Organization, Basis of Presentation

12 Months Ended

Dec. 31, 2015

Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Terms.

FirstEnergy Corp. was organized under the laws of the State of Ohio in 1996. FE’s principal business is the holding, directly or indirectly, of all of the outstanding common stock of its principal subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), JCP&L, ME, PN, FESC, FES and its principal subsidiaries (FG and NG), AE Supply, MP, PE, WP, FET and its principal subsidiaries (ATSI and TrAIL), and AESC. In addition, FE holds all of the outstanding common stock of other direct subsidiaries including: FirstEnergy Properties, Inc., FEV, FENOC, FELHC, Inc., GPU Nuclear, Inc., and AE Ventures, Inc.

FirstEnergy and its subsidiaries are involved in the generation, transmission, and distribution of electricity. FirstEnergy’s ten utility operating companies comprise one of the nation’s largest investor-owned electric systems, serving six million customers in the Midwest and Mid-Atlantic regions. Its generation subsidiaries control nearly 17,000 MW of capacity from a diverse mix of non-emitting nuclear, scrubbed coal, natural gas, hydroelectric and other renewables. FirstEnergy’s transmission operations include approximately 24,000 miles of lines and two regional transmission operation centers.

FirstEnergy follows GAAP and complies with the related regulations, orders, policies and practices prescribed by the SEC, FERC, and, as applicable, the PUCO, the PPUC, the 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, expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The reported results of operations are not necessarily indicative of results of operations for any future period. FE and its subsidiaries have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

FE and its subsidiaries consolidate all majority-owned subsidiaries over which they exercise control and, when applicable, entities for which they have a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation as appropriate. FE and its subsidiaries consolidate a VIE when it is determined that it is the primary beneficiary (see Note 8, Variable Interest Entities). Investments in affiliates over which FE and its subsidiaries have the ability to exercise significant influence, but with respect to which they are not the primary beneficiary and do not exercise control, follow the equity method of accounting. Under the equity method, the interest in the entity is reported as an investment in the Consolidated Balance Sheets and the percentage share of the entity’s earnings is reported in the Consolidated Statements of Income and Comprehensive Income. These Notes to the Consolidated Financial Statements are combined for FirstEnergy and FES.

Certain prior year amounts have been reclassified to conform to the current year presentation.

ACCOUNTING FOR THE EFFECTS OF REGULATION

FirstEnergy accounts for the effects of regulation through the application of regulatory accounting to the Utilities, AGC, ATSI, PATH and TrAIL since their rates are established by a third-party regulator with the authority to set rates that bind customers, are cost-based and can be charged to and collected from customers.

FirstEnergy records regulatory assets and liabilities that result from the regulated rate-making process that would not be recorded under GAAP for non-regulated entities. These assets and liabilities are amortized in the Consolidated Statements of Income concurrent with the recovery or refund through customer rates. FirstEnergy believes that it is probable that its regulatory assets and liabilities will be recovered and settled, respectively, through future rates. FirstEnergy and the Utilities net their regulatory assets and liabilities based on federal and state jurisdictions.

The following table provides information about the composition of net regulatory assets as of December 31, 2015 and December 31, 2014, and the changes during the year ended December 31, 2015:



Regulatory Assets by Source	December 31, 2015			December 31, 2014			Increase (Decrease)
	(In millions)
Regulatory transition costs	$	185		$	240		$	(55	)
Customer receivables for future income taxes	355			370			(15		)
Nuclear decommissioning and spent fuel disposal costs	(272		)	(305		)	33
Asset removal costs	(372		)	(254		)	(118		)
Deferred transmission costs	115			90			25
Deferred generation costs	243			281			(38		)
Deferred distribution costs	335			182			153
Contract valuations	186			153			33
Storm-related costs	403			465			(62		)
Other	170			189			(19		)
Net Regulatory Assets included on the Consolidated Balance Sheets	$	1,348		$	1,411		$	(63	)

Regulatory assets that do not earn a current return totaled approximately $148 million and $488 million as of December 31, 2015 and 2014, respectively, primarily related to storm damage costs. JCP&L's regulatory asset related to 2011 and 2012 storm damage costs began earning a return on April 1, 2015. Effective with the approved settlement on April 9, 2015, associated with their general base rate case, the Pennsylvania Companies transferred the net book value of legacy meters from plant-in-service to regulatory assets, which is being recovered over five years.

As of December 31, 2015 and December 31, 2014, FirstEnergy had approximately $116 million and $243 million of net regulatory liabilities that are primarily related to asset removal costs. Net regulatory liabilities are classified within other noncurrent liabilities on the Consolidated Balance Sheets.

REVENUES AND RECEIVABLES

The Utilities' principal business is providing electric service to customers in Ohio, Pennsylvania, West Virginia, New Jersey and Maryland. FES' 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, and competitive retail sales to customers primarily in Ohio, Pennsylvania, Illinois, Michigan, New Jersey and Maryland. Retail customers are metered on a cycle basis.

Electric revenues are recorded based on energy delivered through the end of the calendar month. An estimate of unbilled revenues is calculated to recognize electric service provided from the last meter reading through the end of the month. This estimate includes many factors, among which are historical customer usage, load profiles, estimated weather impacts, customer shopping activity and prices in effect for each class of customer. In each accounting period, FirstEnergy accrues the estimated unbilled amount as revenue and reverses the related prior period estimate.

Receivables from customers include retail electric sales and distribution deliveries to residential, commercial and industrial customers for the Utilities, and retail and wholesale sales to customers for FES. There was no material concentration of receivables as of December 31, 2015 and 2014 with respect to any particular segment of FirstEnergy’s customers. Billed and unbilled customer receivables as of December 31, 2015 and 2014 are included below.



Customer Receivables	FirstEnergy		FES
	(In millions)
December 31, 2015
Billed	$	836	$	165
Unbilled	579		110
Total	$	1,415	$	275

December 31, 2014
Billed	$	914	$	239
Unbilled	640		176
Total	$	1,554	$	415

EARNINGS PER SHARE OF COMMON STOCK

Basic earnings per share of common stock are computed using the weighted average number of common shares outstanding during the relevant period as the denominator. The denominator for diluted earnings per share of common stock reflects the weighted average of common shares outstanding plus the potential additional common shares that could result if dilutive securities and other agreements to issue common stock were exercised. The following table reconciles basic and diluted earnings per share of common stock:



Reconciliation of Basic and Diluted Earnings per Share of Common Stock	2015		2014		2013
	(In millions, except per share amounts)

Income from continuing operations available to common shareholders	$	578	$	213	$	375
Discontinued operations (Note 19)	—		86		17
Net income	$	578	$	299	$	392

Weighted average number of basic shares outstanding	422		420		418
Assumed exercise of dilutive stock options and awards⁽¹⁾	2		1		1
Weighted average number of diluted shares outstanding	424		421		419

Earnings per share:
Basic earnings per share:
Continuing operations	$	1.37	$	0.51	$	0.90
Discontinued operations (Note 19)	—		0.20		0.04
Earnings per basic share	$	1.37	$	0.71	$	0.94

Diluted earnings per share:
Continuing operations	$	1.37	$	0.51	$	0.90
Discontinued operations (Note 19)	—		0.20		0.04
Earnings per diluted share	$	1.37	$	0.71	$	0.94


⁽¹⁾	For the years ended December 31, 2015, 2014 and 2013, approximately one million, two million, and two million shares were excluded from the calculation of diluted shares outstanding, respectively, as their inclusion would be antidilutive.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment reflects original cost (net of any impairments recognized), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs incurred to place the assets in service. The costs of normal maintenance, repairs and minor replacements are expensed as incurred. FirstEnergy recognizes liabilities for planned major maintenance projects as they are incurred. The cost of nuclear fuel is capitalized within the CES segment's Property, plant and equipment and charged to fuel expense using the specific identification method. The cost of nuclear fuel included in CES' net plant as of December 31, 2015 was $418 million. Net plant in service balances by segment as of December 31, 2015 and 2014 were as follows:



	December 31, 2015							December 31, 2014
Property, Plant and Equipment	In Service⁽²⁾		Accum. Depr.			Net Plant		In Service⁽²⁾		Accum. Depr.			Net Plant
	(In millions)
Regulated Distribution	$	24,553	$	(7,058	)	$	17,495	$	23,973	$	(6,759	)	$	17,214
Regulated Transmission	7,703		(1,647		)	6,056		6,634		(1,595		)	5,039
Competitive Energy Services⁽¹⁾	17,214		(6,213		)	11,001		16,442		(5,598		)	10,844
Corporate/Other	482		(242		)	240		435		(198		)	237
Total	$	49,952	$	(15,160	)	$	34,792	$	47,484	$	(14,150	)	$	33,334

⁽¹⁾Primarily consists of generating assets and nuclear fuel as discussed above.

⁽²⁾Includes capital leases of $253 million and $281 million at December 31, 2015 and 2014, respectively.

The major classes of Property, plant and equipment are largely consistent with the segment disclosures above, with the exception of Regulated Distribution, which has approximately $2.0 billion of regulated generation net plant in service.

FirstEnergy provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The respective annual composite rates for FirstEnergy's and FES' electric plant in 2015, 2014 and 2013 are shown in the following table:



	Annual Composite Depreciation Rate
	2015		2014		2013
FirstEnergy	2.5	%	2.5	%	2.6	%
FES	3.2	%	3.1	%	3.1	%

For the years ended December 31, 2015, 2014 and 2013, capitalized financing costs on FirstEnergy's Consolidated Statements of Income include $49 million, $49 million and $28 million, respectively, of allowance for equity funds used during construction and $68 million, $69 million and $75 million, respectively, of capitalized interest.

Jointly Owned Plants

FE, through its subsidiary, AGC, owns an undivided 40% interest (1,200 MWs) in a 3,003 MW pumped storage, hydroelectric station in Bath County, Virginia, operated by the 60% owner, Virginia Electric and Power Company, a non-affiliated utility. Net Property, plant and equipment includes $666 million representing AGC's share in this facility as of December 31, 2015 of which $484 million is unregulated and included within the CES segment. AGC is obligated to pay its share of the costs of this jointly-owned facility in the same proportion as its ownership interest using its own financing. AGC's share of direct expenses of the joint plant is included in FE's operating expenses on the Consolidated Statements of Income.

Asset Retirement Obligations

FE recognizes an ARO for the future decommissioning of its nuclear power plants and future remediation of other environmental liabilities associated with all of its long-lived assets. The ARO liability represents an estimate of the fair value of FE's current obligation related to nuclear decommissioning and the retirement or remediation of environmental liabilities of other assets. A fair value measurement inherently involves uncertainty in the amount and timing of settlement of the liability. FE uses an expected cash flow approach to measure the fair value of the nuclear decommissioning and environmental remediation ARO. This approach applies probability weighting to discounted future cash flow scenarios that reflect a range of possible outcomes. The scenarios consider settlement of the ARO at the expiration of the nuclear power plant's current license, settlement based on an extended license term and expected remediation dates. The fair value of an ARO is recognized in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying value of the long-lived asset and are depreciated over the life of the related asset.

Conditional retirement obligations associated with tangible long-lived assets are recognized at fair value in the period in which they are incurred if a reasonable estimate can be made, even though there may be uncertainty about timing or method of settlement. When settlement is conditional on a future event occurring, it is reflected in the measurement of the liability, not the timing of the liability recognition.

AROs as of December 31, 2015, are described further in Note 13, Asset Retirement Obligations.

ASSET IMPAIRMENTS

Long-lived Assets

FirstEnergy reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The recoverability of a long-lived asset is measured by comparing its carrying value to the sum of undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is greater than the undiscounted cash flows, an impairment exists and a loss is recognized for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. FirstEnergy utilizes the income approach, based upon discounted cash flows to estimate fair value.

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. In connection with the transaction, 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 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. The impairment charge recognized in 2013 is included within the results of the Regulated Distribution segment.

On July 8, 2013, officers of FirstEnergy and AE Supply committed to deactivating the Hatfield's Ferry, generating Units 1-3, and Mitchell, generating units 2-3. As a result of this decision 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 recognized in 2013 is included within the results of the CES segment. On October 9, 2013, Hatfield's Ferry Units 1-3 and Mitchell Units 2-3 were deactivated.

During 2015, FirstEnergy recognized impairments totaling $42 million associated with certain non-core assets, including equipment and facilities. The impairment charges are included within the Regulated Distribution segment ($8 million) and the CES segment ($34 million).

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. FirstEnergy evaluates goodwill for impairment annually on July 31 and more frequently if indicators of impairment arise.

FirstEnergy's reporting units are consistent with its reportable segments and consist of Regulated Distribution, Regulated Transmission, and CES. The following table presents goodwill by reporting unit:



Goodwill	Regulated Distribution		Regulated Transmission		Competitive Energy Services		Consolidated
	(In millions)
Balance as of December 31, 2015	$	5,092	$	526	$	800	$	6,418

There were no changes in goodwill for any reporting unit during 2015. As of December 31, 2015 and 2014, total goodwill recognized by FES was $23 million. Neither FirstEnergy nor FES has accumulated impairment charges as of December 31, 2015.

Annual impairment testing is conducted as of July 31 of each year and for 2015, 2014 and 2013, the analysis indicated no impairment of goodwill. For 2015, FirstEnergy performed a qualitative assessment of the Regulated Distribution and Regulated Transmission reporting units, assessing economic, industry and market considerations in addition to the reporting unit's overall financial performance. It was determined that the fair value of these reporting units were, more likely than not, greater than their carrying value and a quantitative analysis was not necessary for 2015.

FirstEnergy performed a quantitative assessment of the CES reporting unit as of July 31, 2015. Key assumptions incorporated into the CES discounted cash flow analysis requiring significant management judgment included the following:

•

Future Energy and Capacity Prices: FirstEnergy used observable market information for near term forward power prices, PJM auction results for near term capacity pricing, and a longer-term pricing model for energy and capacity that considered the impact of key factors such as load growth, plant retirements, carbon and other environmental regulations, and natural gas pipeline construction, as well as coal and natural gas pricing.


•	Retail Sales and Margin: FirstEnergy used CES' current retail targeted portfolio to estimate future retail sales volume as well as historical financial results to estimate retail margins.


•	Operating and Capital Costs: FirstEnergy used estimated future operating and capital costs, including the estimated impact on costs of pending carbon and other environmental regulations, as well as costs associated with capacity performance reforms in the PJM market.


•	Discount Rate: A discount rate of 8.25%, based on a capital structure, return on debt and return on equity of selected comparable companies.


•	Terminal Value: A terminal value of 7.0x earnings before interest, taxes, depreciation and amortization based on consideration of peer group data and analyst consensus expectations.

Based on the results of the quantitative analysis, the fair value of the CES reporting unit exceeded its carrying value by approximately 10%. Continued weak economic conditions, lower than expected power and capacity prices, a higher cost of capital and revised environmental requirements could have a negative impact on future goodwill assessments.

Investments

At the end of each reporting period, FirstEnergy evaluates its investments for OTTI. Investments classified as AFS securities are evaluated to determine whether a decline in fair value below the cost basis is other than temporary. FirstEnergy first considers its intent and ability to hold an equity security until recovery and then considers, among other factors, the duration and the extent to which the security's fair value has been less than its cost and the near-term financial prospects of the security issuer when evaluating an investment for impairment. For debt securities, FirstEnergy considers its intent to hold the securities, the likelihood that it will be required to sell the securities before recovery of its cost basis and the likelihood of recovery of the securities' entire amortized cost basis. If the decline in fair value is determined to be other than temporary, the cost basis of the securities is written down to fair value.

Unrealized gains and losses on AFS securities are recognized in AOCI. However, unrealized losses held in the NDTs of FES, OE and TE are recognized in earnings since the trust arrangements, as they are currently defined, do not meet the required ability and intent to hold criteria in consideration of OTTI. The NDTs of JCP&L, ME and PN are subject to regulatory accounting with unrealized gains and losses offset in net regulatory assets. In 2015, 2014 and 2013, FirstEnergy recognized $102 million, $37 million and $90 million, respectively, of OTTI. During the same periods, FES recognized OTTI of $90 million, $33 million and $79 million, respectively. The fair values of FirstEnergy’s investments are disclosed in Note 9, Fair Value Measurements.

FirstEnergy holds a 33-1/3% equity ownership in Global Holding, the holding company for a joint venture in the Signal Peak mining and coal transportation operations with coal sales in U.S. and international markets. In 2015, Global Holding incurred losses primarily as a result of declines in coal prices due to weakening global and U.S. coal demand. Based on the significant decline in coal pricing and the current outlook for the coal market, including the significant decline in the market capitalization of coal companies in 2015, FirstEnergy assessed the value of its investment in Global Holding and determined there was a decline in the fair value of the investment below its carrying value that was other than temporary, resulting in an a pre-tax impairment charge of $362 million. Key assumptions incorporated into the discounted cash flow analysis utilized in the impairment analysis included the discount rate, future long term coal prices, production levels, sales forecasts, projected capital and operating costs. The impairment charge is classified as a component of Other Income (Expense) in the Consolidated Statement of Income. See Note 8, Variable Interest Entities, for further discussion of FirstEnergy's investment in Global Holding.

INVENTORY

Materials and supplies inventory includes fuel inventory and the distribution, transmission and generation plant materials, net of reserve for excess and obsolete inventory. Materials are generally charged to inventory at weighted average cost when purchased and expensed or capitalized, as appropriate, when used or installed. Fuel inventory is accounted for at weighted average cost when purchased, and recorded to fuel expense when consumed.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued, ASU 2014-09 "Revenue from Contracts with Customers", requiring entities to recognize revenue by applying a five-step model in accordance with the core principle to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the accounting for costs to obtain or fulfill a contract with a customer is specified and disclosure requirements for revenue recognition are expanded. In August 2015, the FASB issued a final Accounting Standards Update deferring the effective date until fiscal years beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, (the original effective date). The standard shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.

In February 2015, the FASB issued, ASU 2015-02 "Consolidations: Amendments to the Consolidation Analysis", which amends current consolidation guidance including changes to both the variable and voting interest models used by companies to evaluate whether an entity should be consolidated. This standard is effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. A reporting entity must apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the period of adoption or apply the amendments retrospectively. FirstEnergy does not expect this amendment to have a material effect on its financial statements.

In April 2015, the FASB issued, ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. Upon adoption, an entity must apply the new guidance retrospectively to all prior periods presented in the financial statements. In addition, in August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements", which states given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to the line-of-credit arrangements, the SEC staff would not object to presenting those deferred debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. FirstEnergy will adopt ASU 2015-15 and ASU 2015-03 beginning January 1, 2016. As of December 31, 2015, FirstEnergy and FES debt issuance costs included in Deferred Charges and Other Assets were $93 million and $17 million, respectively. FirstEnergy will elect to continue presenting debt issuance costs relating to its revolving credit facilities as an asset.

In August 2015, the FASB issued ASU 2015 -13, "Application of the NPNS Scope Exception to Certain Electricity Contracts within Nodal Energy Markets", which confirmed that forward physical contracts for the sale or purchase of electricity meet the physical delivery criterion within the NPNS scope exception when the electricity is transmitted through a grid managed by an ISO. As a result, an entity can elect the NPNS exception within the derivative accounting guidance for such contracts, provided that the other NPNS criteria are also met. The ASU was effective on issuance and requires prospective application. There was no material effect on FirstEnergy's financial statements resulting from the issuance of ASU 2015-13.

In November 2015, the FASB issued ASU 2015 - 17, "Balance Sheet Classification of Deferred Taxes", which requires all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The new guidance will be effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively. FirstEnergy early adopted ASU 2015-17 as of December 2015, and applied the new guidance retrospectively to all prior periods presented in the financial statements. There was no impact from the early adoption of ASU 2015-17 on the Consolidated Statements of Income. On the Consolidated Balance Sheet as of December 31, 2014, FirstEnergy and FES reclassified $518 million and $27 million of Accumulated Deferred Income Taxes from Current Assets to Noncurrent Liabilities.

In January of 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities". Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The ASU will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.