ALLEGHENY ENERGY SUPPLY COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS

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1 CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, THROUGH FEBRUARY 24,, FEBRUARY 25, THROUGH DECEMBER 31, AND THE YEAR ENDED DECEMBER 31,

2 CONSOLIDATED STATEMENTS OF INCOME (In thousands) February 25, January 1, February 24, Year ended 2010 REVENUES* $1,637,729 $311,127 $1,758,572 OPERATING EXPENSES: Fuel 793, , ,027 Purchased power 149,603 9,154 39,076 Other operating expenses 451,924 37, ,801 Pensions and OPEB mark-to-market adjustment 43, Provision for depreciation and amortization 112,104 22, ,532 General taxes 45,303 8,161 50,933 Total operating expenses 1,595, ,488 1,344,369 OPERATING INCOME 41,739 88, ,203 OTHER INCOME (EXPENSE): Interest expense (75,389) (21,716) (144,513) Capitalized interest 3, Miscellaneous income ,396 Total other expense (71,616) (21,097) (142,117) INCOME (LOSS) BEFORE INCOME TAXES (29,877) 67, ,086 INCOME TAXES (BENEFIT) (17,862) 27,723 92,891 NET INCOME (LOSS) (12,015) 39, ,195 Income of AGC attributable to noncontrolling interest (6,038) (1,184) (8,624) EARNINGS AVAILABLE (LOSS APPLICABLE) TO PARENT $(18,053) $38,635 $170,571 * Includes $4.9 million, $0.8 million and $0.5 million of excise tax collections in the periods February 25, through, January 1, February 24,, and the year ended December31, 2010, respectively. The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 1

3 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) February 25, January 1, February 24, Year ended 2010 NET INCOME (LOSS) $(12,015) $39,819 $179,195 OTHER COMPREHENSIVE INCOME: Cash flow hedges - 17,640 44,404 Gain (loss) relating to disability benefits - (39) 11 Other comprehensive income - 17,601 44,415 Income taxes on other comprehensive income - 6,800 17,238 Other comprehensive income (loss), net of tax - 10,801 27,177 COMPREHENSIVE INCOME (LOSS) (12,015) 50, ,372 COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST 6,038 1,184 8,624 COMPREHENSIVE INCOME AVAILABLE (LOSS APPLICABLE) TO PARENT $(18,053) $49,436 $197,748 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 2

4 CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS 2010 CURRENT ASSETS: Cash and cash equivalents $19,291 $17,845 Investment in Allegheny Money Pool - 278,893 Receivables- Wholesale and other, net of allowance for uncollectible accounts of $25 in and $1,045 in ,863 30,830 Affiliated companies 40,909 61,744 Notes receivable from affiliates 380,912 - Derivatives 16,799 21,895 Fuel, materials and supplies 127, ,018 Other 18,179 46, , ,674 PROPERTY, PLANT AND EQUIPMENT: In service 3,968,638 6,024,749 Less Accumulated provision for depreciation 98,498 2,595,962 3,870,140 3,428,787 Construction work in progress 121,838 70,416 3,991,978 3,499,203 INVESTMENTS: Investment in unconsolidated affiliate 24,723 23,736 Other ,245 23,736 DEFERRED CHARGES AND OTHER ASSETS: Goodwill 866, ,287 Unamortized debt expense 5,870 21,998 Derivatives - 20 Intangible assets (net of accumulated amortization of $127,998 at December 468,014-31, ) Other 19,399 25,153 1,359, ,458 $6,033,905 $4,541,071 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 3

5 CONSOLIDATED BALANCE SHEETS (Continued) (In thousands) LIABILITIES AND CAPITALIZATION 2010 CURRENT LIABILITIES: Currently payable long-term debt and other obligations $503,336 $- Accounts payable- Affiliated companies 32,817 31,398 Other 125, ,013 Accrued taxes 28,386 22,185 Accrued interest 29,210 31,789 Derivatives 21,047 5,970 Accumulated deferred income taxes - 4,290 Other 4,675 3, , ,164 CAPITALIZATION: Member s equity- Member s capital 2,121,143 2,121,143 Other member s equity 527,435 - Accumulated other comprehensive income - 10,545 Accumulated deficit (18,053) (593,029) Total member s equity 2,630,525 1,538,659 Noncontrolling interest 57,434 56,999 Total equity 2,687,959 1,595,658 Long-term debt and other long-term obligations 1,186,400 1,753,102 3,874,359 3,348,760 NONCURRENT LIABILITIES: Derivative liabilities - 7,404 Income taxes payable - 12,150 Accumulated deferred investment tax credits 44,783 46,448 Accumulated deferred income taxes 1,184, ,509 Adverse power contract liabilities (net of accumulated amortization of $21,425 at 74,836 - ) Other 110,484 54,636 1,414, ,147 COMMITMENTS AND CONTINGENCIES (Note 5 and 12) $6,033,905 $4,541,071 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 4

6 (In thousands) CONSOLIDATED STATEMENTS OF EQUITY Member s capital Other Member s Equity Accumulated other comprehensive income (loss) Accumulated Deficit Noncontrolling interest : Balance, January 1, 2010 $2,120,614 $- $(16,632) $(763,599) $74,320 Net Income 170,571 8,624 Return of capital to holder of - (15,981) noncontrolling interest in AGC Cash dividends paid to holder of noncontrolling interest in AGC (10,017) Stock-based excess tax benefits Cash flow hedges, net of tax of $17, , Net gain during the year related to disability benefits, net of tax of $ Balance, ,121,143-10,545 (593,028) 56,999 Net income ,635 1,184 Cash flow hedges, net of tax of $6, , Other, net - - (39) - - Balance, February 24, 2,121,143-21,346 (554,393) 58,183 : Purchase accounting adjustments - 527,435 (21,346) 554,393 (694) Cash dividends paid to holder of noncontrolling interest in AGC (6,093) Net income (loss) - (18,053) 6,038 Balance, $2,121,143 $527,435 $- $(18,053) 57,434 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 5

7 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) February 25, January 1, February 24, Year ended 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(12,015) $39,819 $179,195 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization 112,104 22, ,532 Deferred income taxes and investment tax credits, net (33,423) 17, ,510 Commodity derivative transactions, net 43,125 (12,695) 23,057 Amortization of purchase accounting adjustments 83, Pensions and OPEB mark-to-market adjustment 43, Decrease (increase) in operating assets- Accounts receivable 234,471 42,294 5,829 Materials and supplies 26,697 (8,793) 54,253 Increase (decrease) in operating liabilities- Accounts payable 33,211 (50,698) 2,330 Accrued interest (12,876) 10,297 (5,032) Other 16,752 25,150 (44,795) Net cash provided from operating activities 534,657 85, ,879 CASH FLOWS FROM FINANCING ACTIVITIES: New financing Long-term debt 100,000-49,610 Redemptions and repayments - Long-term debt (152,954) - (150,517) Financing element of derivatives (5,346) - - Dividend payments (6,093) - (10,017) Cash dividends paid to non-controlling shareholder - - (15,981) Other (6,628) (21) 348 Net cash used for financing activities (71,021) (21) (126,557) CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (134,130) (32,647) (141,635) Investment in Allegheny Energy Money Pool, net - - (275,521) Notes receivable from affiliated companies (330,912) (50,000) 52,961 Decrease in restricted funds ,459 Other Net cash used for investing activities (464,943) (82,646) (353,692) Net change in cash and cash equivalents (1,307) 2,753 14,630 Cash and cash equivalents at beginning of period 20,598 17,845 3,215 Cash and cash equivalents at end of period $19,291 $20,598 $17,845 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid (received) - Interest (net of amounts capitalized) $85,954 $9,883 $140,165 Income taxes $23,234 $- $(44,898) The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 6

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note No. 1 Organization, Basis of Presentation and Significant Accounting Policies 8 2 Merger 11 3 Pensions and Other Postemployment Benefits 12 4 Taxes 13 5 Leases 15 6 Intangible Assets and Liabilities 16 7 Fair Value Measurements 17 8 Derivatives 19 9 Impairment of Long-Lived Assets Long Term Debt and Credit Facilities Asset Retirement Obligations Commitments and Contingencies Transactions with Affiliated Companies 31 Page No. 7

9 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Allegheny Energy Supply Company, LLC (together with its consolidated subsidiaries, AE Supply) is a wholly owned subsidiary of Allegheny Energy, Inc. (AE). Effective February 25,, AE became a wholly owned subsidiary of FirstEnergy Corp. (FirstEnergy), a public utility holding company (See Note 2, Merger, for additional information). AE Supply owns and operates electric generation facilities primarily in Pennsylvania, West Virginia and Maryland. Allegheny Generating Company (AGC) is owned 59% by AE Supply and 41% by Monongahela Power Company (MP), a wholly owned subsidiary of AE. AE Supply consolidates the accounts of AGC in its consolidated financial statements. AE Supply records its proportionate share of operating costs, assets and liabilities of other generation facilities jointly owned with MP in the corresponding line items in these consolidated financial statements. Allegheny Energy Service Corporation (AESC), a wholly owned subsidiary of AE and FirstEnergy Service Company (FESC), a wholly owned subsidiary of FirstEnergy, are service support companies that employ substantially all of FirstEnergy s personnel who provide services to AE Supply. PREDECESSOR AND SUCESSOR REPORTING AND FINANCIAL STATEMENT PRESENTATION In connection with the merger, FirstEnergy acquired all of the outstanding common stock of AE. The merger has been accounted for as a business combination with FirstEnergy treated as the acquirer for accounting purposes. Accordingly, the assets and liabilities of AE were recorded at their fair values as of the merger consummation date. Purchase accounting impacts, including goodwill recognition, have been pushed down to AE and AE Supply, resulting in the assets and liabilities of AE Supply being recorded at their respective fair values as of February 25, (See Note 2, Merger, for additional information). The Consolidated Financial Statements for periods subsequent to the merger include amortization relating to purchase accounting adjustments and reflect the reclassifications as of the merger date of accumulated deficit to other member s equity, accumulated depreciation to property, plant and equipment and the allowance for uncollectible accounts to receivables. In addition, AE Supply has conformed its accounting policies to those of FirstEnergy as of the merger date, including policies relating to the capitalization of overhead charges, the presentation of PJM Interconnection, L.L.C. (PJM) charges and credits in revenues and expenses and the method of recognizing changes in the fair value of plan assets and net actuarial gains and losses related to pension and other postemployment benefit (OPEB) plans. AE Supply s financial statements and certain notes separately present AE Supply s consolidated financial information in two distinct periods, the period before the consummation of the merger (labeled ) and the period after that date (labeled ), because of the application of different bases of accounting between the periods presented. AE Supply follows accounting principles generally accepted in the United States of America (GAAP). 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, AE Supply consolidates all majorityowned subsidiaries over which it exercises control. AE Supply has evaluated events and transactions for potential recognition or disclosure through March 30, 2012, the date the financial statements were issued. ACCOUNTING FOR THE EFFECTS OF REGULATION AE Supply s only regulated subsidiary, AGC, accounts for the effects of regulation through the application of regulatory accounting since its rates are established by a third-party regulator with the authority to set rates that bind customers, are cost-based and can be charged to and collected from customers. AE Supply records regulatory assets and liabilities that result from the regulated rate-making process that would not be recorded under GAAP for non-regulated entities. These assets and liabilities are amortized in the Consolidated Statements of Income concurrent with their recovery or refund through customer rates. AE Supply believes that it is probable that its regulatory assets and liabilities will be recovered and settled, respectively, through future rates. AE Supply nets its regulatory assets and liabilities based on federal and state jurisdictions. Net regulatory liabilities are classified within Other Noncurrent Liabilities on the Consolidated Balance Sheets. 8

10 Regulatory liabilities consisted of the following: 2010 Customer payables for future income taxes $(15.7) $(16.2) Loss on reacquired debt Net regulatory liabilities $(13.7) $(13.1) REVENUES AND RECEIVABLES Revenues from the generation and sale of power are recorded in the period in which the electricity is delivered. PJM is a regional transmission organization that operates a competitive wholesale energy market. To facilitate the economic dispatch of AE Supply s generation, AE Supply sells the power it generates into the PJM market and purchases from the PJM market the power required to meet the needs of its customers. Through February 24,, AE Supply netted all PJM sales and purchases in reported revenues. Consistent with conforming its accounting policies to those of FirstEnergy, effective February 25,, AE Supply nets PJM sales and purchases on an hourly basis. Hourly net sales are reported in revenues and hourly net purchases are reported in purchased power expense. Revenues of AGC are determined under a cost-of-service formula wholesale rate schedule approved by FERC. Under this arrangement, AGC recovers in revenues from its owners, AE Supply and MP, its operation and maintenance expense, depreciation, taxes other than income taxes, income tax expense at the statutory rate and a component for debt and equity return on its investment. In return, AE Supply and MP receive AGC s share of the power generated by the station. Receivables represent amounts due from retail and wholesale sales to customers. There was no material concentration of receivables as of and 2010, with respect to any particular segment of AE Supply's customers. Billed and unbilled wholesale receivables were $39.8 million and $14.1 million, respectively, as of and $19.9 million and $10.9 million, respectively, as of PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment reflects original cost (net of any impairments recognized), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs incurred to place the assets in service. The costs of normal maintenance, repairs and minor replacements are expensed as incurred. AE Supply recognizes liabilities for planned major maintenance projects as they are incurred. AE Supply provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. Depreciation expense was approximately 3.4% of average depreciable property in and 2.3% of average depreciable property in JOINTLY OWNED PLANTS AE Supply, through its subsidiary, AGC, owns an undivided 40% interest (1,109 MWs) in a 2,773 MW pumped storage, hydroelectric station in Bath County, Virginia, operated by the 60% owner, Virginia Electric and Power Company, a non-affiliated utility. Net Property, Plant and Equipment includes $468 million relating to this facility as of. The increase in rate is principally due to the effect of reclassifying AE Supply's accumulated depreciation to property, plant and equipment in conjunction with Purchase Accounting. ASSET RETIREMENT OBLIGATIONS AE Supply recognizes an ARO for the future remediation of environmental liabilities associated with all of its longlived assets. An ARO is recognized in the period in which it is incurred if it can be reasonably estimated, with the offsetting associated asset retirement costs capitalized as a part of the carrying amount of the long-lived assets. The asset retirement cost is subsequently charged to expense over its useful life. Changes in the ARO resulting from the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense. Changes resulting from revisions to the timing or amount of the original estimate of cash flows are recognized as an increase or decrease in the asset retirement cost and ARO. When settled, actual costs to retire the asset are charged against the recorded ARO liability. 9

11 INVESTMENT IN UNCONSOLIDATED AFFILIATE AE Supply s investment in unconsolidated affiliates consisted of an investment in Buchanan Generation, LLC in the amount of $24.7 million and $23.7 million as of and 2010, respectively. This investment is accounted for under the equity method of accounting. GOODWILL In a business combination, the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed is recognized as goodwill. Goodwill is evaluated for impairment at least annually and more frequently if indicators of impairment arise. In accordance with the accounting standards, if the fair value of a reporting unit is less than its carrying value (including goodwill), the goodwill is tested for impairment. Impairment is indicated and a loss is recognized if the implied fair value of a reporting unit's goodwill is less than the carrying value of its goodwill. Goodwill from the merger with FirstEnergy of $866 million was pushed down to AE Supply. Annual impairment testing is conducted during the third quarter of each year and for the analysis indicated no impairment of goodwill. For purposes of annual testing the estimated fair values of AE Supply was determined using a discounted cash flow approach. The discounted cash flow model is based on the forecasted operating cash flow for the current year, projected operating cash flows (determined using forecasted amounts as well as an estimated growth rate) and a terminal value. Discounted cash flows consist of the operating cash flows for each reporting unit less an estimate for capital expenditures. The key assumptions incorporated in the discounted cash flow approach include growth rates, projected operating income, changes in working capital, projected capital expenditures, planned funding of pension plans, anticipated funding of nuclear decommissioning trusts, expected results of future rate proceedings (applicable to the Regulated Distribution segment only) and a discount rate equal to assumed long-term cost of capital. Cash flows may be adjusted to exclude certain non-recurring or unusual items. Reporting unit income was the starting point for determining operating cash flow and there were no non-recurring or unusual items excluded from the calculations of operating cash flow in any of the periods included in the determination of fair value. This approach involves management judgment and estimates that are used in relation to changing market conditions and the business environment; unanticipated changes in assumptions could have a significant effect on AE Supply s evaluation of goodwill. At the time AE Supply conducted the annual impairment testing in, fair value would have to have declined in excess of 25% to indicate a potential goodwill impairment. ACCUMULATED OTHER COMPREHENSIVE INCOME Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in member s equity except those resulting from transactions with members. Accumulated other comprehensive income, net of tax, included on AE Supply s Consolidated Balance Sheets as of and 2010, is comprised of the following: 2010 Cash flow hedges, net of tax of $6.5 $- $10.3 Unrecognized disability benefits, net of tax Total $- $10.5 No amount of other comprehensive income or accumulated other comprehensive income was attributable to the noncontrolling interest for the periods covered by these financial statements. NEW ACCOUNTING PRONOUNCEMENTS New accounting pronouncements, not yet effective, are not expected to have a material effect on AE Supply s financial statements. 10

12 2. MERGER On February 25,, the merger between FirstEnergy and AE 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 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 exchanged for FirstEnergy equity-based awards on the same basis. Total consideration in the merger was $4,354 million, based on the closing price of a share of FirstEnergy common stock on February 24,, of which approximately $2,706 million was attributable to AE Supply. The following table summarizes the differences between the fair values and the carrying values of AE Supply s assets and liabilities that were pushed down to AE Supply as of the date of the merger: Purchase price attributable to AE Supply $2,706 Less: AE Supply net book value at merger date, including previously recorded goodwill 1,646 Purchase price in excess of net book value $1,060 Fair value adjustments to assets acquired - increases: Coal supply contracts $408 Energy contracts 181 Property, plant and equipment 432 Fair value adjustments to liabilities assumed - increases: Accumulated deferred income taxes (365) Coal supply and transportation contracts (96) Other 1 Net fair value adjustments 561 Increase in goodwill 499 Total adjustments $1,060 The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill. Total goodwill resulting from the merger was $866 million. The goodwill is not deductible for tax purposes. The estimated fair values of the assets acquired and liabilities assumed have been determined based on the accounting guidance under GAAP for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 11

13 The valuation of the additional intangible assets and liabilities recorded as result of the merger is as follows: Valuation Above market contracts: Energy contracts $181 Coal supply contracts 408 Below market contracts: Coal supply contracts 61 Transportation contract 35 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 these 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 are being amortized based on expected deliveries under each contract. 3. PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS Through, AE maintained a noncontributory, defined benefit pension plan covering substantially all of its employees and a supplemental nonqualified, defined benefit pension plan for certain employees. AE also provided subsidies for medical and life insurance plans for eligible retirees and dependents. AE Supply is allocated a share of the net periodic costs for pension and OPEB benefits for employees and covered dependents provided by AE through AESC based on salaries and wages, number of employees and other factors. Prior to a change in the fourth quarter of, FirstEnergy s accounting policy had been to recognize net actuarial gains and losses for its defined benefit pension and OPEB plans as a component of accumulated other comprehensive income and amortize such amounts outside a corridor over the remaining service lives of employees. AE had a similar accounting policy relating to its benefit plans prior to the date of the merger. During the fourth quarter of, FirstEnergy elected to change its accounting policy to recognize all changes in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year. Consistent with conforming its accounting policies to those of FirstEnergy as of February 25,, the change in the fair value of plan assets and net actuarial gains and losses for AE s plans during the period February 25, through were recognized as of the year-end actuarial measurement date of. AE Supply s share of this mark-to-market adjustment resulted in a $43.3 million charge to expense. AE Supply s allocated share of pension and OPEB costs, including the mark-to-market adjustment referred to above was as follows: $ 493 February 25, January 1, February 24, Year ended 2010 Pension plans $49.2 $2.2 $10.7 Other postretirement benefit plans $2.8 $0.8 $5.9 For the periods February 25,, January 1, February 24, and the year ended 2010, AE Supply capitalized to property, plant and equipment $2.8 million, $0.1 million and $0.7 million, respectively, of the above pension and OPEB costs. 12

14 4. TAXES Income Taxes AE Supply records income taxes in accordance with the liability method of accounting. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recognized for tax purposes. Deferred income tax liabilities related to temporary tax and accounting basis differences and tax credit carryforward items are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Deferred tax assets are recognized based on income tax rates expected to be in effect when they are settled. The following table presents the components of the provision for income taxes: February 25, through December 31, January 1, through February 24, Year ended December 31, 2010 Currently payable (receivable)- Federal $13.5 $9.1 $(40.1) State (17.5) (57.6) Deferred, net- Federal (23.7) State (8.3) (32.0) Investment tax credit amortization (1.4) (0.3) (1.7) Total provision for income taxes (benefit) $(17.9) $27.7 $92.9 AE Supply is party to AE s (prior to February 25, ) and FirstEnergy s and FirstEnergy s other subsidiaries (subsequent to February 24, ) intercompany income tax allocation agreement that provides for the allocation of consolidated tax liabilities. Net tax benefits attributable to FirstEnergy, excluding any tax benefits derived from interest expense associated with acquisition indebtedness from FirstEnergy s merger with GPU, are reallocated to the subsidiaries of FirstEnergy that have taxable income. That allocation is accounted for as a capital contribution to the company receiving the tax benefit. The following table provides a reconciliation of federal income tax expense at the federal statutory rate to the total provision for income taxes: February 25, December 31, January 1, through February 24, Year ended 2010 Book income (loss) before provision for income taxes $(29.9) $67.5 $272.1 Federal income tax expense (benefit) at statutory rate (10.5) Increases (reductions) resulting from: State income tax, net of federal income tax benefit (7.0) Amortization of deferred investment tax credits (1.4) (0.3) (1.7) Changes in tax reserves related to uncertain tax positions (5.9) Other, net (0.8) Total provision for income taxes (benefit) $(17.9) $27.7 $

15 Accumulated deferred income taxes as of and 2010 were as follows: 2010 Accumulated deferred income tax assets: Unamortized investment tax credits $24.2 $25.0 Tax effect of net operating loss carryforwards Fair value adjustment of long-term debt Other Total accumulated deferred income tax assets Accumulated deferred income tax liabilities: Property basis differences 1, ,038.0 Derivative contracts Fair value of contracts and investments Total accumulated deferred income tax liabilities 1, ,044.0 Net deferred income tax liabilities 1, Deferred income taxes included in current assets - (4.3) Long-term net deferred income tax liability $1,184.0 $820.5 AE Supply accounts for uncertainty in income taxes recognized in its financial statements. Accounting guidance prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken on a company s tax return. Changes in unrecognized tax benefits during and 2010, excluding accrued interest were as follows: 2010 Balance as of January 1 $25.3 $32.7 Additions based on tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions of prior years (2.4) (10.7) Balance as of December 31 $28.4 $25.3 As of, it is reasonably possible that approximately $6.5 million of the unrecognized tax benefits may be resolved within the next twelve months, and if recognized, would affect AE Supply s effective tax rate. AE Supply recognizes interest expense or income related to uncertain tax positions. That amount is computed by applying the applicable statutory interest rate to the difference between the tax position recognized and the amount previously taken or expected to be taken on the tax return. AE Supply includes net interest and penalties in the provision for income taxes. Net interest expense recognized by AE Supply for the periods February 25,, January 1, February 24, and the year ended 2010 was immaterial, as well as the net interest payable as of and AE Supply is part of AE s (prior to February 25, ) and FirstEnergy s (subsequent to February 24, ) consolidated federal income tax returns and is also subject to tax in Maryland, Pennsylvania and West Virginia. The federal returns are currently under audit by the Internal Revenue Service for tax years 2007 and The 2009 and 2010 federal returns have been filed and are subject to review. Returns filed with the Pennsylvania Department of Revenue are substantially complete through Returns for tax years 2008 through 2010 remain subject to review. The West Virginia returns are substantially complete through West Virginia returns for 2008 through 2010 remain subject to review. The Maryland returns are substantially complete through Maryland returns 2008 through 2010 remain subject to review. 14

16 AE Supply has net operating loss carryforwards of $219.5 million, all of which are expected to be utilized. Of this amount, $131.8 million relates to federal income taxes and $87.7 relates to state iincome taxes. AE Supply has Federal Alternative Minimum Tax credits of $15.3 million that have an indefinite carryforward period. The federal net operating losses begin to expire in varying amounts from 2021 through The state net operating losses expire as follows: $ $87.7 General Taxes General taxes consisted of the following: February 25, January 1, February 24, Year ended 2010 State gross receipts $4.9 $0.8 $0.5 Real and personal property Social security and unemployment Business and Occupation Other 1.5 (0.2) 1.9 Total general taxes $45.3 $8.2 $ LEASES AE Supply leases certain office space and other property and equipment under cancelable and noncancelable leases. Total capital and operating lease payments for the periods February 25,, January 1, February 24, and the year ended 2010 of $2.5 million, $0.5 million, and $3.0 million, respectively, were recorded as rent expense, as a component of operations and maintenance expenses. AE Supply s estimated future minimum lease payments for capital and operating leasesas of with initial or remaining lease terms in excess of one year are as follows: Thereafter Total Less: amount representing interest and fees Present value of net minimum capital lease payments Capital Leases $0.4 $0.3 $0.1 $- $- $- $0.8 $0.1 $0.7 Operating Leases $3.6 $3.5 $3.5 $3.5 $2.1 $- $16.2 $- $- The carrying amounts of assets recorded under capital lease agreements included in Property, plant and equipment, net on AE Supply s Consolidated Balance Sheets as of and 2010, were $0.7 million and $0.9 million, respectively. 15

17 6. INTANGIBLE ASSETS AND LIABILITIES As of, intangible assets and liabilities on AE Supply s Consolidated Balance Sheet, were as follows: Balance, net of amortization Weighted Average Amortization Period Intangible assets: Ohio Valley Electric Corporation power purchase contract $ years Coal supply contracts years Energy contracts years $468.0 Intangible liabilities adverse power contract liabilities: Coal supply contracts $ years Transportation contract years $74.8 In addition, AE Supply has certain intangible assets included in Property, plant and equipment, net on the Consolidated Balance Sheets as follows: 2010 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Software $7.9 $ Land easements, amortized 1.1 $- $2.2 $1.1 Total $9.0 $2.0 $12.4 $5.8 For the periods February 25,, January 1, February 24, and the year ended 2010, amortization expense for intangible assets was $2.0 million, $0.3 million, and $1.7 million, respectively. 16

18 Future amortization expense for intangible assets included in Property, plant and equipment, net as of is estimated as follows: Annual amortization expense $1.8 $1.5 $0.5 $0.5 $ FAIR VALUE MEASUREMENTS LONG-TERM DEBT The following table provides the approximate fair value and related carrying amounts of long-term debt and other long-term obligations, excluding capital lease obligations, as of and 2010: 2010 Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt $1,689.4 $1,796.6 $1,753.2 $1,706.9 The fair values of long-term debt 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 AE Supply. CASH AND CASH EQUIVALENTS 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. RECURRING FAIR VALUE MEASUREMENTS Authoritative accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The three levels of the fair value hierarchy are as follows: Level 1 Quoted prices for identical instruments in active markets. Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations for which all significant inputs are observable market data. Level 3 Valuation inputs are unobservable and significant to the fair value measurement. 17

19 The following tables set forth financial assets and liabilities measured at fair value by level within the fair value hierarchy. There were no significant transfers between levels during. Fair Value as of Level 1 Level 2 Level 3 Total Derivative assets Power contracts $- $16.6 $- $16.6 Financial transmission rights (FTRs) Total derivative assets Derivative liabilities Power contracts - (13.4) - (13.4) FTRs - - (7.6) (7.6) Total derivative liabilities - (13.4) (7.6) (21.0) Net derivative assets (liabilities) $- $3.2 $(7.4) $(4.2) Fair Value as of 2010 Level 1 Level 2 Level 3 Total Derivative assets Power contracts $1.5 $15.5 $- $17.0 FTRs Total derivative assets Derivative liabilities Power contracts (8.3) (9.5) - (17.8) Interest rate swaps - (2.1) - (2.1) Total derivative liabilities (8.3) (11.6) - (19.9) Net derivative assets (liabilities) $(6.8) $3.9 $76.9 $74.0 The following tables provide a reconciliation of changes in the fair value of FTRs held by AE Supply and classified as Level 3 in the fair value hierarchy during the periods February 25,, January 1, through February 24, and the year ended Consistant with FirstEnergy s accopunting policy for periods commencing with the merger date, the FTR obligation to the RTO is netted directly against the FTRs in the fair value hierarchy tables and reconciilations. Balance, February 25, $36.2 FTR obligation, as of merger date (43.9) Realized gain 86.9 Unrealized gain 0.3 Purchases - Issuances - Sales - Settlements (86.9) Transfers in / out of Level 3 - Balance, $(7.4) 18

20 Balance, January 1, $76.9 Realized gain 11.3 Unrealized gain (loss) (5.6) Purchases - Issuances - Sales - Settlements (46.4) Transfers in / out of Level 3 - Balance, February 24, $36.2 Balance, January 1, 2010 $63.0 Realized/unrealized gain 57.6 Purchases - Issuances - Sales - Settlements (43.7) Transfers in / out of Level 3 - Balance, 2010 $ DERIVATIVE INSTRUMENTS AE Supply is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity. To manage the volatility relating to these exposures, FirstEnergy s Risk Policy Committee, comprised of senior management, provides general management oversight for risk management activities throughout FirstEnergy, including AE Supply. 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 practices. AE Supply also uses a variety of derivative instruments for risk management purposes including forward contracts and swaps. AE Supply also enters into master netting agreements with certain third parties. AE Supply accounts for derivative instruments on its Consolidated Balance Sheets at fair value unless they meet the normal purchases and normal sales criteria or are designated as cash flow hedge instruments. Derivatives that meet normal purchase and normal sale 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 qualified and were designated as cash flow hedge instruments were recorded in Accumulated Other Comprehensive Income (AOCI). Changes in the fair value of derivative instruments that do not meet normal purchases and normal sales criteria or are not designated as cash flow hedge instruments are recorded in earnings on a mark-to-market basis. AE Supply has contractual derivative agreements through Cash Flow Hedges AE Supply uses cash flow hedges for risk management purposes to manage the volatility related to exposures associated with fluctuating commodity prices. The effective portion of gains and losses on derivative contracts in a hedge relationship are reported as a component of AOCI with subsequent reclassification to earnings in the period during which the hedged forecasted transaction affects earnings. In connection with the merger, AE Supply electively dedesignated all outstanding cash flow hedge relationships and has not designated any cash flow hedge relationships subsequent to that date. Commodity Derivatives AE Supply 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. 19

21 Outstanding commodity derivatives consist of electricity forwards that are used to balance expected sales with expected generation and purchased power. As of, AE Supply posted $1 million in collateral relating to commodity derivative contracts. FTRs AE Supply holds FTRs that generally represent an economic hedge of future congestion charges that will be incurred in connection with AE Supply s load obligations. AE Supply acquires the majority of its FTRs in an annual auction through a self-scheduling process involving the use of auction revenue rights allocated to members of a regional transmission organization (RTO) that have load serving obligations and through the direct allocation of FTRs from the PJM RTO. AE Supply records FTRs acquired in the auction at the auction price less the obligation due to the RTO, and subsequently adjusts the carrying value of remaining FTRs to their estimated fair value at the end of each accounting period prior to settlement. Changes in the fair value of FTRs are included in other operating expenses as unrealized gains or losses. Directly allocated FTRs are accounted for under the accrual method of accounting, and their effects are included in earnings at the time of contract performance. The following table summarizes the net fair value of derivative instruments on AE Supply s Consolidated Balance Sheet as of, None of which were designated as hedging instruments: Power Contracts Sales Purchases FTRs Total Derivatives Derivative assets Current $16.6 $- $0.2 $16.8 Long-term Total derivative assets Derivative liabilities Current (0.4) (13.0) (7.6) (21.0) Long-term Total derivative liabilities (0.4) (13.0) (7.6) (21.0) Net derivative assets (liabilities) $16.2 $(13.0) $(7.4) $(4.2) 20

22 The following table summarizes the fair value of derivative instruments on AE Supply s Consolidated Balance Sheet as of 2010: Power Contracts Sales Purchases Interest Rate Swaps FTRs Gross Derivatives Netting Net Derivatives FTR Obligation (a) Collateral Balance Sheet Derivatives Derivatives designated as hedging instruments: Derivative assets Current $6.9 $- $- $- $6.9 $(6.9) $- $- $- $- Long-term (1.5) Total derivative assets (8.4) Derivative liabilities Current (5.1) (5.1) Long-term (0.4) (0.4) Total derivative liabilities (5.5) (5.5) Total designated (2.9) Derivatives not designated as hedging instruments: Derivative assets Current (19.0) 93.9 (72.0) Long-term (1.1) (1.1) Total derivative assets (17.9) 93.9 (72.0) Derivative liabilities Current (23.5) (2.7) (2.1) - (28.3) 20.8 (7.5) (6.0) Long-term (4.2) (8.2) - - (12.4) - (12.4) (7.4) Total derivative liabilities (27.7) (10.9) (2.1) - (40.7) 20.8 (19.9) (13.4) Total not designated 7.2 (10.9) (2.1) (72.0) Net derivative assets (liabilities) $10.1 $(10.9) $(2.1) $76.9 $74.0 $- $74.0 $(72.0) $6.5 $8.5 (a) The FTR obligation as of 2010 was $72.0 million and was payable to PJM in approximately equal weekly amounts through the PJM planning year ended May 31,. This obligation has been netted against the FTR derivative asset balance on the Consolidated Balance Sheet The volume and expiration of AE Supply s derivative contracts as of, were as follows: 2012 Electricity contracts (Megawatt-hours (MWhs)): Sales of power 2.6 Purchases of power 0.6 FTRs (MWhs)

23 The following table provides details on the changes in AOCI relating to derivative assets and liabilities that qualified for cash flow hedge accounting: February 25, January 1, February 24, Year ended 2010 Beginning balance - AOCI derivative gain (loss) (before tax effect of $-, $(6.5) million and $10.8 million, respectively) $- $16.9 $(27.6) Effective portion of changes in fair value (before tax effect of $-, $(6.4) million and $13.6 million, respectively) Reclassifications of losses from AOCI to earnings (before tax effect of $-, $(0.5) million and $3.6 million, respectively) Fair value adjustments related to merger (before tax effect of $13.4 million) - (34.6) - Ending balance - AOCI derivative gain (before tax effect of $-, $- and $6.5 million, respectively) $- $- $16.9 The following table shows the location and amounts of gains (losses) on derivatives designated as cash flow hedges: February 25, January 1, February 24, Year ended 2010 Gain recognized in AOCI (effective portion) $- $16.4 $35.3 Loss reclassified from AOCI into operating revenues (effective portion) $- $(1.3) $(9.2) Gain (loss) recognized in operating revenues (ineffective portion) $- $4.5 $(13.9) Unrealized gains (losses) on derivative instruments not designated or qualifying as cash flow hedge instruments were as follows: February 25, January 1, February 24, Year ended 2010 Interest rate swaps $2.1 $- $6.1 Mark-to-market power contracts (45.5) 13.8 (5.2) Gas contracts - - (32.0) FTRs 0.3 (5.6) 21.9 Total $(43.1) $8.2 $(9.2) 9. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived Assets AE Supply reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. The recoverability of the long-lived asset is measured by comparing the long-lived asset s carrying value to the sum of undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is greater than the undiscounted future cash flows of the long-lived asset, impairment exists and a loss is recognized for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. Generating Plant Retirements 22

24 On January 26, 2012, FirstEnergy announced that it will retire certain coal-fired generating plants owned by AE Supply: Armstrong Units 1-2 and R. Paul Smith Units 3-4. Both of these generating plants are expected to be closed by September 1, 2012, subject to review by PJM for reliability impacts (see Note 12, Commitments, Guarantees and Contingencies). The decision to close the plants was made in light of the Mercury and Air Toxics Standards (MATS) rules and other environmental requirements. As a result of this decision, AE Supply recorded a pre-tax impairment of $3.1 million to continuing operations during the year ended. This impairment consists of a $0.6 million write down of the carrying value of the plant assets and a $2.5 million charge for excess and obsolete inventory at these facilities. In addition to the emission allowance impairments in connection with the plant closures, AE Supply recorded during pre-tax impairment charges of approximately $5 million for NOx emission allowances that were expected to be obsolete after and approximately $3 million for excess sulfur dioxide (SO 2) emission allowances in inventory that it expects will not be consumed in the future. AE Supply estimates that total severance benefits associated with the plant retirements may be up to $5 million. It is also estimated that additional costs to prepare the plants for closing during 2012 will be approximately $3 million. AE Supply has other obligations that could be affected by the plant closings and it is currently unable to reasonably estimate potential costs, or a range thereof, that could be incurred. 10. LONG TERM DEBT AND CREDIT FACILITIES AE Supply s long-term debt was as follows: As of (Dollar amounts in millions) Maturity Date Interest Rate % 2010 Medium-Term Notes $1,105.7 $1,103.2 Pollution Control Bonds Exempt Facilities Revenue Bonds Debentures - AGC Medium-Term Notes AGC Revolving Credit Facility AGC (variable rate) Total long-term debt 1, ,756.7 Capital lease obligations Net unamortized debt discounts - (3.6) Long-term debt due within one year (503.3) - Total long-term debt and other long-term obligations $1,186.4 $1,

25 Outstanding debt and scheduled debt repayments as of (excluding capital leases and unamortized debt discounts) were as follows: Thereafter Total Medium-Term Notes $503.3 $- $- $- $- $600.0 $1,103.3 Pollution Control Bonds Exempt Facilities Revenue Bonds Medium-Term Notes AGC Revolving Credit Facility AGC Total scheduled repayments $503.3 $50.0 $- $- $- $1,150.5 $1,703.8 Unamortized merger date fair value adjustment 14.4 Total debt $1,689.4 Certain of AE Supply s properties are subject to liens of various relative priorities securing debt. Credit Facilities On June 17,, FirstEnergy Solutions Corp. (FES) and AE Supply, entered into a new $2.5 billion five-year syndicated revolving credit facility. The new revolving credit facility replaced AE Supply s $1 billion revolving credit facility. Under the new credit facility, $1 billion is available to be borrowed, repaid and reborrowed by AE Supply. The new revolving credit facility is scheduled to mature on June 17, 2016, unless the lenders agree, at the request of the applicable borrowers, to up to two additional one-year extensions. Borrowings under the new revolving credit facility mature on the earlier of 364 days from the date of the borrowing or the commitment termination date. AE Supply and AGC have in place revolving credit facilities as follows: Matures Total Capacity Borrowed Letters of Credit Issued Available Capacity Revolving Credit Facility - AE Supply 2016 $1,000.0 $- $- $1,000.0 Revolving Credit Facility - AGC Total $1,050.0 $50.0 $- $1,000.0 Borrowings and principal repayments on debt during the years ended and 2010, were as follows: 2010 Borrowings Repayments Borrowings Repayments Pollution Control Bonds - $53.0 $- $- Medium-Term Notes Revolving Credit Facility AGC Debentures - AGC Medium-Term Notes AGC Total $100.0 $153.0 $50.0 $