitive Energy Services...

  • Page 163
    ...fair value of Allegheny's energy, NUG and gas transportation contracts, both above-market and below-market, were estimated based on the present value of the above/below market cash flows attributable to the contracts based on the contract type, discounted by a current market interest rate consistent...

  • Page 164
    ... and $36 million of pre-tax charges from merger settlements approved by regulatory agencies were recognized. The unaudited pro forma financial information has been presented below for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved...

  • Page 165
    ... OF QUARTERLY FINANCIAL DATA (UNAUDITED) The following summarizes certain consolidated operating results by quarter for 2012 and 2011. FirstEnergy CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share amounts) Revenues(1) Other operating expense Pensions and OPEB mark-to-market Provision...

  • Page 166
    JCP&L CONSOLIDATED STATEMENTS OF INCOME (In millions) Revenues Other operating expense Pensions and OPEB mark-to-market Provision for depreciation Operating Income (Loss) Income (loss) before income taxes Income taxes (benefits) Net Income (Loss) Dec. 31 $ 419 339 65 28 13 (16) (7) (9) 2012 Sept. ...

  • Page 167
    ... Utilities (A) Senior Vice President, Energy Delivery & Customer Service (B) Senior Vice President (C)(D) President (E) President (L) President, FE Generation (B)(H) President (I)(L) Chief Nuclear Officer (F) President and Chief Nuclear Officer (F) President, FirstEnergy Nuclear Operating Company...

  • Page 168
    ... at any time of at least $25 per payment up to $100,000 annually. Contact AST toll-free at 1-800-736-3402 to receive an enrollment form. DIRECT DIVIDEND DEPOSIT Shareholders can have their dividend payments automatically deposited to checking and savings accounts at any financial institution that...

  • Page 169
    presorted std u.s. postage Paid aKroN, oh permit No. 561 76 South Main Street, Akron, Ohio 44308-1890