Form 10-Q
Table of Contents

 
 
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 March 31, 2011
OR
     
o   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.
(An Ohio Corporation)
76 South Main Street
Akron, OH 44308
Telephone (800)736
-3402
  34-1843785
         
000-53742   FIRSTENERGY SOLUTIONS CORP.
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
  31-1560186
         
1-2578   OHIO EDISON COMPANY
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736
-3402
  34-0437786
         
1-2323   THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736
-3402
  34-0150020
         
1-3583   THE TOLEDO EDISON COMPANY
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736
-3402
  34-4375005
         
1-3141   JERSEY CENTRAL POWER & LIGHT COMPANY
(A New Jersey Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736
-3402
  21-0485010
         
1-446   METROPOLITAN EDISON COMPANY
(A Pennsylvania Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736
-3402
  23-0870160
         
1-3522   PENNSYLVANIA ELECTRIC COMPANY
(A Pennsylvania Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736
-3402
  25-0718085
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., FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company
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.
     
Yes o No o
 
FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company, and Pennsylvania Electric Company
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., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company
     
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 Act).
     
Yes o No þ
 
FirstEnergy Corp., FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company
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 April 29, 2011  
FirstEnergy Corp., $.10 par value
    418,216,437  
FirstEnergy Solutions Corp., no par value
    7  
Ohio Edison Company, no par value
    60  
The Cleveland Electric Illuminating Company, no par value
    67,930,743  
The Toledo Edison Company, $5 par value
    29,402,054  
Jersey Central Power & Light Company, $10 par value
    13,628,447  
Metropolitan Edison Company, no par value
    740,905  
Pennsylvania Electric Company, $20 par value
    4,427,577  
FirstEnergy Corp. is the sole holder of FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company common stock.
This combined Form 10-Q is separately filed by FirstEnergy Corp., FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company. 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 any other registrant, except that information relating to any of the FirstEnergy subsidiary registrants is also attributed to FirstEnergy Corp.
FirstEnergy Web Site
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 FirstEnergy’s Internet web site at www.firstenergycorp.com.
These reports are posted on the web site as soon as reasonably practicable after they are electronically filed with the SEC. Additionally, the registrants routinely post important information on FirstEnergy’s Internet web site and recognize FirstEnergy’s Internet 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. Information contained on FirstEnergy’s Internet web site shall not be deemed incorporated into, or to be part of, this report.
OMISSION OF CERTAIN INFORMATION
FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.
 
 

 

 


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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,” “believe,” “estimate” and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Actual results may differ materially due to:
 
The speed and nature of increased competition in the electric utility industry.
 
The impact of the regulatory process on the pending matters in the various states in which we do business including, but not limited to, matters related to rates.
 
The status of the PATH project in light of PJM’s direction to suspend work on the project pending review of its planning process, its re-evaluation of the need for the project and the uncertainty of the timing and amounts of any related capital expenditures.
 
Business and regulatory impacts from ATSI’s realignment into PJM Interconnection, L.L.C.
 
Economic or weather conditions affecting future sales and margins.
 
Changes in markets for energy services.
 
Changing energy and commodity market prices and availability.
 
Financial derivative reforms that could increase our liquidity needs and collateral costs.
 
Replacement power costs being higher than anticipated or inadequately hedged.
 
The continued ability of FirstEnergy’s regulated utilities to collect transition and other costs.
 
Operation and maintenance costs being higher than anticipated.
 
Other legislative and regulatory changes, and revised environmental requirements, including possible GHG emission, water intake and coal combustion residual regulations, the potential impacts of any laws, rules or regulations that ultimately replace CAIR and the effects of the EPA’s recently released MACT proposal to establish certain mercury and other emission standards for electric generating units.
 
The uncertainty of the timing and amounts of the capital expenditures that may arise in connection with any NSR litigation or potential regulatory initiatives or rulemakings (including that such expenditures could result in our decision to shut down or idle certain generating units).
 
Adverse regulatory or legal decisions and outcomes (including, but not limited to, the revocation of necessary licenses or operating permits) and oversight by the NRC, including as a result of the incident at Japan’s Fukushima Daiichi Nuclear Plant.
 
Adverse legal decisions and outcomes related to Met-Ed’s and Penelec’s transmission service charge appeal at the Commonwealth Court of Pennsylvania.
 
The continuing availability of generating units and changes in their ability to operate at or near full capacity.
 
The ability to comply with applicable state and federal reliability standards and energy efficiency mandates.
 
Changes in customers’ demand for power, including but not limited to, changes resulting from the implementation of state and federal energy efficiency mandates.
 
The ability to accomplish or realize anticipated benefits from strategic goals.
 
Efforts and our ability to improve electric commodity margins and the impact of, among other factors, the increased cost of coal and coal transportation on such margins.
 
The ability to experience growth in the distribution business.
 
The changing market conditions that could affect the value of assets held in the registrants’ nuclear decommissioning trusts, pension trusts and other trust funds, and cause FirstEnergy to make additional contributions sooner, or in amounts that are larger than currently anticipated.

 

 


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The ability to access the public securities and other capital and credit markets in accordance with FirstEnergy’s financing plan, the cost of such capital and overall condition of the capital and credit markets affecting the registrants and other FirstEnergy subsidiaries.
 
Changes in general economic conditions affecting the registrants and other FirstEnergy subsidiaries.
 
Interest rates and any actions taken by credit rating agencies that could negatively affect the registrants’ access to financing or their costs and increase requirements to post additional collateral to support outstanding commodity positions, LOCs and other financial guarantees.
 
The continuing uncertainty of the national and regional economy and its impact on the registrants’ major industrial and commercial customers and those of other FirstEnergy subsidiaries.
 
Issues concerning the soundness of financial institutions and counterparties with which the registrants and FirstEnergy’s other subsidiaries do business.
 
Issues arising from the recently completed merger of FirstEnergy and Allegheny Energy, Inc. and the ongoing coordination of their combined operations including FirstEnergy’s ability to maintain relationships with customers, employees or suppliers, as well as the ability to successfully integrate the businesses and realize cost savings and any other synergies and the risk that the credit ratings of the combined company or its subsidiaries may be different from what the companies expect.
 
The risks and other factors discussed from time to time in the registrants’ SEC filings, and other similar factors.
Dividends declared from time to time on FirstEnergy’s common stock during any annual period may in aggregate vary from the indicated amount due to circumstances considered by FirstEnergy’s Board of Directors at the time of the actual declarations. A security rating is not a recommendation to buy, or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
The foregoing review of factors should not be construed as exhaustive. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor assess the impact of any such factor on the registrants’ 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 any forward-looking statements contained herein as a result of new information, future events or otherwise.

 

 


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TABLE OF CONTENTS
         
    Page  
 
       
       
 
       
  iii-v  
 
       
       
 
       
FirstEnergy Corp.
       
 
       
    1  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
FirstEnergy Solutions Corp.
       
 
       
    5  
 
       
    6  
 
       
    7  
 
       
Ohio Edison Company
       
 
       
    8  
 
       
    9  
 
       
    10  
 
       
The Cleveland Electric Illuminating Company
       
 
       
    11  
 
       
    12  
 
       
    13  
 
       
The Toledo Edison Company
       
 
       
    14  
 
       
    15  
 
       
    16  
 
       
Jersey Central Power & Light Company
       
 
       
    17  
 
       
    18  
 
       
    19  
 
       
Metropolitan Edison Company
       
 
       
    20  
 
       
    21  
 
       
    22  
 
       
Pennsylvania Electric Company
       
 
       
    23  
 
       
    24  
 
       
    25  

 

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Table of Contents

TABLE OF CONTENTS (Cont’d)
         
    Page  
 
       
    26  
 
       
    78  
 
       
Management’s Narrative Analysis of Results of Operations
       
 
       
    117  
 
       
    120  
 
       
    122  
 
       
    124  
 
       
    126  
 
       
    128  
 
       
    130  
 
       
    132  
 
       
    132  
 
       
       
 
       
    133  
 
       
    133  
 
       
    134  
 
       
    135  
 
       
    136  
 
       
 Exhibit 10.1
 Exhibit 10.5
 Exhibit 10.6
 Exhibit 10.7
 Exhibit 10.8
 Exhibit 10.9
 Exhibit 10.10
 Exhibit 12
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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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
AESC
  Allegheny Energy Service Corporation, a subsidiary of AE
AE Supply
  Allegheny Energy Supply Company LLC, an unregulated generation subsidiary of AE
AGC
  Allegheny Generating Company, a generation subsidiary of AE
Allegheny
  Allegheny Energy, Inc., together with its consolidated subsidiaries
AVE
  Allegheny Ventures, Inc.
ATSI
  American Transmission Systems, Incorporated, which owns and operates transmission facilities
CEI
  The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary
FENOC
  FirstEnergy Nuclear Operating Company, which operates nuclear generating facilities
FES
  FirstEnergy Solutions Corp., which provides energy-related products and services
FESC
  FirstEnergy Service Company, which provides legal, financial and other corporate support services
FEV
  FirstEnergy Ventures Corp., which invests in certain unregulated enterprises and business ventures
FGCO
  FirstEnergy Generation Corp., which owns and operates non-nuclear generating facilities
FirstEnergy
  FirstEnergy Corp., a public utility holding company
Global Rail
  A joint venture between FEV and WMB Loan Ventures II LLC, that owns coal transportation operations near Roundup, Montana
GPU
  GPU, Inc., former parent of JCP&L, Met-Ed and Penelec, that merged with FirstEnergy on November 7, 2001
JCP&L
  Jersey Central Power & Light Company, a New Jersey electric utility operating subsidiary
Met-Ed
  Metropolitan Edison Company, a Pennsylvania electric utility operating subsidiary
MP
  Monongahela Power Company, a West Virginia electric utility operating subsidiary of AE
NGC
  FirstEnergy Nuclear Generation Corp., 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 Allegheny and a subsidiary of American Electric Power Company, Inc.
PATH-VA
  PATH Allegheny Virginia Transmission Corporation
PE
  The Potomac Edison Company, a Maryland electric operating subsidiary of AE
Penelec
  Pennsylvania Electric Company, a Pennsylvania electric utility operating subsidiary
Penn
  Pennsylvania Power Company, a Pennsylvania electric utility operating subsidiary of OE
Pennsylvania Companies
  Met-Ed, Penelec, Penn and WP
PNBV
  PNBV Capital Trust, a special purpose entity created by OE in 1996
Shippingport
  Shippingport Capital Trust, a special purpose entity created by CEI and TE in 1997
Signal Peak
  A joint venture between FEV and WMB Loan Ventures LLC, that owns mining operations near Roundup, Montana
TE
  The Toledo Edison Company, an Ohio electric utility operating subsidiary
TrAIL
  Trans-Allegheny Interstate Line Company
Utilities
  OE, CEI, TE, Penn, JCP&L, Met-Ed, Penelec, MP, PE and WP
Utility Registrants
  OE, CEI, TE, JCP&L, Met-Ed and Penelec
WP
  West Penn Power Company, a Pennsylvania electric utility operating subsidiary of AE
The following abbreviations and acronyms are used to identify frequently used terms in this report:
     
ALJ
  Administrative Law Judge
AOCL
  Accumulated Other Comprehensive Loss
AEP
  American Electric Power
AQC
  Air Quality Control
ARO
  Asset Retirement Obligation
BGS
  Basic Generation Service
CAA
  Clean Air Act
CAIR
  Clean Air Interstate Rule
CAMR
  Clean Air Mercury Rule
CATR
  Clean Air Transport Rule
CBP
  Competitive Bid Process
CDWR
  California Department of Water Resources
CO2
  Carbon Dioxide
CTC
  Competitive Transition Charge

 

iii


Table of Contents

GLOSSARY OF TERMS, Cont’d.
     
DCPD
  Deferred Compensation Plan for Outside Directors
DOE
  United States Department of Energy
DOJ
  United States Department of Justice
DPA
  Department of the Public Advocate, Division of Rate Counsel (New Jersey)
DSP
  Default Service Plan
EDCP
  Executive Deferred Compensation Plan
EE&C
  Energy Efficiency and Conservation
EIS
  Energy Insurance Services, Inc.
EMP
  Energy Master Plan
ENEC
  Expanded Net Energy Cost
EPA
  United States Environmental Protection Agency
ESOP
  Employee Stock Ownership Plan
ESP
  Electric Security Plan
FASB
  Financial Accounting Standards Board
FERC
  Federal Energy Regulatory Commission
FMB
  First Mortgage Bond
FPA
  Federal Power Act
FRR
  Fixed Resource Requirement
FTRs
  Financial Transmission Rights
GAAP
  Generally Accepted Accounting Principles in the United States
RGGI
  Regional Greenhouse Gas Initiative
GHG
  Greenhouse Gases
IRS
  Internal Revenue Service
JOA
  Joint Operating Agreement
kV
  Kilovolt
KWH
  Kilowatt-hours
LED
  Light-Emitting Diode
LOC
  Letter of Credit
LTIP
  Long-Term Incentive Plan
MACT
  Maximum Achievable Control Technology
MDPSC
  Maryland Public Service Commission
MEIUG
  Met-Ed Industrial Users Group
MISO
  Midwest Independent Transmission System Operator, Inc.
Moody’s
  Moody’s Investors Service, Inc.
MRO
  Market Rate Offer
MSHA
  Mine Safety and Health Administration
MTEP
  MISO Regional Transmission Expansion Plan
MW
  Megawatts
MWH
  Megawatt-hours
NAAQS
  National Ambient Air Quality Standards
NDT
  Nuclear Decommissioning Trusts
NERC
  North American Electric Reliability Corporation
NJBPU
  New Jersey Board of Public Utilities
NNSR
  Non-Attainment New Source Review
NOAC
  Northwest Ohio Aggregation Coalition
NOPEC
  Northeast Ohio Public Energy Council
NOV
  Notice of Violation
NOX
  Nitrogen Oxide
NRC
  Nuclear Regulatory Commission
NSR
  New Source Review
NUG
  Non-Utility Generation
NUGC
  Non-Utility Generation Charge
NYSEG
  New York State Electric and Gas
OCC
  Ohio Consumers’ Counsel
OCI
  Other Comprehensive Income
OPEB
  Other Post-Employment Benefits
OVEC
  Ohio Valley Electric Corporation
PADEP
  Pennsylvania Department of Environmental Protection
PCRB
  Pollution Control Revenue Bond
PICA
  Pennsylvania Intergovernmental Cooperation Authority
PJM
  PJM Interconnection L. L. C.
POLR
  Provider of Last Resort; an electric utility’s obligation to provide generation service to customers Whose alternative supplier fails to deliver service
PPUC
  Pennsylvania Public Utility Commission

 

iv


Table of Contents

GLOSSARY OF TERMS, Cont’d.
     
PSCWV
  Public Service Commission of West Virginia
PSA
  Power Supply Agreement
PSD
  Prevention of Significant Deterioration
PUCO
  Public Utilities Commission of Ohio
PURPA
  Public Utility Regulatory Policies Act of 1978
RECs
  Renewable Energy Credits
RFP
  Request for Proposal
RGGI
  Regional Greenhouse Gas Initiative
RTEP
  Regional Transmission Expansion Plan
RTC
  Regulatory Transition Charge
RTO
  Regional Transmission Organization
S&P
  Standard & Poor’s Ratings Service
SB221
  Amended Substitute Senate Bill 221
SBC
  Societal Benefits Charge
SEC
  U.S. Securities and Exchange Commission
SIP
  State Implementation Plan(s) Under the Clean Air Act
SMIP
  Smart Meter Implementation Plan
SNCR
  Selective Non-Catalytic Reduction
SO2
  Sulfur Dioxide
SOS
  Standard Offer Service
TBC
  Transition Bond Charge
TDS
  Total Dissolved Solid
TMDL
  Total Maximum Daily Load
TMI-2
  Three Mile Island Unit 2
TSC
  Transmission Service Charge
VIE
  Variable Interest Entity
VSCC
  Virginia State Corporation Commission
WVDEP
  West Virginia Department of Environmental Protection
WVPSC
  Public Service Commission of West Virginia

 

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FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
In millions, except per share amounts   2011     2010  
 
               
REVENUES:
               
Electric utilities
  $ 2,332     $ 2,543  
Unregulated businesses
    1,244       756  
 
           
Total revenues*
    3,576       3,299  
 
           
 
               
EXPENSES:
               
Fuel
    453       334  
Purchased power
    1,186       1,238  
Other operating expenses
    1,033       701  
Provision for depreciation
    220       193  
Amortization of regulatory assets
    132       212  
General taxes
    237       205  
 
           
Total expenses
    3,261       2,883  
 
           
 
               
OPERATING INCOME
    315       416  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Investment income
    21       16  
Interest expense
    (231 )     (213 )
Capitalized interest
    18       41  
 
           
Total other expense
    (192 )     (156 )
 
           
 
               
INCOME BEFORE INCOME TAXES
    123       260  
 
               
INCOME TAXES
    78       111  
 
           
 
               
NET INCOME
    45       149  
 
               
Loss attributable to noncontrolling interest
    (5 )     (6 )
 
           
 
               
EARNINGS AVAILABLE TO FIRSTENERGY CORP.
  $ 50     $ 155  
 
           
 
               
BASIC EARNINGS PER SHARE OF COMMON STOCK
  $ 0.15     $ 0.51  
 
           
 
               
WEIGHTED AVERAGE NUMBER OF BASIC SHARES OUTSTANDING
    342       304  
 
           
 
               
DILUTED EARNINGS PER SHARE OF COMMON STOCK
  $ 0.15     $ 0.51  
 
           
 
               
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING
    343       306  
 
           
 
               
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
  $ 0.55     $ 0.55  
 
           
     
*  
Includes $119 and $109 million of excise tax collections in the three months ended March 31, 2011 and 2010, respectively.
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In millions)   2011     2010  
 
               
NET INCOME
  $ 45     $ 149  
 
           
 
               
OTHER COMPREHENSIVE INCOME:
               
Pension and other postretirement benefits
    19       13  
Unrealized gain (loss) on derivative hedges
    (6 )     4  
Change in unrealized gain on available-for-sale securities
    9       6  
 
           
Other comprehensive income
    22       23  
Income tax expense related to other comprehensive income
    1       7  
 
           
Other comprehensive income, net of tax
    21       16  
 
           
 
               
COMPREHENSIVE INCOME
    66       165  
 
               
COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
    (5 )     (6 )
 
           
 
               
COMPREHENSIVE INCOME AVAILABLE TO FIRSTENERGY CORP.
  $ 71     $ 171  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
(In millions)   2011     2010  
ASSETS
               
 
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 1,101     $ 1,019  
Receivables-
               
Customers, net of allowance for uncollectible accounts of $38 in 2011 and $36 in 2010
    1,636       1,392  
Other, net of allowance for uncollectible accounts of $10 in 2011 and $8 in 2010
    229       176  
Materials and supplies
    852       638  
Prepaid taxes
    241       199  
Derivatives
    377       182  
Other
    210       92  
 
           
 
    4,646       3,698  
 
           
PROPERTY, PLANT AND EQUIPMENT:
               
In service
    38,168       29,451  
Less — Accumulated provision for depreciation
    11,345       11,180  
 
           
 
    26,823       18,271  
Construction work in progress
    2,322       1,517  
Property, plant and equipment held for sale, net
    490        
 
           
 
    29,635       19,788  
 
           
INVESTMENTS:
               
Nuclear plant decommissioning trusts
    2,018       1,973  
Investments in lease obligation bonds
    422       476  
Nuclear fuel disposal trust
    207       208  
Other
    434       345  
 
           
 
    3,081       3,002  
 
           
DEFERRED CHARGES AND OTHER ASSETS:
               
Goodwill
    6,527       5,575  
Regulatory assets
    2,084       1,826  
Intangible assets
    1,075       256  
Other
    818       660  
 
           
 
    10,504       8,317  
 
           
 
  $ 47,866     $ 34,805  
 
           
LIABILITIES AND CAPITALIZATION
               
 
               
CURRENT LIABILITIES:
               
Currently payable long-term debt
  $ 1,385     $ 1,486  
Short-term borrowings
    486       700  
Accounts payable
    1,080       872  
Accrued taxes
    412       326  
Accrued compensation and benefits
    312       315  
Derivatives
    425       266  
Other
    1,062       733  
 
           
 
    5,162       4,698  
 
           
CAPITALIZATION:
               
Common stockholders’ equity-
               
Common stock, $0.10 par value, authorized 490,000,000 shares- 418,216,437 shares outstanding
    42       31  
Other paid-in capital
    9,779       5,444  
Accumulated other comprehensive loss
    (1,518 )     (1,539 )
Retained earnings
    4,426       4,609  
 
           
Total common stockholders’ equity
    12,729       8,545  
Noncontrolling interest
    (40 )     (32 )
 
           
Total equity
    12,689       8,513  
Long-term debt and other long-term obligations
    17,535       12,579  
 
           
 
    30,224       21,092  
 
           
 
               
NONCURRENT LIABILITIES:
               
Accumulated deferred income taxes
    4,832       2,879  
Retirement benefits
    2,313       1,868  
Asset retirement obligations
    1,443       1,407  
Deferred gain on sale and leaseback transaction
    951       959  
Power purchase contract liability
    606       466  
Other
    2,335       1,436  
 
           
 
    12,480       9,015  
 
           
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 9)
               
 
  $ 47,866     $ 34,805  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In millions)   2011     2010  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 45     $ 149  
Adjustments to reconcile net income to net cash from operating activities-
               
Provision for depreciation
    220       193  
Amortization of regulatory assets
    132       212  
Nuclear fuel and lease amortization
    47       41  
Deferred purchased power and other costs
    (58 )     (77 )
Deferred income taxes and investment tax credits, net
    171       59  
Deferred rents and lease market valuation liability
    (15 )     (17 )
Accrued compensation and retirement benefits
    (13 )     (81 )
Commodity derivative transactions, net
    (25 )     33  
Pension trust contribution
    (157 )      
Asset impairments
    31       12  
Cash collateral paid
    (28 )     (46 )
Decrease (increase) in operating assets-
               
Receivables
    164       2  
Materials and supplies
    40       (42 )
Prepayments and other current assets
    118       33  
Increase (decrease) in operating liabilities-
               
Accounts payable
    (90 )     (57 )
Accrued taxes
    (182 )     7  
Accrued interest
    76       66  
Other
    15       19  
 
           
Net cash provided from operating activities
    491       506  
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
New financing-
               
Long-term debt
    217        
Redemptions and repayments-
               
Long-term debt
    (359 )     (109 )
Short-term borrowings, net
    (214 )     (295 )
Common stock dividend payments
    (190 )     (168 )
Other
    (4 )     (22 )
 
           
Net cash used for financing activities
    (550 )     (594 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property additions
    (449 )     (508 )
Proceeds from asset sales
          114  
Sales of investment securities held in trusts
    969       733  
Purchases of investment securities held in trusts
    (993 )     (755 )
Customer acquisition costs
    (1 )     (101 )
Cash investments
    47       49  
Cash received in Allegheny merger
    590        
Other
    (22 )     (8 )
 
           
Net cash provided from (used for) investing activities
    141       (476 )
 
           
 
               
Net change in cash and cash equivalents
    82       (564 )
Cash and cash equivalents at beginning of period
    1,019       874  
 
           
Cash and cash equivalents at end of period
  $ 1,101     $ 310  
 
           
 
               
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Non-cash transaction: merger with Allegheny, common stock issued
  $ 4,354     $  
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
STATEMENTS OF INCOME
               
REVENUES:
               
Electric sales to non-affiliates
  $ 1,044,490     $ 668,685  
Electric sales to affiliates
    260,874       607,302  
Other
    85,724       112,106  
 
           
Total revenues
    1,391,088       1,388,093  
 
           
 
               
EXPENSES:
               
Fuel
    343,109       328,221  
Purchased power from affiliates
    68,743       60,953  
Purchased power from non-affiliates
    296,938       450,216  
Other operating expenses
    495,935       304,510  
Provision for depreciation
    68,452       62,918  
General taxes
    29,105       26,746  
Impairment of long-lived assets
    13,800       1,833  
 
           
Total expenses
    1,316,082       1,235,397  
 
           
 
               
OPERATING INCOME
    75,006       152,696  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Investment income
    5,861       717  
Miscellaneous income
    19,241       3,143  
Interest expense — affiliates
    (1,017 )     (2,305 )
Interest expense — other
    (52,960 )     (49,644 )
Capitalized interest
    9,919       19,690  
 
           
Total other expense
    (18,956 )     (28,399 )
 
           
 
               
INCOME BEFORE INCOME TAXES
    56,050       124,297  
 
               
INCOME TAXES
    20,116       44,371  
 
           
 
               
NET INCOME
    35,934       79,926  
 
           
 
               
Loss attributable to noncontrolling interest
    (76 )      
 
           
 
               
EARNINGS AVAILABLE TO PARENT
  $ 36,010     $ 79,926  
 
           
 
               
STATEMENTS OF COMPREHENSIVE INCOME
               
 
               
NET INCOME
  $ 35,934     $ 79,926  
 
           
 
               
OTHER COMPREHENSIVE INCOME (LOSS):
               
Pension and other postretirement benefits
    1,512       (9,834 )
Unrealized gain (loss) on derivative hedges
    (8,879 )     1,274  
Change in unrealized gain on available-for-sale securities
    7,807       5,028  
 
           
Other comprehensive income (loss)
    440       (3,532 )
Income tax benefit related to other comprehensive income
    (2,362 )     (1,340 )
 
           
Other comprehensive income (loss), net of tax
    2,802       (2,192 )
 
           
 
               
COMPREHENSIVE INCOME
    38,736       77,734  
 
               
COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
    (76 )      
 
           
 
               
COMPREHENSIVE INCOME ATTRIBUTABLE TO PARENT
  $ 38,812     $ 77,734  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
(In thousands)   2011     2010  
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 6,839     $ 9,281  
Receivables-
               
Customers, net of allowance for uncollectible accounts of $18,636 in 2011 and $16,591 in 2010
    388,951       365,758  
Associated companies
    533,280       477,565  
Other, net of allowances for uncollectible accounts of $6,702 in 2011 and $6,765 in 2010
    86,711       89,550  
Notes receivable from associated companies
    478,418       396,770  
Materials and supplies, at average cost
    488,997       545,342  
Derivatives
    328,156       181,660  
Prepayments and other
    50,938       60,171  
 
           
 
    2,362,290       2,126,097  
 
           
PROPERTY, PLANT AND EQUIPMENT:
               
In service
    11,239,565       11,321,318  
Less — Accumulated provision for depreciation
    4,107,542       4,024,280  
 
           
 
    7,132,023       7,297,038  
Construction work in progress
    756,305       1,062,744  
Property, plant and equipment held for sale, net
    476,602        
 
           
 
    8,364,930       8,359,782  
 
           
INVESTMENTS:
               
Nuclear plant decommissioning trusts
    1,159,903       1,145,846  
Other
    9,744       11,704  
 
           
 
    1,169,647       1,157,550  
 
           
DEFERRED CHARGES AND OTHER ASSETS:
               
Customer intangibles
    131,870       133,968  
Goodwill
    24,248       24,248  
Property taxes
    41,112       41,112  
Unamortized sale and leaseback costs
    90,803       73,386  
Derivatives
    211,223       97,603  
Other
    53,057       48,689  
 
           
 
    552,313       419,006  
 
           
 
  $ 12,449,180     $ 12,062,435  
 
           
LIABILITIES AND CAPITALIZATION
               
CURRENT LIABILITIES:
               
Currently payable long-term debt
  $ 986,863     $ 1,132,135  
Short-term borrowings-
               
Associated companies
    360,543       11,561  
Other
    661        
Accounts payable-
               
Associated companies
    499,936       466,623  
Other
    189,144       241,191  
Accrued taxes
    66,493       70,129  
Derivatives
    380,744       266,411  
Other
    224,525       251,671  
 
           
 
    2,708,909       2,439,721  
 
           
CAPITALIZATION:
               
Common stockholders’ equity-
               
Common stock, without par value, authorized 750 shares- 7 shares outstanding
    1,487,565       1,490,082  
Accumulated other comprehensive loss
    (117,612 )     (120,414 )
Retained earnings
    2,454,587       2,418,577  
 
           
Total common stockholders’ equity
    3,824,540       3,788,245  
Noncontrolling interest
    16       (504 )
 
           
Total equity
    3,824,556       3,787,741  
Long-term debt and other long-term obligations
    3,144,997       3,180,875  
 
           
 
    6,969,553       6,968,616  
 
           
NONCURRENT LIABILITIES:
               
Deferred gain on sale and leaseback transaction
    950,726       959,154  
Accumulated deferred income taxes
    117,503       57,595  
Accumulated deferred investment tax credits
    53,181       54,224  
Asset retirement obligations
    866,643       892,051  
Retirement benefits
    289,285       285,160  
Property taxes
    41,112       41,112  
Lease market valuation liability
    205,366       216,695  
Derivatives
    168,409       81,393  
Other
    78,493       66,714  
 
           
 
    2,770,718       2,654,098  
 
           
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 9)
               
 
  $ 12,449,180     $ 12,062,435  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 35,934     $ 79,926  
Adjustments to reconcile net income to net cash from operating activities-
               
Provision for depreciation
    68,452       62,918  
Nuclear fuel and lease amortization
    46,653       42,118  
Deferred rents and lease market valuation liability
    (38,759 )     (40,869 )
Deferred income taxes and investment tax credits, net
    61,268       37,773  
Asset impairments
    18,791       11,439  
Commodity derivative transactions, net
    (35,293 )     32,900  
Cash collateral paid
    (27,063 )     (21,411 )
Decrease (increase) in operating assets-
               
Receivables
    (76,069 )     (158,288 )
Materials and supplies
    60,633       (8,700 )
Prepayments and other current assets
    8,728       13,516  
Increase (decrease) in operating liabilities-
               
Accounts payable
    (18,734 )     (41,057 )
Accrued taxes
    (3,164 )     (16,300 )
Accrued interest
    (11,845 )     (14,930 )
Other
    4,093       12,069  
 
           
Net cash provided from (used for) operating activities
    93,625       (8,896 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
New financing-
               
Long-term debt
    150,190        
Short-term borrowings, net
    349,643        
Redemptions and repayments-
               
Long-term debt
    (331,428 )     (1,278 )
Short-term borrowings, net
          (9,237 )
Other
    (1,017 )     (731 )
 
           
Net cash provided from (used for) financing activities
    167,388       (11,246 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property additions
    (159,006 )     (301,603 )
Proceeds from asset sales
          114,272  
Sales of investment securities held in trusts
    215,620       272,094  
Purchases of investment securities held in trusts
    (230,912 )     (284,888 )
Loans from (to) associated companies, net
    (81,647 )     321,680  
Customer acquisition costs
    (1,103 )     (100,615 )
Other
    (6,407 )     (799 )
 
           
Net cash provided from (used for) investing activities
    (263,455 )     20,141  
 
           
 
               
Net change in cash and cash equivalents
    (2,442 )     (1 )
Cash and cash equivalents at beginning of period
    9,281       12  
 
           
Cash and cash equivalents at end of period
  $ 6,839     $ 11  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
STATEMENTS OF INCOME
               
 
               
REVENUES:
               
Electric sales
  $ 363,831     $ 479,925  
Excise and gross receipts tax collections
    28,195       28,475  
 
           
Total revenues
    392,026       508,400  
 
           
 
               
EXPENSES:
               
Purchased power from affiliates
    93,262       153,677  
Purchased power from non-affiliates
    60,379       94,231  
Other operating costs
    101,462       88,855  
Provision for depreciation
    21,876       21,880  
Amortization of regulatory assets, net
    774       29,345  
General taxes
    49,426       47,492  
 
           
Total expenses
    327,179       435,480  
 
           
 
               
OPERATING INCOME
    64,847       72,920  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Investment income
    4,308       5,244  
Miscellaneous income (expense)
    290       (292 )
Interest expense
    (22,145 )     (22,310 )
Capitalized interest
    331       208  
 
           
Total other expense
    (17,216 )     (17,150 )
 
           
 
               
INCOME BEFORE INCOME TAXES
    47,631       55,770  
 
               
INCOME TAXES
    17,491       19,609  
 
           
 
               
NET INCOME
    30,140       36,161  
 
           
 
               
Income attributable to noncontrolling interest
    116       132  
 
           
 
               
EARNINGS AVAILABLE TO PARENT
  $ 30,024     $ 36,029  
 
           
 
               
STATEMENTS OF COMPREHENSIVE INCOME
               
 
               
NET INCOME
  $ 30,140     $ 36,161  
 
           
 
               
OTHER COMPREHENSIVE INCOME (LOSS):
               
Pension and other postretirement benefits
    339       4,015  
Change in unrealized gain on available-for-sale securities
    (22 )     291  
 
           
Other comprehensive income
    317       4,306  
Income tax expense (benefit) related to other comprehensive income
    (1,496 )     693  
 
           
Other comprehensive income, net of tax
    1,813       3,613  
 
           
 
               
COMPREHENSIVE INCOME
    31,953       39,774  
 
               
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
    116       132  
 
           
 
               
COMPREHENSIVE INCOME AVAILABLE TO PARENT
  $ 31,837     $ 39,642  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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Table of Contents

OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
(In thousands)   2011     2010  
 
               
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 345,030     $ 420,489  
Receivables-
               
Customers (net of allowance for uncollectible accounts of $3,774 in 2011 and $4,086 in 2010)
    158,146       176,591  
Associated companies
    74,125       118,135  
Other
    17,290       12,232  
Notes receivable from associated companies
    16,762       16,957  
Prepayments and other
    29,366       6,393  
 
           
 
    640,719       750,797  
 
           
UTILITY PLANT:
               
In service
    3,156,648       3,136,623  
Less — Accumulated provision for depreciation
    1,217,827       1,207,745  
 
           
 
    1,938,821       1,928,878  
Construction work in progress
    48,302       45,103  
 
           
 
    1,987,123       1,973,981  
 
           
OTHER PROPERTY AND INVESTMENTS:
               
Investment in lease obligation bonds
    190,340       190,420  
Nuclear plant decommissioning trusts
    126,826       127,017  
Other
    94,604       95,563  
 
           
 
    411,770       413,000  
 
           
DEFERRED CHARGES AND OTHER ASSETS:
               
Regulatory assets
    385,005       400,322  
Pension assets
    59,104       28,596  
Property taxes
    71,331       71,331  
Unamortized sale and leaseback costs
    28,877       30,126  
Other
    16,007       17,634  
 
           
 
    560,324       548,009  
 
           
 
  $ 3,599,936     $ 3,685,787  
 
           
LIABILITIES AND CAPITALIZATION
               
CURRENT LIABILITIES:
               
Currently payable long-term debt
  $ 1,424     $ 1,419  
Short-term borrowings-
               
Associated companies
    103,071       142,116  
Other
    320       320  
Accounts payable-
               
Associated companies
    96,003       99,421  
Other
    25,515       29,639  
Accrued taxes
    68,415       78,707  
Accrued interest
    25,334       25,382  
Other
    105,315       74,947  
 
           
 
    425,397       451,951  
 
           
CAPITALIZATION:
               
Common stockholders’ equity-
               
Common stock, without par value, authorized 175,000,000 shares- 60 shares outstanding
    951,802       951,866  
Accumulated other comprehensive loss
    (177,263 )     (179,076 )
Retained earnings
    71,645       141,621  
 
           
Total common stockholders’ equity
    846,184       914,411  
Noncontrolling interest
    5,796       5,680  
 
           
Total equity
    851,980       920,091  
Long-term debt and other long-term obligations
    1,152,171       1,152,134  
 
           
 
    2,004,151       2,072,225  
 
           
 
               
NONCURRENT LIABILITIES:
               
Accumulated deferred income taxes
    719,979       696,410  
Accumulated deferred investment tax credits
    9,799       10,159  
Retirement benefits
    182,461       183,712  
Asset retirement obligations
    69,793       74,456  
Other
    188,356       196,874  
 
           
 
    1,170,388       1,161,611  
 
           
COMMITMENTS AND CONTINGENCIES (Note 9)
               
 
  $ 3,599,936     $ 3,685,787  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 30,140     $ 36,161  
Adjustments to reconcile net income to net cash from operating activities-
               
Provision for depreciation
    21,876       21,880  
Amortization of regulatory assets, net
    774       29,345  
Purchased power cost recovery reconciliation
    (4,926 )     (5,908 )
Amortization of lease costs
    32,933       32,934  
Deferred income taxes and investment tax credits, net
    26,682       (2,489 )
Accrued compensation and retirement benefits
    (7,944 )     (12,160 )
Pension trust contribution
    (27,000 )      
Decrease (increase) in operating assets-
               
Receivables
    82,291       65,141  
Prepayments and other current assets
    (22,973 )     (21,802 )
Decrease in operating liabilities-
               
Accounts payable
    (19,625 )     (35,461 )
Accrued taxes
    (10,305 )     (15,849 )
Accrued interest
    (48 )     (226 )
Other
    2,438       9,647  
 
           
Net cash provided from operating activities
    104,313       101,213  
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Redemptions and repayments-
               
Long-term debt
    (110 )     (1,363 )
Short-term borrowings, net
    (39,045 )     (92,863 )
Common stock dividend payments
    (100,000 )     (250,000 )
Other
          (113 )
 
           
Net cash used for financing activities
    (139,155 )     (344,339 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property additions
    (37,651 )     (35,680 )
Sales of investment securities held in trusts
    7,972       2,424  
Purchases of investment securities held in trusts
    (8,896 )     (2,971 )
Loan repayments from associated companies, net
    195       14,469  
Cash investments
    (136 )     (384 )
Other
    (2,101 )     1,773  
 
           
Net cash used for investing activities
    (40,617 )     (20,369 )
 
           
 
               
Net change in cash and cash equivalents
    (75,459 )     (263,495 )
Cash and cash equivalents at beginning of period
    420,489       324,175  
 
           
Cash and cash equivalents at end of period
  $ 345,030     $ 60,680  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
STATEMENTS OF INCOME
               
REVENUES:
               
Electric sales
  $ 206,742     $ 312,497  
Excise tax collections
    18,145       17,573  
 
           
Total revenues
    224,887       330,070  
 
           
 
               
EXPENSES:
               
Purchased power from affiliates
    46,168       109,393  
Purchased power from non-affiliates
    18,220       37,398  
Other operating expenses
    35,036       31,235  
Provision for depreciation
    18,426       18,111  
Amortization of regulatory assets
    23,370       45,139  
General taxes
    40,212       38,489  
 
           
Total expenses
    181,432       279,765  
 
           
 
               
OPERATING INCOME
    43,455       50,305  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Investment income
    6,597       7,547  
Miscellaneous income
    636       581  
Interest expense
    (33,078 )     (33,621 )
Capitalized interest
    27       26  
 
           
Total other expense
    (25,818 )     (25,467 )
 
           
 
               
INCOME BEFORE INCOME TAXES
    17,637       24,838  
 
               
INCOME TAXES
    4,436       10,843  
 
           
 
               
NET INCOME
    13,201       13,995  
 
           
 
               
Income attributable to noncontrolling interest
    366       419  
 
           
 
               
EARNINGS AVAILABLE TO PARENT
  $ 12,835     $ 13,576  
 
           
 
               
STATEMENTS OF COMPREHENSIVE INCOME
               
 
               
NET INCOME
  $ 13,201     $ 13,995  
 
           
 
               
OTHER COMPREHENSIVE INCOME (LOSS):
               
Pension and other postretirement benefits
    2,967       (22,585 )
Income tax benefit related to other comprehensive income
    (462 )     (8,277 )
 
           
Other comprehensive income (loss), net of tax
    3,429       (14,308 )
 
           
 
               
COMPREHENSIVE INCOME (LOSS)
    16,630       (313 )
 
               
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
    366       419  
 
           
 
               
TOTAL COMPREHENSIVE INCOME (LOSS) AVAILABLE TO PARENT
  $ 16,264     $ (732 )
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
(In thousands)   2011     2010  
 
               
ASSETS
               
 
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 30,244     $ 238  
Receivables-
               
Customers (less allowance for doubtful accounts of $3,018 in 2011 and $4,589 in 2010, respectively)
    107,418       183,744  
Associated companies
    34,819       77,047  
Other
    4,848       11,544  
Notes receivable from associated companies
    22,704       23,236  
Prepayments and other
    13,894       3,656  
 
           
 
    213,927       299,465  
 
           
UTILITY PLANT:
               
In service
    2,407,827       2,396,893  
Less — Accumulated provision for depreciation
    937,105       932,246  
 
           
 
    1,470,722       1,464,647  
Construction work in progress
    48,572       38,610  
 
           
 
    1,519,294       1,503,257  
 
           
OTHER PROPERTY AND INVESTMENTS:
               
Investment in lessor notes
    286,747       340,029  
Other
    10,035       10,074  
 
           
 
    296,782       350,103  
 
           
DEFERRED CHARGES AND OTHER ASSETS:
               
Goodwill
    1,688,521       1,688,521  
Regulatory assets
    337,189       370,403  
Property taxes
    80,614       80,614  
Other
    11,176       11,486  
 
           
 
    2,117,500       2,151,024  
 
           
 
  $ 4,147,503     $ 4,303,849  
 
           
LIABILITIES AND CAPITALIZATION
               
 
               
CURRENT LIABILITIES:
               
Currently payable long-term debt
  $ 174     $ 161  
Short-term borrowings-
               
Associated companies
    23,303       105,996  
Accounts payable-
               
Associated companies
    43,564       32,020  
Other
    8,811       14,947  
Accrued taxes
    75,771       84,668  
Accrued interest
    39,256       18,555  
Other
    40,862       44,569  
 
           
 
    231,741       300,916  
 
           
CAPITALIZATION:
               
Common stockholder’s equity-
               
Common stock, without par value, authorized 105,000,000 shares- 67,930,743 shares outstanding
    886,995       887,087  
Accumulated other comprehensive loss
    (149,758 )     (153,187 )
Retained earnings
    531,741       568,906  
 
           
Total common stockholder’s equity
    1,268,978       1,302,806  
Noncontrolling interest
    14,886       18,017  
 
           
Total equity
    1,283,864       1,320,823  
Long-term debt and other long-term obligations
    1,831,011       1,852,530  
 
           
 
    3,114,875       3,173,353  
 
           
 
               
NONCURRENT LIABILITIES:
               
Accumulated deferred income taxes
    631,507       622,771  
Accumulated deferred investment tax credits
    10,784       10,994  
Retirement benefits
    60,682       95,654  
Other
    97,914       100,161  
 
           
 
    800,887       829,580  
 
           
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 9)
               
 
  $ 4,147,503     $ 4,303,849  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 13,201     $ 13,995  
Adjustments to reconcile net income to net cash from operating activities-
               
Provision for depreciation
    18,426       18,111  
Amortization of regulatory assets, net
    23,370       45,139  
Deferred income taxes and investment tax credits, net
    4,140       (13,627 )
Accrued compensation and retirement benefits
    2,158       2,282  
Accrued regulatory obligations
    (863 )     (26 )
Pension trust contribution
    (35,000 )      
Decrease (increase) in operating assets-
               
Receivables
    136,887       70,633  
Prepayments and other current assets
    (10,236 )     (9,133 )
Increase (decrease) in operating liabilities-
               
Accounts payable
    5,408       (14,387 )
Accrued taxes
    (8,898 )     (16,616 )
Accrued interest
    20,701       20,795  
Other
    (3,870 )     (2,636 )
 
           
Net cash provided from operating activities
    165,424       114,530  
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Redemptions and repayments-
               
Long-term debt
    (36 )     (26 )
Short-term borrowings, net
    (104,228 )     (126,334 )
Common stock dividend payments
    (50,000 )     (100,000 )
Other
    (3,497 )     (3,365 )
 
           
Net cash used for financing activities
    (157,761 )     (229,725 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property additions
    (29,334 )     (19,735 )
Loans to associated companies, net
    532       1,426  
Redemptions of lessor notes
    53,282       48,606  
Other
    (2,137 )     (1,085 )
 
           
Net cash provided from investing activities
    22,343       29,212  
 
           
 
               
Net change in cash and cash equivalents
    30,006       (85,983 )
Cash and cash equivalents at beginning of period
    238       86,230  
 
           
Cash and cash equivalents at end of period
  $ 30,244     $ 247  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
STATEMENTS OF INCOME
               
 
               
REVENUES:
               
Electric sales
  $ 106,325     $ 125,431  
Excise tax collections
    7,302       7,041  
 
           
Total revenues
    113,627       132,472  
 
           
 
               
EXPENSES:
               
Purchased power from affiliates
    35,517       54,618  
Purchased power from non-affiliates
    13,988       18,491  
Other operating expenses
    36,587       25,545  
Provision for depreciation
    7,931       7,950  
Deferral of regulatory assets, net
    (11,478 )     (8,499 )
General taxes
    14,452       13,461  
 
           
Total expenses
    96,997       111,566  
 
           
 
               
OPERATING INCOME
    16,630       20,906  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Investment income
    2,922       3,800  
Miscellaneous expense
    (1,629 )     (1,406 )
Interest expense
    (10,443 )     (10,487 )
Capitalized interest
    102       78  
 
           
Total other expense
    (9,048 )     (8,015 )
 
           
 
               
INCOME BEFORE INCOME TAXES
    7,582       12,891  
 
               
INCOME TAXES
    1,735       5,382  
 
           
 
               
NET INCOME
    5,847       7,509  
 
           
 
               
Income attributable to noncontrolling interest
    2       3  
 
           
 
               
EARNINGS AVAILABLE TO PARENT
  $ 5,845     $ 7,506  
 
           
 
               
STATEMENTS OF COMPREHENSIVE INCOME
               
 
               
NET INCOME
  $ 5,847     $ 7,509  
 
           
 
               
OTHER COMPREHENSIVE INCOME:
               
Pension and other postretirement benefits
    592       296  
Change in unrealized gain on available-for-sale securities
    1,305       369  
 
           
Other comprehensive income
    1,897       665  
Income tax expense related to other comprehensive income
    334       170  
 
           
Other comprehensive income, net of tax
    1,563       495  
 
           
 
               
COMPREHENSIVE INCOME
    7,410       8,004  
 
               
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
    2       3  
 
           
 
               
COMPREHENSIVE INCOME AVAILABLE TO PARENT
  $ 7,408     $ 8,001  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
(In thousands)   2011     2010  
 
               
ASSETS
               
 
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 150,014     $ 149,262  
Receivables-
               
Customers (net of allowance for uncollectible accounts of $1,209 in 2011 and $1 in 2010)
    45,749       29  
Associated companies
    56,913       31,777  
Other (net of allowance for uncollectible accounts of $343 in 2011 and $330 in 2010)
    18,752       18,464  
Notes receivable from associated companies
    35,489       96,765  
Prepayments and other
    8,302       2,306  
 
           
 
    315,219       298,603  
 
           
UTILITY PLANT:
               
In service
    952,874       947,203  
Less — Accumulated provision for depreciation
    449,791       446,401  
 
           
 
    503,083       500,802  
Construction work in progress
    12,647       12,604  
 
           
 
    515,730       513,406  
 
           
OTHER PROPERTY AND INVESTMENTS:
               
Investment in lessor notes
    82,133       103,872  
Nuclear plant decommissioning trusts
    77,141       75,558  
Other
    1,469       1,492  
 
           
 
    160,743       180,922  
 
           
DEFERRED CHARGES AND OTHER ASSETS:
               
Goodwill
    500,576       500,576  
Regulatory assets
    83,544       72,059  
Pension assets
    24,427        
Property taxes
    24,990       24,990  
Other
    36,167       23,750  
 
           
 
    669,704       621,375  
 
           
 
  $ 1,661,396     $ 1,614,306  
 
           
LIABILITIES AND CAPITALIZATION
               
 
               
CURRENT LIABILITIES:
               
Currently payable long-term debt
  $ 191     $ 199  
Accounts payable-
               
Associated companies
    36,055       17,168  
Other
    5,238       7,351  
Accrued taxes
    23,043       24,401  
Accrued interest
    15,983       5,931  
Lease market valuation liability
    36,900       36,900  
Other
    54,905       23,145  
 
           
 
    172,315       115,095  
 
           
CAPITALIZATION:
               
Common stockholders’ equity-
               
Common stock, $5 par value, authorized 60,000,000 shares- 29,402,054 shares outstanding
    147,010       147,010  
Other paid-in capital
    178,122       178,182  
Accumulated other comprehensive loss
    (47,620 )     (49,183 )
Retained earnings
    108,379       117,534  
 
           
Total common stockholders’ equity
    385,891       393,543  
Noncontrolling interest
    2,591       2,589  
 
           
Total equity
    388,482       396,132  
Long-term debt and other long-term obligations
    600,508       600,493  
 
           
 
    988,990       996,625  
 
           
 
               
NONCURRENT LIABILITIES:
               
Accumulated deferred income taxes
    157,797       132,019  
Accumulated deferred investment tax credits
    5,822       5,930  
Retirement benefits
    51,253       71,486  
Asset retirement obligations
    29,245       28,762  
Lease market valuation liability
    190,075       199,300  
Other
    65,899       65,089  
 
           
 
    500,091       502,586  
 
           
COMMITMENTS AND CONTINGENCIES (Note 9)
               
 
  $ 1,661,396     $ 1,614,306  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 5,847     $ 7,509  
Adjustments to reconcile net income to net cash from operating activities-
               
Provision for depreciation
    7,931       7,950  
Deferral of regulatory assets, net
    (11,478 )     (8,499 )
Deferred rents and lease market valuation liability
    6,141       6,141  
Deferred income taxes and investment tax credits, net
    25,046       11,287  
Accrued compensation and retirement benefits
    (142 )     837  
Pension trust contribution
    (45,000 )      
Decrease (increase) in operating assets-
               
Receivables
    (70,694 )     45,376  
Prepayments and other current assets
    (5,996 )     (4,569 )
Increase (decrease) in operating liabilities-
               
Accounts payable
    16,774       (35,414 )
Accrued taxes
    (1,358 )     (4,933 )
Accrued interest
    10,052       10,050  
Other
    6,098       (4,578 )
 
           
Net cash provided from (used for) operating activities
    (56,779 )     31,157  
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Redemptions and repayments-
               
Long-term debt
    (56 )     (56 )
Short-term borrowings, net
          (225,975 )
Common stock dividend payments
    (15,000 )     (130,000 )
Other
          (2 )
 
           
Net cash used for financing activities
    (15,056 )     (356,033 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property additions
    (9,507 )     (9,597 )
Loan repayments from (loans to) associated companies, net
    61,276       (33,587 )
Redemptions of lessor notes
    21,739       20,509  
Sales of investment securities held in trusts
    13,883       31,067  
Purchases of investment securities held in trusts
    (14,338 )     (31,705 )
Other
    (466 )     (1,227 )
 
           
Net cash provided from (used for) investing activities
    72,587       (24,540 )
 
           
 
               
Net change in cash and cash equivalents
    752       (349,416 )
Cash and cash equivalents at beginning of period
    149,262       436,712  
 
           
Cash and cash equivalents at end of period
  $ 150,014     $ 87,296  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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JERSEY CENTRAL POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
STATEMENTS OF INCOME
               
REVENUES:
               
Electric sales
  $ 634,023     $ 691,392  
Excise tax collections
    12,487       12,352  
 
           
Total revenues
    646,510       703,744  
 
           
 
               
EXPENSES:
               
Purchased power
    370,168       414,016  
Other operating expenses
    86,079       95,660  
Provision for depreciation
    25,314       27,971  
Amortization of regulatory assets, net
    81,587       69,448  
General taxes
    17,411       16,436  
 
           
Total expenses
    580,559       623,531  
 
           
 
               
OPERATING INCOME
    65,951       80,213  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Miscellaneous income
    1,910       1,833  
Interest expense
    (30,657 )     (29,423 )
Capitalized interest
    427       133  
 
           
Total other expense
    (28,320 )     (27,457 )
 
           
 
               
INCOME BEFORE INCOME TAXES
    37,631       52,756  
 
               
INCOME TAXES
    18,078       23,530  
 
           
 
               
NET INCOME
  $ 19,553     $ 29,226  
 
           
 
               
STATEMENTS OF COMPREHENSIVE INCOME
               
 
               
NET INCOME
  $ 19,553     $ 29,226  
 
           
 
               
OTHER COMPREHENSIVE INCOME:
               
Pension and other postretirement benefits
    4,221       15,928  
Unrealized gain on derivative hedges
    69       69  
 
           
Other comprehensive income
    4,290       15,997  
Income tax expense related to other comprehensive income
    1,590       6,558  
 
           
Other comprehensive income, net of tax
    2,700       9,439  
 
           
 
               
COMPREHENSIVE INCOME
  $ 22,253     $ 38,665  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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JERSEY CENTRAL POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
(In thousands)   2011     2010  
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 1     $ 4  
Receivables-
               
Customers (net of allowance for uncollectible accounts of $3,842 in 2011 and $3,769 in 2010)
    268,171       323,044  
Associated companies
    27,144       53,780  
Other
    21,269       26,119  
Notes receivable — associated companies
    298,274       177,228  
Prepaid taxes
    10,968       10,889  
Other
    16,357       12,654  
 
           
 
    642,184       603,718  
 
           
UTILITY PLANT:
               
In service
    4,579,753       4,562,781  
Less — Accumulated provision for depreciation
    1,667,017       1,656,939  
 
           
 
    2,912,736       2,905,842  
Construction work in progress
    78,819       63,535  
 
           
 
    2,991,555       2,969,377  
 
           
OTHER PROPERTY AND INVESTMENTS:
               
Nuclear fuel disposal trust
    206,833       207,561  
Nuclear plant decommissioning trusts
    190,424       181,851  
Other
    2,111       2,104  
 
           
 
    399,368       391,516  
 
           
DEFERRED CHARGES AND OTHER ASSETS:
               
Goodwill
    1,810,936       1,810,936  
Regulatory assets
    460,156       513,395  
Other
    25,243       27,938  
 
           
 
    2,296,335       2,352,269  
 
           
 
  $ 6,329,442     $ 6,316,880  
 
           
LIABILITIES AND CAPITALIZATION
               
CURRENT LIABILITIES:
               
Currently payable long-term debt
  $ 32,855     $ 32,402  
Accounts payable-
               
Associated companies
    16,983       28,571  
Other
    123,814       158,442  
Accrued compensation and benefits
    33,415       35,232  
Customer deposits
    23,494       23,385  
Accrued taxes
    15,142       2,509  
Accrued interest
    29,926       18,111  
Other
    25,663       22,263  
 
           
 
    301,292       320,915  
 
           
CAPITALIZATION:
               
Common stockholders’ equity-
               
Common stock, $10 par value, authorized 16,000,000 shares- 13,628,447 shares outstanding
    136,284       136,284  
Other paid-in capital
    2,508,754       2,508,874  
Accumulated other comprehensive loss
    (250,842 )     (253,542 )
Retained earnings
    246,723       227,170  
 
           
Total common stockholder’s equity
    2,640,919       2,618,786  
Long-term debt and other long-term obligations
    1,762,365       1,769,849  
 
           
 
    4,403,284       4,388,635  
 
           
NONCURRENT LIABILITIES:
               
Accumulated deferred income taxes
    729,478       715,527  
Power purchase contract liability
    238,677       233,492  
Nuclear fuel disposal costs
    196,843       196,768  
Retirement benefits
    175,175       182,364  
Asset retirement obligations
    110,050       108,297  
Other
    174,643       170,882  
 
           
 
    1,624,866       1,607,330  
 
           
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 9)
               
 
  $ 6,329,442     $ 6,316,880  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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JERSEY CENTRAL POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 19,553     $ 29,226  
Adjustments to reconcile net income to net cash from operating activities-
               
Provision for depreciation
    25,314       27,971  
Amortization of regulatory assets, net
    81,587       69,448  
Deferred purchased power and other costs
    (26,516 )     (32,775 )
Deferred income taxes and investment tax credits, net
    25,560       (2,082 )
Accrued compensation and retirement benefits
    (4,776 )     (5,847 )
Cash collateral returned to suppliers
    (250 )     (23,400 )
Decrease (increase) in operating assets-
               
Receivables
    86,359       33,257  
Prepayments and other current assets
    (1,687 )     16,472  
Increase (decrease) in operating liabilities-
               
Accounts payable
    (61,612 )     (40,992 )
Accrued taxes
    12,631       50,857  
Accrued interest
    11,815       11,816  
Tax collections payable
    7,084       14,544  
Other
    7,448       466  
 
           
Net cash provided from operating activities
    182,510       148,961  
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Redemptions and repayments-
               
Long-term debt
    (7,190 )     (6,773 )
Common stock dividend payments
          (90,000 )
 
           
Net cash used for financing activities
    (7,190 )     (96,773 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property additions
    (47,604 )     (37,338 )
Loans to associated companies, net
    (121,046 )     (7,620 )
Sales of investment securities held in trusts
    217,103       190,198  
Purchases of investment securities held in trusts
    (221,695 )     (194,748 )
Other
    (2,081 )     (2,706 )
 
           
Net cash used for investing activities
    (175,323 )     (52,214 )
 
           
 
               
Net change in cash and cash equivalents
    (3 )     (26 )
Cash and cash equivalents at beginning of period
    4       27  
 
           
Cash and cash equivalents at end of period
  $ 1     $ 1  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
STATEMENTS OF INCOME
               
 
               
REVENUES:
               
Electric sales
  $ 338,416     $ 451,560  
Gross receipts tax collections
    18,800       21,567  
 
           
Total revenues
    357,216       473,127  
 
           
 
               
EXPENSES:
               
Purchased power from affiliates
    49,889       161,080  
Purchased power from non-affiliates
    153,043       91,928  
Other operating expenses
    47,232       101,983  
Provision for depreciation
    12,423       12,758  
Amortization of regulatory assets, net
    32,094       48,800  
General taxes
    22,150       21,740  
 
           
Total expenses
    316,831       438,289  
 
           
 
               
OPERATING INCOME
    40,385       34,838  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Interest income
    93       1,217  
Miscellaneous income
    970       2,173  
Interest expense
    (13,057 )     (13,773 )
Capitalized interest
    147       126  
 
           
Total other expense
    (11,847 )     (10,257 )
 
           
 
               
INCOME BEFORE INCOME TAXES
    28,538       24,581  
 
               
INCOME TAXES
    5,951       12,266  
 
           
 
               
NET INCOME
  $ 22,587     $ 12,315  
 
           
 
               
STATEMENTS OF COMPREHENSIVE INCOME
               
 
               
NET INCOME
  $ 22,587     $ 12,315  
 
           
 
               
OTHER COMPREHENSIVE INCOME:
               
Pension and other postretirement benefits
    1,963       9,709  
Unrealized gain on derivative hedges
    84       84  
 
           
Other comprehensive income
    2,047       9,793  
Income tax expense related to other comprehensive income
    763       4,177  
 
           
Other comprehensive income, net of tax
    1,284       5,616  
 
           
 
               
COMPREHENSIVE INCOME
  $ 23,871     $ 17,931  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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METROPOLITAN EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
(In thousands)   2011     2010  
 
               
ASSETS
               
 
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 117     $ 243,220  
Receivables-
               
Customers (less allowance for doubtful accounts of $3,841 in 2011 and $3,868 in 2010, respectively)
    159,801       178,522  
Associated companies
    23,110       24,920  
Other
    16,836       13,007  
Notes receivable from associated companies
    9,542       11,028  
Prepaid taxes
    40,883       343  
Other
    1,973       2,289  
 
           
 
    252,262       473,329  
 
           
UTILITY PLANT:
               
In service
    2,260,156       2,247,853  
Less — Accumulated provision for depreciation
    852,326       846,003  
 
           
 
    1,407,830       1,401,850  
Construction work in progress
    27,714       23,663  
 
           
 
    1,435,544       1,425,513  
 
           
OTHER PROPERTY AND INVESTMENTS:
               
Nuclear plant decommissioning trusts
    303,906       289,328  
Other
    881       884  
 
           
 
    304,787       290,212  
 
           
DEFERRED CHARGES AND OTHER ASSETS:
               
Goodwill
    416,499       416,499  
Regulatory assets
    285,300       295,856  
Power purchase contract asset
    107,055       111,562  
Other
    51,939       31,699  
 
           
 
    860,793       855,616  
 
           
 
  $ 2,853,386     $ 3,044,670  
 
           
LIABILITIES AND CAPITALIZATION
               
 
               
CURRENT LIABILITIES:
               
Currently payable long-term debt
  $ 42,450     $ 28,760  
Short-term borrowings-
               
Associated companies
    109,709       124,079  
Accounts payable-
               
Associated companies
    35,758       33,942  
Other
    47,450       29,862  
Accrued taxes
    14,514       60,856  
Accrued interest
    11,738       16,114  
Other
    29,543       29,278  
 
           
 
    291,162       322,891  
 
           
CAPITALIZATION:
               
Common stockholders’ equity-
               
Common stock, without par value, authorized 900,000 shares- 740,905 shares outstanding
    1,046,970       1,197,076  
Accumulated other comprehensive loss
    (141,099 )     (142,383 )
Retained earnings
    29,994       32,406  
 
           
Total common stockholder’s equity
    935,865       1,087,099  
Long-term debt and other long-term obligations
    705,125       718,860  
 
           
 
    1,640,990       1,805,959  
 
           
NONCURRENT LIABILITIES:
               
Accumulated deferred income taxes
    481,530       473,009  
Accumulated deferred investment tax credits
    6,761       6,866  
Nuclear fuel disposal costs
    44,465       44,449  
Asset retirement obligations
    195,883       192,659  
Retirement benefits
    22,405       29,121  
Power purchase contract liability
    118,123       116,027  
Other
    52,067       53,689  
 
           
 
    921,234       915,820  
 
           
COMMITMENTS AND CONTINGENCIES (Note 9)
               
 
  $ 2,853,386     $ 3,044,670  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 22,587     $ 12,315  
Adjustments to reconcile net income to net cash from operating activities-
               
Provision for depreciation
    12,423       12,758  
Amortization of regulatory assets, net
    32,094       48,800  
Deferred costs recoverable as regulatory assets
    (12,082 )     (18,276 )
Deferred income taxes and investment tax credits, net
    1,304       (10,308 )
Accrued compensation and retirement benefits
    (1,433 )     (2,527 )
Cash collateral returned from (paid to) suppliers
    1,000       (700 )
Pension trust contributions
    (35,000 )      
Decrease (increase) in operating assets-
               
Receivables
    16,702       (5,083 )
Prepayments and other current assets
    (40,225 )     (52,040 )
Increase (decrease) in operating liabilities-
               
Accounts payable
    15,749       (7,279 )
Accrued taxes
    (46,006 )     19,960  
Accrued interest
    (4,376 )     (5,674 )
Other
    6,337       2,373  
 
           
Net cash used for operating activities
    (30,926 )     (5,681 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
New financing-
               
Short-term borrowings, net
          48,793  
Redemptions and repayments-
               
Long-term debt
          (100,000 )
Short-term borrowings, net
    (14,369 )      
Common stock
    (150,000 )      
Common stock dividend payments
    (25,000 )      
 
           
Net cash used for financing activities
    (189,369 )     (51,207 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property additions
    (21,126 )     (25,526 )
Sales of investment securities held in trusts
    335,860       143,713  
Purchases of investment securities held in trusts
    (337,632 )     (146,056 )
Loans repayments from associated companies, net
    1,486       85,383  
Other
    (1,396 )     (618 )
 
           
Net cash provided from (used for) investing activities
    (22,808 )     56,896  
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    (243,103 )     8  
Cash and cash equivalents at beginning of period
    243,220       120  
 
           
Cash and cash equivalents at end of period
  $ 117     $ 128  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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PENNSYLVANIA ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
STATEMENTS OF INCOME
               
REVENUES:
               
Electric sales
  $ 308,316     $ 385,936  
Gross receipts tax collections
    16,529       17,524  
 
           
Total revenues
    324,845       403,460  
 
           
 
               
EXPENSES:
               
Purchased power from affiliates
    47,484       168,400  
Purchased power from non-affiliates
    141,436       91,423  
Other operating expenses
    41,328       72,394  
Provision for depreciation
    14,573       14,682  
Amortization (deferral) of regulatory assets, net
    13,007       (9,966 )
General taxes
    20,736       16,534  
 
           
Total expenses
    278,564       353,467  
 
           
 
               
OPERATING INCOME
    46,281       49,993  
 
           
 
               
OTHER INCOME (EXPENSE):
               
Miscellaneous income
    25       1,613  
Interest expense
    (17,234 )     (17,290 )
Capitalized interest
    22       140  
 
           
Total other expense
    (17,187 )     (15,537 )
 
           
 
               
INCOME BEFORE INCOME TAXES
    29,094       34,456  
 
               
INCOME TAXES
    11,788       17,157  
 
           
 
               
NET INCOME
  $ 17,306     $ 17,299  
 
           
 
               
STATEMENTS OF COMPREHENSIVE INCOME
               
 
               
NET INCOME
  $ 17,306     $ 17,299  
 
           
 
               
OTHER COMPREHENSIVE INCOME:
               
Pension and other postretirement benefits
    1,585       8,547  
Unrealized gain on derivative hedges
    16       16  
 
           
Other comprehensive income
    1,601       8,563  
Income tax expense related to other comprehensive income
    555       3,284  
 
           
Other comprehensive income, net of tax
    1,046       5,279  
 
           
 
               
COMPREHENSIVE INCOME
  $ 18,352     $ 22,578  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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PENNSYLVANIA ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
(In thousands)   2011     2010  
 
               
ASSETS
               
 
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 3     $ 5  
Receivables-
               
Customers (net of allowance for uncollectible accounts of $3,395 in 2011 and $3,369 in 2010)
    139,058       148,864  
Associated companies
    16,921       54,052  
Other
    12,142       11,314  
Notes receivable from associated companies
    12,334       14,404  
Prepaid taxes
    47,126       14,026  
Other
    1,843       1,592  
 
           
 
    229,427       244,257  
 
           
UTILITY PLANT:
               
In service
    2,545,211       2,532,629  
Less — Accumulated provision for depreciation
    939,247       935,259  
 
           
 
    1,605,964       1,597,370  
Construction work in progress
    40,799       30,505  
 
           
 
    1,646,763       1,627,875  
 
           
OTHER PROPERTY AND INVESTMENTS:
               
Nuclear plant decommissioning trusts
    159,999       152,928  
Non-utility generation trusts
    80,275       80,244  
Other
    294       297  
 
           
 
    240,568       233,469  
 
           
DEFERRED CHARGES AND OTHER ASSETS:
               
Goodwill
    768,628       768,628  
Regulatory assets
    179,092       163,407  
Power purchase contract asset
    4,169       5,746  
Other
    15,140       19,287  
 
           
 
    967,029       957,068  
 
           
 
  $ 3,083,787     $ 3,062,669  
 
           
LIABILITIES AND CAPITALIZATION
               
 
               
CURRENT LIABILITIES:
               
Currently payable long-term debt
  $ 45,000     $ 45,000  
Short-term borrowings-
               
Associated companies
    90,363       101,338  
Accounts payable-
               
Associated companies
    41,231       35,626  
Other
    33,125       41,420  
Accrued taxes
    4,262       5,075  
Accrued interest
    24,069       17,378  
Other
    23,467       22,541  
 
           
 
    261,517       268,378  
 
           
CAPITALIZATION:
               
Common stockholders’ equity-
               
Common stock, $20 par value, authorized 5,400,000 shares- 4,427,577 shares outstanding
    88,552       88,552  
Other paid-in capital
    913,439       913,519  
Accumulated other comprehensive loss
    (162,480 )     (163,526 )
Retained earnings
    58,299       60,993  
 
           
Total common stockholder’s equity
    897,810       899,538  
Long-term debt and other long-term obligations
    1,072,339       1,072,262  
 
           
 
    1,970,149       1,971,800  
 
           
NONCURRENT LIABILITIES:
               
Accumulated deferred income taxes
    393,088       371,877  
Retirement benefits
    187,888       187,621  
Power purchase contract liability
    121,558       116,972  
Asset retirement obligations
    99,773       98,132  
Other
    49,814       47,889  
 
           
 
    852,121       822,491  
 
           
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 9)
               
 
  $ 3,083,787     $ 3,062,669  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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PENNSYLVANIA ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Three Months Ended  
    March 31  
(In thousands)   2011     2010  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
  $ 17,306     $ 17,299  
Adjustments to reconcile net income to net cash from operating activities-
               
Provision for depreciation
    14,573       14,682  
Amortization (deferral) of regulatory assets, net
    13,007       (9,966 )
Deferred costs recoverable as regulatory assets
    (17,771 )     (20,461 )
Deferred income taxes and investment tax credits, net
    16,648       21,772  
Accrued compensation and retirement benefits
    1,551       (169 )
Cash collateral paid, net
    (2,124 )     (400 )
Decrease (increase) in operating assets-
               
Receivables
    46,100       (4,641 )
Prepayments and other current assets
    (33,350 )     (50,186 )
Increase (decrease) in operating liabilities-
               
Accounts payable
    (8,534 )     (1,348 )
Accrued taxes
    (813 )     (2,142 )
Accrued interest
    6,691       6,882  
Other
    10,204       7,162  
 
           
Net cash provided from (used for) operating activities
    63,488       (21,516 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
New financing-
               
Short-term borrowings, net
          51,334  
Redemptions and repayments-
               
Short-term borrowings, net
    (10,975 )      
Common stock dividend payments
    (20,000 )      
Other
    26       (6 )
 
           
Net cash provided from (used for) financing activities
    (30,949 )     51,328  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property additions
    (31,128 )     (27,388 )
Loan repayments from associated companies, net
    2,070       279  
Sales of investment securities held in trusts
    178,927       93,057  
Purchases of investment securities held in trusts
    (180,411 )     (94,464 )
Other
    (1,999 )     (1,298 )
 
           
Net cash used for investing activities
    (32,541 )     (29,814 )
 
           
 
               
Net change in cash and cash equivalents
    (2 )     (2 )
Cash and cash equivalents at beginning of period
    5       14  
 
           
Cash and cash equivalents at end of period
  $ 3     $ 12  
 
           
The accompanying Combined Notes to the Consolidated Financial Statements are an integral part of these financial statements.

 

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COMBINED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
FirstEnergy is a diversified energy company that holds, directly or indirectly, all of the outstanding common stock of its principal subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), ATSI, JCP&L, Met-Ed, Penelec, FENOC, AE and its principal subsidiaries (AE Supply, AGC, MP, PE, WP and TrAIL Company), FES and its subsidiaries FGCO and NGC, and FESC. AE merged with a subsidiary of FirstEnergy on February 25, 2011, with AE remaining as the surviving corporation and becoming a wholly-owned subsidiary of FirstEnergy (See Note 2, Merger).
FirstEnergy and its subsidiaries follow GAAP and comply with the regulations, orders, policies and practices prescribed by the SEC, the FERC, the NERC and, as applicable, the PUCO, the PPUC, the MDPSC, the NYPSC, the WVPSC and the NJBPU. The preparation of financial statements in conformity with GAAP requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The reported results of operations are not indicative of results of operations for any future period. In preparing the financial statements, FirstEnergy and its subsidiaries have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
These 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, 2010 for FirstEnergy, FES and the Utility Registrants, as applicable, and the Current Report on Form 8-K filed by FirstEnergy on February 25, 2011, as amended on April 19, 2011. The consolidated unaudited financial statements of FirstEnergy, FES and each of the Utility Registrants reflect all normal recurring adjustments that, in the opinion of management, are necessary to fairly present results of operations for the interim periods. Certain prior year amounts have been reclassified to conform to the current year presentation. Unless otherwise indicated, defined terms used herein have the meanings set forth in the accompanying Glossary of Terms.
FirstEnergy 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. FirstEnergy consolidates a VIE when it is determined that it is the primary beneficiary (see Note 7, Variable Interest Entities). Investments in affiliates over which FirstEnergy and its subsidiaries have the ability to exercise significant influence, but with respect to which 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.
2. MERGER
Merger
On February 25, 2011, the merger between FirstEnergy and Allegheny closed. Pursuant to the terms of the Agreement and Plan of Merger among FirstEnergy, Element Merger Sub, Inc., a Maryland corporation and a wholly-owned subsidiary of FirstEnergy (Merger Sub), and AE, Merger Sub merged with and into AE, with AE continuing as the surviving corporation and becoming a wholly-owned subsidiary of FirstEnergy. As part of the merger, AE shareholders received 0.667 of a share of FirstEnergy common stock for each share of AE common stock outstanding as of the date the merger was completed, and all outstanding AE equity-based employee compensation awards were converted into FirstEnergy equity-based awards on the same basis.
The merger created a combined company with increased scale and scope and greater diversification in energy delivery, generation and transmission. The combined company is the largest U.S. diversified electric utility by customers and operates one of the largest unregulated power generation fleets in the United States with FirstEnergy’s total current capacity of approximately 23,000 MW, which includes approximately 3,000 MW of regulated generation.

 

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The total consideration in the merger was based on the closing price of a share of FirstEnergy common stock on February 24, 2011, the day prior to the date the merger was completed, and was calculated as follows (in millions, except per share data):
         
Shares of Allegheny common stock outstanding on February 24, 2011
    170  
Exchange ratio
    0.667  
 
     
Number of shares of FirstEnergy common stock issued
    113  
Closing price of FirstEnergy common stock on February 24, 2011
  $ 38.16  
 
     
Fair value of shares issued by FirstEnergy
  $ 4,327  
Fair value of replacement share-based compensation awards relating to pre-merger service
    27  
 
     
Total consideration transferred
  $ 4,354  
 
     
The preliminary allocation of the total consideration transferred to the assets acquired and liabilities assumed includes adjustments for the fair value of coal contracts, energy supply contracts, emission allowances, unregulated property, plant and equipment, derivative instruments, goodwill, intangible assets, long-term debt and deferred income taxes. The preliminary allocation of the purchase price is as follows:
         
    Preliminary  
    Purchase Price  
(In millions)   Allocation  
 
       
Current assets
  $ 1,509  
Property, plant and equipment
    9,656  
Investments
    138  
Goodwill
    952  
Other noncurrent assets
    1,262  
Current liabilities
    (714 )
Noncurrent liabilities
    (3,453 )
Long-term debt and other long-term obligations
    (4,996 )
 
     
 
  $ 4,354  
 
     
Assumptions and estimates underlying the fair value adjustments are subject to change pending further review of the assets acquired and liabilities assumed.
The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill. The Allegheny delivery, transmission and generation businesses have been assigned to the Regulated Distribution, Regulated Independent Transmission and Competitive Energy Services segments, respectively. The preliminary estimate of goodwill from the merger of $952 million was assigned entirely to the Competitive Energy Services segment based on expected synergies from the merger. The goodwill is not deductible for tax purposes.
Total goodwill recognized by segment in FirstEnergy’s Consolidated Balance Sheet is as follows:
                                         
            Competitive     Regulated              
    Regulated     Energy     Independent     Other/        
(In millions)   Distribution     Services     Transmission     Corporate     Consolidated  
 
                                       
Balance at December 31, 2010
  $ 5,551     $ 24     $     $     $ 5,575  
 
                                       
Merger with Allegheny
          952                   952  
 
                             
 
                                       
Balance at March 31, 2011
  $ 5,551     $ 976     $     $     $ 6,527  
 
                             
 
                                     

 

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The preliminary valuation of the additional intangible assets and liabilities recorded as result of the merger is as follows:
                 
    Preliminary     Weighted Average  
(In millions)   Valuation     Amortization Period  
Above market contracts:
               
Energy supply contracts
  $ 189     10 years
NUG contracts
    124     25 years
Coal supply contracts
    525     8 years
 
             
 
    838          
 
               
Below market contracts:
               
NUG contracts
    143     13 years
Coal supply contracts
    86     7 years
Transportation contract
    35     8 years
 
             
 
    264          
 
             
 
               
 
  $ 574          
 
             
The fair value measurements of intangible assets and liabilities were primarily based on significant unobservable inputs and thus represent level 3 measurements as defined in accounting guidance for fair value measurements.
The fair value of Allegheny’s energy, NUG and gas transportation contracts, both above-market and below-market, were estimated based on the present value of the above/below market cash flows attributable to the contracts based on the contract type, discounted by a current market interest rate consistent with the overall credit quality of the portfolio. The above/below market cash flows were estimated by comparing the expected cash flow based on existing contracted prices and expected volumes with the cash flows from estimated current market contract prices for the same expected volumes. The estimated current market contract prices were derived considering current market prices, such as the price of energy and transmission, miscellaneous fees and a normal profit margin. The weighted average amortization period was determined based on the expected volumes to be delivered over the life of the contract.
The fair value of coal supply contracts was determined in a similar manner based on the present value of the above/below market cash flows attributable to the contracts. The fair value of these contracts will be amortized based on expected deliveries under each contract.
Total intangible assets recorded on FirstEnergy’s Consolidated Balance Sheet as of March 31, 2011 are as follows:
         
    Intangible  
(In millions)   Assets  
Purchase contract assets
       
NUG
  $ 241  
OVEC
    52  
 
     
 
    293  
 
       
Intangible assets
       
Coal contracts
    520  
FES customer intangible assets
    132  
Energy contracts
    130  
 
     
 
    782  
 
     
 
       
 
  $ 1,075  
 
     
Other intangible assets acquired in the Allegheny merger include land easements and software, having a fair value of $126 million, are included in “Property, plant and equipment” on FirstEnergy’s Consolidated Balance Sheet as of March 31, 2011.
In connection with the merger, FirstEnergy recorded approximately $82 million ($68 million net of tax) and $14 million ($10 million net of tax) of merger transaction costs during the first quarter of 2011 and 2010, respectively. These costs are included in “Other operating expenses” in the Consolidated Statement of Income. Merger transaction costs recognized in the first quarter of 2011 include $56 million ($47 net of tax) of change in control and other benefit payments to AE executives.

 

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FirstEnergy also recorded approximately $75 million in merger integration costs during the first quarter of 2011, including an inventory valuation adjustment. In connection with the merger, FirstEnergy reviewed its inventory levels as a result of combining the inventory of both companies. Following this review FirstEnergy management determined the combined inventory stock contained excess and duplicative items. FirstEnergy management also adopted a consistent excess and obsolete inventory practice for the combined entity. Application of the revised practice, in conjunction with those items identified as excess and duplicative, resulted in an inventory valuation adjustment of $67 million ($42 million net of tax).
The amounts of revenue and earnings of Allegheny since the merger date included in FirstEnergy’s Consolidated Statement of Income for the quarter ended March 31, 2011 are as follows:
         
    February 26 -  
(In millions, except per share amounts)   March 31, 2011  
 
       
Total revenues
  $ 437  
Net Income(1)
    (46 )
 
       
Basic Earnings Per Share
  $ (0.13 )
Diluted Earnings Per Share
  $ (0.13 )
     
(1)  
Includes Allegheny’s after-tax merger costs of $52 million.
Pro Forma Financial Information
The following unaudited pro forma financial information reflects the consolidated results of operations of FirstEnergy as if the merger with Allegheny had taken place on January 1, 2010. The unaudited pro forma information has been calculated after applying FirstEnergy’s accounting policies and adjusting Allegheny’s results to reflect the depreciation and amortization that would have been charged assuming fair value adjustments to property, plant and equipment, debt and intangible assets had been applied on January 1, 2010, together with the consequential tax effects.
FirstEnergy and Allegheny both incurred non-recurring costs directly related to the merger that have been included in the pro forma earnings presented below. Approximately $83 million and $27 million of combined pre-tax transaction costs were incurred in the three months ended March 31, 2011 and March 31, 2010, respectively. In addition, in the three months ended March 31, 2011, $75 million of pre-tax merger integration costs and $24 million of charges from merger settlements approved by regulatory agencies have been recognized. Charges resulting from merger settlements are not expected to be material in future periods.
The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or the future consolidated results of operations of the combined company.
                 
    Three Months Ended  
    March 31  
(Pro forma amounts in millions, except per share amounts)   2011     2010  
 
               
Revenues
  $ 4,786     $ 4,685  
Net income attributable to FirstEnergy
  $ 137     $ 255  
 
               
Basic Earnings Per Share
  $ 0.33     $ 0.61  
 
           
Diluted Earnings Per Share
  $ 0.33     $ 0.61  
 
           

 

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3. EARNINGS PER SHARE
Basic earnings per share of common stock are computed using the weighted average of actual 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 would be issued 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:
                 
    Three Months Ended  
Reconciliation of Basic and Diluted   March 31  
Earnings per Share of Common Stock   2011     2010  
    (In millions, except per  
    share amounts)  
 
               
Earnings available to FirstEnergy Corp.
  $ 50     $ 155  
 
           
 
               
Weighted average number of basic shares outstanding(1)
    342       304  
Assumed exercise of dilutive stock options and awards
    1       2  
 
           
Weighted average number of diluted shares outstanding(1)
    343       306  
 
           
 
               
Basic earnings per share of common stock
  $ 0.15     $ 0.51  
 
           
Diluted earnings per share of common stock
  $ 0.15     $ 0.51  
 
           
     
(1)  
Includes 113 million shares issued to AE stockholders for the period subsequent to the merger date. (See Note 2, Merger)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
(A) LONG-TERM DEBT AND OTHER LONG-TERM OBLIGATIONS
All borrowings with initial maturities of less than one year are defined as short-term financial instruments under GAAP and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value, in the caption “short-term borrowings.” The following table provides the approximate fair value and related carrying amounts of long-term debt and other long-term obligations as of March 31, 2011 and December 31 2010:
                                 
    March 31, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
    (In millions)  
FirstEnergy(1)
  $ 18,743     $ 19,776     $ 13,928     $ 14,845  
FES
    4,099       4,227       4,279       4,403  
OE
    1,159       1,334       1,159       1,321  
CEI
    1,831       2,035       1,853       2,035  
TE
    600       666       600       653  
JCP&L
    1,802       1,980       1,810       1,962  
Met-Ed
    742       826       742       821  
Penelec
    1,120       1,190       1,120       1,189  
     
(1)  
Includes debt assumed in the Allegheny merger (See Note 2) with a carrying value and a fair value as of March 31, 2011 of $4,995 million and $5,004 million, respectively.
The fair values of long-term debt and other long-term obligations reflect the present value of the cash outflows relating to those obligations based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective period. The yields assumed were based on debt with similar characteristics offered by corporations with credit ratings similar to those of FirstEnergy, FES, the Utilities and other subsidiaries.
(B) INVESTMENTS
All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Investments other than cash and cash equivalents include held-to-maturity securities, available-for-sale securities and notes receivable.

 

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FES and the Utilities periodically evaluate their investments for other-than-temporary impairment. They first consider their intent and ability to hold an equity investment until recovery and then consider, among other factors, the duration and the extent to which the security’s fair value has been less than cost and the near-term financial prospects of the security issuer when evaluating an investment for impairment. For debt securities, FES and the Utilities consider their intent to hold the security, the likelihood that they will be required to sell the security before recovery of their cost basis, and the likelihood of recovery of the security’s entire amortized cost basis.
Available-For-Sale Securities
FES and the Utilities hold debt and equity securities within their nuclear decommissioning trusts, nuclear fuel disposal trusts and NUG trusts. These trust investments are considered as available-for-sale at fair market value. FES and the Utilities have no securities held for trading purposes.
The following table summarizes the amortized cost basis, unrealized gains and losses and fair values of investments held in nuclear decommissioning trusts, nuclear fuel disposal trusts and NUG trusts as of March 31, 2011 and December 31, 2010:
                                                                 
    March 31, 2011(1)     December 31, 2010(2)  
    Cost     Unrealized     Unrealized     Fair     Cost     Unrealized     Unrealized     Fair  
    Basis     Gains     Losses     Value     Basis     Gains     Losses     Value  
 
  (In millions)  
Debt securities
                                                               
FirstEnergy
  $ 1,985     $ 32     $     $ 2,017     $ 1,699     $ 31     $     $ 1,730  
FES
    1,012       18             1,030       980       13             993  
OE
    124       1             125       123       1             124  
TE
    51                   51       42                   42  
JCP&L
    358       7             365       281       9             290  
Met-Ed
    240       4             244       127       4             131  
Penelec
    200       2             202       145       4             149  
 
                                                               
Equity securities
                                                               
FirstEnergy
  $ 186     $ 7     $     $ 193     $ 268     $ 69     $     $ 337  
FES
    88       5             93                          
TE
    24       1             25                          
JCP&L
    21                   21       80       17             97  
Met-Ed
    33       1             34       125       35             160  
Penelec
    20                   20       63       16             79  
     
(1)  
Excludes cash investments, receivables, payables, deferred taxes and accrued income: FirstEnergy — $97 million; FES — $37 million; OE — $2 million; TE — $1 million; JCP&L — $12 million; Met-Ed — $27 million and Penelec — $18 million.
 
(2)  
Excludes cash investments, receivables, payables, deferred taxes and accrued income: FirstEnergy — $193 million; FES — $153 million; OE — $3 million; TE — $34 million; JCP&L — $3 million; Met-Ed — $(3) million and Penelec — $4 million.

 

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Proceeds from the sale of investments in available-for-sale securities, realized gains and losses on those sales net of adjustments recorded, and interest and dividend income for the three months ended March 31, 2011 and 2010 were as follows:
                                 
                            Interest and  
March 31, 2011   Sales Proceeds     Realized Gains     Realized Losses     Dividend Income  
    (In millions)  
FirstEnergy
  $ 970     $ 100     $ (29 )   $ 24  
FES
    216       12       (15 )     15  
OE
    8                   1  
TE
    14       1       (1 )     1  
JCP&L
    217       22       (4 )     4  
Met-Ed
    336       43       (5 )     2  
Penelec
    179       22       (4 )     1  
                                 
                            Interest and  
March 31, 2010   Sales Proceeds     Realized Gains     Realized Losses     Dividend Income  
    (In millions)  
FirstEnergy
  $ 733     $ 37     $ (51 )   $ 22  
FES
    272       13       (24 )     13  
OE
    2                   1  
TE
    31       1       (1 )     1  
JCP&L
    190       8       (8 )     4  
Met-Ed
    144       9       (11 )     2  
Penelec
    93       6       (7 )     1  
Unrealized gains applicable to the decommissioning trusts of FES, OE and TE are recognized in OCI because fluctuations in fair value will eventually impact earnings. The decommissioning trusts of JCP&L, Met-Ed and Penelec are subject to regulatory accounting. Net unrealized gains and losses are recorded as regulatory assets or liabilities because the difference between investments held in trust and the decommissioning liabilities will be recovered from or refunded to customers.
The investment policy for the nuclear decommissioning trust funds restricts or limits the plans’ ability to hold certain types of assets including private or direct placements, warrants, securities of FirstEnergy, investments in companies owning nuclear power plants, financial derivatives, preferred stocks, securities convertible into common stock and securities of the trust fund’s custodian or managers and their parents or subsidiaries.
FirstEnergy recognized $3 million and $11 million of net realized losses for the three-month period ended March 31, 2011 and 2010, respectively, resulting from the sale of securities held in nuclear decommissioning trusts.
Held-To-Maturity Securities
The following table provides the amortized cost basis, unrealized gains and losses, and approximate fair values of investments in held-to-maturity securities as of March 31, 2011 and December 31, 2010:
                                                                 
    March 31, 2011     December 31, 2010  
    Cost     Unrealized     Unrealized     Fair     Cost     Unrealized     Unrealized     Fair  
    Basis     Gains     Losses     Value     Basis     Gains     Losses     Value  
    (In millions)  
Debt Securities
                                                               
FirstEnergy
  $ 422     $ 79     $     $ 501     $ 476     $ 91     $     $ 567  
OE
    190       45             235       190       51             241  
CEI
    287       33             320       340       41             381  
Investments in emission allowances, employee benefits and cost and equity method investments totaling $345 million as of March 31, 2011 and $259 million as of December 31, 2010 are not required to be disclosed and are excluded from the amounts reported above.

 

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Notes Receivable
The table below provides the approximate fair value and related carrying amounts of notes receivable as of March 31, 2011 and December 31, 2010. The fair value of notes receivable represents the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. The maturity dates range from 2013 to 2021.
                                 
    March 31, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
    (In millions)  
Notes Receivable
                               
FirstEnergy
  $ 7     $ 8     $ 7     $ 8  
TE
    82       94       104       118  
(C) RECURRING FAIR VALUE MEASUREMENTS
Fair value is the price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants on the measurement date. A fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:
Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Pricing inputs are either directly or indirectly observable in the market as of the reporting date, other than quoted prices in active markets included in Level 1. Additionally, Level 2 includes those financial instruments that are valued using models or other valuation methodologies based on assumptions that are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Instruments in this category may include non-exchange-traded derivatives such as forwards and certain interest rate swaps.
Level 3 — Pricing inputs include inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. FirstEnergy develops its view of the future market price of key commodities through a combination of market observation and assessment (generally for the short term) and fundamental modeling (generally for the long term). Key fundamental electricity model inputs are generally directly observable in the market or derived from publicly available historic and forecast data. Some key inputs reflect forecasts published by industry leading consultants who generally employ similar fundamental modeling approaches. Fundamental model inputs and results, as well as the selection of consultants, reflect the consensus of appropriate FirstEnergy management. Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs.
FirstEnergy utilizes market data and assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. FirstEnergy primarily applies the market approach for recurring fair value measurements using the best information available. Accordingly, FirstEnergy maximizes the use of observable inputs and minimizes the use of unobservable inputs.
The determination of the fair value measures takes into consideration various factors. These factors include nonperformance risk, including counterparty credit risk and the impact of credit enhancements (such as cash deposits, LOCs and priority interests). The impact of nonperformance risk was immaterial in the fair value measurements.
The following tables set forth financial assets and liabilities that are accounted for at fair value by level within the fair value hierarchy as of March 31, 2011 and December 31, 2010. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. FirstEnergy’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the fair valuation of assets and liabilities and their placement within the fair value hierarchy levels. The fair value of financial assets and liabilities as of March 31, 2011 assumed in the merger with Allegheny totaled $52 million and $51 million, respectively. There were no significant transfers between Level 1, Level 2 and Level 3 as of March 31, 2011 and December 31, 2010.

 

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FirstEnergy Corp.
The following tables summarize assets and liabilities recorded on FirstEnergy’s Consolidated Balance Sheets at fair value as of March 31, 2011 and December 31, 2010:
                                 
March 31, 2011   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 877     $     $ 877  
Derivative assets — commodity contracts
          524             524  
Derivative assets — FTRs
                1       1  
Derivative assets — interest rate swaps
          4             4  
Derivative assets — NUG contracts(1)
                117       117  
Equity securities(2)
    194                   194  
Foreign government debt securities
          150             150  
U.S. government debt securities
          681             681  
U.S. state debt securities
          297             297  
 
                       
Other(4)
          148             148  
 
                       
Total assets
  $ 194     $ 2,681     $ 118     $ 2,993  
 
                       
 
                               
Liabilities
                               
Derivative liabilities — commodity contracts
  $     $ (583 )   $     $ (583 )
Derivative liabilities — FTRs
                (12 )     (12 )
Derivative liabilities — interest rate swaps
          (5 )           (5 )
 
                       
Derivative liabilities — NUG contracts(1)
                (478 )     (478 )
 
                       
Total liabilities
  $     $ (588 )   $ (490 )   $ (1,078 )
 
                       
 
                               
Net assets (liabilities)(3)
  $ 194     $ 2,093     $ (372 )   $ 1,915  
 
                       
                                 
December 31, 2010   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 597     $     $ 597  
Derivative assets — commodity contracts
          250             250  
Derivative assets — NUG contracts(1)
                122       122  
Equity securities(2)
    338                   338  
Foreign government debt securities
          149             149  
U.S. government debt securities
          595             595  
U.S. state debt securities
          379             379  
Other(4)
          219             219  
 
                       
Total assets
  $ 338     $ 2,189     $ 122     $ 2,649  
 
                       
 
                               
Liabilities
                               
Derivative liabilities — commodity contracts
  $     $ (348 )   $     $ (348 )
Derivative liabilities — NUG contracts(1)
                (466 )     (466 )
 
                       
Total liabilities
  $     $ (348 )   $ (466 )   $ (814 )
 
                       
 
                               
Net assets (liabilities)(3)
  $ 338     $ 1,841     $ (344 )   $ 1,835  
 
                       
(1)  
NUG contracts are subject to regulatory accounting and do not impact earnings.
 
(2)  
NDT funds hold equity portfolios the performance of which is benchmarked against the S&P 500 Index or Russell 3000 Index.
 
(3)  
Excludes $(31) million and $(7) million as of March 31, 2011 and December 31, 2010, respectively, of receivables, payables, deferred taxes and accrued income associated with the financial instruments reflected within the fair value table.
 
(4)  
Primarily consists of cash and cash equivalents.

 

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Rollforward of Level 3 Measurements
The following table provides a reconciliation of changes in the fair value of NUG contracts held by the Utilities and FTRs held by FirstEnergy and classified as Level 3 in the fair value hierarchy for the periods ending March 31, 2011 and December 31, 2010, respectively:
                         
    Derivative Asset(1)     Derivative Liability(1)                  Net(1)                
    (In millions)  
January 1, 2011 Balance
  $ 122     $ (466 )   $ (344 )
Realized gain (loss)
                 
Unrealized gain (loss)
    (1 )     (89 )     (90 )
Purchases
                 
Issuances
                 
Sales
                 
Settlements
    (3 )     77       74  
Transfers in (out) of Level 3
          (12 )     (12 )
 
                 
March 31, 2011 Balance
  $ 118     $ (490 )   $ (372 )
 
                 
 
                       
January 1, 2010 Balance
  $ 200     $ (643 )   $ (443 )
Realized gain (loss)
                 
Unrealized gain (loss)
    (71 )     (110 )     (181 )
Purchases
                 
Issuances
                 
Sales
                 
Settlements
    (7 )     287       280  
Transfers in (out) of Level 3
                 
 
                 
December 31, 2010 Balance
  $ 122     $ (466 )   $ (344 )
 
                 
(1)  
Changes in the fair value of NUG contracts are subject to regulatory accounting and do not impact earnings.
FirstEnergy Solutions Corp.
The following tables summarize assets and liabilities recorded on FES’ Consolidated Balance Sheets at fair value as of March 31, 2011 and December 31, 2010:
                                 
March 31, 2011   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 567     $     $ 567  
Derivative assets — commodity contracts
          476             476  
Derivative assets — FTRs
                1       1  
Equity securities(3)
    93                   93  
Foreign government debt securities
          148             148  
U.S. government debt securities
          304             304  
 
                       
U.S. state debt securities
          8             8  
Other(2)
          43             43  
 
                       
Total assets
  $ 93     $ 1,546     $ 1     $ 1,640  
 
                       
 
                               
Liabilities
                               
Derivative liabilities — commodity contracts
  $     $ (549 )   $     $ (549 )
 
                       
Total liabilities
  $     $ (549 )   $     $ (549 )
 
                       
 
                               
Net assets (liabilities)(1)
  $ 93     $ 997     $ 1     $ 1,091  
 
                       

 

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December 31, 2010   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 528     $     $ 528  
Derivative assets — commodity contracts
          241             241  
Foreign government debt securities
          147             147  
U.S. government debt securities
          308             308  
U.S. state debt securities
          6             6  
Other(2)
          148             148  
 
                       
Total assets
  $     $ 1,378     $     $ 1,378  
 
                       
 
                               
Liabilities
                               
Derivative liabilities – commodity contracts
  $     $ (348 )   $     $ (348 )
 
                       
Total liabilities
  $     $ (348 )   $     $ (348 )
 
                       
 
                               
Net assets (liabilities)(1)
  $     $ 1,030     $     $ 1,030  
 
                       
(1)  
Excludes $(3) million and $7 million as of March 31, 2011 and December 31, 2010, respectively, of receivables, payables, deferred taxes and accrued income associated with the financial instruments reflected within the fair value table.
 
(2)  
Primarily consists of cash and cash equivalents.
 
(3)  
NDT funds hold equity portfolios the performance of which is benchmarked against the S&P 500 Index or Russell 3000 Index.
Rollforward of Level 3 Measurements
The following table provides a reconciliation of changes in the fair value of FTRs held by FES and classified as Level 3 in the fair value hierarchy for the period ending March 31, 2011:
                         
    Derivative Asset     Derivative Liability     Net  
    FTRs     FTRs                FTRs             
    (In millions)  
January 1, 2011 Balance
  $     $     $  
Realized gain (loss)
                 
Unrealized gain (loss)
    1             1  
Purchases
                 
Issuances
                 
Sales
                 
Settlements
                 
Transfers in (out) of Level 3
                 
 
                 
March 31, 2011 Balance
  $ 1     $     $ 1  
 
                 
Ohio Edison Company
The following tables summarize assets and liabilities recorded on OE’s Consolidated Balance Sheets at fair value as of March 31, 2011 and December 31, 2010:
                                 
March 31, 2011   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
U.S. government debt securities
  $     $ 125     $     $ 125  
Other
          6             6  
 
                       
Total assets(1)
  $     $ 131     $     $ 131  
 
                       
                                 
December 31, 2010   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
U.S. government debt securities
  $     $ 124     $     $ 124  
Other
          2             2  
 
                       
Total assets(1)
  $     $ 126     $     $ 126  
 
                       
(1)  
Excludes $(3) million and $1 million as of March 31, 2011 and December 31, 2010 of receivables, payables, deferred taxes and accrued income associated with the financial instruments reflected within the fair value table.

 

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Toledo Edison Company
The following tables summarize assets and liabilities recorded on TE’s Consolidated Balance Sheets at fair value as of March 31, 2011 and December 31, 2010:
                                 
March 31, 2011   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 16     $     $ 16  
Equity securities(3)
    25                   25  
U.S. government debt securities
          32             32  
U.S. state debt securities
          2             2  
Other(2)
          3             3  
 
                       
Total assets(1)
  $ 25     $ 53     $     $ 78  
 
                       
                                 
December 31, 2010   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 7     $     $ 7  
U.S. government debt securities
          33             33  
U.S. state debt securities
          1             1  
Other(2)
          35             35  
 
                       
Total assets(1)
  $     $ 76     $     $ 76  
 
                       
(1)  
Excludes $(1) million and $2 million as of March 31, 2011 and December 31, 2010 of receivables, payables, deferred taxes and accrued income associated with the financial instruments reflected within the fair value table.
 
(2)  
Primarily consists of cash and cash equivalents.
 
(3)  
NDT funds hold equity portfolios the performance of which is benchmarked against the S&P 500 Index or Russell 3000 Index.
Jersey Central Power & Light Company
The following tables summarize assets and liabilities recorded on JCP&L’s Consolidated Balance Sheets at fair value as of March 31, 2011 and December 31, 2010:
                                 
March 31, 2011   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 92     $     $ 92  
Derivative assets — commodity contracts
                       
Derivative assets — NUG contracts(1)
                6       6  
Equity securities(2)
    21                   21  
Foreign government debt securities
          1             1  
U.S. government debt securities
          60             60  
U.S. state debt securities
          214             214  
 
                       
Other
          16             16  
 
                       
Total assets
  $ 21     $ 383     $ 6     $ 410  
 
                       
 
                               
Liabilities
                               
Derivative liabilities – NUG contracts(1)
  $     $     $ (239 )   $ (239 )
 
                       
Total liabilities
  $     $     $ (239 )   $ (239 )
 
                       
 
                               
Net assets (liabilities)(3)
  $ 21     $ 383     $ (233 )   $ 171  
 
                       

 

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December 31, 2010   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 23     $     $ 23  
Derivative assets — commodity contracts
          2             2  
Derivative assets — NUG contracts(1)
                6       6  
Equity securities(2)
    96                   96  
U.S. government debt securities
          33             33  
U.S. state debt securities
          236             236  
Other
          4             4  
 
                       
Total assets
  $ 96     $ 298     $ 6     $ 400  
 
                       
 
                               
Liabilities
                               
Derivative liabilities – NUG contracts(1)
  $     $     $ (233 )   $ (233 )
 
                       
Total liabilities
  $     $     $ (233 )   $ (233 )
 
                       
 
                               
Net assets (liabilities)(3)
  $ 96     $ 298     $ (227 )   $ 167  
 
                       
(1)  
NUG contracts are subject to regulatory accounting and do not impact earnings.
 
(2)  
NDT funds hold equity portfolios the performance of which is benchmarked against the S&P 500 Index or Russell 3000 Index.
 
(3)  
Excludes $(8) million and $(3) million as of March 31, 2011 and December 31, 2010 of receivables, payables, deferred taxes and accrued income associated with the financial instruments reflected within the fair value table.
Rollforward of Level 3 Measurements
The following table provides a reconciliation of changes in the fair value of NUG contracts held by JCP&L and classified as Level 3 in the fair value hierarchy for the periods ending March 31, 2011 and December 31, 2010:
                         
    Derivative Asset     Derivative Liability     Net  
    NUG Contracts(1)     NUG Contracts(1)     NUG Contracts(1)  
    (In millions)  
January 1, 2011 Balance
  $ 6     $ (233 )   $ (227 )
Realized gain (loss)
                 
Unrealized gain (loss)
          (42 )     (42 )
Purchases
                 
Issuances
                 
Sales
                 
Settlements
          36       36  
Transfers in (out) of Level 3
                 
 
                 
March 31, 2011 Balance
  $ 6     $ (239 )   $ (233 )
 
                 
 
                       
January 1, 2010 Balance
  $ 8     $ (399 )   $ (391 )
Realized gain (loss)
                 
Unrealized gain (loss)
    (1 )     36       35  
Purchases
                 
Issuances
                 
Sales
                 
Settlements
    (1 )     130       129  
Transfers in (out) of Level 3
                 
 
                 
December 31, 2010 Balance
  $ 6     $ (233 )   $ (227 )
 
                 
(1)  
Changes in the fair value of NUG contracts are subject to regulatory accounting and do not impact earnings.

 

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Metropolitan Edison Company
The following tables summarize assets and liabilities recorded on Met-Ed’s Consolidated Balance Sheets at fair value as of March 31, 2011 and December 31, 2010:
                                 
March 31, 2011   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 131     $     $ 131  
Derivative assets — commodity contracts
                       
Derivative assets — NUG contracts(1)
                107       107  
Equity securities(2)
    34                   34  
Foreign government debt securities
          2             2  
U.S. government debt securities
          100             100  
U.S. state debt securities
          2             2  
Other
          37             37  
 
                       
Total assets
  $ 34     $ 272     $ 107     $ 413  
 
                       
 
                               
Liabilities
                               
Derivative liabilities – NUG contracts(1)
  $     $     $ (118 )   $ (118 )
 
                       
Total liabilities
  $     $     $ (118 )   $ (118 )
 
                       
 
                               
Net assets (liabilities)(3)
  $ 34     $ 272     $ (11 )   $ 295  
 
                       
                                 
December 31, 2010   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 32     $     $ 32  
Derivative assets — commodity contracts
          5             5  
Derivative assets — NUG contracts(1)
                112       112  
Equity securities(2)
    160                   160  
Foreign government debt securities
          1             1  
U.S. government debt securities
          88             88  
U.S. state debt securities
          2             2  
Other
          14             14  
 
                       
Total assets
  $ 160     $ 142     $ 112     $ 414  
 
                       
 
                               
Liabilities
                               
Derivative liabilities – NUG contracts(1)
  $     $     $ (116 )   $ (116 )
 
                       
Total liabilities
  $     $     $ (116 )   $ (116 )
 
                       
 
                               
Net assets (liabilities)(3)
  $ 160     $ 142     $ (4 )   $ 298  
 
                       
(1)  
NUG contracts are subject to regulatory accounting and do not impact earnings.
 
(2)  
NDT funds hold equity portfolios the performance of which is benchmarked against the S&P 500 Index or Russell 3000 Index.
 
(3)  
Excludes $(1) million and $(9) million as of March 31, 2011 and December 31, 2010, respectively, of receivables, payables, deferred taxes and accrued income associated with the financial instruments reflected within the fair value table.

 

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Rollforward of Level 3 Measurements
The following table provides a reconciliation of changes in the fair value of NUG contracts held by Met-Ed and classified as Level 3 in the fair value hierarchy for the periods ending March 31, 2011 and December 31, 2010:
                         
    Derivative Asset     Derivative Liability     Net  
    NUG Contracts(1)     NUG Contracts(1)     NUG Contracts(1)  
    (In millions)  
January 1, 2011 Balance
  $ 112     $ (116 )   $ (4 )
Realized gain (loss)
                 
Unrealized gain (loss)
    (2 )     (16 )     (18 )
Purchases
                 
Issuances
                 
Sales
                 
Settlements
    (3 )     14       11  
Transfers in (out) of Level 3
                 
 
                 
March 31, 2011 Balance
  $ 107     $ (118 )   $ (11 )
 
                 
 
                       
January 1, 2010 Balance
  $ 176     $ (143 )   $ 33  
Realized gain (loss)
                 
Unrealized gain (loss)
    (59 )     (38 )     (97 )
Purchases
                 
Issuances
                 
Sales
                 
Settlements
    (5 )     65       60  
Transfers in (out) of Level 3
                 
 
                 
December 31, 2010 Balance
  $ 112     $ (116 )   $ (4 )
 
                 
(1)  
Changes in the fair value of NUG contracts are subject to regulatory accounting and do not impact earnings.
Pennsylvania Electric Company
The following tables summarize assets and liabilities recorded on Penelec’s Consolidated Balance Sheets at fair value as of March 31, 2011 and December 31, 2010:
                                 
March 31, 2011   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 70     $     $ 70  
Derivative assets — commodity contracts
                       
Derivative assets — NUG contracts(1)
                4       4  
Equity securities(2)
    20                   20  
Foreign government debt securities
                       
U.S. government debt securities
          60             60  
U.S. state debt securities
          72             72  
 
                       
Other
          32             32  
 
                       
Total assets
  $ 20     $ 234     $ 4     $ 258  
 
                       
 
                               
Liabilities
                               
Derivative liabilities – NUG contracts(1)
  $     $     $ (122 )   $ (122 )
 
                       
Total liabilities
  $     $     $ (122 )   $ (122 )
 
                       
 
                               
Net assets (liabilities)(3)
  $ 20     $ 234     $ (118 )   $ 136  
 
                       

 

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December 31, 2010   Level 1     Level 2     Level 3     Total  
    (In millions)  
Assets
                               
Corporate debt securities
  $     $ 8     $     $ 8  
Derivative assets — commodity contracts
          2             2  
Derivative assets — NUG contracts(1)
                4       4  
Equity securities(2)
    81                   81  
U.S. government debt securities
          9             9  
U.S. state debt securities
          133             133  
Other
          5             5  
 
                       
Total assets
  $ 81     $ 157     $ 4     $ 242  
 
                       
 
                               
Liabilities
                               
Derivative liabilities – NUG contracts(1)
  $     $     $ (117 )   $ (117 )
 
                       
Total liabilities
  $     $     $ (117 )   $ (117 )
 
                       
 
                               
Net assets (liabilities)(3)
  $ 81     $ 157     $ (113 )   $ 125  
 
                       
(1)  
NUG contracts are subject to regulatory accounting and do not impact earnings.
 
(2)  
NDT funds hold equity portfolios the performance of which is benchmarked against the S&P 500 Index or Russell 3000 Index.
 
(3)  
Excludes $(15) million and $(3) million as of March 31, 2011 and December 31, 2010, respectively, of receivables, payables and accrued income associated with the financial instruments reflected within the fair value table.
Rollforward of Level 3 Measurements
The following table provides a reconciliation of changes in the fair value of NUG and commodity contracts held by Penelec and classified as Level 3 in the fair value hierarchy for the periods ended March 31, 2011 and December 31, 2010:
                         
    Derivative Asset     Derivative Liability     Net  
    NUG Contracts(1)     NUG Contracts(1)     NUG Contracts(1)  
    (In millions)  
January 1, 2011 Balance
  $ 4     $ (117 )   $ (113 )
Realized gain (loss)
                 
Unrealized gain (loss)
          (30 )     (30 )
Purchases
                 
Issuances
                 
Sales
                 
Settlements
          25       25  
Transfers in (out) of Level 3
                 
 
                 
March 31, 2011 Balance
  $ 4     $ (122 )   $ (118 )
 
                 
 
                       
January 1, 2010 Balance
  $ 16     $ (101 )   $ (85 )
Realized gain (loss)
                 
Unrealized gain (loss)
    (11 )     (108 )     (119 )
Purchases
                 
Issuances
                 
Sales
                 
Settlements
    (1 )     92       91  
Transfers in (out) of Level 3
                 
 
                 
December 31, 2010 Balance
  $ 4     $ (117 )   $ (113 )
 
                 
(1)  
Changes in the fair value of NUG contracts are subject to regulatory accounting and do not impact earnings.

 

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5. DERIVATIVE INSTRUMENTS
FirstEnergy is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity, natural gas, coal and energy transmission. To manage the volatility relating to these exposures, FirstEnergy established a Risk Policy Committee, comprised of members of senior management, which provides general management oversight for risk management activities throughout FirstEnergy. The Committee is responsible for promoting the effective design and implementation of sound risk management programs and oversees compliance with corporate risk management policies and established risk management practice. FirstEnergy also uses a variety of derivative instruments for risk management purposes including forward contracts, options, futures contracts and swaps. In addition to derivatives, FirstEnergy also enters into master netting agreements with certain third parties.
FirstEnergy accounts for derivative instruments on its Consolidated Balance Sheets at fair value unless they meet the normal purchases and normal sales criteria. Derivatives that meet those criteria are accounted for under the accrual method of accounting, and their effects are included in earnings at the time of contract performance. Changes in the fair value of derivative instruments that qualify and are designated as cash flow hedge instruments are recorded to AOCL. Change in the fair value of derivative instruments that are not designated as cash flow hedge instruments are recorded in the income statement on a mark-to-market basis. FirstEnergy’s has contractual derivative agreements through December 2018.
Cash Flow Hedges
FirstEnergy has used cash flow hedges for risk management purposes to manage the volatility related to exposures associated with fluctuating interest rates and commodity prices. The effective portion of gains and losses on the derivative contract are reported as a component of AOCL with subsequent reclassification to earnings in the period during which the hedged forecasted transaction affects earnings.
As of December 31, 2010, commodity derivative contracts designated in cash flow hedging relationships were $104 million of assets and $101 million of liabilities. In February 2011, FirstEnergy elected to dedesignate all outstanding cash flow hedge relationships. Total net unamortized losses included in AOCL associated with dedesignated cash flow hedges totaled $6 million as of March 31, 2011. Since the forecasted transactions remain probable of occurring, these amounts were “frozen” in AOCL and will be amortized into earnings over the life of the hedging instruments. Reclassifications from AOCL into other operating expense totaled $5 million for the three-months ended March 31, 2011. Approximately $16 million will be amortized to earnings as expense during the next twelve months.
FirstEnergy has used forward starting swap agreements to hedge a portion of the consolidated interest rate risk associated with anticipated issuances of fixed-rate, long-term debt securities of its subsidiaries. These derivatives were treated as cash flow hedges, protecting against the risk of changes in future interest payments resulting from changes in benchmark U.S. Treasury rates between the date of hedge inception and the date of the debt issuance. As of March 31, 2011, no forward starting swap agreements were outstanding. Total unamortized losses included in AOCL associated with prior interest rate cash flow hedges totaled $87 million ($57 million net of tax) as of March 31, 2011. Based on current estimates, approximately $10 million will be amortized to interest expense during the next twelve months. Reclassifications from AOCL into interest expense totaled $3 million for the three-months ended March 31, 2011 and 2010.
Fair Value Hedges
FirstEnergy has used fixed-for-floating interest rate swap agreements to hedge a portion of the consolidated interest rate risk associated with the debt portfolio of its subsidiaries. These derivative instruments were treated as fair value hedges of fixed-rate, long-term debt issues, protecting against the risk of changes in the fair value of fixed-rate debt instruments due to lower interest rates. As of March 31, 2011, no fixed-for-floating interest rate swap agreements were outstanding.
As of March 31, 2010, FirstEnergy held fixed-for-floating interest rate swap agreements with combined notional amounts of $950 million. The gains included in interest expense related to interest rate swaps totaled $1 million and the fair value of the derivative instruments totaled $(3) million. There was no impact on the results of operations as a result of ineffectiveness from fair value hedges.
Total unamortized gains included in long-term debt associated with prior fixed-for-floating interest rate swap agreements totaled $118 million ($77 million net of tax) as of March 31, 2011. Based on current estimates, approximately $22 million will be amortized to interest expense during the next twelve months. Reclassifications from long-term debt into interest expense totaled approximately $5 million and $1 million for the three-months ended March 31, 2011 and 2010, respectively.
Commodity Derivatives
FirstEnergy uses both physically and financially settled derivatives to manage its exposure to volatility in commodity prices. Commodity derivatives are used for risk management purposes to hedge exposures when it makes economic sense to do so, including circumstances where the hedging relationship does not qualify for hedge accounting.

 

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Electricity forwards are used to balance expected sales with expected generation and purchased power. Natural gas futures are entered into based on expected consumption of natural gas, primarily natural gas used in FirstEnergy’s peaking units. Heating oil futures are entered into based on expected consumption of oil and the financial risk in FirstEnergy’s coal transportation contracts. Interest rate swaps include two intere