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FE > SEC Filings for FE > Form 10-K on 27-Feb-2014All Recent SEC Filings

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Form 10-K for FIRSTENERGY CORP


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF REGISTRANT AND SUBSIDIARIES

Forward-Looking Statements: This Form 10-K includes forward-looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements include declarations regarding management's intents, beliefs and current expectations. These statements typically contain, but are not limited to, the terms "anticipate," "potential," "expect," "will," "intend," "believe," "estimate" and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Actual results may differ materially due to:
The speed and nature of increased competition in the electric utility industry, in general, and the retail sales market in particular.

The ability to experience growth in the Regulated Distribution and Regulated Transmission segments and to continue to successfully implement our direct retail sales strategy in the Competitive Energy Services segment.

The accomplishment of our regulatory and operational goals in connection with our transmission plan and planned distribution rate cases and the effectiveness of our repositioning strategy.

The impact of the regulatory process on the pending matters before FERC and in the various states in which we do business including, but not limited to, matters related to rates and pending rate cases or the WVCAG's pending appeal of the Generation Resource Transaction.

The uncertainties of various cost recovery and cost allocation issues resulting from ATSI's realignment into PJM.

Economic or weather conditions affecting future sales and margins such as the polar vortex or other significant weather events.

Regulatory outcomes associated with storm restoration, including but not limited to, Hurricane Sandy, Hurricane Irene and the October snowstorm of 2011.

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.

The continued ability of our regulated utilities to recover their costs.

Costs being higher than anticipated and the success of our policies to control costs and to mitigate low energy, capacity and market prices.

Other legislative and regulatory changes, and revised environmental requirements, including possible GHG emission, water discharge, water intake and coal combustion residual regulations, the potential impacts of CSAPR, CAIR, and/or any laws, rules or regulations that ultimately replace CAIR, and the effects of the EPA's MATS rules including our estimated costs of compliance.

The uncertainty of the timing and amounts of the capital expenditures that may arise in connection with any litigation, including NSR litigation or potential regulatory initiatives or rulemakings (including that such expenditures could result in our decision to deactivate or idle certain generating units).

The uncertainties associated with the deactivation of certain older regulated and competitive fossil units including the impact on vendor commitments, and the timing thereof as they relate to, among other things, RMR arrangements and the reliability of the transmission grid.

Adverse regulatory or legal decisions and outcomes with respect to our nuclear operations (including, but not limited to the revocation or non-renewal of necessary licenses, approvals or operating permits by the NRC or as a result of the incident at Japan's Fukushima Daiichi Nuclear Plant).

Issues arising from the indications of cracking in the shield building and the steam generator replacement at Davis-Besse.

The impact of future changes to the operational status or availability of our generating units.

The risks and uncertainties associated with litigation, arbitration, mediation and like proceedings, including, but not limited to, any such proceedings related to vendor commitments.

Replacement power costs being higher than anticipated or not fully hedged.

The ability to comply with applicable state and federal reliability standards and energy efficiency and peak demand reduction mandates.

Changes in customers' demand for power, including but not limited to, changes resulting from the implementation of state and federal energy efficiency and peak demand reduction mandates.

The ability to accomplish or realize anticipated benefits from strategic and financial goals including, but not limited to, the ability to reduce costs and to successfully complete our announced financial plans designed to improve our credit metrics and strengthen our balance sheet, including but not limited to, the benefits from our announced dividend reduction and our proposed capital raising and debt reduction initiatives.

Our ability to improve electric commodity margins and the impact of, among other factors, the increased cost of fuel and fuel transportation on such margins.

Changing market conditions that could affect the measurement of certain liabilities and the value of assets held in our NDTs, pension trusts and other trust funds, and cause us and our subsidiaries to make additional contributions sooner, or in amounts that are larger than currently anticipated.

The impact of changes to material accounting policies.

The ability to access the public securities and other capital and credit markets in accordance with our announced financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us and our subsidiaries.


Actions that may be taken by credit rating agencies that could negatively affect us and our subsidiaries' access to financing, increase the costs thereof, and increase requirements to post additional collateral to support outstanding commodity positions, LOCs and other financial guarantees.

Changes in national and regional economic conditions affecting us, our subsidiaries and our major industrial and commercial customers, and other counterparties including fuel suppliers, with which we do business.

The impact of any changes in tax laws or regulations or adverse tax audit results or rulings.

Issues concerning the stability of domestic and foreign financial institutions and counterparties with which we do business.

The risks and other factors discussed from time to time in our SEC filings, and other similar factors.

Dividends declared from time to time on FE's common stock during any period may in the aggregate vary from prior periods due to circumstances considered by FE's Board of Directors at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.

The foregoing review of factors should not be construed as exhaustive. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor assess the impact of any such factor on FirstEnergy's business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. The registrants expressly disclaim any current intention 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.


                               FIRSTENERGY CORP.
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Earnings available to FirstEnergy Corp. in 2013 were $392 million, or basic
earnings of $0.94 per share of common stock ($0.94 diluted), compared with $770
million, or basic earnings of $1.85 per share of common stock ($1.84 diluted) in
2012 and $885 million, or $2.22 per basic share ($2.21 diluted), in 2011. The
principal reasons for the changes in basic earnings per share are summarized
below:
Change In Basic Earnings Per Share From Prior Year     2013       2012
Basic Earnings Per Share - Prior Year                $ 1.85     $ 2.22
Segment operating results(1) -
Regulated Distribution                                 0.06      (0.05 )
Regulated Transmission                                (0.03 )        -
Competitive Energy Services                           (0.45 )    (0.21 )
Regulatory charges                                    (0.46 )    (0.03 )
Non-core asset sales/impairments                          -      (0.78 )
Merger-related costs                                   0.03       0.36
Merger accounting - commodity contracts                0.05       0.11
Net merger accretion(1)(2)                                -       0.01
Trust securities impairments                          (0.09 )     0.01
Mark-to-market adjustments-
 Pension and OPEB actuarial assumptions                1.29      (0.17 )
 All other                                            (0.07 )     0.13
Plant deactivation costs                              (0.74 )     0.20
West Virginia asset transfer charges                  (0.51 )        -
Litigation resolution                                     -       0.06
Debt redemption costs                                 (0.20 )        -
Restructuring costs                                    0.01      (0.02 )
Interest expense, net of amounts capitalized          (0.01 )     0.04
Investment income                                         -      (0.01 )
Income tax legislative changes                         0.08      (0.02 )
Change in effective tax rate                           0.11      (0.09 )
Settlement of uncertain tax positions                     -       0.06
Discontinued operations                                   -       0.01
Other                                                  0.02       0.02
Basic Earnings Per Share                             $ 0.94     $ 1.85

(1) Excludes amounts that are shown separately.

(2) Includes dilutive effect of shares issued in connection with the Allegheny merger.

FirstEnergy continued to be exposed to weak economic conditions across its multi-state utility service territory throughout 2013, as evidenced by relatively flat distribution sales over the last three years. This prolonged decrease in demand, coupled with excess generation supply in the region, has caused a period of protracted low power and capacity prices. Further, the PJM RPM Auction for 2016/2017 capacity that was conducted in May 2013 produced prices in the regions served by FirstEnergy's Competitive Energy Services segment that were lower than expected. This result is a broader indication of an underlying supply/demand imbalance that is expected to continue to affect power producers in this region, adding pressure on already depressed energy prices and potentially pushing any significant power price recovery further into the future than FirstEnergy, or the industry at large, previously expected.

Over the course of 2013, FirstEnergy took a number of actions designed to reposition the Competitive Energy Services segment, including adjusting its hedging strategy by slowing forward sales in order to capture any potential future improvements in power


prices, being more selective in the customers targeted and focusing more on customers with higher profit margins. With the deactivation of the Hatfield's Ferry and Mitchell plants and the Harrison/Pleasants asset transfer in October of 2013, as well as the sale of 527 MW of hydro assets on February 12, 2014, FirstEnergy has reduced the size of the competitive fleet and changed the mix of its assets. While these actions will result in the competitive fleet being about the same size as before the Allegheny merger, FirstEnergy believes it is a much stronger, more efficient, and environmentally controlled platform of units.

In late 2013, FirstEnergy announced plans to grow its regulated operations - specifically its transmission segment. FirstEnergy plans to implement a transmission expansion plan designed to improve operating flexibility, increase the reliability of the regional transmission system, position capacity for future load growth and facilitate response to system events. These investments will focus primarily in ATSI, which has a formula rate recovery mechanism, but will ultimately extend throughout FirstEnergy's service area.

Operational Matters

Employee Relations

As of December 31, 2013, the IBEW, the UWUA and the OPEIU unions collectively represented approximately 48% of FirstEnergy's total employees. There are various CBAs between FirstEnergy's subsidiaries and these unions, most of which have three year terms. There were seven CBAs covering approximately 2,850 bargaining unit employees that expired in 2013. Negotiations on five of the seven CBAs resulted in new CBAs that expire in 2014, 2015, or 2016.

FirstEnergy is engaged in separate negotiations with Local 102 and Local 180 of the UWUA. The CBA with Local 102, which represents approximately 700 employees at WP and PE, expired on April 30, 2013. WP and PE have work continuation plans in place in the event of any work stoppage. The CBA with Local 180, which represents approximately 150 employees at PN, expired on August 31, 2013. After multiple bargaining sessions without an agreement on a new CBA, FirstEnergy issued a final offer, which Local 180 rejected. Beginning November 25, 2013, FirstEnergy locked out members of Local 180 and commenced its work continuation plan.

In addition, two other CBAs due to expire in 2014 were extended to 2017 prior to their expiration.

West Virginia Asset Transfer - 2013

On October 9, 2013, MP sold its approximate 8% share of Pleasants at its fair market value of $73 million to AE Supply, and AE Supply sold its approximate 80% share of Harrison to MP at its book value of $1.2 billion. The transaction resulted in AE Supply receiving net consideration of $1.1 billion and MP's assumption of a $73.5 million pollution control note. The $1.1 billion net consideration was originally financed by MP through an equity infusion from FE of approximately $527 million and a note payable to AE Supply of approximately $573 million. The note payable to AE Supply was repaid in the fourth quarter of 2013. In connection with the closing, in the fourth quarter of 2013, MP recorded a pre-tax impairment charge of approximately $322 million to reduce the net book value of the Harrison Power Station to the amount that was permitted to be included in jurisdictional rate base. Additionally, MP recognized a regulatory liability of approximately $23 million in the fourth quarter of 2013 representing refunds to customers associated with the excess purchase price received by MP above the net book value of MP's minority interest in the Pleasants Power Station.

Hatfield's Ferry, Mitchell & Mad River Plant Deactivations

As a result of the cost of compliance with current and future environmental regulations and the continued low market price for electricity, FirstEnergy deactivated its 1,700-MW Hatfield's Ferry and 370-MW Mitchell coal-fired plants on October 9, 2013. In connection with the deactivations, in the second quarter of 2013, FirstEnergy recorded a pre-tax impairment of approximately $473 million to continuing operations, which also includes pre-tax impairments of $13 million related to excessive inventory at these facilities. The impairment charge is included within the results of the Competitive Energy Services segment.

Approximately 240 plant employees and generation related positions were affected by these plant deactivations. FirstEnergy recorded approximately $6 million (pre-tax) of severance related expenses that were recognized in Other operating expenses in the Consolidated Statements of Income for the year ended December 31, 2013.

On January 9, 2014, FirstEnergy deactivated the 60 MW Mad River power station in Springfield, Ohio as PJM found no reliability issues.

Davis-Besse Inspection

As part of routine inspections of the concrete shield building at Davis-Besse Nuclear Power Station in 2013, FENOC identified changes to the subsurface laminar cracking condition originally discovered in 2011. The shield building is a 2 1/2-foot thick reinforced concrete structure that provides biological shielding, protection from natural phenomena including wind and tornadoes and additional shielding in the event of an accident. FENOC then expanded its sample size to include all of the existing core bores in the shield building. These inspections, which are now complete, identified additional subsurface cracking that was determined to be pre-existing, but only now identified with the aid of improved inspection technology. These inspections also revealed that the cracking


condition has propagated a small amount in select areas. Preliminary analysis of the inspections results confirm that the building continues to maintain its structural integrity, and its ability to safely perform all of its functions.

Nuclear Refueling Outages

The following table includes details for the two refueling outages in 2013:
Unit                   Outage Start         Returned to Service
Perry                  March 18, 2013       May 2, 2013
Beaver Valley Unit 1   September 30, 2013   November 4, 2013

On March 18, 2013, Perry Nuclear Power Plant safely shut down for scheduled refueling, maintenance and a turbine upgrade. While the unit was off-line, 280 of the 748 fuel assemblies were replaced, and numerous safety inspections were conducted on the unit's reactor vessel, turbine and generator. In addition, preventative maintenance was performed on major components, including testing more than 160 valves, replacing several control rod blades and inspecting and cleaning cooling tower piping. During the outage, Perry's three low pressure turbines were replaced with new 175-ton turbine rotors.

On September 30, 2013, the 911 MW Beaver Valley Unit 1 entered into a scheduled refueling and maintenance outage, including a turbine upgrade that is designed to improve efficiency and reliability. During the outage, 60 of the 157 fuel assemblies were exchanged. Numerous inspections, maintenance activities and improvement projects designed to ensure continued safe and reliable operations have occurred. Prior to the outage, Beaver Valley operated safely and reliably for 507 consecutive days since the completion of its last refueling outage in May 2012.

Beaver Valley Unit 1 returned to service January 29, 2014, following replacement and testing of the Main Unit Transformer associated with a fault that occurred on January 6, 2014 that resulted in an automatic shutdown. In addition, during January 2014, given higher customer usage associated with extreme weather conditions and unit unavailability, including Beaver Valley Unit 1, FirstEnergy's Competitive Energy Services segment (including FES) was required to purchase higher volumes of power. Given the market conditions in PJM, the Competitive Energy Services segment (including FES) also experienced increased levels of transmission charges, primarily associated with ancillary expenses, such as synchronous and operating reserves, which are intended for reliability purposes and are socialized across all load serving entities based on load share. Certain of these transmission charges are expected to be billed to retail customers.

On February 1, 2014, the Davis-Besse Nuclear Power Station entered into an outage to install two new steam generators, replace about a third of the unit's 177 fuel assemblies and perform numerous safety inspections and preventative maintenance activities. During the preliminary stages of the outage an area of concrete that was not filled to the expected thickness within the shield building wall was discovered at the top of the temporary construction opening that was created as part of the 2011 outage. The 2011 temporary construction opening was created to install the new reactor head. FENOC has assessed the as-found condition of the concrete and has determined the shield building would have performed its design functions. This condition within the shield building wall will be repaired during this outage to conform to its original design configuration. This condition is not expected to extend the outage.

Regulatory Matters

Ohio Alternative Energy Rider Update

Under SB221 the Ohio Companies are required to serve part of their load from renewable energy sources. During 2009 through 2011, the Ohio Companies, in accordance with SB221, conducted RFPs to secure RECs. On August 7, 2013 the PUCO disallowed the Ohio Companies' recovery of $43.4 million, plus interest, that related to 2011 RECs that were purchased in the August 2010 RFP. The Ohio Companies, along with other parties, timely filed applications for rehearing on September 6, 2013. On December 18, 2013, the PUCO denied all of the applications for rehearing. Based on the PUCO ruling, a regulatory charge of approximately $51 million, including interest, was recorded in the fourth quarter of 2013 included in Amortization of regulatory assets, net within the Consolidated Statement of Income. On December 24, 2013, the Ohio Companies filed a notice of appeal and a motion for stay of the PUCO's order with the Supreme Court of Ohio. On February 10, 2014, the Supreme Court of Ohio granted the Ohio Companies' motion for stay, which went into effect on February 14, 2014. On February 18, 2014, the Office of Consumers' Counsel and the Environmental Law and Policy Center also filed appeals of the PUCO's order.

Pennsylvania Marginal Transmission Losses

On September 30, 2013, the U.S. District Court granted the PPUC's motion to dismiss. As a result of the U.S. District Court's September 30, 2013 decision, FirstEnergy recorded a regulatory asset impairment charge of approximately $254 million (pre-tax) in the quarter ended September 30, 2013 included in Amortization of regulatory assets, net within the Consolidated Statement of Income. The balance of marginal transmission losses was fully refunded to customers by the second quarter of 2013. On October 29, 2013, ME and PN filed a Notice of Appeal of the U.S. District Court's decision to dismiss the complaint with the United States Court of Appeals for the Third Circuit. On December 30, 2013, ME and PN filed a brief with the Third Circuit that explained why it


was legal error for the U.S. District Court to dismiss the complaint. The PPUC filed its brief on February 3, 2014, and ME and PN filed a reply brief on February 21, 2014. Oral argument has been scheduled for April 9, 2014.

JCP&L Rate Filing Update

On September 7, 2011, the Division of Rate Counsel filed a Petition with the NJBPU asserting that it has reason to believe that JCP&L is earning an unreasonable return on its New Jersey jurisdictional rate base. The Division of Rate Counsel requested that the NJBPU order JCP&L to file a base rate case petition so that the NJBPU may determine whether JCP&L's current rates for electric service are just and reasonable. JCP&L's rate case petition was filed on November 30, 2012. JCP&L is requesting an increase in base rate revenues of approximately $20.6 million. Hearings in the rate case have concluded. Initial briefs were filed on January 27, 2014. In the initial briefs, the Division of Rate Counsel and the Staff of the NJBPU recommended current rate revenues be decreased by $214.9 million and $207.4 million, respectively. Such amounts do not address the revenue requirements associated with the major storm events of 2011 and 2012. Reply briefs were filed on February 24, 2014.

On February 24, 2014, a Stipulation was filed with the NJBPU by JCP&L, the Division of Rate Counsel and NJBPU Staff which will allow recovery of $736 million of JCP&L's $744 million of costs related to the significant weather events of 2011 and 2012. As a result, FirstEnergy recorded a regulatory asset impairment charge of approximately $8 million (pre-tax) as of December 31, 2013, included in Amortization of regulatory assets, net within the Consolidated Statements of Income. The agreement, upon which no other party took a position to oppose or support, is now pending before the NJBPU. Recovery of 2011 storm costs will be addressed in the pending base rate case; recovery of 2012 storm costs will be determined by the NJBPU.

Financial Matters

In early 2013, FirstEnergy announced a financial plan with the intention of strengthening the balance sheets of its subsidiaries. Completion of the plan was also expected to significantly improve credit metrics at the Competitive Energy Services segment and included the net transfer of 1,476 MW of the Harrison and Pleasants power plants between AE Supply and MP, and the proposed sale of up to 1,240 MW of unregulated hydro assets. In line with these efforts, FirstEnergy and its subsidiaries executed its 2013 financial plan as described below.

FE

On March 5, 2013, FE issued in aggregate $1.5 billion of senior unsecured notes in two series: $650 million of 2.75% senior notes due March 15, 2018 and $850 million of 4.25% senior notes due March 15, 2023. The stated interest rates are subject to adjustments based upon changes in the credit ratings of FirstEnergy but will not decrease below the issued rates. The proceeds were used to repay short-term borrowings and to invest in the money pool for FES and AE Supply's use in funding a portion of their tender offers. During the second quarter of 2013, FE also completed a $1.5 billion equity contribution to FES.

On September 25, 2013, FE filed a registration statement with the SEC to register 4 million shares of common stock to be issued to registered shareholders and its employees and the employees of its subsidiaries under its Stock Investment Plan. In addition, during December 2013, FE began fulfilling certain share-based benefit plan obligations through the issuance of authorized but unissued common stock.

During December of 2013, FE entered into an agreement to extend and amend its $150 million term loan agreement with a maturity date of December 31, 2014. The maturity of the loan was extended to December 31, 2015 and the principal amount was increased to $200 million.

Competitive Energy Services

On March 28, 2013, pursuant to tender offers launched in February 2013, FES and AE Supply repurchased $369 million and $294 million, respectively, of outstanding senior notes with interest rates ranging from 5.75% to 6.8%. FES and AE Supply paid $67 million and $43 million, respectively, in premiums to repurchase the tendered senior notes.

On April 15, 2013 FES redeemed $400 million of its 4.8% senior notes due 2015 and paid $31 million of premiums in connection with the redemption.

On June 3, 2013, FG exercised a mandatory put option and repurchased approximately $235 million of PCRBs due 2023, which FG is currently holding for remarketing subject to future market and other conditions.

On September 4, 2013, FESC, on behalf of FG, AE Supply and Green Valley Hydro LLC applied for authorization from FERC to sell eleven hydroelectric power stations in Pennsylvania, Virginia and West Virginia to subsidiaries of Harbor Hydro, a subsidiary of LS Power. The hydroelectric power stations involved have . . .

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