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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________
Commission
 
Registrant; State of Incorporation;
 
I.R.S. Employer
File Number
 
Address; and Telephone Number
 
Identification No.
 
 
 
 
 
333-21011
 
FIRSTENERGY CORP.
 
34-1843785
 
 
(An Ohio Corporation)
 
 
 
 
76 South Main Street
 
 
 
 
Akron, OH 44308
 
 
 
 
Telephone (800)736-3402
 
 
 
 
 
 
 
000-53742
 
FIRSTENERGY SOLUTIONS CORP.
 
31-1560186
 
 
(An Ohio Corporation)
 
 
 
 
c/o FirstEnergy Corp.
 
 
 
 
76 South Main Street
 
 
 
 
Akron, OH 44308
 
 
 
 
Telephone (800)736-3402
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
 
FirstEnergy Corp. and FirstEnergy Solutions Corp.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
 
FirstEnergy Corp. and FirstEnergy Solutions Corp.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ
FirstEnergy Corp.
 
 
Accelerated Filer o
N/A
 
 
Non-accelerated Filer (Do not check
if a smaller reporting company)
þ
FirstEnergy Solutions Corp.
 
 
Smaller Reporting Company o
N/A
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
 
FirstEnergy Corp. and FirstEnergy Solutions Corp.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
 
OUTSTANDING
CLASS
 
AS OF SEPTEMBER 30, 2016
FirstEnergy Corp., $0.10 par value
 
425,743,282

FirstEnergy Solutions Corp., no par value
 
7

FirstEnergy Corp. is the sole holder of FirstEnergy Solutions Corp. common stock.
This combined Form 10-Q is separately filed by FirstEnergy Corp. and FirstEnergy Solutions Corp. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to the other registrant, except that information relating to FirstEnergy Solutions Corp. is also attributed to FirstEnergy Corp.
FirstEnergy Web Site and Other Social Media Sites and Applications

Each of the registrants’ Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also made available free of charge on or through the "Investors" page of FirstEnergy’s web site at www.firstenergycorp.com.

These SEC filings are posted on the web site as soon as reasonably practicable after they are electronically filed with the SEC. Additionally, the registrants routinely post additional important information including press releases, investor presentations and notices of upcoming events, under the "Investors" section of FirstEnergy’s web site and recognize FirstEnergy’s web site as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under SEC Regulation FD. Investors may be notified of postings to the web site by signing up for email alerts and RSS feeds on the "Investors" page of FirstEnergy's web site or through push alerts from FirstEnergy Investor Relations apps for Apple Inc.'s iPad® and iPhone® devices, which can be installed for free at the Apple® App Store. FirstEnergy also uses Twitter® and Facebook® as additional channels of distribution to reach public investors and as a supplemental means of disclosing material non-public information for complying with its disclosure obligations under SEC Regulation FD. Information contained on FirstEnergy’s web site, Twitter® handle or Facebook® page, and any corresponding applications of those sites, shall not be deemed incorporated into, or to be part of, this report.
OMISSION OF CERTAIN INFORMATION
FirstEnergy Solutions Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.
 





Forward-Looking Statements: This Form 10-Q 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,” "forecast," "target," "will," "intend," “believe,” "project," “estimate," "plan" 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, which may include the following:
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.
The accomplishment of our regulatory and operational goals in connection with our transmission investment plan, including, but not limited to, the proposed transmission asset transfer to MAIT, and the effectiveness of our strategy to reflect a more regulated business profile.
Changes in assumptions regarding economic conditions within our territories, assessment of the reliability of our transmission system, or the availability of capital or other resources supporting identified transmission investment opportunities.
The impact of the regulatory process and resulting outcomes on the matters at the federal level and in the various states in which we do business including, but not limited to, matters related to rates and the ESP IV.
The impact of the federal regulatory process on FERC-regulated entities and transactions, in particular FERC regulation of wholesale energy and capacity markets, including PJM markets and FERC-jurisdictional wholesale transactions; FERC regulation of cost-of-service rates, including FERC Opinion No. 531's revised ROE methodology for FERC-jurisdictional wholesale generation and transmission utility service; and FERC’s compliance and enforcement activity, including compliance and enforcement activity related to NERC’s mandatory reliability standards.
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 a polar vortex or other significant weather events, and all associated regulatory events or actions.
Changing energy, capacity and commodity market prices including, but not limited to, coal, natural gas and oil prices, and their availability and impact on margins and asset valuations, including without limitation impairments thereon.
The risks and uncertainties at the CES segment, including FES and its subsidiaries and FENOC, related to continued depressed wholesale energy and capacity markets, and the viability and/or success of strategic business alternatives, such as potential CES generating unit asset sales, the potential conversion of the remaining generation fleet from competitive operations to a regulated or regulated-like construct or the potential need to deactivate additional generating units.
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, but not limited to, the effects of the EPA's CPP, CCR, CSAPR and MATS programs, including our estimated costs of compliance, CWA waste water effluent limitations for power plants, and CWA 316(b) water intake regulation.
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 initiatives or rulemakings could result in our decision to deactivate or idle certain generating units).
The uncertainties associated with the deactivation of older regulated and competitive units, including the impact on vendor commitments, such as long-term fuel and transportation agreements, and as it relates to the reliability of the transmission grid, the timing thereof.
The impact of other future changes to the operational status or availability of our generating units and any capacity performance charges associated with unit unavailability.
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 at Davis-Besse.
The risks and uncertainties associated with litigation, arbitration, mediation and like proceedings, including, but not limited to, any such proceedings related to vendor commitments, such as long-term fuel and transportation agreements.
The impact of labor disruptions by our unionized workforce.
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 continue to reduce costs and to successfully execute our financial plans designed to improve our credit metrics and strengthen our balance sheet through, among other actions, our cash flow improvement plan and other proposed capital raising 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/or our subsidiaries to make additional contributions sooner, or in amounts that are larger than currently anticipated.
The impact of changes to significant accounting policies.
The ability to access the public securities and other capital and credit markets in accordance with our financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us and our subsidiaries.
Further actions that may be taken by credit rating agencies that could negatively affect us and/or our subsidiaries’ access to financing, increase the costs thereof, increase requirements to post additional collateral to support, or accelerate payments under outstanding commodity positions, LOCs and other financial guarantees, and the impact of these events on the financial condition and liquidity of FirstEnergy and/or its subsidiaries, specifically the subsidiaries within the CES segment.
The risks and uncertainties surrounding FirstEnergy's need to obtain waivers from its bank group under FirstEnergy's credit facilities caused by a debt to total capitalization ratio, as defined under each of the revolving credit facilities, in excess of 65% resulting from impairment charges or other events at CES.
Changes in national and regional economic conditions affecting us, our subsidiaries and/or our major industrial and commercial customers, and other counterparties with which we do business, including fuel suppliers.
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 associated with cyber-attacks and other disruptions to our information technology system that may compromise our generation, transmission and/or distribution services and data security breaches of sensitive data, intellectual property and proprietary or personally identifiable information regarding our business, employees, shareholders, customers, suppliers, business partners and other individuals in our data centers and on our networks.
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 factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and risks that are included in FirstEnergy's and FES' filings with the SEC, including but not limited to the most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. 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.





TABLE OF CONTENTS
 
Page
 
 
Part I. Financial Information
 
 
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
 
 
 
 
Item 2. Management's Discussion and Analysis of Registrant and Subsidiaries
FirstEnergy Corp. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Management's Narrative Analysis of Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
Item 4. Mine Safety Disclosures
 
 
Item 5. Other Information
 
 


i



GLOSSARY OF TERMS
The following abbreviations and acronyms are used in this report to identify FirstEnergy Corp. and its current and former subsidiaries:

AE
Allegheny Energy, Inc., a Maryland utility holding company that merged with a subsidiary of FirstEnergy on February 25, 2011. As of January 1, 2014, AE merged with and into FirstEnergy Corp.
AESC
Allegheny Energy Service Corporation, a subsidiary of FirstEnergy Corp.
AE Supply
Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary
AGC
Allegheny Generating Company, a generation subsidiary of AE Supply and equity method investee of MP.
ATSI
American Transmission Systems, Incorporated, formerly a direct subsidiary of FE that became a subsidiary of FET in April 2012, which owns and operates transmission facilities.
CEI
The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary
CES
Competitive Energy Services, a reportable operating segment of FirstEnergy
FE
FirstEnergy Corp., a public utility holding company
FENOC
FirstEnergy Nuclear Operating Company, which operates NG's nuclear generating facilities
FES
FirstEnergy Solutions Corp., together with its consolidated subsidiaries, which provides energy-related products and services
FESC
FirstEnergy Service Company, which provides legal, financial and other corporate support services
FET
FirstEnergy Transmission, LLC, formerly known as Allegheny Energy Transmission, LLC which is the parent of ATSI, TrAIL and MAIT, and has a joint venture in PATH.
FEV
FirstEnergy Ventures Corp., which invests in certain unregulated enterprises and business ventures
FG
FirstEnergy Generation, LLC, a wholly owned subsidiary of FES, which owns and operates non-nuclear generating facilities
FirstEnergy
FirstEnergy Corp., together with its consolidated subsidiaries
Global Holding
Global Mining Holding Company, LLC, a joint venture between FEV, WMB Marketing Ventures, LLC and Pinesdale LLC
Global Rail
A subsidiary of Global Holding that owns coal transportation operations near Roundup, Montana
JCP&L
Jersey Central Power & Light Company, a New Jersey electric utility operating subsidiary
MAIT
Mid-Atlantic Interstate Transmission, LLC, a subsidiary of FET, formed to own and operate transmission facilities
ME
Metropolitan Edison Company, a Pennsylvania electric utility operating subsidiary
MP
Monongahela Power Company, a West Virginia electric utility operating subsidiary
NG
FirstEnergy Nuclear Generation, LLC, a subsidiary of FES, which owns nuclear generating facilities
OE
Ohio Edison Company, an Ohio electric utility operating subsidiary
Ohio Companies
CEI, OE and TE
PATH
Potomac-Appalachian Transmission Highline, LLC, a joint venture between FE and a subsidiary of AEP
PATH-Allegheny
PATH Allegheny Transmission Company, LLC
PATH-WV
PATH West Virginia Transmission Company, LLC
PE
The Potomac Edison Company, a Maryland and West Virginia electric utility operating subsidiary
Penn
Pennsylvania Power Company, a Pennsylvania electric utility operating subsidiary of OE
Pennsylvania Companies
ME, PN, Penn and WP
PN
Pennsylvania Electric Company, a Pennsylvania electric utility operating subsidiary
PNBV
PNBV Capital Trust, a special purpose entity created by OE in 1996
Signal Peak
An indirect subsidiary of Global Holding that owns mining operations near Roundup, Montana
TE
The Toledo Edison Company, an Ohio electric utility operating subsidiary
TrAIL
Trans-Allegheny Interstate Line Company, a subsidiary of FET, which owns and operates transmission facilities
Utilities
OE, CEI, TE, Penn, JCP&L, ME, PN, MP, PE and WP
WP
West Penn Power Company, a Pennsylvania electric utility operating subsidiary
 
 
The following abbreviations and acronyms are used to identify frequently used terms in this report:
AAA
American Arbitration Association
AEP
American Electric Power Company, Inc.
AFS
Available-for-sale
AFUDC
Allowance for Funds Used During Construction
ALJ
Administrative Law Judge
AOCI
Accumulated Other Comprehensive Income
Apple®
Apple®, iPad® and iPhone® are registered trademarks of Apple Inc.

ii



GLOSSARY OF TERMS, Continued

ARO
Asset Retirement Obligation
ARR
Auction Revenue Right
ASU
Accounting Standards Update
BGS
Basic Generation Service
BNSF
BNSF Railway Company
BRA
PJM RPM Base Residual Auction
CAA
Clean Air Act
CCR
Coal Combustion Residuals
CDWR
California Department of Water Resources
CERCLA
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
CFIP
Cash Flow Improvement Project
CFR
Code of Federal Regulations
CO2
Carbon Dioxide
CPP
EPA's Clean Power Plan
CSAPR
Cross-State Air Pollution Rule
CSX
CSX Transportation, Inc.
CTA
Consolidated Tax Adjustment
CWA
Clean Water Act
DCR
Delivery Capital Recovery
DMR
Distribution Modernization Rider
DR
Demand Response
DSIC
Distribution System Improvement Charge
DSP
Default Service Plan
EDC
Electric Distribution Company
EE&C
Energy Efficiency and Conservation
EGS
Electric Generation Supplier
ELPC
Environmental Law & Policy Center
EmPOWER Maryland
EmPower Maryland Energy Efficiency Act
ENEC
Expanded Net Energy Cost
EPA
United States Environmental Protection Agency
ERO
Electric Reliability Organization
ESP IV
Electric Security Plan IV
ESP IV PPA
Unit Power Agreement entered into on April 1, 2016 by and between the Ohio Companies and FES
Facebook®
Facebook is a registered trademark of Facebook, Inc.
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Fitch
Fitch Ratings
FMB
First Mortgage Bond
FPA
Federal Power Act
FTR
Financial Transmission Right
GAAP
Accounting Principles Generally Accepted in the United States of America
GHG
Greenhouse Gases
GWH
Gigawatt-hour
HB554
Ohio House Bill No. 554
HCl
Hydrochloric Acid
ICE
Intercontinental Exchange, Inc.
IRP
Integrated Resource Plan
IRS
Internal Revenue Service
ISO
Independent System Operator
kV
Kilovolt
KWH
Kilowatt-hour
LOC
Letter of Credit

iii



GLOSSARY OF TERMS, Continued

LSE
Load Serving Entity
LTIIPs
Long-Term Infrastructure Improvement Plans
MATS
Mercury and Air Toxics Standards
MDPSC
Maryland Public Service Commission
MISO
Midcontinent Independent System Operator, Inc.
MLP
Master Limited Partnership
mmBTU
One Million British Thermal Units
Moody’s
Moody’s Investors Service, Inc.
MOPR
Minimum Offer Price Rule
MVP
Multi-Value Project
MW
Megawatt
MWH
Megawatt-hour
NAAQS
National Ambient Air Quality Standards
NDT
Nuclear Decommissioning Trust
NERC
North American Electric Reliability Corporation
Ninth Circuit
United States Court of Appeals for the Ninth Circuit
NJBPU
New Jersey Board of Public Utilities
NMB
Non-Market Based
NOAC
Northwestern Ohio Aggregation Coalition
NOL
Net Operating Loss
NOV
Notice of Violation
NOx
Nitrogen Oxide
NPDES
National Pollutant Discharge Elimination System
NRC
Nuclear Regulatory Commission
NSR
New Source Review
NUG
Non-Utility Generation
NYPSC
New York State Public Service Commission
OCC
Ohio Consumers' Counsel
OPEB
Other Post-Employment Benefits
OTTI
Other Than Temporary Impairments
OVEC
Ohio Valley Electric Corporation
PA DEP
Pennsylvania Department of Environmental Protection
PCB
Polychlorinated Biphenyl
PCRB
Pollution Control Revenue Bond
PJM
PJM Interconnection, L.L.C.
PJM Region
The aggregate of the zones within PJM
PJM Tariff
PJM Open Access Transmission Tariff
PM
Particulate Matter
POLR
Provider of Last Resort
POR
Purchase of Receivables
PPA
Purchase Power Agreement
PPB
Parts Per Billion
PPUC
Pennsylvania Public Utility Commission
PSA
Power Supply Agreement
PSD
Prevention of Significant Deterioration
PUCO
Public Utilities Commission of Ohio
PURPA
Public Utility Regulatory Policies Act of 1978
RCRA
Resource Conservation and Recovery Act
REC
Renewable Energy Credit
REIT
Real Estate Investment Trust
RFC
ReliabilityFirst Corporation
RFP
Request for Proposal

iv



GLOSSARY OF TERMS, Continued

RGGI
Regional Greenhouse Gas Initiative
ROE
Return on Equity
RPM
Reliability Pricing Model
RRS
Retail Rate Stability
RSS
Rich Site Summary
RTEP
Regional Transmission Expansion Plan
RTO
Regional Transmission Organization
S&P
Standard & Poor’s Ratings Service
SB221
Amended Substitute Ohio Senate Bill No. 221
SB310
Substitute Ohio Senate Bill No. 310
SB320
Ohio Senate Bill No. 320
SBC
Societal Benefits Charge
SEC
United States Securities and Exchange Commission
SEC Regulation FD
SEC Regulation Fair Disclosure
Seventh Circuit
United States Court of Appeals for the Seventh Circuit
SIP
State Implementation Plan(s) Under the Clean Air Act
SO2
Sulfur Dioxide
Sixth Circuit
United States Court of Appeals for the Sixth Circuit
SOS
Standard Offer Service
SPE
Special Purpose Entity
SREC
Solar Renewable Energy Credit
SSO
Standard Service Offer
TDS
Total Dissolved Solid
TMI-2
Three Mile Island Unit 2
TO
Transmission Owner
Twitter®
Twitter is a registered trademark of Twitter, Inc.
U.S. Court of Appeals for the D.C. Circuit
United States Court of Appeals for the District of Columbia Circuit
VIE
Variable Interest Entity
VSCC
Virginia State Corporation Commission
WVDEP
West Virginia Department of Environmental Protection
WVPSC
Public Service Commission of West Virginia
 

v



PART I. FINANCIAL INFORMATION

ITEM I.         Financial Statements

FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)

 

For the Three Months Ended September 30
 
For the Nine Months Ended September 30
 
(In millions, except per share amounts)
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
 
 
Regulated Distribution
 
$
2,702

 
$
2,624

 
$
7,423

 
$
7,425

 
Regulated Transmission
 
285

 
248

 
824

 
755

 
Unregulated businesses
 
930

 
1,251

 
2,940

 
3,305

 
Total revenues*
 
3,917

 
4,123

 
11,187


11,485

 
 
 
 
 
 
 





 
OPERATING EXPENSES:
 
 
 
 
 





 
Fuel
 
450

 
482

 
1,269


1,378

 
Purchased power
 
979

 
1,209

 
2,992


3,311

 
Other operating expenses
 
953

 
842

 
2,835


2,799

 
Provision for depreciation
 
311

 
328

 
974


969

 
Amortization of regulatory assets, net
 
98

 
110

 
222


201

 
General taxes
 
265

 
236

 
786


747

 
Impairment of assets (Note 2)
 

 
8

 
1,447

 
24

 
Total operating expenses
 
3,056

 
3,215

 
10,525


9,429

 
 
 
 
 
 
 





 
OPERATING INCOME
 
861

 
908

 
662


2,056

 
 
 
 
 
 
 





 
OTHER INCOME (EXPENSE):
 
 
 
 
 





 
Investment income (loss)
 
28

 
(28
)
 
75


(14
)
 
Interest expense
 
(286
)
 
(285
)
 
(863
)

(846
)
 
Capitalized financing costs
 
28

 
26

 
79


93

 
Total other expense
 
(230
)
 
(287
)
 
(709
)

(767
)
 
 
 
 
 
 
 





 
INCOME (LOSS) BEFORE INCOME TAXES
 
631

 
621

 
(47
)

1,289

 
 
 
 
 
 
 





 
INCOME TAXES
 
251

 
226

 
334


485

 
 
 
 
 
 
 





 
NET INCOME (LOSS)
 
$
380

 
$
395

 
$
(381
)

$
804

 
 
 
 
 
 
 





 
EARNINGS (LOSSES) PER SHARE OF COMMON STOCK:
 
 
 
 
 





 
Basic
 
$
0.89

 
$
0.94

 
$
(0.90
)

$
1.91

 
Diluted
 
$
0.89

 
$
0.93

 
$
(0.90
)

$
1.90

 
 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
 
 
 
 
 
 
 
 
 
Basic
 
425

 
423

 
425

 
422

 
Diluted
 
427

 
424

 
425

 
423

 
 
 
 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
 
$
0.72

 
$
0.72

 
$
1.44

 
$
1.44

 

* Includes excise tax collections of $111 million and $109 million in the three months ended September 30, 2016 and 2015, respectively, and $310 million and $320 million in the nine months ended September 30, 2016 and 2015, respectively.

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


1



FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
 
(In millions)
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
 
$
380

 
$
395

 
$
(381
)
 
$
804

 
 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS):
 
 

 
 

 
 
 
 
 
Pension and OPEB prior service costs
 
(18
)
 
(31
)
 
(54
)
 
(94
)
 
Amortized losses on derivative hedges
 
2

 
2

 
6

 
4

 
Change in unrealized gains on available-for-sale securities
 
4

 
(11
)
 
67

 
(21
)
 
Other comprehensive income (loss)
 
(12
)
 
(40
)
 
19

 
(111
)
 
Income taxes (benefits) on other comprehensive income (loss)
 
(5
)
 
(15
)
 
6

 
(42
)
 
Other comprehensive income (loss), net of tax
 
(7
)
 
(25
)
 
13

 
(69
)
 
 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
$
373

 
$
370

 
$
(368
)
 
$
735

 
 
 
 
 
 
 
 
 
 
 

The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.



2



FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In millions, except share amounts)
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
551

 
$
131

Receivables-
 
 

 
 

Customers, net of allowance for uncollectible accounts of $61 in 2016 and $69 in 2015
 
1,470

 
1,415

Other, net of allowance for uncollectible accounts of $3 in 2016 and $5 in 2015
 
159

 
180

Materials and supplies
 
699

 
785

Prepaid taxes
 
204

 
135

Derivatives
 
152

 
157

Collateral
 
89

 
70

Other
 
156

 
167

 
 
3,480

 
3,040

PROPERTY, PLANT AND EQUIPMENT:
 
 

 
 

In service
 
50,889

 
49,952

Less — Accumulated provision for depreciation
 
15,450

 
15,160

 
 
35,439

 
34,792

Construction work in progress
 
2,394

 
2,422

 
 
37,833

 
37,214

INVESTMENTS:
 
 

 
 

Nuclear plant decommissioning trusts
 
2,502

 
2,282

Other
 
533

 
506

 
 
3,035

 
2,788

 
 
 
 
 
DEFERRED CHARGES AND OTHER ASSETS:
 
 

 
 

Goodwill (Note 2)
 
5,618

 
6,418

Regulatory assets
 
1,088

 
1,348

Other
 
907

 
1,286

 
 
7,613

 
9,052

 
 
$
51,961

 
$
52,094

LIABILITIES AND CAPITALIZATION
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Currently payable long-term debt
 
$
1,216

 
$
1,166

Short-term borrowings
 
2,975

 
1,708

Accounts payable
 
944

 
1,075

Accrued taxes
 
537

 
519

Accrued compensation and benefits
 
365

 
334

Derivatives
 
91

 
106

Other
 
915

 
694

 
 
7,043

 
5,602

CAPITALIZATION:
 
 

 
 

Common stockholders’ equity-
 
 

 
 

Common stock, $0.10 par value, authorized 490,000,000 shares - 425,743,282 and 423,560,397 shares outstanding as of September 30, 2016 and December 31, 2015, respectively
 
43

 
42

Other paid-in capital
 
10,012

 
9,952

Accumulated other comprehensive income
 
184

 
171

Retained earnings
 
1,264

 
2,256

Total common stockholders’ equity
 
11,503

 
12,421

Noncontrolling interest
 

 
1

Total equity
 
11,503

 
12,422

Long-term debt and other long-term obligations
 
18,532

 
19,099

 
 
30,035

 
31,521

NONCURRENT LIABILITIES:
 
 

 
 

Accumulated deferred income taxes
 
7,136

 
6,773

Retirement benefits
 
4,080

 
4,245

Asset retirement obligations
 
1,459

 
1,410

Deferred gain on sale and leaseback transaction
 
765

 
791

Adverse power contract liability
 
174

 
197

Other
 
1,269

 
1,555

 
 
14,883

 
14,971

COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 12)
 


 


 
 
$
51,961

 
$
52,094


The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


3



FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
For the Nine Months Ended September 30
(In millions)
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net Income (loss)
 
$
(381
)
 
$
804

Adjustments to reconcile net income (loss) to net cash from operating activities-
 
 
 
 
Depreciation and amortization, including nuclear fuel, regulatory assets and customer intangible asset amortization
 
1,440

 
1,383

Deferred purchased power and other costs
 
(34
)
 
(73
)
Deferred income taxes and investment tax credits, net
 
318

 
428

Impairment of assets (Note 2)
 
1,447

 
24

Investment impairments
 
13

 
70

Deferred costs on sale leaseback transaction, net
 
36

 
37

Retirement benefits, net of payments
 
45

 
(18
)
Pension trust contributions
 
(297
)
 
(143
)
Commodity derivative transactions, net (Note 9)
 
(10
)
 
(64
)
Lease payments on sale and leaseback transaction
 
(94
)
 
(102
)
Changes in current assets and liabilities-
 
 
 
 
Receivables
 
(34
)
 
7

Materials and supplies
 
45

 
32

Prepayments and other current assets
 
(28
)
 
(43
)
Accounts payable
 
(17
)
 
(285
)
Accrued taxes
 
(81
)
 
(68
)
Accrued interest
 
36

 
37

Accrued compensation and benefits
 
2

 
16

Other current liabilities
 
17

 
26

Cash collateral, net
 
25

 
59

Other
 
132

 
190

Net cash provided from operating activities
 
2,580

 
2,317

 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
New Financing-
 
 
 
 
Long-term debt
 
521

 
1,084

Short-term borrowings, net
 
1,275

 
134

Redemptions and Repayments-
 
 
 
 
Long-term debt
 
(1,017
)
 
(781
)
Common stock dividend payments
 
(458
)
 
(455
)
Other
 
(5
)
 
(11
)
Net cash provided from (used for) financing activities
 
316

 
(29
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Property additions
 
(2,156
)
 
(2,025
)
Nuclear fuel
 
(195
)
 
(101
)
Sales of investment securities held in trusts
 
1,361

 
1,126

Purchases of investment securities held in trusts
 
(1,437
)
 
(1,213
)
Asset removal costs
 
(101
)
 
(111
)
Other
 
52

 
37

Net cash used for investing activities
 
(2,476
)
 
(2,287
)
 
 
 
 
 
Net change in cash and cash equivalents
 
420

 
1

Cash and cash equivalents at beginning of period
 
131

 
85

Cash and cash equivalents at end of period
 
$
551

 
$
86

    
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


4



FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
(In millions)
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
STATEMENTS OF INCOME (LOSS)
 
 
 
 
 
 
 
 

REVENUES:
 
 
 
 
 
 
 
 

Electric sales to non-affiliates
 
$
952

 
$
1,157

 
$
2,917

 
$
3,146

Electric sales to affiliates
 
111

 
135

 
360

 
547

Other
 
37

 
46

 
124

 
141

Total revenues
 
1,100

 
1,338

 
3,401

 
3,834

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 

 
 

Fuel
 
202


245


595

 
666

Purchased power from affiliates
 
191


103


440

 
250

Purchased power from non-affiliates
 
186


401


829

 
1,336

Other operating expenses
 
316


246


925

 
996

Provision for depreciation
 
83


79


250

 
240

General taxes
 
21


24


66

 
78

Impairment of assets (Note 2)
 




540

 
16

Total operating expenses
 
999


1,098


3,645

 
3,582

 
 
 
 
 
 
 
 
 
OPERATING INCOME (LOSS)
 
101


240


(244
)
 
252

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 

 
 

Investment income (loss)
 
24


(21
)

56

 
(7
)
Miscellaneous income
 
1


1


4

 
5

Interest expense — affiliates
 
(3
)

(2
)

(6
)
 
(6
)
Interest expense — other
 
(36
)

(36
)

(109
)
 
(110
)
Capitalized interest
 
9


8


27

 
26

Total other expense
 
(5
)

(50
)

(28
)
 
(92
)
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES (BENEFITS)
 
96


190


(272
)
 
160

 
 
 
 
 
 
 
 
 
INCOME TAXES (BENEFITS)
 
56


70


(5
)
 
64

 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
 
$
40


$
120


$
(267
)
 
$
96

 
 
 
 
 
 
 
 
 
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
 
$
40


$
120


$
(267
)
 
$
96

 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 

 
 

Pension and OPEB prior service costs
 
(3
)

(4
)

(10
)
 
(12
)
Amortized losses (gains) on derivative hedges
 
1





 
(2
)
Change in unrealized gains on available-for-sale securities
 
5


(11
)

61

 
(20
)
Other comprehensive income (loss)
 
3


(15
)

51

 
(34
)
Income taxes (benefits) on other comprehensive income (loss)
 
1

 
(6
)
 
20

 
(13
)
Other comprehensive income (loss), net of tax
 
2

 
(9
)
 
31

 
(21
)
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
$
42


$
111


$
(236
)
 
$
75


The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


5



FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share amounts)
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
2


$
2

Receivables-
 
 

 
 

Customers, net of allowance for uncollectible accounts of $6 in 2016 and $8 in 2015
 
225


275

Affiliated companies
 
482


451

Other, net of allowance for uncollectible accounts of $3 in 2016 and 2015
 
55


59

Notes receivable from affiliated companies
 
26


11

Materials and supplies
 
403


470

Derivatives
 
146


154

Collateral
 
85

 
70

Prepayments and other
 
72


66

 
 
1,496


1,558

PROPERTY, PLANT AND EQUIPMENT:
 
 

 
 

In service
 
14,100


14,311

Less — Accumulated provision for depreciation
 
5,822


5,765

 
 
8,278


8,546

Construction work in progress
 
1,048


1,157

 
 
9,326


9,703

INVESTMENTS:
 
 

 
 

Nuclear plant decommissioning trusts
 
1,542


1,327

Other
 
10


10

 
 
1,552


1,337

DEFERRED CHARGES AND OTHER ASSETS:
 
 

 
 

Customer intangibles
 
11


61

Goodwill (Note 2)
 


23

Property taxes
 
10


40

Derivatives
 
98


79

Other
 
374


367

 
 
493


570

 
 
$
12,867


$
13,168

LIABILITIES AND CAPITALIZATION
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Currently payable long-term debt
 
$
182


$
512

Short-term borrowings-
 
 
 
 
Affiliated companies
 
101

 

Other
 

 
8

Accounts payable-
 
 

 
 

Affiliated companies
 
393


542

Other
 
89


139

Accrued taxes
 
72


76

Derivatives
 
89


104

Other
 
182


181

 
 
1,108


1,562

CAPITALIZATION:
 
 

 
 

Common stockholder's equity-
 
 

 
 

Common stock, without par value, authorized 750 shares - 7 shares outstanding as of September 30, 2016 and December 31, 2015
 
3,653

 
3,613

Accumulated other comprehensive income
 
77

 
46

Retained earnings
 
1,679

 
1,946

Total common stockholder's equity
 
5,409


5,605

Long-term debt and other long-term obligations
 
2,815


2,510

 
 
8,224


8,115

NONCURRENT LIABILITIES:
 
 

 
 

Deferred gain on sale and leaseback transaction
 
765


791

Accumulated deferred income taxes
 
734


600

Retirement benefits
 
219


332

Asset retirement obligations
 
887


831

Derivatives
 
50

 
38

Other
 
880


899

 
 
3,535


3,491

COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 12)
 


 


 
 
$
12,867


$
13,168


The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


6



FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
For the Nine Months Ended September 30
(In millions)
 
2016
 
2015
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income (loss)
 
$
(267
)
 
$
96

Adjustments to reconcile net income (loss) to net cash from operating activities-
 
 
 
 
Depreciation and amortization, including nuclear fuel and customer intangible asset amortization
 
463

 
422

Deferred costs on sale and leaseback transaction, net
 
36

 
37

Deferred income taxes and investment tax credits, net
 
90

 
139

Investment impairments
 
12

 
63

Pension trust contribution
 
(138
)
 

Commodity derivative transactions, net (Note 9)
 
(10
)
 
(65
)
Lease payments on sale and leaseback transaction
 
(94
)
 
(102
)
Impairment of assets (Note 2)
 
540

 
16

Changes in current assets and liabilities-
 
 
 
 
Receivables
 
19

 
171

Materials and supplies
 
25

 
(1
)
Accounts payable
 
(69
)
 
(241
)
Accrued taxes
 
(6
)
 
(28
)
Accrued compensation and benefits
 

 
2

Other current liabilities
 
13

 
24

Cash collateral, net
 
6

 
107

Other
 
(16
)
 
(4
)
Net cash provided from operating activities
 
604

 
636

 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
New financing-
 
 
 
 
Long-term debt
 
471

 
339

Short-term borrowings, net
 
101

 

Redemptions and repayments-
 
 
 
 
Long-term debt
 
(503
)
 
(382
)
Short-term borrowings, net
 

 
(109
)
Other
 
(7
)
 
(5
)
Net cash provided from (used for) financing activities
 
62

 
(157
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Property additions
 
(432
)
 
(341
)
Nuclear fuel
 
(195
)
 
(101
)
Sales of investment securities held in trusts
 
576

 
503

Purchases of investment securities held in trusts
 
(619
)
 
(546
)
Cash investments
 
10

 
(10
)
Loans to affiliated companies, net
 
(15
)
 

Other
 
9

 
16

Net cash used for investing activities
 
(666
)
 
(479
)
 
 
 
 
 
Net change in cash and cash equivalents
 

 

Cash and cash equivalents at beginning of period
 
2

 
2

Cash and cash equivalents at end of period
 
$
2

 
$
2


The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.


7



FIRSTENERGY CORP. AND SUBSIDIARIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note
Number
 
Page
Number
 
 
 
 
 
 
2
Asset Impairments
 
 
 
3
Earnings Per Share of Common Stock
 
 
 
4
 
 
 
5
Accumulated Other Comprehensive Income
 
 
 
6
Income Taxes
 
 
 
7
Variable Interest Entities
 
 
 
8
Fair Value Measurements
 
 
 
9
Derivative Instruments
 
 
 
10
Asset Retirement Obligations
 
 
 
11
Regulatory Matters
 
 
 
12
Commitments, Guarantees and Contingencies
 
 
 
13
Supplemental Guarantor Information
 
 
 
14
Segment Information
 
 
 



8



COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

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 Allegheny Ventures, Inc.

FE and its subsidiaries are principally 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, based on serving six million customers in the Midwest and Mid-Atlantic regions. Its regulated and unregulated 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.
These interim financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 2015. These Notes to the Consolidated Financial Statements are combined for FirstEnergy and FES.

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 accompanying interim financial statements are unaudited, but reflect all adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair statement of the financial statements. 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 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 7, Variable Interest Entities). Investments in affiliates over which FE and its subsidiaries have the ability to exercise significant influence, but do not have a controlling financial interest, 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 of FE's ownership share of the entity’s earnings is reported in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

For the three months ended September 30, 2016 and 2015, capitalized financing costs on FirstEnergy's Consolidated Statements of Income (Loss) include $11 million and $10 million, respectively, of allowance for equity funds used during construction and $17 million and $16 million, respectively, of capitalized interest. For the nine months ended September 30, 2016 and 2015, capitalized financing costs on FirstEnergy's Consolidated Statements of Income (Loss) include $28 million and $40 million, respectively, of allowance for equity funds used during construction and $51 million and $53 million, respectively, of capitalized interest.

During the third quarter of 2016, a reduction to depreciation of $21 million ($19 million prior to January 1, 2016) was recorded that related to prior periods. The out-of-period adjustment related to the utilization of an accelerated useful life for a component of a certain power station. Management has determined this adjustment is not material to the current period or any prior periods.

Strategic Review of Competitive Operations

FirstEnergy’s strategy is to be a fully regulated utility focusing on stable and predictable earnings and cash flow from its regulated business units.  In order to execute on this strategy, FirstEnergy has begun a strategic review of its competitive operations focused on the sale of gas and hydroelectric units as well as exploring all alternatives for the remaining generation assets at FES and AE Supply. These include, but are not limited to, legislative efforts to convert generation from competitive operations to a regulated or regulated-like construct such as a regulatory restructuring in Ohio, offering generation into any process designed to address MP's generation shortfall included in its IRP, and/or a solution for nuclear generation that recognize their environmental benefits. Management anticipates that the viability of these alternatives will be determined in the near term with a target to implement these strategic options within the next 12 to 18 months and could result in material asset impairments.

Based on current market forwards, CES, including FES, expects to have more than sufficient cash flow from operations in 2017 and 2018 to fund anticipated capital expenditures with no equity contributions from FirstEnergy. However, in addition to exposure


9



to market price volatility and operational risks, CES, including FES, faces significant financial risks that could impact its anticipated cash flow and liquidity, including, but not limited to, the following:

Requests to post additional collateral or accelerated payments of up to $355 million resulting from current credit ratings at FES, including Moody's downgrade of the Senior Unsecured debt rating for FES to Caa1 as well as S&P's downgrade of the Senior Unsecured debt rating at FES to B, both of which occurred on November 4, 2016.
Adverse outcomes in the previously disclosed disputes regarding long-term coal transportation contracts.
The inability to extend or refinance debt maturities at CES, including at FES subsidiaries, in 2017 and 2018 of $130 million and $515 million, respectively.

A significant collateral call or the inability to refinance 2017 debt maturities at FES subsidiaries is expected to be addressed by FES through a combination of cash on hand, additional capital expenditure reductions, asset sales, and/or borrowings under the unregulated money pool. However, adverse outcomes in the coal transportation contracts disputes, the inability to refinance 2018 debt maturities, or lack of viable alternative strategies could cause FES to take one or more of the following actions: (i) restructuring of debt and other financial obligations, (ii) additional borrowings under the unregulated money pool, (iii) further asset sales or plant deactivations, and/or (iv) seek protection under bankruptcy laws. In the event FES seeks such protection, FENOC may similarly seek protection under bankruptcy laws.

Material asset impairments resulting from the sale or deactivation of generation assets or from a determination by management of its intent to exit competitive generation assets before the end of their estimated useful life resulting from the inability to implement alternative strategies discussed above, adverse judgments or a FES bankruptcy filing could result in an event of default under various agreements related to the indebtedness of FE. Although management expects to successfully resolve any FE defaults through waivers or other actions on acceptable terms and conditions, the failure to do so would have a material and adverse impact on FirstEnergy’s financial condition, and FirstEnergy cannot provide any assurance that it will be able to successfully resolve any such defaults on satisfactory terms.

New Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers". Subsequent accounting standards updates have been issued which amend and/or clarify the application of ASU 2014-09. The core principle of the new guidance is that an entity recognizes revenue 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. More detailed disclosures will also be required to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. For public business entities, the new revenue recognition guidance will be effective for annual and interim reporting periods beginning after December 15, 2017. Earlier adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. The standards 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 these standards.

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. 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's adoption of ASU 2015-02, on January 1, 2016, did not result in a change in the consolidation of VIEs by FE or its subsidiaries.

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. 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 allows debt issuance costs related to line of credit arrangements to be presented as an asset and amortized ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. FirstEnergy adopted ASU 2015-15 and ASU 2015-03 beginning January 1, 2016. As of December 31, 2015, FirstEnergy and FES reclassified $93 million and $17 million of debt issuance costs included in Deferred charges and other assets to Long-term debt and Other long-term obligations. FirstEnergy has elected to continue presenting debt issuance costs relating to its revolving credit facilities as an asset.

In January of 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities", which primarily affects 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 for certain provisions 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.



10



In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. In addition, new qualitative and quantitative disclosures of the amounts, timing, and uncertainty of cash flows arising from leases will be required. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Lessors and lessees will be required to apply a modified retrospective transition approach, which requires adjusting the accounting for any leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.

In March of 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting", which simplifies several aspects of the accounting for employee share-based payment. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will not require liability accounting when an employer repurchases more of an employee’s shares for tax withholding purposes. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which removes all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments". The standard is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for all entities. FirstEnergy does not expect this ASU to have a material effect on its financial statements.

In October 2016, the FASB issued ASU 2016-16, " Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory." ASU 2016-16 eliminates the exception for all intra-entity sales of assets other than inventory, which allows companies to defer the tax effects of intra-entity asset transfers. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the intra-entity transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted and the modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.

Additionally, during 2016, the FASB issued the following ASUs:

ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships,”
ASU 2016-06, “Contingent Put and Call Options in Debt Instruments (a consensus of the FASB Emerging Issues Task Force),"
ASU 2016-07, “Simplifying the Transition to the Equity Method of Accounting," and
ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control.”

FirstEnergy does not expect these ASUs to have a material effect on its financial statements.


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2. ASSET IMPAIRMENTS

Plant Impairments

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 July 19, 2016, FirstEnergy and FES committed to exit operations of the Bay Shore Unit 1 generating station (136 MW) by October 1, 2020, through either sale or deactivation and to deactivate Units 1-4 of the W. H. Sammis generating station (720 MW) by May 31, 2020. As a result, FirstEnergy recorded a non-cash pre-tax impairment charge of $647 million ($517 million - FES) in the second quarter of 2016, which is included in Impairment of assets on the Consolidated Statement of Income (Loss) and included within the results of the CES segment. PJM has approved the W.H Sammis Units 1-4 and Bay Shore Unit 1 deactivations pending review by the Independent Market Monitor. In addition, FirstEnergy and FES recorded termination and settlement costs on fuel contracts of approximately $58 million (pre-tax) in the second quarter of 2016 resulting from plant retirements and deactivations.

During the first nine months of 2015, FirstEnergy and FES recognized impairment charges of $24 million and $16 million, respectively, associated with certain transportation equipment and facilities. In order to conform to current year presentation, the charge was reclassified from Other operating expenses in the Consolidated Statement of Income (Loss) to Impairment of assets.
Goodwill

In a business combination, the excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. FirstEnergy's reporting units are consistent with its reportable segments and consist of Regulated Distribution, Regulated Transmission, and CES. The following table presents the changes in the carrying value of goodwill for the nine months ended September 30, 2016:
Goodwill
 
Regulated Distribution
 
Regulated Transmission
 
Competitive Energy Services
 
Consolidated
 
 
(In millions)
Balance as of December 31, 2015
 
$
5,092

 
$
526

 
$
800

 
$
6,418

Impairment
 

 

 
(800
)
 
(800
)
Balance as of September 30, 2016
 
$
5,092

 
$
526

 
$

 
$
5,618


FirstEnergy tests goodwill for impairment annually as of July 31 and considers more frequent testing if indicators of potential impairment arise.

As a result of low capacity prices associated with the 2019/2020 PJM Base Residual Auction in May 2016, as well as its annual update to its fundamental long-term capacity and energy price forecast, FirstEnergy determined that an interim impairment analysis of the CES reporting unit’s goodwill was necessary during the second quarter of 2016.

Consistent with FirstEnergy’s annual goodwill impairment test, a discounted cash flow analysis was used to determine the fair value of the CES reporting unit for purposes of step one of the interim goodwill impairment test. Key assumptions incorporated into the CES discounted cash flow analysis requiring significant management judgment included the following:

Future Energy and Capacity Prices: Observable market information for near-term forward power prices, PJM auction results for near term capacity pricing, and a longer-term fundamental 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: 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: 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 9.50%, based on selected comparable companies' capital structure, return on debt and return on equity.
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.



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Based on the impairment analysis, FirstEnergy determined that the carrying value of goodwill exceeded its fair value and recognized a non-cash pre-tax impairment charge of $800 million ($23 million - FES) in the second quarter of 2016, which is included within the caption Impairment of assets in the Consolidated Statement of Income (Loss).

As of July 31, 2016, FirstEnergy performed a qualitative assessment of the Regulated Distribution and Regulated Transmission reporting units' goodwill, assessing economic, industry and market considerations in addition to the reporting units' 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.
Termination of Customer Contract

During the third quarter of 2016, FES recorded a pre-tax charge of $32 million associated with the termination of a customer contract, which is included in Other operating expenses in the Consolidated Statement of Income (Loss).
3. 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:
(In millions, except per share amounts)
 
For the Three Months Ended September 30
 
For the Nine Months Ended September 30
Reconciliation of Basic and Diluted Earnings per Share of Common Stock
 
2016

2015
 
2016
 
2015
 
 
 
 
 
 
 
Net income (loss)
 
$
380

 
$
395

 
$
(381
)
 
$
804

 
 
 
 
 
 
 
 
 
Weighted average number of basic shares outstanding
 
425

 
423

 
425

 
422

Assumed exercise of dilutive stock options and awards(1)
 
2

 
1

 

 
1

Weighted average number of diluted shares outstanding
 
427

 
424

 
425

 
423

 
 
 
 
 
 
 
 
 
Basic earnings (losses) per share of common stock
 
$
0.89

 
$
0.94

 
$
(0.90
)
 
$
1.91

Diluted earnings (losses) per share of common stock
 
$
0.89

 
$
0.93

 
$
(0.90
)
 
$
1.90


(1) 
For the nine months ended September 30, 2016, three million shares were excluded from the calculation of diluted shares outstanding, as their inclusion would be antidilutive as a result of the net loss for the period. For the three months ended September 30, 2016 and 2015, and for the nine months ended September 30, 2015, one million shares were excluded from the calculation of diluted shares outstanding, as their inclusion would be antidilutive.
4. PENSION AND OTHER POSTEMPLOYMENT BENEFITS

Through October 2016, FirstEnergy satisfied its minimum required funding obligations to its qualified pension plan for the year with contributions of $382 million ($85 million in October 2016), including $138 million at FES. Depending on, among other things, market conditions, FirstEnergy expects to make additional contributions to its qualified pension plan in 2016 of up to $500 million of equity to address its funding obligations for future years.



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The components of the consolidated net periodic cost (credits) for pension and OPEB (including amounts capitalized) were as follows:
Components of Net Periodic Benefit Costs (Credits)
 
Pension
OPEB
For the Three Months Ended September 30
 
2016

2015

2016

2015
 
 
(In millions)
Service costs
 
$
48

 
$
49

 
$
2

 
$
2

Interest costs
 
99

 
96

 
7

 
7

Expected return on plan assets
 
(100
)
 
(111
)
 
(7
)
 
(9
)
Amortization of prior service costs (credits)
 
2

 
2

 
(20
)
 
(33
)
Net periodic costs (credits)
 
$
49

 
$
36

 
$
(18
)
 
$
(33
)
 
 
 
 
 
 
 
 
 
Components of Net Periodic Benefit Costs (Credits)
 
Pension
OPEB
For the Nine Months Ended September 30
 
2016
 
2015
 
2016
 
2015
 
 
(In millions)
Service costs
 
$
144

 
$
145

 
$
4

 
$
4

Interest costs
 
298

 
288

 
22

 
21

Expected return on plan assets
 
(297
)
 
(333
)
 
(23
)
 
(25
)
Amortization of prior service costs (credits)
 
6

 
6

 
(60
)
 
(100
)
Net periodic costs (credits)
 
$
151

 
$
106

 
$
(57
)
 
$
(100
)

FES' share of the net periodic pension and OPEB costs (credits) were as follows:
 
 
Pension
OPEB
 
 
2016
 
2015
 
2016
 
2015
 
 
(In millions)
For the Three Months Ended September 30
 
$
6

 
$
4

 
$
(4
)
 
$
(5
)
For the Nine Months Ended September 30
 
18

 
12

 
(12
)
 
(15
)

Pension and OPEB obligations are allocated to FE's subsidiaries, including FES, employing the plan participants. The net periodic pension and OPEB costs (credits), net of amounts capitalized, recognized in earnings by FirstEnergy and FES were as follows: