Submitted to PJM on June 27, 2013

Transcription

1 FirstEnergy Transmission Affiliates Pre-Qualification Submittal for Designated Transmission Entity Status Submitted to PJM on June 27, 2013 Table of Contents Section (A) (B) (C) (D) (E) (F) (G) (H) (I) Title Name and Address of the Entity with Point of Contact (include parent company, affiliates or partners) Technical & Engineering Qualifications Demonstrated experience of the entity or its affiliate to develop, construct, maintain and operate transmission facilities Prior record of the entity or its affiliate to adhere to standardized construction, maintenance and operating practices Capability of the entity or its affiliate to adhere to standardized construction, maintenance and operating practices Financial statements of the entity or its affiliate; to include most recent fiscal quarter, most recent three fiscal years or period of existence of the entity Commitment by the entity to execute the Consolidated Transmission Owners Agreement Evidence demonstrating the ability of the entity to address and timely remedy failure of the facilities Evidence of the entity s ability to acquire rights of way 1

2 (A) Name and Address of Parent and Affiliates with Point of Contact Parent: FirstEnergy Corporation (FirstEnergy) 76 S. Main Street Akron, OH Affiliates FirstEnergy Transmission Owners: American Transmission Systems, Inc (ATSI) 76 S. Main Street Akron, OH Trans-Allegheny Interstate Line Company (TrAILCo) 800 Cabin Hill Drive Greensburg, PA Jersey Central Power & Light Company (JCP&L) 300 Madison Avenue Morristown, NJ Metropolitan Edison Company (Met-Ed) 2800 Pottsville Pike Reading, PA Pennsylvania Electric Company (Penelec) 5404 Evans Road Erie, PA Monongahela Power Company (Mon Power) 1310 Fairmont Avenue Fairmont, WV The Potomac Edison Company (Potomac Edison) 800 Cabin Hill Drive Greensburg, PA West Penn Power Company (West Penn Power) 800 Cabin Hill Drive Greensburg, PA

3 Contact Representative for Parent and Transmission Affiliates: Primary: Alternate: Richard O Callaghan Director, Transmission & Substation Design FirstEnergy Service Company 76 S. Main Street Akron, OH (330) ocallaghanr@firstenergycorp.com Cheryl Orner General Manager, External Engineering Services FirstEnergy Service Company PO Box Reading, PA (610) corner@firstenergycorp.com Corporate Structural Summary: FirstEnergy is a regional energy provider headquartered in Akron, Ohio. Its subsidiaries and affiliates are involved in the generation, transmission, distribution and sale of electricity, as well as energy management and other energy-related services. FirstEnergy is a publicly traded corporation. JCP&L, Met-Ed and Penelec are wholly-owned direct subsidiaries of FirstEnergy. Mon Power, Potomac Edison and West Penn Power are wholly-owned direct subsidiaries of Allegheny Energy, Inc., which is a wholly-owned direct subsidiary of FirstEnergy. ATSI and TrAILCo are wholly-owned direct subsidiaries of FirstEnergy Transmission, LLC, which is a wholly-owned subsidiary of Allegheny Energy, Inc. FirstEnergy has 10 utility operating companies, forming one of the nation s largest investor-owned electric systems based on six million customers served within a nearly 65,000 square-mile area of Ohio, Pennsylvania, Maryland, West Virginia, New Jersey and New York. In addition, FirstEnergy has two multi-state stand-alone transmission companies. FirstEnergy has $50 billion in assets with $15 billion in annual revenues and is ranked 181 out of Fortune Magazine s top 500 U.S. companies. FirstEnergy, through its subsidiaries, is a PJM member. FirstEnergy representatives are actively involved in various PJM Committees, Sub- Committees, Task Forces, User Groups, Working Groups and Stakeholder Groups. The eight FirstEnergy Transmission Owners ATSI, TrAILCo, JCP&L, Met-Ed, Penelec, Mon Power, Potomac Edison and West Penn Power operate approximately 24,000 miles of transmission lines connecting the Midwest and Mid-Atlantic regions. (For the purposes of this Submittal, the transmission lines 3

4 and other transmission facilities of the FirstEnergy Transmission Owners will be collectively referred to as the FirstEnergy Transmission System. ) FirstEnergy s generation subsidiaries control approximately 20,000 megawatts of capacity from a diversified mix of scrubbed coal, nuclear, natural gas, oil, hydroelectric, pumped-storage and contracted wind and solar resources, including more than 2,400 megawatts of renewable energy. FirstEnergy Solutions, the FirstEnergy competitive subsidiary, is one of the nation s largest competitive electric suppliers, serving more than 2.6 million residential, commercial and industrial customers in Ohio, Pennsylvania, New Jersey, Maryland, Michigan and Illinois. ATSI owns, operates and maintains over 8,100 circuit-miles of transmission lines, substations and other transmission facilities operated at nominal voltages of 345 kv, 138 kv and 69 kv located solely in the ATSI Zone of PJM. The ATSI system has tie-lines to the neighboring transmission systems of American Electric Power (AEP), Dayton Power and Light, International Transmission Company, Duquesne Light Company (DLCO), Cleveland Public Power, Buckeye Power, Inc., American Municipal Power, Inc. and ATSI affiliate, West Penn Power and Mon Power. The ATSI system was integrated into PJM on June 1, As a result, PJM became the Reliability Coordinator, Balancing Authority, Transmission Operator and Transmission Planner for all ATSI 100 kv and above facilities. ATSI is permitted by Attachment H-21 of the PJM OATT to recover costs for its transmission facilities. ATSI does not own or operate any distribution or generation facilities. TrAILCo owns, operates and maintains over 180 circuit-miles of transmission lines, substations and other transmission facilities operated at nominal voltages of 500 kv, 345 kv, 230 kv, 138 kv and 115 kv 1, including the Trans-Allegheny Interstate Line which became commercially operational on May 19, 2011, and the Black Oak SVC which became commercially operational in December Currently, TrAILCo s operating assets are located in the Allegheny Power Zone, with projects in the Met-Ed and Penelec Zones under construction. In the future, TrAILCo expects to construct, own, operate and maintain new transmission facilities required by the RTEP in all of the FirstEnergy Zones. TrAILCo is interconnected to the neighboring transmission systems of Dominion Virginia Power (DVP), AEP and TrAILCo affiliates Mon Power, Potomac Edison and West Penn Power. PJM is the Reliability Coordinator, Balancing Authority, Transmission Operator and Transmission Planner for all TrAILCo 100 kv and above facilities. TrAILCo is permitted by Attachment H-18 of the PJM OATT to recover costs for facilities it may own, operate and maintain in the Allegheny Power, Penelec, Met-Ed, JCP&L and ATSI Zones. TrAILCo does not own or operate any distribution or generation facilities. Penelec owns, operates and maintains 3,161 circuit miles of transmission lines, substations and other transmission facilities operated at nominal voltages of TrAILCo owns and operates limited 765 kv facilities but does not own any 765 kv transmission lines. 4

5 kv, 345 kv, 230 kv, 138 kv, 115 kv and 46 kv. Penelec has tie-lines with neighboring transmission systems of PP&L Electric Utilities (PP&L), New York State Electric & Gas, National Grid, Allegheny Electric Cooperative (AEC) and affiliates ATSI, Met-Ed, Potomac Edison and West Penn Power. PJM is the Reliability Coordinator, Balancing Authority, Transmission Operator and Transmission Planner for all Penelec 100 kv and above facilities. Penelec is permitted by Attachment H-6 of the PJM OATT to recover costs for its transmission facilities. Penelec also owns and operates distribution facilities but does not own or operate any generation facilities. Met-Ed owns, operates and maintains 1,422 circuit miles of transmission lines, substations and other transmission facilities operated at nominal voltages of 500 kv, 230 kv, 138 kv, 115 kv, 69 kv and 34.5 kv. MetEd has tie-lines with neighboring transmission systems of PP&L, Philadelphia Electric Company, AEC and affiliates Penelec, Potomac Edison and JCP&L. PJM is the Reliability Coordinator, Balancing Authority, Transmission Operator and Transmission Planner for all Met-Ed 100 kv and above facilities. MetEd is permitted by Attachment H-5 of the PJM OATT to recover costs for its transmission facilities. Met-Ed also owns and operates distribution facilities but does not own or operate any generation facilities. JCP&L owns, operates and maintains 2,569 circuit miles of transmission lines, substations and other transmission facilities operated at nominal voltages of 500 kv, 230 kv, 115 kv and 34.5 kv. JCP&L has tie-lines with neighboring transmission systems of PP&L, Long Island Lighting Company, Central Hudson Gas & Electric Company, Public Service Electric & Gas, Atlantic City Electric Company and affiliate Met-Ed. JCP&L is permitted by Attachment H-4 of the PJM OATT to recover costs for its transmission facilities. PJM is the Reliability Coordinator, Balancing Authority, Transmission Operator and Transmission Planner for all JCP&L 100 kv and above facilities. JCP&L also owns and operates distribution and generation facilities. Potomac Edison owns, operates and maintains 2,042 circuit miles of transmission lines, substations and other transmission facilities operated at nominal voltages of 500 kv, 230 kv, 138 kv and 115 kv. Potomac Edison has tie-lines with neighboring transmission systems of DVP, Potomac Electric Power Company and affiliates Met-Ed, Mon Power, Penelec, TrAILCo and West Penn Power. PJM is the Reliability Coordinator, Balancing Authority, Transmission Operator and Transmission Planner for all Potomac Edison 100 kv and above facilities. Potomac Edison is permitted by Attachment H-11 of the PJM OATT to recover costs for its transmission facilities. Potomac Edison also owns and operates distribution facilities but does not own or operate any generation facilities. Mon Power owns, operates and maintains 2,211 circuit miles of transmission lines, substations and other transmission facilities operated at nominal voltages of 500 kv, 345 kv and 138 kv 2. Mon Power has tie-lines with neighboring transmission systems of AEP, DVP and affiliates ATSI, Potomac Edison, 2 Mon Power owns and operates limited 765 kv facilities but does not own any 765 kv transmission lines. 5

6 TrAILCo and West Penn Power. PJM is the Reliability Coordinator, Balancing Authority, Transmission Operator and Transmission Planner for all Mon Power 100 kv and above facilities. Mon Power is permitted by Attachment H-11 of the PJM OATT to recover costs for its transmission facilities. Mon Power also owns and operates distribution and generation facilities. West Penn Power owns, operates and maintains 4,106 circuit miles of transmission lines, substations and other transmission facilities operated at nominal voltages of 500 kv, 345 kv, 230 kv, 138 kv and 115 kv. West Penn has tie-lines with neighboring transmission systems of AEP, DLCO and affiliates ATSI, TrAILCo, Mon Power, Penelec, Potomac Edison and TrAILCo. PJM is the Reliability Coordinator, Balancing Authority, Transmission Operator and Transmission Planner for all West Penn Power 100 kv and above facilities. West Penn Power is permitted by Attachment H-11 of the PJM OATT to recover costs for its transmission facilities. West Penn Power also owns and operates distribution facilities but does not own or operate any generation facilities. 6

7 (B) Technical and Engineering Qualifications The FirstEnergy Transmission System spans seven states and five PJM Transmission Zones and consists of approximately 24,000 miles of transmission lines. To assure that the system is operated reliably, assessments of the system are conducted annually by the FirstEnergy Transmission Owners and PJM. This is accomplished by evaluating system reliability against the federally-mandated Reliability Standards established by the North American Electric Reliability Corporation (NERC) and approved by the Federal Energy Regulatory Commission (FERC), the PJM reliability criteria, and the FirstEnergy Transmission Planning Criteria. The PJM assessment process follows the rigorous Regional Transmission Expansion Planning Protocol which develops the Regional Transmission Expansion Plan (RTEP) focusing on five-year and 15-year timeframes with the results shared through the PJM stakeholder process. Representatives of the FirstEnergy Transmission Owners actively participate in the PJM planning process and use this process to evaluate system conditions for future years. Results of these studies drive system upgrades to the overall PJM transmission system, including the FirstEnergy Transmission System. In addition, the FirstEnergy Transmission Owners perform internal studies that assess the FirstEnergy Transmission System and associated sub-transmission systems through nearterm and long-term planning windows. These internal studies identify thermal, voltage, voltage stability and dynamic stability issues on the transmission and sub-transmission systems. The PJM and FirstEnergy assessments ensure the FirstEnergy Transmission System and associated sub-transmission systems are operated in a reliable and secure manner. Models are created representing a wide variety of load levels and stressed conditions depending on the type of study being performed. When a potential criteria violation is identified, further study is initiated to determine if it can be resolved by a formal operating procedure and if a system upgrade is warranted. If a system upgrade is determined to be needed and is authorized by management, the upgrade is installed subject to any necessary PJM reviews. As mentioned previously both the PJM RTEP and the FirstEnergy Transmission Owners internal assessments identify potential projects throughout the FirstEnergy Transmission System footprint which are further reviewed and upgrades implemented where required to improve the reliability of the FirstEnergy transmission and sub-transmission systems. The FirstEnergy Transmission Owners have significant experience as Transmission Owners in responding to PJM s directives to build RTEP projects, and have never failed to build projects that PJM has determined are needed for reliability or market efficiency of the PJM transmission system. The FirstEnergy Transmission Owners build, operate and maintain their transmission facilities reliably and safely and in accordance with all governmental regulations as well as applicable industry requirements. FirstEnergy has three main transmission design offices staffed with engineers and designers. 3 At these locations, FirstEnergy trained and experienced engineers perform design, procurement and regulatory permitting activities necessary for the construction and modification of transmission lines and substations ranging from 34.5 kv up to FirstEnergy s design offices are located in Akron, Ohio; Reading, Pennsylvania; and Greensburg, Pennsylvania. 7

8 kv. 4 In addition to these professionals, FirstEnergy has a cadre of trained and experienced personnel dedicated to transmission system construction, operation and maintenance stationed throughout the entire FirstEnergy transmission system footprint. FirstEnergy engineers and support personnel provide a comprehensive suite of energy services that drive transmission construction. This is accomplished through their combined experience and knowledge of the technical, engineering and infrastructure requirements for transmission construction, including the power engineering services necessary for transmission lines, substation facilities, protection and controls. Overall, FirstEnergy s personnel have extensive direct, hands-on experience with all phases of design, build, maintenance and operation of the transmission system. Working in coordination with PJM, FirstEnergy professionals work to develop the best, most cost-effective solution to the reliability and market efficiency needs of the transmission system based on PJM s determination of the need for reliability and market efficiency improvements. Proactively over the years, FirstEnergy engineers have worked with PJM through multiple iterations of studies, cost estimates, right-of-way (ROW) and other regulatory considerations to ensure the final plans for construction of RTEP projects are the most effective and cost efficient. Over the years, FirstEnergy has developed an excellent working relationship with PJM Staff to facilitate discussions and reviews of the electrical need and the proposed solution for various transmission projects and has worked successfully with PJM to produce the best outcome. FirstEnergy has long-term alliances with several design firms including Burns & McDonnell, Black & Veatch and TRC. FirstEnergy s in-house staff is currently supplemented by about 205 full time equivalents from these and other firms for design work to perform necessary support on projects when in-house staff is unavailable to complete the work in a timely manner necessary. In addition, FirstEnergy maintains lists of certified contractors with proven records of building transmission projects. When these contractors are retained to construct a project, FirstEnergy professionals provide oversight management of the construction process including cost control, quality review and completion times. Recently, FirstEnergy announced plans to build a series of PJM RTEP projects to enhance reliability across its five PJM Transmission Zones. This initiative, known as Energizing the Future, will include transmission projects new or rebuilt high voltage power lines, new substations and the installation of specialized voltage regulating equipment. PJM has determined the projects are needed to enhance system reliability as the result of the deactivation of certain generating facilities. One of the key projects included in the initiative is the construction by ATSI of a new 345 kv transmission line in excess of 100 miles from the Bruce Mansfield Plant in Beaver County, Pennsylvania, to a new substation in the Cleveland suburb of Glenwillow. As designed, the new substation will connect with two existing 345 kv transmission lines in the Glenwillow area. To minimize impacts to property owners, approximately 70 percent of the project will consist of adding another circuit to existing 4 FirstEnergy engineers have professional licenses in the states in which FirstEnergy operates transmission facilities. 8

9 structures. In addition, much of the remaining length of the project will involve the use of existing ROW already controlled by ATSI. The route for this project, which traverses part of Cuyahoga, Summit, Portage, Mahoning, Columbiana, and Trumbull Counties in Ohio, and Beaver County, Pennsylvania, has been approved in Ohio by the Ohio Power Siting Board. The construction of the transmission line and substation will occur simultaneously in order to meet PJM s June 2015 in-service date. One of FirstEnergy s past transmission line construction successes is the 500 kv Trans- Allegheny Interstate Line (TrAIL) approved by PJM in TrAIL consists of 661 structures and extends 180 miles from southwestern Pennsylvania across West Virginia to northern Virginia. The project includes the construction of the 502 Junction Substation and modifications to other substations. The project was energized on May 19, 2011 two weeks prior to the June 1, 2011 in-service date set by PJM. This new line was needed to meet the demand for electricity in the mid-atlantic region and prevent overloading on the transmission grid. FirstEnergy Senior Transmission Management Team FirstEnergy s senior transmission management team is dedicated to the safe, reliable and efficient delivery of electricity through the FirstEnergy Transmission System. These individuals manage a dedicated full-time workforce of professional engineers, legal and business personnel focused on the planning, construction, operation and maintenance of the transmission system. Charles E. Jones is Senior Vice President of FirstEnergy and President of FirstEnergy Utilities, a business unit of FirstEnergy. He has responsibility for energy delivery, customer service, compliance with FERC transmission requirements, and energy efficiency activities, while leading FirstEnergy s 10 utility operating companies and its two stand-alone transmission companies. Mr. Jones began his career with Ohio Edison as a substation engineer in He held a variety of positions in the Akron, Marion and Elyria areas and, in 1995, was named President of Ohio Edison s Penn Power subsidiary. He returned to Akron in 1996 as division manager. Mr. Jones was subsequently named President of FirstEnergy s Northern Region in 1997, Vice President of Regional Operations in 2001, Senior Vice President of Energy Delivery and Customer Service in 2003, and President, FirstEnergy Solutions Corp., in He was named Senior Vice President, Energy Delivery and Customer Service, in 2009, and elected to his current position in Mr. Jones received a Bachelor of Science degree in Electrical Engineering from The University of Akron. He also attended the United States Naval Academy for two years and was a member of the Institute of Electrical and Electronics Engineers. James R. Haney is Vice President, Compliance and Regulated Services, and Chief FERC Compliance Officer for FirstEnergy Service Company, a subsidiary of FirstEnergy. Prior 9

10 to promotion to his current position, Mr. Haney served as President of FirstEnergy s West Virginia Operations. Mr. Haney joined Allegheny Energy, Inc. (Allegheny) in 1978 as an engineer. Following a series of promotions, he was named division manager in In 1996, he became Director, Transmission Projects and was promoted in 1998 to Vice President, Customer Operations. Mr. Haney was named Vice President, Transmission and Distribution, in 2003, prior to becoming Vice President, Transmission, in Upon the merger of Allegheny into FirstEnergy, he was promoted to President of West Virginia Operations in February Mr. Haney received a Bachelor s Degree in Electrical Engineering from West Virginia University and is a Registered Professional Engineer. He serves as a director for the West Virginia High Technology Consortium Foundation, Ohio Valley Electric Corporation and ReliabilityFirst Corporation (RFC). Carl Bridenbaugh is Vice President of Transmission for FirstEnergy Service Company. In his current position, Mr. Bridenbaugh is responsible for transmission operations, system planning and protection, transmission line and substation maintenance, asset and project management and transmission substation and line design. He also is FirstEnergy s interface with transmission organizations such as NERC, PJM and RFC. Mr. Bridenbaugh began his career with Ohio Edison Company, a FirstEnergy operating company, in 1988 as a transmission planning engineer and has held positions in the FirstEnergy organization as Manager, Transmission Planning and Director, Transmission Operations. Prior to promotion to his current position, Mr. Bridenbaugh was Director of Transmission Planning and Protection. Prior to joining Ohio Edison Company, he was an application engineer with General Electric Company. Mr. Bridenbaugh received a Bachelor s Degree in Electrical Engineering from the University of Detroit Mercy and a Master s Degree in Electrical Engineering from Union College. He is a Registered Professional Engineer in Ohio. FirstEnergy Transmission Organization The transmission function within FirstEnergy includes hundreds of highly skilled professionals organized in the following key departments: Asset and Project Management Transmission and Substation Design Transmission and Substation Services Transmission Planning and Protection Transmission Operations 10

11 (C) Demonstrated experience of the entity or its affiliate, partner, or parent company to develop, construct, maintain, and operate transmission facilities. Including a list or other evidence of transmission facilities previously developed regarding construction, maintenance, or operation of transmission facilities both inside and outside of the PJM Region. Through a series of several strategic mergers and asset transactions over the past 15 years, the most recent of which was completed in February 2011, FirstEnergy has grown its diverse and sizeable asset base. FirstEnergy is now uniquely positioned as the nation s largest contiguous electric system with complementary assets across its generation, transmission and distribution operations. These assets are in a prime location within PJM. FirstEnergy s vision is to be a leading regional energy provider, recognized for operational excellence, outstanding customer service and a commitment to safety; the choice for long-term growth, investment value and financial strength; and a company driven by its leadership, skills, diversity and character of its employees. Through the FirstEnergy Transmission Owners, FirstEnergy expects to invest approximately $700 million over the next several years in transmission upgrades across its five PJM Transmission Zones to help maintain system reliability following the deactivation of several older coal-based power plants. These projects include construction of a transmission line by ATSI from the Bruce Mansfield plant to a new substation near Cleveland, Ohio. Additionally, ATSI is building a new transmission operations facility in Akron, Ohio. The center will feature advanced computer systems to monitor grid reliability across the FirstEnergy Transmission System. Eventually, the transmission and substation operations of several FirstEnergy utilities will be moved to the new transmission operations facility to maximize efficiency. FirstEnergy is also enhancing the reliability of the distribution system through targeted investments in new technologies that provide greater information on system conditions and customer usage. New features have been introduced, including an online 24/7 Power Center and greater functionality on mobile devices that make it easier for customers to stay informed when outages occur. Asset and Project Management Department FirstEnergy s Asset and Project Management Department, comprised of transmission specialists, schedulers, engineers and project and construction managers, have three main responsibilities: 1) to develop and facilitate strategies and processes to maximize the value of FirstEnergy's transmission and distribution assets; 2) to manage the process and facilitate the development of FirstEnergy's transmission and distribution capital portfolio; and 3) to provide project management and construction site management support for FirstEnergy's capital projects. The Asset Management group is responsible for developing asset strategies and processes including those associated with spare equipment levels and total life-cycle analyses. Asset Management also manages Cascade which is FirstEnergy's asset management system. The Project Management groups 11

12 manage large transmission projects and work with each FirstEnergy Transmission Zone s project management to ensure capital projects are appropriately managed. Transmission and Substation Design Department The mission of the Transmission and Substation Design organization is to support regional operations and bulk transmission on design and technical activities associated with capital projects. Additionally, this group provides design and technical support on projects associated with electricity delivery to retail customers and, upon request, for projects undertaken by the generation business unit. This group also maintains engineering and material schedules, coordinates equipment specification and evaluation, drawing management, transmission system wireless communication attachment process and the PJM transmission interconnection study process. Transmission and Substation Services Department FirstEnergy s transmission and substation maintenance programs are designed to ensure the reliability and integrity of transmission infrastructure and substation equipment to safeguard employees and the public and to meet all state and federal regulatory requirements. These programs include preventive maintenance and corrective maintenance practices. Preventive maintenance is typically time and/or conditioned based. Corrective maintenance is used to address equipment deficiencies that are identified during or outside of a preventive maintenance program. All preventive maintenance and corrective maintenance practices are based on accepted electric utility practices, manufacturer s specifications, NESC, ASTM, ANSI and IEEE standards, Electric Power Research Institute Copper Book on power transformers, expertise from FirstEnergy engineers, managers, supervisors and other subject matter experts in the industry. Maintenance practices are designed to provide guidance to field personnel for the maintenance and testing of transmission infrastructure and substation equipment and to ensure compliance with federal and state regulations. FirstEnergy utilizes a combination of manufacturer s guidelines, utility industry transmission benchmarking, condition assessment and reliability evaluations to determine maintenance programs and intervals, and to determine when substation equipment should be repaired or replaced. The expected remaining life of equipment, in addition to other factors, is taken into consideration when determining whether to repair, replace or refurbish equipment. FirstEnergy retains maintenance records and/or inspection results as required by all federal and state regulations. FirstEnergy engineers assigned to the Transmission and Substation Services Department are responsible for commissioning infrastructure, equipment, relay and control installations, which includes releasing these assets for service. In addition to commissioning responsibilities, the Transmission and Substation Services Department engineers participate in equipment failure investigations and system mis-operations. Transmission Planning and Protection Department The Transmission Planning and Protection Department is responsible for planning as well as protecting the FirstEnergy Transmission System and associated sub-transmission systems in the PJM footprint. This analysis ensures compliance with NERC, PJM and 12

13 FirstEnergy reliability standards and criteria. Transmission Planning routinely performs studies and makes system enhancement recommendations for transmission (i.e. the PJM RTEP process) and sub-transmission system changes, new load connections and new generation connections. Transmission Protection provides relay system requirements, relay settings and operational event analysis for FirstEnergy transmission and subtransmission protection systems. The Transmission Planning and Protection Department activities drive the FirstEnergy transmission capital budget. In support of these activities, and by working with PJM and RFC, the Transmission Compliance and Models group is responsible to develop and maintain load flow, short circuit and dynamic stability models. Transmission Operations Department The Transmission Operations group operates three control centers with direct responsibility for the operation of over 24,000 circuit-miles of transmission lines with voltages ranging from 34.5 kv to 500 kv. The three control centers are staffed 24/7 by 84 NERC and PJM certified Transmission System Operators and Shift Supervisors. FirstEnergy maintains a state-of-the-art Energy Management System (EMS) that allows for the monitoring and control of the bulk electric system. FirstEnergy personnel have experience in designing and managing data acquisition systems that are integrated into the bulk transmission assets. These systems acquire data made available to FirstEnergy transmission control centers and transmit FirstEnergy data to PJM to assist in its role as Reliability Coordinator. The three control centers also utilize state-of-the-art large-screen visualization, which affords the Transmission System Operators effective situational awareness of the status of the FirstEnergy Transmission System. FirstEnergy has been recognized as a NERC-approved continuing education provider and maintains an internal training department dedicated to Transmission System Operator training and credential maintenance. FirstEnergy Transmission Operations also maintains a power network analysis engineering group responsible for the review and support of real-time network analysis and EMS network model maintenance. FirstEnergy is committed to a culture of compliance in its Transmission Operations Compliance and Procedures group, which is responsible for procedure development and regulatory compliance. 13

14 (D) Previous record of the entity or its affiliate, partner, or parent company to adhere to standardized construction, maintenance and operating practices Standardized Construction Maintenance and Operation Practices FirstEnergy s transmission construction, maintenance and operation standards and practices are currently publicly posted on the PJM website at: pjm.com/planning/designengineering/maac-to-guidelines. The standards and practices documents posted at the above website are as follows: Transmission System Design Criteria Substation Bus Configuration and Substation Design Requirements Spare Equipment Philosophy Design, Application, Maintenance and Operations Technical Requirements Ratings Guides Installation & Commissioning Inspection, Testing and Acceptance (E) Capability of the entity or its affiliate, partner, or parent company to adhere to standardized construction, maintenance and operating practices FirstEnergy has a long history of proven adherence to all state, federal and industry practices and requirements. FirstEnergy has well-established design standards across its system for implementation of new and retro-fit projects. These standards are based on industry, local, state and federal requirements in addition to good utility practice. These standards are reviewed and revised on a regular basis. Additionally, FirstEnergy has documented standards, and materials for timely emergency restoration following failures of both substation and transmission line equipment. All identified project design solution alternatives are thoroughly reviewed during the conceptual design layout period, and include constructability review. FirstEnergy was involved in the creation and intent to post the standard Technical Guidelines and Recommendations outlined in response to part (D) above. 14

15 (F) Financial statements of the entity or its affiliate, partner, or parent company. Please provide the most recent fiscal quarter, as well as the most recent three fiscal years, or the period of existence of the entity, if shorter, or such other evidence demonstrating an entity s current and expected financial capability acceptable to the Office of the Interconnection The following documents are provided either as websites (below) or as appendices where the online information is not available: Financial statements of FirstEnergy for 2010 through 2012 Financial statements of FirstEnergy for the quarter ending March 31, Moody s, Fitch and S&P rating agency reports (G) Commitment by the entity to execute the Consolidated Transmission Owners Agreement, if the entity becomes a Designated Entity. All of the FirstEnergy Transmission Owners companies are signatories to the Consolidated Transmission Owners Agreement (CTOA) and active participants in the Transmission Owners Sector of PJM and the CTOA s Administrative Committee, Legal Issues Team and various working groups. The FirstEnergy Transmission Owners commit to remaining signatories to the CTOA while they are transmission owning members of PJM. Met-Ed, JCP&L and Penelec were transmission owning members of PJM and signatories to a predecessor transmission owners agreement prior to FERC s designation of PJM as an Independent System Operator and later as a Regional Transmission Organization. Met-Ed, JCP&L and Penelec were members of the original PJM power pool and have remained members of PJM as it has evolved over the past fifty-plus years. Mon Power, Potomac Edison and West Penn Power, doing business as Allegheny Power, became signatories to a predecessor transmission owners agreement on December 15, Subsequently, Met-Ed, JCP&L, Penelec, Mon Power, Potomac Edison and West Penn Power became signatories to the CTOA when it replaced the predecessor transmission owner agreements. TrAILCo became a signatory to the CTOA on November 8, 2007 followed by ATSI becoming a CTOA signatory on December 17,

16 (H) Evidence demonstrating the ability of the entity to address and timely remedy failure of facilities. The FirstEnergy Transmission Owners have a strong record of responding quickly and safely to service interruptions. Most recently, this was demonstrated by FirstEnergy s response to Hurricane Sandy, which struck FirstEnergy s service area on October 29, Sandy ranks as the most damaging weather event faced by FirstEnergy. By comparison, Sandy disrupted service to nearly 2.6 million FirstEnergy customers which is more customers than Hurricane Irene and the October 2011 snowstorm combined and more than twice as many customers as the 2011 Summer derecho. By the time Sandy s wind and rains ceased and floodwaters receded, the super storm had crossed every state served by the FirstEnergy. Sandy s hurricane-force winds and rains hammered FirstEnergy s operating companies in New Jersey, Pennsylvania and parts of Maryland. In addition, FirstEnergy service areas in western Maryland and parts of West Virginia were blanketed with up to three feet of snow and wind gusts of up to 80 mph. In Ohio, FirstEnergy s service area along the Lake Erie shoreline experienced high winds and rain. FirstEnergy s transmission and distribution utilities responded to the catastrophic destruction caused by Sandy with the largest mobilization of crews, equipment, material and support in FirstEnergy history. While the regional dispatch offices of FirstEnergy's utilities directed local restoration efforts, FirstEnergy's emergency operations center in Akron, Ohio, supported the overall service restoration effort. More than 20,000 workers, comprised of FirstEnergy employees, other utility personnel and contractors, joined the massive service restoration effort. Linemen, hazard responders, damage assessors, and other service and support personnel were engaged in restoring service to customers. Companywide, crews responded to more than 65,000 reports of lines down and other hazards. During the restoration effort, approximately 20,000 damaged crossarms, 6,300 utility poles and 4,600 transformers were replaced and 700 miles of wire hung. Overall, FirstEnergy's three customer contact centers received 1.5 million outage calls, the most ever taken in a single service restoration event. In the face of many challenges, crews restored service to more than half of the affected FirstEnergy customers within three days and two-thirds of customers within five days. More than 95 percent of the affected FirstEnergy customers in Pennsylvania, Ohio, West Virginia and Maryland had service restored within eight days of Hurricane Sandy coming ashore. By day 13 over 95 percent of JCP&L s customers had their service restored. In addressing large-scale outages, securing outside utility crews, electrical contractors and tree contractors can be challenging as utilities impacted by the storm are pursuing the same pool of utility workers and support personnel. To bring in sufficient crews to tackle the historic rebuild effort in a safe and timely manner, FirstEnergy worked with six mutual-aid assistance groups, including Mid-Atlantic Mutual Assistance, the New York Mutual Assistance Group, Southeastern Electric Exchange, Great Lakes Mutual Assistance, Midwest Mutual Assistance and Western Region Mutual Assistance. Additionally, the Dept. of Energy volunteered personnel and contractors from the Bonneville Power Administration, Western Area Power Administration and 16

17 Southwestern Power Administration. In all, workers were recruited from more than 30 states and Canada, coming from as far away as Oregon and California. As part of the restoration process, 13 helicopters flew about 10,000 miles to perform aerial patrols on FirstEnergy s transmission, sub-transmission and distribution systems. Crews worked 16 hours with eight hours mandatory rest until the job was done. And, despite challenging work conditions, no significant safety incidents occurred. Effective communication with key state personnel was vital to the successful service restoration effort. In New Jersey, JCP&L implemented its recently enhanced emergency communications plan during Sandy, providing information updates to local officials, the Board of Public Utilities (BPU), legislators and the governor, including participation in twice-daily calls with the BPU president and governor. In Ohio, daily communications were provided to the governor, the chairman of the Public Utilities Commission of Ohio, and the mayor of Cleveland. In Pennsylvania, updates were provided to local officials, the Public Utility Commission, the General Assembly and the governor's staff. In Maryland, frequent status updates were provided to the governor and his administration s energy advisor, and included helicopter tours of storm-ravaged Garrett County to show the extent of the damage to the electrical infrastructure. FirstEnergy s ability to have skilled resources available to restore transmission facilities is measured by the industry standard of outage duration. FirstEnergy s outage duration was better than first quartile in four of the past six years (based on PJMs Performance Metrics Comparison report). 5 (I) Description of the experience of the entity in acquiring rights of way (ROW) To address the right-of-way (ROW) requirements of the large FirstEnergy Transmission System, FirstEnergy has a substantial full-time internal staff responsible for ROW acquisition. The ROW group has personnel throughout the FirstEnergy transmission zones with numerous ROW acquisition efforts underway at all times. Presently, FirstEnergy has hundreds of millions of dollars in planned transmission underway for 2013 for which the necessary ROW have been or are being acquired. This follows an additional several hundred million dollars in transmission completed in 2012 for which substantial ROW acquisition also was required. Additionally, FirstEnergy has the ability to exercise eminent domain in the states covered by its transmission zones. The FirstEnergy ROW group has considerable experience working within the eminent domain construct to timely effect construction of RTEP projects. FirstEnergy also benefits from participation in the Midwest Utilities Real Estate Managers group and other utility real estate professionals groups to standardize procedures and to collaborate on real estate issues making the entire process more efficient and more transparent. 5 For the two years that FirstEnergy did not meet this criteria, associated long-duration outages were a result of the SF6 buss failure at Smithburg and, as noted above, the major storms that occurred across its service territory in

18 Credit Opinion: FirstEnergy Corp. Global Credit Research - 27 Feb 2013 Akron, Ohio, United States Ratings Category Outlook Issuer Rating Sr Unsec Bank Credit Facility Senior Unsecured FirstEnergy Solutions Corp. Outlook Issuer Rating Sr Unsec Bank Credit Facility Bkd Senior Unsecured Cleveland Electric Illuminating Company (The) Outlook Issuer Rating First Mortgage Bonds Senior Secured Senior Unsecured Pref. Stock Jersey Central Power & Light Company Outlook Issuer Rating Senior Secured MTN Senior Unsecured Pref. Stock Moody's Rating Negative Baa3 Baa3 Baa3 Stable Baa3 Baa3 Baa3 Stable Baa3 Baa1 Baa1 Baa3 Ba2 Negative Baa2 (P)A3 Baa2 Ba1 Contacts Analyst Phone Scott Solomon/New York City William L. Hess/New York City Key Indicators [1][2]FirstEnergy Corp. (The) LTM 9/30/ (CFO Pre-W/C + Interest) / Interest Expense 3.7x 3.7x 4.1x 3.5x (CFO Pre-W/C) / Debt 14% 14% 17% 16% (CFO Pre-W/C - Dividends) / Debt 10% 10% 13% 12% Debt / Book Capitalization 54% 53% 60% 62% [1] All ratios calculated in accordance with the Global Regulated Electric Utilities Rating Methodology using Moody's standard adjustments. [2] 2011 Financial metrics reflect the merger with Allegheny Energy effective on February 25, 2011.

19 Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers Scale and diversity of rate regulated cash flows Fairly supportive regulatory environments in multi-state service territories Commitment to strengthen balance sheet of its unregulated business segment Reduced financial flexibility due to Hurricane Sandy Assertions of over-earning and criticism around service restoration could negatively influence JCP&L's rate case More elevated risk profile than a vertically-integrated utility Consolidated financial metrics weakly position company in Baa3 rating category Corporate Profile FirstEnergy Corp. (FE: Baa3, negative outlook) owns twelve regulated utilities that collectively serve 6 million customers and an unregulated electric generating portfolio of approximately 18,000 megawatts located primarily in the Midwest with a heavy concentration of nuclear and super-critical base load coal plants. FE's regulated utilities consist of two FERC-regulated transmission-only utilities: American Transmission Systems, Inc. (ATSI: Baa1, under review for possible downgrade) and Trans-Allegheny Interstate Line Company (TrAILCo: A3, under review for possible downgrade) and 10 state-regulated utilities, all of which but one are electric transmission and distribution (T&D) utilities. Challenges confronting FE's regulated businesses includes controlling costs in face of flat distribution sales and managing a credit supportive rate case outcome in a rate filing made by Jersey Central Power & Light Company (JCP&L: Baa2, negative) in the wake of Hurricane Sandy. This case has the potential to be politicized due to accusations of over earning as well as the company's request to recover significant storm-related costs. FE's two primary unregulated subsidiaries are FirstEnergy Solutions, Inc. (FES: Baa3 senior unsecured, stable) and Allegheny Energy Supply Company, LLC (AE Supply: Baa3 senior unsecured debt, stable). Their generating capacity is connected to the PJM Power Pool. This portfolio includes super-critical coal-fired generation (8,176 MW or 45% of the portfolio), nuclear generation (3,991 MW or 22%), sub-critical coal-fired generation (2,506 MW or 14%), gas-fired generation (1,745 MW or 10%) and renewable generation (1,658 MW or 9%). The sales strategy of the company's non-regulated generating subsidiaries is asset-based, meaning that sales are largely limited to its own electric production and are in market areas which can be served (i.e. hedged) with the energy produced. FES is focused on selling at least 90% of its generation one-year forward to three key retail sales channels primarily located within the footprint of its generation assets: industrial and large commercial customers (referred to as direct sales); government aggregation (primarily residential and small business customers); and Provider of Last Resort (PoLR) load requirements. FES' objective is to have no more than 10% of its generation exposed to the spot wholesale power market at any time while maintaining a laddered 3-4 year hedging approach to mitigate cash flow volatility. That said, FE's non-regulated generating business is operating in a weak business environment driven by a sluggish recovering economy and depressed power and natural gas prices. In an effort to improve FES and AE Supply's positioning within its current rating category, FE has committed to reduce these combined entities' debt by a minimum of $1.5 billion, or 20%, by year-end. Rating Rationale Moody's evaluates FE's consolidated financial performance relative to the Regulated Electric and Gas Utilities rating methodology and the Unregulated Utilities and Power Companies methodology both of which were published in August The emphasis, however, is on the regulated methodology to reflect the scale and scope of FE's regulated operations and that cash flow up-streamed to FE is primarily derived from these operations.

20 As depicted in the grid below, FE's implied ratings under the regulated methodology is Baa3 compared to its current Baa3 senior unsecured rating. The indicated ratings under the methodology considers FE's consolidated financial performance based on a three-year historical average and a month prospective basis. FE's Baa3 senior unsecured rating is supported by the scale and diversification of the company's regulated T&D subsidiaries, the regulatory supportiveness provided to these companies and steps taken by management to offset a weak business environment, including a planned issuance of up to $300 million of common equity during The negative outlook, however, reflects headwinds facing the consolidated entity, including increased debt levels, weakened key financial metrics and reduced financial flexibility DETAILED RATING CONSIDERATIONS Large and diversified regulated utility platform The merger with Allegheny Energy completed in February 2011 increased the scale and diversification of FE's regulated businesses. FE owns twelve regulated utility subsidiaries that operate in six states with an aggregate rate base of approximately $13 billion. Utility subsidiaries include Ohio Edison (Ohio), Penn Power (which is owned by Ohio Edison and operates in Pennsylvania), Cleveland Electric Illuminating (Ohio), Toledo Edison (Ohio), Jersey Central Power and Light (New Jersey), Metropolitan Edison (Pennsylvania), Pennsylvania Electric Company (Pennsylvania and New York), American Transmission System, Inc.(ATSI), West Penn Power Company (Pennsylvania), Monongahela Power Company (West Virginia), The Potomac Edison Company (Maryland and West Virginia), and TrAILCo. TrAILCo's primary asset is a 150-mile FERC-regulated transmission line that was energized in May 2011 and will be a solid contributor of earnings and cash flow going forward. With the exception of Monongahela Power Company, all of FE's regulated utility subsidiaries are fairly low-risk transmission-only, distribution-only or transmission and distribution utilities (Monongahela is the only vertically integrated utility). Collectively, these regulated businesses accounted for more than 60% of FE's consolidated revenue, approximately 80% of consolidated operating income and 65% of consolidated assets during the nine months ended September 30, From a regulated electric delivery perspective, approximately 37% of total delivered volumes is to customers in Ohio, 35% in Pennsylvania, 14% in New Jersey and the remainder to customers in West Virginia and Maryland. We view the diversity associated with the ownership of multiple utilities positively due to the insulation that benefits the parent company from any unexpected adverse event or other negative development occurring at one of its companies or with one of its state service territories. FE's portfolio of regulated businesses provides financial support with strong predictable cash flows and up-stream dividend support. It is our expectation that FE's regulated utility subsidiaries will provide FE parent with an aggregate dividend equal to its annual dividend to shareholders through at least This strategy has been a credit positive for FES and AE Supply, and a distinction from some peers, in that it has enabled the two unregulated subsidiaries to retain all of their operating cash flow for internal investment. Fairly supportive regulatory environments in multi-state service territory As discussed in Moody's rating methodology for Regulated Electric and Gas Utilities, the credit supportiveness of the regulatory framework under which a utility operates is a critical rating factor. Generally speaking, the regulatory environments in Pennsylvania, Ohio, and New Jersey have been fairly predictable and supportive in granting reasonable rate increases and cost-recovery mechanisms but somewhat less predictable in West Virginia and Maryland. The regulatory frameworks provided by the FERC to ATSI and TrAILCo are considered strong. Retail electric markets in FE's service territories in Ohio, Pennsylvania, New Jersey and Maryland are competitive in terms of electricity supply. Consequently, all customer classes have the ability to choose their retail energy supplier. FE's utilities' primary role in these states is the delivery of power to customers over their transmission and distribution network and, in return, the collection of energy delivery charges regardless of a customer's choice of electricity supplier. Because these utilities also have provider of last resort obligations (PoLR), they must provide retail power to consumers in their respective service territory who have not chosen an alternative energy supplier. The costs associated with POLR are fully passed through to the utility's customers with no meaningful financial impact. Generally speaking, utilities operating in these states are provided an adequate opportunity to recover their

21 respective costs and earn an allowed return. From the perspective of our rating methodology, the overall regulatory treatment that FE's regulated utilities receive from the multiple jurisdictions in which they operate and their respective ability to earn costs is considered to be adequate, scoring on average in the mid-baa range. From a consolidated perspective, however, we notch downward to reflect FE's exposure to unregulated cash flows. As such, FE maps to rating factors in the range of high-ba, low - Baa range for Factor 1: Regulated Framework and for Factor 2: Ability to Recover Costs and Earn Returns. Commitment to strengthen balance sheet of its unregulated business FE's intention to reduce the consolidated debt at its unregulated businesses by a minimum of $1.5 billion, or approximately 20% by year-end is a credit positive for FES/AE Supply and is expected to improve their positioning within the Baa3 rating category. Specifically, we expect the reduced debt profile to allow FES/AE Supply to achieve key financial metrics of CFO pre-w/c to debt and RCF to debt in excess of 18% and interest coverage in excess of 4.5 times annually during the three-year period , levels we view as appropriate for the current rating level. The financial performance of these companies has been negatively impacted by a decline in electric demand, the price paid for electricity in the Midwest and reduced capacity pricing levels. For example, in 2012, FE had originally anticipated selling 104 TWh of unregulated power to retail channel customers at an average price of $58 MWh but achieved 100 TWh at $56 MWh. Proceeds from a proposed asset transfer and asset sales, both of which FE intends to close prior to year-end, are to facilitate the debt reduction. To that end, FE filed a generation transfer request with the West Virginia Public Service Commission that involved its vertically integrated Monongahela Power Company (MP: Baa3, stable) acquiring AE Supply's 80% ownership in the Harrison Power Station at book value (approximately $1.2 billion) and placing it into its rate base. The transfer would result in MP having sole ownership in the 1,984 megawatt fullyscrubbed coal plant. As part of the transaction, MP would sell its 8% ownership in the Pleasants Plant to AE Supply. MP would fund the transaction with a combination of debt issuance and equity provided by FE which could potentially net AE Supply $1.1 billion. Separately, FE has announced its intention to sell up to 1,181MW's of pumped storage hydro generating capacity. These generation assets include AE Supply's approximate 24% ownership (660MW's) in the 2,775 Bath County Pumped Storage Hydro facility located in Virginia and FES' sole ownership of the 450 MW Pennsylvania-based Seneca Pumped Storage Generating Station. We would expect FE to issue common equity should the net proceeds from the above proposed transactions result in less than $1.5 billion of debt reduction. In addition, FE has committed to issuing up to $300 million in common equity in Hurricane Sandy negatively impacted FE's financial flexibility Moody's estimates that FE's consolidated adjusted debt at year-end 2012 stood at approximately $23 billion, almost $1 billion more than previously expected and up from approximately $21.6 billion at year-end The increase in consolidated debt levels was driven in part by damage caused by Hurricane Sandy which required debt funding of the material restoration costs that has pressured FE's financial flexibility. Total storm restoration costs associated with Sandy is currently estimated at $860M (JCP&L's share is $629M or 74% of total costs), of which approximately $485 million was paid out during 4Q12 and funded in large with shortterm debt. The remaining $375 million, which is reflected in working capital at year-end 2012, will also be funded with short-term debt. Recently, JCP&L received a financing order from the New Jersey Board of Public Utilities (BPU) for long-term debt issuance of up to $750 million to repay short-term debt incurred to fund storm restoration costs. As a result, JCP&L's adjusted leverage will increase by approximately 30% relative to pre-sandy levels which has pressured its key financial metrics that have historically positioned the company firmly in the Baa2- rating category. Assertions of over-earning and criticism around service restoration could negatively influence JCP&L's rate case In July 2012, the New Jersey Board of Public Utilities (BPU) requested JCP&L file a rate case utilizing a calendar test year, including known adjustments, to assure that JCP&L's rates are just and reasonable. This request was driven in part by assertions made by the New Jersey Division of Rate Counsel, who stated its belief that

22 JCP&L was earning an unreasonable return. Specifically, the Division of Rate Counsel cited an opinion that, using FERC Form 1 data, JCP&L had earned a 12.37% return on rate base in JCP&L responded to this petition stating that their achieved return on equity is currently within a reasonable range (10.1% ROE for the twelve month period ended June 30, 2011). Pursuant to BPU's request, JCP&L filed a rate case in November 2012, requesting a $31.5 million rate increase based on an 11.5% ROE request and a 53.8% equity capital ratio. Prior to December 2012, JCP&L had not filed a rate case in years; its last rate case was effective in 2005, when the BPU approved an order allowing a 9.75% ROE. In February 2013, JCP&L included in its amended rate case recovery of Sandy-related storm costs. The BPU is expected to issue its order late in fourth quarter In our opinion, JCP&L is at increased regulatory risk due to the Division of Rate Counsel's claims that it had been earning unreasonable returns and the criticism around service restoration efforts in the aftermath of Sandy. As such, we see a potential for a rate case outcome that is credit negative. Taking into consideration JCP&L's increased leverage profile, if the BPU were to order a rate reduction as part of the current rate case or if the company is unable to recover its Sandy-related costs in a reasonable manner, JCP&L's financial metrics would likely be severely pressured and the company could face a rating downgrade. Because FE is highly dependent on JCP&L (we estimate that approximately 20% of total distributions received from its utility subsidiaries in 2012 were sourced from JCP&L), a downgrade of JCP&L could potentially trigger a downgrade of FE. Consolidated cash flow coverage metrics weakly position FE in the Baa3 rating category We estimate FE's consolidated key financial metrics to have weakened in 2012, with consolidated CFO pre-w/c to debt of approximately 13%, retained cash flow to debt of 9% and interest coverage of 3.7 times, compared to 17%, 13% and 4.1 times in 2010, the year prior to its merger with Allegheny Energy, Inc. These estimated key financial metrics for 2012 include the impact of Hurricane Sandy on FE's consolidated operating cash flows. Excluding this impact, consolidated key financial metrics would have been only slightly lower than FE's 2011 financial performance of approximately 14.4% consolidated CFO pre-w/c to debt, 10.3% retained cash flow to debt and 3.7 times interest coverage which positioned the company weakly in the Baa3 rating category. From a key financial metric perspective, a holding company that owns regulated utilities should achieve CFO pre- WC to debt and retained cash flow to debt in the range 13-16% and 9-12%, respectively, to achieve a Baa3 rating. Given FE's more elevated risk profile, we are the opinion that the company should achieve consolidated financial metrics more toward the high-end of these ranges. As such, we believe FE will need to achieve key consolidated financial metrics of CFO pre-wc to debt of at least 15%, retained cash to debt of 11% and interest coverage of 3.8 times on a sustainable basis to maintain its current rating. Peer comparables for FE include, among others, Exelon Corporation (Exelon: Baa2, stable), Public Service Enterprise Group (PSEG: Baa2, stable) and PPL Corporation (PPL: Baa3, stable). Key financial metrics for these companies during the trailing twelve months ended September 30, 2012 included CFO pre-wc to debt and retained cash flow to debt of 24% and 17%, respectively, at Exelon, 20% and 12% at PSEG and 16% and 13% at PPL. Liquidity FE's near-term liquidity profile is considered adequate as the company appears to have sufficient liquidity to fund its near-term requirements. FE had $61 million of consolidated cash at January 31, 2013 and the family had access to approximately $3.3 billion in aggregate liquidity under various committed credit facilities totaling $5.6 billion. FE parent does not have a commercial paper program. Its primary external source of liquidity is a 5-year $2.0 billion revolving credit facility due May In addition to FE, each of its regulated utility operating subsidiaries with the exception of its transmission utilities are named co-borrowers with contractually defined sub-limits. Availability under this facility as of January 31, 2013 was $776 million. FirstEnergy Transmission, LLC (FET - not rated), the parent company of ATSI and TrAILCo, is party to a 5-year $1.0 billion revolving credit facility due May 2017 (similarly, ATSI and TRAILCo are named co-borrowers). This facility is fully drawn.

23 A money pool arrangement provides FE's regulated companies the ability to borrow from each other and the holding company. Lastly, $2.5 billion is available to FES and AE Supply under a separate syndicated revolving credit facility expiring in May 2017 that is subject to separate borrowing sub-limits for each borrower. This facility is expected to remain undrawn as a primary purpose is to provide contingent liquidity in the event of a credit event. Specifically, as part of normal business activities, FES and to a lesser extent AE Supply enter into various agreements that contain collateral provisions that are contingent upon its credit ratings or the occurrence of a "material adverse event." As of December 31, 2012, FES and AE Supply's exposure under these collateral provisions under a "material adverse event" was $628 million (AE Supply, $55 million), of which $427 million would be triggered by a credit rating downgrade to Ba1 (AE Supply, $6 million). Given the size of FES\AYE Supply's credit facility, this potential collateral requirement appears manageable. Each revolving credit facility contains only one financial covenant, applicable to each listed borrower separately, which is a requirement to maintain a consolidated debt to total capitalization ratio of no more than 65% (FET's requirement is 70%). All borrowers were in compliance with this requirement as of December 31, Terms of the syndicated revolving credit facilities include a representation that no material adverse change has occurred, albeit only at the time of initial execution of the revolving credit agreement. Subsequent usage of the credit facilities does not require such a representation. FE had approximately $2.3 billion in consolidated short- term borrowings as of December 31, We expect the company to reduce its short-term debt balances with proceeds from long-term offerings. Recently, JCP&L received a financing order from the New Jersey Board of Public Utilities (BPU) for long-term debt issuance of up to $750 million to repay short-term debt. FE's anticipates generating approximately $3.2-$3.4 billion in cash flow from operations in Anticipated cash outflows include $920 million for dividends, $2.4 billion for anticipated capital expenditures and $205 million for nuclear fuel, suggesting a net cash shortfall in the range of $ million. FE has committed to issuing up to $300 million of common equity during Rating Outlook FE's rating outlook is currently negative and reflects headwinds facing the consolidated entity, including increased debt, weakened key financial metrics and reduced financial flexibility. What Could Change the Rating - Up Upward rating pressure is unlikely absent a significant shift in the company's mix of regulated and unregulated businesses or a material improvement in power prices. Nevertheless, financial ratios incorporating Moody's standard adjustments that would be consistent with a upgrade would be a sustainable ratio of CFO pre-w/c to debt in excess of 19% and CFO pre-w/c interest coverage of greater than 4.0x. What Could Change the Rating - Down To maintain its current ratings, we believe FE will need to achieve key consolidated financial metrics of CFO pre- WC to debt of at least 15%, retained cash to debt of 11% and interest coverage of 3.8 times on a sustainable basis. These specific levels take into consideration FE's consolidated risk profile and the financial performance and rating levels of its peers. While these metrics appear attainable, to achieve them the company will likely need to have a constructive regulatory outcome in New Jersey, sustain reductions to operating costs, increase sales from its unregulated businesses and manage consolidated debt levels. Signs over the near-term that FE will be unable to meet these criteria would likely result in a downgrade. Rating Factors FirstEnergy Corp. (The) Regulated Electric and Gas Utilities Industry [1][2] LTM 9/30/2012 Moody's month

24 Forward View* As of February 2013 Factor 1: Regulatory Framework (25%) Measure Score Measure Score a) Regulatory Framework Baa Ba Factor 2: Ability To Recover Costs And Earn Returns (25%) a) Ability To Recover Costs And Earn Returns Baa Baa Factor 3: Diversification (10%) a) Market Position (10%) A A b) Generation and Fuel Diversity (0%) Ba Ba Factor 4: Financial Strength, Liquidity And Key Financial Metrics (40%) a) Liquidity (10%) Baa Baa b) CFO pre-wc + Interest/ Interest (3 Year Avg) (7.5%) 3.8x Baa 3.4x- Baa 3.8x c) CFO pre-wc / Debt (3 Year Avg) (7.5%) 14.6% Baa 13-16% Baa d) CFO pre-wc - Dividends / Debt (3 Year Avg) (7.5%) 10.8% Baa 9-12% Baa e) Debt/Capitalization (3 Year Avg) (7.5%) 55.5% Ba 54-58% Baa/Ba Rating: a) Indicated Rating from Grid Baa3 Baa3 b) Actual Rating Assigned Baa3 Baa3 * THIS REPRESENTS MOODY'S FORWARD VIEW; NOT THE VIEW OF THE ISSUER; AND UNLESS NOTED IN THE TEXT DOES NOT INCORPORATE SIGNIFICANT ACQUISITIONS OR DIVESTITURES [1] All ratios are calculated using Moody's Standard Adjustments. [2] As of 9/30/2012; Source: Moody's Financial Metrics 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN

25 INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable, including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading "Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy." For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN AFSL and/or Moody's Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to

26 make any investment decision based on MOODY'S credit rating. If in doubt you should contact your financial or other professional adviser.

27 Credit Opinion: American Transmission Systems, Incorporated Global Credit Research - 08 Nov 2012 Akron, Ohio, United States Ratings Category Outlook Senior Unsecured Parent: FirstEnergy Corp. Outlook Issuer Rating Sr Unsec Bank Credit Facility Senior Unsecured Moody's Rating Stable Baa1 Stable Baa3 Baa3 Baa3 Contacts Analyst Phone Scott Solomon/New York City William L. Hess/New York City Key Indicators [1]American Transmission Systems, Incorporated LTM 6/30/ (CFO Pre-W/C + Interest) / Interest Expense 4.9x 4.0x 6.4x 5.9x (CFO Pre-W/C) / Debt 22% 17% 23% 18% (CFO Pre-W/C - Dividends) / Debt 17% -13% 13% 11% Debt / Book Capitalization 42% 42% 50% 51% [1] All ratios calculated in accordance with the Global Regulated Electric Utilities Rating Methodology using Moody's standard adjustments. Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Low business risk profile - Supportive regulatory environment - Solid financial profile - Parent's policy of managing its subsidiaries as a consolidated system Corporate Profile American Transmission System, Incorporated (ATSI: Baa1 senior unsecured, stable), an operating subsidiary of FirstEnergy Transmission, LLC (FET: not rated), is a FERC regulated transmission company ultimately owned by

28 FirstEnergy Corp. (FE: Baa3, Stable Outlook). ATSI owns high-voltage transmission facilities primarily in Ohio including approximately 5,800 pole miles of transmission lines. ATSI's principal business is providing transmission services to electric energy providers and power marketers for which it receives a fee that is regulated by the Federal Energy Regulatory Commission (FERC). Operational control of ATSI's transmission facilities transferred to PJM from the MISO in June The primary rationale for the transfer was to align all of FE's transmission facilities in PJM. ATSI was formed in In 2000, several of FE's regulated utilities (Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison Company and Pennsylvania Power Company) transferred their transmission assets to ATSI. ATSI's has one long-term note outstanding: $400 million of 5.25% senior notes due January SUMMARY RATING RATIONALE Moody's evaluates ATSI's consolidated financial performance relative to the Regulated Electric and Gas Utilities rating methodology published in August ATSI's indicated rating as depicted in the grid below is A3 compared to its Baa1 senior unsecured rating. ATSI's Baa1 senior unsecured rating reflects its low business risk profile and the strong supportive regulatory environment provided by the FERC that usually facilitates predictable cash flows and a solid financial profile. The rating, however, is constrained by FE's policy of managing its subsidiaries as a consolidated system. DETAILED RATING CONSIDERATIONS The most important drivers for ATSI's rating are as follows: - Low risk business profile ATSI's business plan is dedicated exclusively to the transmission of high voltage electricity and is considered to be low risk. ATSI's assets are long lived, have relatively low operating risk and operate as a monopoly within its service territory. ATSI bears no commodity price risk but has some exposure to transmission demand on its system. - Supportive regulatory environment provides steady, stable cash flows As an independent transmission company, ATSI's rates are subject to regulation by the FERC. In order to encourage the separation of transmission systems from the generation and sale of electricity, and to facilitate greater investment in transmission infrastructure, the FERC has allowed independent transmission system owners to earn incentive rates of return that tend to be above those allowed for regulated electric utilities. The FERC currently allows ATSI to collect in its rates a 12.38% return on equity. Because the rate setting processes do not require rate hearings at the state commission level or contested proceedings before regulators, and since they work to ensure timely recovery, we generally consider revenues determined under this FERC regulatory framework to be more stable and predictable than other regulated utility businesses. As a result, within the framework of the Methodology, ATSI maps to a rating factor in the Aa range for Factor 1: Regulatory Framework. ATSI's rates are established using a formulaic historical-looking cost-of-service model known as Attachment H, which is recalculated annually and provides the utility the ability to recover increased or unexpected expenses in future rates. While the formulaic rate setting mechanic generally provides assurance of cost recovery within a two year period, it is still subject to challenge by interested parties including state regulators via a proceeding at the FERC. Consequently, within the framework of the Methodology, ATSI maps to a rating in the A range for Factor 2: Ability to Recover Costs and Earn Returns. Ongoing favorable regulatory support represents an essential factor in ATSI's ability to maintain its financial strength. - Customer concentration risk mitigated by PJM membership More than 80% of ATSI's revenues are generated by providing transmission services to the FE affiliates that previously owned the transmission assets. Although this increases ATSI's customer concentration risk, its status as a member of PJM acts to limit the risk of non-payment. Specifically, while ATSI indirectly provides the bulk of its transmission services to its affiliates, it bills PJM for its transmission services. In turn, PJM bills its members and remits payment directly to ATSI. Losses at ATSI caused by non-payment are generally socialized amongst PJM members, which is currently in excess of 800 in number.

29 - Parent's policy of managing its subsidiaries as a consolidated system FE's policy of managing its subsidiaries as a consolidated system tends to keep the ratings of FE's subsidiaries closely aligned. FE and its subsidiaries commingle funds through a central managed money pool arrangement and share management. Furthermore, the primary source for external liquidity for FE's regulated subsidiaries are $3B of shared revolving credit facilities. That being said, ATSI's low business risk profile, supportive regulatory environment and solid financial profile has resulted in a rating that is the highest in the FE family. - Solid financial profile; near-term growth opportunities seen ATSI's financial performance is expected to remain solid. Specifically, its key financial metrics of cash from operation pre-working capital (CFO pre-w/c) to debt for the trailing twelve months ended June 30, 2012 was approximately 22% and CFO pre-w/c interest coverage was approximately 5 times. ATSI's key financial metrics over the are expected to remain in excess of 20% and 5 times, respectively. FE sees considerable investment opportunities for transmission expansion projects. These opportunities are concentrated within the footprint of the company's Ohio-based distribution utilities driven in part by FE's decision to retire certain coal plants in this region. Specifically, FE sees the potential for $500-$700 million in transmission related investments through We view investment in transmission positively due to the strong allowed return, minimal construction risk and cash flow visibility. That said, we would expect the company to finance such investments in a manner that supports its existing credit profile and would involve a combination of incremental debt, and internal cash flow. Liquidity ATSI's sources of external liquidity include access to FE's regulated utility money and a $100 million committed sub-limit under FET's five-year, $1.0 billion revolving credit facility maturing in May 2017 (ATSI and its affiliate Trans-Allegheny Interstate Line Company are listed borrower under this facility). Prior to May 2012, ATSI was a listed borrower under FE's $2 billion facility with the same $100 million committed sub-limit. Under the terms of the regulated money pool, FE can only place money into the money pool while all its regulated utilities can either place money into, or borrow from the money pool. The revolving credit facility contains only one financial covenant, applicable to each listed borrower separately, which is a requirement to maintain a consolidated debt to total capitalization ratio of no more than 65%. ATSI's ratio of consolidated debt to total capitalization at June 30, 2012, as defined under the credit facility, was 48.6%. Terms of the syndicated revolving credit facility include a representation that no material adverse change has occurred, albeit only at the time of initial execution of the revolving credit agreement. Subsequent usage of the credit facility does not require such a representation. ATSI had no short-term debt outstanding at December 31, 2011 or June 30, We expect ATSI will continue to pay a dividend to FE in an amount equal to 100% of earnings for at least 2012 and to be cash flow neutral through Within the framework of the methodology, ATSI maps to a rating factor in the low Baa range for Factor 4 - Liquidity. This rating is principally driven by ATSI's participation in a money pool administered by its lower-rated parent. Rating Outlook The stable outlook for ATSI reflects our expectation for continued setting of rates by the current formulaic method, and CFO pre-w/c to debt and interest coverage in excess of 20% and 5 times, respectively. What Could Change the Rating - Up An upgrade in the near-term seems unlikely. A significant increase in credit metrics, such as a ratio of CFO pre- WC to debt of greater than 26% on a sustainable basis or a more lucrative ROE and rate structure from the FERC could be a trigger for upgrade. Upgrades at either FE or multiple subsidiaries could also have positive rating implications. What Could Change the Rating - Down ATSI could experience downward rate pressure if the FERC negatively changes the rate structure or if there is a serious deterioration of credit metrics, such as a ratio of CFO pre-w/c to debt of below 16% on a sustainable basis. A downgrade of FE or multiple FE subsidiaries could also have negative rating implications.

30 Rating Factors American Transmission Systems, Incorporated Regulated Electric and Gas Utilities Industry [1][2] Current 12/31/2011 Moody's month Forward View* As of November 2012 Factor 1: Regulatory Framework (25%) Measure Score Measure Score a) Regulatory Framework Aa Aa Factor 2: Ability To Recover Costs And Earn Returns (25%) a) Ability To Recover Costs And Earn Returns A A Factor 3: Diversification (10%) a) Market Position (10%) Baa Baa b) Generation and Fuel Diversity (0%) na na Factor 4: Financial Strength, Liquidity And Key Financial Metrics (40%) a) Liquidity (10%) Baa Baa b) CFO pre-wc + Interest/ Interest (3 Year Avg) (7.5%) 5.4x A x A c) CFO pre-wc / Debt (3 Year Avg) (7.5%) 19.7% Baa 22-26% A d) CFO pre-wc - Dividends / Debt (3 Year Avg) (7.5%) 4.9% Ba 20-24% A e) Debt/Capitalization (3 Year Avg) (7.5%) 47.9% Baa 40-45% A Rating: a) Indicated Rating from Grid A3 A2 b) Actual Rating Assigned Baa1 Baa1 * THIS REPRESENTS MOODY'S FORWARD VIEW; NOT THE VIEW OF THE ISSUER; AND UNLESS NOTED IN THE TEXT DOES NOT INCORPORATE SIGNIFICANT ACQUISITIONS OR DIVESTITURES [1] All ratios are calculated using Moody's Standard Adjustments. [2] As of 12/31/2011; Source: Moody's Financial Metrics 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND

31 MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable, including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading "Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy." Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN , which holds Australian Financial Services License no This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.

32 Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody's Japan K.K. ( MJKK ) are MJKK's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, MIS in the foregoing statements shall be deemed to be replaced with MJKK. MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. This credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.

33 Credit Opinion: Trans-Allegheny Interstate Line Company Global Credit Research - 15 Jan 2013 Greensburg, Pennsylvania, United States Ratings Category Outlook Issuer Rating Sr Unsec Bank Credit Facility Senior Unsecured Ult Parent: FirstEnergy Corp. Outlook Issuer Rating Sr Unsec Bank Credit Facility Senior Unsecured Moody's Rating Stable A3 A3 A3 Stable Baa3 Baa3 Baa3 Contacts Analyst Phone Scott Solomon/New York City William L. Hess/New York City Key Indicators [1]Trans-Allegheny Interstate Line Company LTM 9/30/ (CFO Pre-W/C + Interest) / Interest Expense 9.3x 5.3x 2.8x 4.5x (CFO Pre-W/C) / Debt 41% 20% 7% 6% (CFO Pre-W/C - Dividends) / Debt 15% -2% 7% 6% Debt / Book Capitalization 33% 42% 65% 66% [1] All ratios calculated in accordance with the Global Regulated Electric Utilities Rating Methodology using Moody's standard adjustments. Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Low business risk profile - Supportive regulatory environment - Solid financial profile - Parent's policy of managing its subsidiaries as a consolidated system Corporate Profile

34 Trans-Allegheny Interstate Line Company (TrAILCo: A3, Stable) is a transmission company that primarily constructs, owns, operates, and maintains transmission assets located primarily within the PJM Interconnection. TrAILCo's primary investment is Trans-Allegheny Interstate Line (TrAIL) a 500 kv transmission line that extends for 150 miles from southwestern Pennsylvania through West Virginia to a point of interconnection in northern Virginia. The project commenced construction in June 2006 and was completed and energized on May 19, TrAIL accounts for approximately 90% of TrAILCo's rate base. TrAILCo is an operating subsidiary of FirstEnergy Transmission, LLC (FET: not rated), and ultimately owned by FirstEnergy Corp. (FE: Baa3, Stable). FET's other significant operating subsidiary is American Transmission Systems, Incorporated (ATSI: Baa1, Stable). ATSI owns high-voltage transmission facilities primarily in Ohio including approximately 5,800 pole miles of transmission lines. The one-notch rating differential between TrAILCo and ATSI is driven by TrAILCo's stronger financial performance and a modest difference in regulatory treatment. Specifically, TrAILCo files its annual revenue requirement based on forward-looking costs while ATSI's is based on historical costs. TrAILCo has one long-term note outstanding: $450 million of 4.0% senior notes due January It does not currently anticipate a need for additional long-term debt. SUMMARY RATING RATIONALE Moody's evaluates TrAILCo's financial performance relative to the Regulated Electric and Gas Utilities rating methodology published in August TrAILCo's indicated rating as depicted in the grids below is A2 compared to its current A3 senior unsecured rating. TrAILCo's rating is constrained by its ownership by lower-rated FE. The indicated grid ratings consider TrAILCo's consolidated financial performance based on a three-year historical average and month prospective basis. TrAILCo's A3 senior unsecured rating reflects its low business risk profile; the strong supportive regulatory environment provided by the FERC that usually facilitates predictable cash flows and strong expected financial performance. Recent Events On January 3, 2012 via a letter, The Division of Audits in the Office of Enforcement (OE) at FERC announced that it would be conducting an audit of TrAILCo. The audit is intended to evaluate whether TrAILCo has remained in compliance with the conditions of its incentive rate treatments, the provisions of its formula rate and FERC's accounting regulations. FE maintains that the audit is routine and is currently awaiting the FERC's findings. DETAILED RATING CONSIDERATIONS The most important drivers for TrAILCo's rating are as follows: - Supportive regulatory environment provides steady, stable cash flows TrAILCo's rates are subject to regulation by the FERC. In order to facilitate greater investment in transmission infrastructure, the FERC has allowed transmission system owners to earn incentive rates of return that tend to be above those allowed for regulated electric utilities. The FERC currently allows TrAILCo to collect in its rates a 12.7% return on equity on for the TrAIL project and 11.7% on most other transmission projects. TrAILCo's transmission revenue is determined through a FERC formula that allows for recovery of all prudently incurred expenses and for a return on capital all prudently incurred capital costs. The revenue requirement, reset annually, includes a return on rate base plus recovery of forward-looking depreciation, interest expense, income taxes and operating and maintenance costs. TrAILCo typically files its annual revenue requirement with the FERC in May for rates effective in June. TrAILCo began collecting rates under its formula rate mechanism on June 1, 2007, and received payments for 100% of construction work in progress during the construction of TrAIL, earning a return on equity based on a hypothetical capital structure of 50% debt and 50% equity during TrAIL's construction. The actual capital structure was incorporated in the formula rate mechanism for TrAILCo's capital structure at September 30, 2012 was 60% equity and 40% debt.

35 Moody's observes that unlike state regulatory rate setting, FERC's formulaic rating setting process does not require a rate hearing, suggesting that the revenue recovery will be more timely and predictable than other state regulated utilities. For these reasons and for some of the characteristics embodied in the formula, Moody's considers FERC regulation for electric transmission to be Aa for regulatory supportiveness and A for its cost recovery mechanism. That said, there has been some indications that the FERC may be contemplating in some instances a lowered allowed return on equity for transmission investments. TrAILCo's rating could be downgraded if FERC noticeably changes its revenue recovery framework. - Low risk business profile TrAILCo's transmission operation bears low business and operation risk, with a high barrier to entry. TrAILCo receives all of its revenues from PJM on a monthly basis. PJM's diverse membership and legal structure ensures low counterparty risk. PJM allocates each transmission owner's revenue requirement to the transmission zones within the PJM region under FERC's direction. PJM determines an annual demand charge by dividing the total revenue requirement allocated to a specific transmission zone by the annual system peak load and bills network customers on monthly basis. Each member's obligation to PJM is joint and several. If one of the PJM participants defaults on its payment to PJM, the defaulted amount is shared across all other participants. - Well capitalized balance sheet TrAILCo's capital structure at September 30, 2012 stood at approximately 60% equity and 40% debt. The sole long-term debt outstanding is a $450 million senior unsecured note due 2015 and we expect TrAILCo to maintain its current capital structure going forward. TrAILCo will likely refinance its senior unsecured note with a similarly sized debt offering close to maturity. - Continued strong financial metrics TrAILCo's recent financial performance and key financial metrics have been exceptionally strong. Specifically, the company's ratio of cash from operations before working capital changes to adjusted debt and interest coverage during the twelve months ended September 30, 2012 was approximately 40% and 9 times, respectively compared to 20% and 5 times, respectively, during the twelve months ended December The primary driver for improved performance has been the impact of bonus depreciation, which largely negated TrAILCo's tax obligation during this period. The impact of bonus depreciation, however, is non-recurring. Regardless, we expect TrAILCo's near-term financial performance to remain consistent with a low A-rated transmission company. Specifically, its ratio of cash from operations before working capital changes (CFO pre- W/C) to adjusted debt is expected to be at approximately 25% and interest coverage at 6.0 times through FE sees considerable investment opportunities for transmission expansion projects. These opportunities are concentrated within the footprint of the company's Ohio-based distribution utilities driven in part by coal plant retirements in this region. Specifically, FE sees the potential for $700 million in transmission related investments through The majority of this spend is expected to occur at ATSI. We view investment in transmission positively due to the strong allowed return, minimal construction risk and cash flow visibility. That said, we would expect the company to finance such investments in a manner that supports its existing credit profile and would involve a combination of incremental debt, and internal cash flow. - Parent's policy of managing its subsidiaries as a consolidated system FE's policy of managing its subsidiaries as a consolidated system tends to keep the ratings of FE's subsidiaries closely aligned. FE and its subsidiaries commingle funds through a central managed money pool arrangement and share management. That being said, TrAILCo's low business risk profile, supportive regulatory environment and strong financial profile has resulted in a rating that is the highest in the FE family. Liquidity TrAILCo has generated strong internal cash flows since it achieved commercial operation in May During the twelve months ended September 30, 2012, the company generated approximately $140 million of cash flow from operations. This amount was used to fund capital expenditures totaling $40 million and to reduce short-term borrowings from affiliates by approximately $100 million. Short-term debt was incurred in 2011 when TrAILCo repaid amounts borrowed under a revolving credit facility to fund in part construction costs.

36 We anticipate TrAILCo will generate $130 million from operations in These funds will likely be used to fund capital expenditures (estimated at $85 million) with the balance to be provided to FE in the form of a dividend. TrAILCo's sources of external liquidity include access to FE's regulated utility money and a $200 million committed sub-limit under FET's five-year, $1.0 billion revolving credit facility maturing in May 2017 (TrAILCo and ATSI are listed borrowers under this facility). Under the terms of the regulated money pool, FE can only place money into the money pool while all its regulated utilities can either place money into, or borrow from the money pool. The revolving credit facility contains only one financial covenant, applicable to each listed borrower separately, which is a requirement to maintain a consolidated debt to total capitalization ratio of no more than 65%. TrRAILCo's ratio of consolidated debt to total capitalization at September 30, 2012, as defined under the credit facility, was 40.5%. Terms of the syndicated revolving credit facility include a representation that no material adverse change has occurred, albeit only at the time of initial execution of the revolving credit agreement. Subsequent usage of the credit facility does not require such a representation. TrAILCo had $41 million of short-term debt borrowed from its affiliates as of September 30, 2012, reduced from $145 million at year-end Borrowings from affiliates do not count against the revolving credit facility. Within the framework of the methodology, TrAILCo maps to a rating factor in the low Baa range for Factor 4 - Liquidity. This rating is principally driven by the company's participation in a money pool administered by its lowerrated parent. Rating Outlook The stable rating outlook for TrAILCo reflects our expectation that the company will generate cash from operations prior to changes in working capital to debt in excess of 20% and positive free cash flow through What Could Change the Rating - Up TrAILCo's current rating is capped at A3 due to its ownership by lower-rated FE as well as FE's policy of managing its subsidiaries as a consolidated system. At this time, the prospects for an upgrade are limited. TrAILCo's rating could only be upgraded if there is a significant positive change in FE's credit profile. What Could Change the Rating - Down The rating could be downgraded if FERC noticeably changes its revenue recovery framework in a less favorable fashion or if the company increases its leverage profile such that its metric of CFO pre-w/c to debt declines to below 20% for an extended period of time. Additionally, if FE is downgraded, rating pressure on TrAILCo could surface. As noted previously, FE's positioning within the Baa3 rating category has weakened. Rating Factors Trans-Allegheny Interstate Line Company Regulated Electric and Gas Utilities Industry [1][2] Current 12/31/2011 Moody's month Forward View* As of January 2013 Factor 1: Regulatory Framework (25%) Measure Score Measure Score a) Regulatory Framework Aa Aa Factor 2: Ability To Recover Costs And Earn Returns (25%) a) Ability To Recover Costs And Earn Returns A A Factor 3: Diversification (10%) a) Market Position (5%) Baa Baa b) Generation and Fuel Diversity (5%)

37 Factor 4: Financial Strength, Liquidity And Key Financial Metrics (40%) a) Liquidity (10%) Baa Ba b) CFO pre-wc + Interest/ Interest (3 Year Avg) (7.5%) 4.1x Baa 5.9x- 6.2x Aa c) CFO pre-wc / Debt (3 Year Avg) (7.5%) 10.7% Ba 24-26% Aa d) CFO pre-wc - Dividends / Debt (3 Year Avg) (7.5%) 3.8% Ba 12-14% Aa e) Debt/Capitalization (3 Year Avg) (7.5%) 55.2% Ba 35-40% A Rating: a) Indicated Rating from Grid A3 A2 b) Actual Rating Assigned A3 A3 * THIS REPRESENTS MOODY'S FORWARD VIEW; NOT THE VIEW OF THE ISSUER; AND UNLESS NOTED IN THE TEXT DOES NOT INCORPORATE SIGNIFICANT ACQUISITIONS OR DIVESTITURES [1] All ratios are calculated using Moody's Standard Adjustments. [2] As of 12/31/2011; Source: Moody's Financial Metrics 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information

38 contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable, including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading "Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy." For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN AFSL and/or Moody's Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY'S credit rating. If in doubt you should contact your financial or other professional adviser.

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57 AMERICAN TRANSMISSION SYSTEMS, INCORPORATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2011

58 AMERICAN TRANSMISSION SYSTEMS, INCORPORATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, (In thousands) OPERATING REVENUES $ 204,992 $ 241,077 EXPENSES: Operation and maintenance expenses 54,364 61,696 Pensions and OPEB mark to market adjustments 135 (1,849) Provision for depreciation 38,840 37,471 Amortization of regulatory assets, net 5,369 9,857 General taxes 30,804 29,688 Total operating expenses 129, ,863 OPERATING INCOME 75, ,214 OTHER INCOME (EXPENSE): Miscellaneous income 2, Interest expense (22,480) (21,827) Capitalized interest 1,315 1,717 Total other expense (18,636) (19,371) INCOME BEFORE INCOME TAXES 56,844 84,843 INCOME TAXES 17,294 28,365 NET INCOME $ 39,550 $ 56,478 STATEMENTS OF COMPREHENSIVE INCOME NET INCOME $ 39,550 $ 56,478 OTHER COMPREHENSIVE INCOME: Pensions and OPEB prior service costs (103) (81) Other comprehensive income (loss) (103) (81) Income taxes (benefits) on other comprehensive income (loss) (165) 666 Other comprehensive income (loss), net of tax 62 (747) COMPREHENSIVE INCOME $ 39,612 $ 55,731 The accompanying Notes to Financial Statements are an integral part of these financial statements. 1

59 AMERICAN TRANSMISSION SYSTEMS, INCORPORATED BALANCE SHEETS As of December 31, (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ - $ 170,100 Receivables- Affiliated companies 1,262 53,396 Other 9,768 20,055 Notes receivable from affiliated companies 150,354 5,200 Prepayments and other 1, , ,379 UTILITY PLANT: In service 1,649,517 1,590,419 Less - Accumulated provision for depreciation 922, , , ,023 Construction work in progress 80,872 31, , ,064 DEFERRED CHARGES AND OTHER ASSETS: Regulatory assets 45,443 49,193 Property taxes 31,700 32,809 Other 3,345 3,352 80,488 85,354 $ 1,051,086 $ 1,067,797 LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES: Accounts payable to affiliated companies $ 3,214 $ 20,706 Accrued taxes 30,573 31,060 Accrued MISO exit fee - 39,000 Accrued Interest 9,625 9,625 Other 2, , ,366 CAPITALIZATION: Common stockholder's equity Common stock, no par value, authorized 850 shares- 1 share outstanding 1 1 Other paid-in capital 373, ,250 Accumulated other comprehensive income Retained earnings 49, ,395 Total common stockholder's equity 424, ,208 Long-term debt 399, , , ,894 NONCURRENT LIABILITIES: Accumulated deferred income taxes 123,747 93,783 Accumulated deferred investment tax credits 7,528 8,274 Property taxes 31,700 32,809 Other 17,803 19, , ,537 COMMITMENTS AND CONTINGENCIES $ 1,051,086 $ 1,067,797 The accompanying Notes to Financial Statements are an integral part of these financial statements. The accompanying Notes to Financial Statements are an integral part of these financial statements. 2

60 AMERICAN TRANSMISSION SYSTEMS, INCORPORATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Accumulated Common Stock Other Other Number Par Paid-In Comprehensive Retained (In thousands, except share amounts) of Shares Value Capital Income Earnings Balance, January 1, ,510 1, ,917 Net income 56,478 Pension and OPEB benefits, net of $666 of income tax expense (747) Consolidated tax benefit allocation 1,740 Cash dividends declared on common stock (50,000) Balance, December 31, , ,395 Net income 39,550 Pension and OPEB benefits, net of $165 of income tax benefits 62 Consolidated tax benefit allocation 465 Equity Infusion 91,000 Cash dividends declared on common stock (119,000) Balance, December 31, $ 1 $ 373,715 $ 624 $ 49,945 The accompanying Notes to Financial Statements are an integral part of these financial statements. 3

61 AMERICAN TRANSMISSION SYSTEMS, INCORPORATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 39,550 $ 56,478 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation 38,840 37,471 Amortization of regulatory assets, net 5,369 9,857 Pensions and OPEB mark-to-market adjustments 135 (1,849) Deferred income taxes and investment tax credits, net 28,020 15,493 Pension trust contribution (3,000) - MISO exit fee (39,000) - Decrease (increase) in operating assets- Receivables 62,421 (48,054) Prepayments and other current assets (696) 37 Increase (decrease) in operating liabilities- Accounts payable (17,492) 12,800 Accrued taxes 175 6,191 Accrued Interest - 8,750 Other (552) 1,592 Net cash provided from operating activities 113,770 98,766 CASH FLOWS FROM FINANCING ACTIVITIES: Equity infusion from parent 91,000 - Common stock dividend payments (119,000) (50,000) Other (359) (217) Net cash used for financing activities (28,359) (50,217) CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (107,822) (64,333) Loans to affiliated companies, net (145,154) 190,074 Other (2,535) (4,190) Net cash provided from (used for) investing activities (255,511) 121,551 Net increase(decrease) in cash and cash equivalents (170,100) 170,100 Cash and cash equivalents at beginning of year 170,100 - Cash and cash equivalents at end of year $ - $ 170,100 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid (received) during the year- Interest (net of amounts capitalized) $ 20,810 $ 11,127 Income taxes $ (39,138) $ 31,086 The accompanying Notes to Financial Statements are an integral part of these financial statements. 4

62 AMERICAN TRANSMISSION SYSTEMS, INCORPORATED NOTES TO FINANCIAL STATEMENTS Note No. 1 Organization, Basis of Presentation and Significant Accounting Policies 6 2 Pension and Other Postemployment Benefits 9 3 Taxes 9 4 Leases 11 5 Capitalization 11 6 Short-Term Borrowings and Bank Lines of Credit 11 7 Regulatory Matters 11 8 Commitments and Contingencies 14 9 Transactions with Affiliated Companies 14 Page No. 5

63 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES American Transmission Systems, Incorporated (ATSI), is a wholly owned subsidiary of FirstEnergy Corp. (FirstEnergy). ATSI follows accounting principles generally accepted in the United States (GAAP) and complies with the regulations, orders, policies and practices prescribed by the Federal Energy Regulatory Commission (FERC). 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 the 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. ATSI has evaluated events and transactions for potential recognition or disclosure through March 14, ACCOUNTING FOR THE EFFECTS OF REGULATION ATSI accounts for the effects of regulation through the application of regulatory accounting to its operating utilities since their rates are established by a third-party regulator with the authority to set rates that bind customers, are cost-based and can be charged to and collected from customers. ATSI 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 Statements of Income concurrent with the recovery or refund through customer rates. ATSI believes that it is probable that its regulatory assets and liabilities will be recovered and settled, respectively, through future rates. ATSI nets its regulatory assets and liabilities. Regulatory Assets - Regulatory assets on the Balance Sheet are as follows: (In thousands) MISO Exit Fee Deferral (a) $ 41,508 $ 39,000 Transmission Vegetation Management - 5,275 Other 3,935 4,918 $ 45,443 $ 49,193 (a) Comprised of recoverable MISO exit fees (See RTO Realignment below), which are not earning a current return. REVENUES AND RECEIVABLES ATSI's principal business is providing transmission service to electric energy providers, power marketers, and receiving transmission-related revenues from operation of a portion of the FirstEnergy transmission system. Receivables from transmission customers include any electric utility (including transmission providers and power marketers), federal power marketing agency, or person generating electric energy for sale or resale. There were no unbilled revenues or reserves related to accounts receivable as of December 31, 2011 and There are 38 interconnections with six neighboring control areas. ATSI's transmission system offers gateways into the East via high-capacity ties through Pennsylvania Electric Company (Penelec), Duquesne Light Company (Duquesne) and West Penn Power Company; into the North through multiple 345 kv high-capacity ties with Michigan's International Transmission Company and 138 kv through Cleveland Public Power; and into the South through ties with American Electric Power Company, Inc. (AEP) and Dayton Power & Light. PROPERTY, PLANT AND EQUIPMENT ATSI owns high-voltage transmission facilities consisting of approximately 5,800 pole miles of transmission lines with nominal voltages of 345 kv, 138 kv and 69 kv. Effective October 1, 2003, ATSI transferred operational control of its transmission facilities to the Midwest Independent Transmission System Operator, Inc. (MISO). On December 17, 2009, the FERC authorized ATSI to transfer operational control of its facilities to the PJM Interconnection L.L.C. (PJM). On June 1, 2011, ATSI successfully integrated into PJM. Property, plant and equipment reflects original cost, 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. ATSI recognizes liabilities for planned major maintenance projects as they are incurred. ATSI provides for depreciation on a straight-line basis over the estimated lives of property included in plant in service. The annual composite rate for ATSI's transmission facilities was approximately 2.4% in 2011 and ATSI reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The recoverability of long-lived assets is measured by comparing the long-lived assets 6

64 carrying value to the sum of undiscounted future cash flows expected to result from the use and eventual disposition of the assets. If the carrying value is greater than the undiscounted future cash flows of the long-lived asset an impairment exists and a loss is recognized for the amount by which the carrying value of the long-lived assets exceeds their estimated fair value. INVESTMENTS All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Balance Sheet at cost, which approximates their fair market value. Investments other than cash include notes receivable. ACCUMULATED OTHER COMPREHENSIVE INCOME The Accumulated Other Comprehensive Income (AOCI), net of tax, included on ATSI s Balance Sheets as of December 31, 2011 and 2010, represents the net liability for unfunded pensions and other postemployment benefits (OPEB). Other comprehensive income reclassified to net income in the two years ended December 31, 2011 is as follows: (In thousands) Pensions and OPEB $ 350 $ (427) Income taxes (benefits) related to reclassification to net income 127 (155) Reclassification to net income $ 223 $ (272) NEW ACCOUNTING STANDARDS AND INTERPRETATIONS During the year, there have been various new accounting pronouncements that are not expected to have a material effect on ATSI's financial statements. CHANGE IN PENSIONS AND OPEB ACCOUNTING POLICY Effective in 2011, ATSI elected to change its method of recognizing actuarial gains and losses for its defined benefit pension and OPEB plans. Previously, ATSI recognized net actuarial gains and losses as a component of AOCI and amortized the gains and losses into income over the remaining service life of affected employees within the related plans to the extent such gains and losses were outside a corridor of the greater of 10% of the fair value of plan assets or 10% of the plans' projected benefit obligation. ATSI has elected to immediately recognize the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. The remaining components of pensions and OPEB expense, primarily service costs, interest on obligations, assumed return on assets and prior service costs, will be recorded on a quarterly basis. While ATSI's historical policy of recognizing pensions and OPEB expense was considered acceptable under GAAP, FirstEnergy believes that the new policy is preferable as it eliminates the delay in recognizing gains and losses to earnings. The change will also improve transparency to ATSI's operational results and benefits plan performance by immediately recognizing deviations from expected actuarial assumptions in the year they are incurred. This change in accounting policy has been applied retrospectively, adjusting all prior periods presented. Applying this change retrospectively increased property, plant and equipment as a result of capitalizing a portion of the pension and OPEB costs now recognized for each year in addition to additional depreciation expense. As a result of increasing those asset balances, FirstEnergy recognized additional affiliated company asset transfers associated with ATSI and the Generation Asset Transfer, and further impairments of certain long-lived assets in those periods. Additionally, the allocation of related pension and OPEB costs from FESC and AESC to ATSI resulted in affiliated noncurrent liabilities as of December 31, 2011 of $17.3 million. The impact of this accounting policy change on the financial statements is summarized below: 7

65 ATSI CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2010 (In thousands) As Effect of As Reported Change Revised Operating costs 61, ,696 Pensions and OPEB mark-to-market adjustments - (1,849) (1,849) Provision for depreciation 37, ,471 Capitalized interest 1, ,717 Income before income taxes 83,373 1,470 84,843 Income taxes 28,470 (105) 28,365 Net Income 54,903 1,575 56,478 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2010 (In thousands, except per share amounts) As Effect of As Reported Change Revised Net Income $ 54,903 $ 1,575 $ 56,478 Pensions and OPEB, (612) 531 (81) Income taxes (benefits) on other comprehensive income (226) Comprehensive income 54,517 1,214 55,731 CONSOLIDATED BALANCE SHEETS As of December 31, 2010 (In thousands) As Effect of As Reported Change Revised Utility plant - in service 1,583,071 7,348 1,590,419 Accumlated provision for depreciation 887, ,396 Total property, plant, and equipment 695,421 6, ,023 Total assets 1,061,195 6,602 1,067,797 Accumulated other comprehensive income (loss) (2,714) 3, Retained earnings 145,709 (16,314) 129,395 Total common stockholder's equity 424,932 (12,724) 412,208 Total capitalization 824,618 (12,724) 811,894 Accrued taxes 30, ,060 Accumulated deferred income taxes 91,596 2,187 93,783 Other noncurrent liabilities 2,600 17,071 19,671 Total liabilities and capitalization 1,061,195 6,602 1,067,797 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Year Ended December 31, 2010 (In thousands) As Effect of As Reported Change Revised Retained Earnings- Beginning Balance $ 140,806 $ (17,889) $ 122,917 Net Income 54,903 1,575 56,478 Ending Balance 145,709 (16,314) 129,395 Accumulated Comprehensive Income (Loss)- Beginning Balance $ (2,328) $ 3,637 $ 1,309 Pension and OPEB, net of taxes (386) (361) (747) Ending Balance (2,714) 3, CONSOLIDATED STATEMENTS OF CASH FLOW Year Ended December 31, 2010 (In thousands) As Effect of As Reported Change Revised Net income 54,903 1,575 56,478 Provision for depreciation 37, ,471 Deferred income taxes and investment tax credits, net 15,636 (143) 15,493 Pensions and OPEB mark-to-market adjustments - (1,849) (1,849) Other operating activities 1, ,592 Net cash provided from operating activities 98,766-98,766 8

66 2. PENSIONS AND OPEB As described in Note 1, Organization, Basis of Presentation and Significant Accounting Policies, FirstEnergy elected to change its method of recognizing actuarial gains and losses for its defined benefit pension plans and OPEB plans and applied this change retrospectively to all periods presented. FirstEnergy provides a noncontributory qualified defined benefit pension plan that covers substantially all of its employees and non-qualified pension plans that cover certain employees. The plans provide defined benefits based on years of service and compensation levels. In addition, FirstEnergy provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee contributions, deductibles and co-payments, are also available upon retirement to certain employees, their dependents and, under certain circumstances, their survivors. FirstEnergy recognizes the expected cost of providing OPEB to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. FirstEnergy also has obligations to former or inactive employees after employment, but before retirement, for disability-related benefits. FirstEnergy s funding policy is based on actuarial computations using the projected unit credit method. During 2011, FirstEnergy made pre-tax contributions to its qualified pension plans of $372 million ($3 million by ATSI). Pension and OPEB costs are affected by employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plans and earnings on plan assets. Pension and OPEB costs may also be affected by changes in key assumptions, including anticipated rates of return on plan assets, the discount rates and health care trend rates used in determining the projected benefit obligations for pension and OPEB costs. FirstEnergy uses a December 31 measurement date for its pension and OPEB plans. The fair value of the plan assets represents the actual market value as of the measurement date. The following is a summary of the plan status: 3. TAXES Pensions OPEB As of December 31, (in millions) FirstEnergy benefit obligation $ 7,977 $ 5,858 $ 1,037 $ 861 FirstEnergy accumulated benefit obligation 7,409 5, ATSI Share of net liability - (2) - (1) Income Taxes ATSI 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. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. Deferred income tax liabilities related to temporary tax and accounting basis differences 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. Details of income taxes for the two years ended December 31, 2011 are shown below: PROVISION FOR INCOME TAXES: (In thousands) Currently payable(receivable)- Federal $ (7,834) $ 11,451 State (2,892) 1,421 (10,726) 12,872 Deferred, net- Federal 27,161 16,194 State 1, ,766 16,239 Investment tax credit amortization (746) (746) Total provision for income taxes $ 17,294 $ 28,365 ATSI is party to an intercompany income tax allocation agreement with FirstEnergy and its other subsidiaries 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, is 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. 9

67 The following table provides a reconciliation of federal income tax expense at the federal statutory rate to the total provision for income taxes for the two years ended December 31, (In thousands) Book income before provision for income taxes $ 56,844 $ 84,843 Federal income tax expense at statutory rate $ 19,895 $ 29,695 Increases (reductions) in taxes resulting from- Amortization of investment tax credits (746) (746) State income taxes, net of federal income tax benefit (837) 953 Effectively settled tax items - (1,036) Interest from amended returns (1,302) (29) Other, net 284 (472) Total provision for income taxes $ 17,294 $ 28,365 Accumulated deferred income taxes as of December 31, 2011 and 2010, are as follows: (In thousands) Property basis differences $ 170,916 $ 159,380 Tax basis step-up (58,337) (65,159) MISO exit fee deferral 14,160 14,140 Accrual for MISO exit fee (654) (14,140) Unamortized investment tax credits (2,733) (3,000) Deferred vegetation management costs - 1,913 All other Net accumulated deferred income tax liability $ 123,747 $ 93,783 ATSI accounts for uncertainty in income taxes recognized in its financial statements. Accounting guidance prescribes a recognition threshold and measurement attributed for financial statement recognition and measurement of tax positions taken or expected to be taken on a company s tax return. After reaching settlement at appeals in 2010 related primarily to the capitalization of certain costs for tax years , as well as receiving final approval from Joint Committee on Taxation, ATSI recognized approximately $8.5 million of current net tax benefits in 2010 that were offset by deferred taxes, having no impact to ATSI s effective tax rate. ATSI s unrecognized tax benefits as of December 31, 2011 and 2010, were immaterial. ATSI 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. ATSI includes net interest and penalties in the provision for income taxes. The reversal of accrued interest associated with the recognized tax benefits noted above favorably affected ATSI s effective tax rate by $1 million in The amount of net interest recognized during 2011 was immaterial. In 2009, FirstEnergy filed a change in tax accounting method related to the costs to repair and maintain electric utility network (transmission and distribution) assets. In 2010, approximately $325 million of costs ($3.5 million related to ATSI) were included as a repair deduction on FirstEnergy s 2009 consolidated tax return, which reduced taxable income and increased the amount of tax refunds that were applied to FirstEnergy s 2010 estimated federal tax payments. There was no impact on ATSI s effective tax rate. The IRS issued guidance in 2011 providing a safe harbor method of tax accounting for electric transmission and distribution property to determine the tax treatment of repair costs for electric transmission and distribution assets. ATSI is evaluating the method change for this temporary tax item and, if elected, it is not expected to be material to ATSI s financial position or effective tax rate. ATSI has tax returns that are under review at the audit or appeals level by the IRS ( ) and state tax authorities. Tax returns for all state jurisdictions are open from The IRS completed its audit of tax year 2008 in July 2010 and tax year 2009 in April Tax years are under review by the IRS. Management believes that adequate reserves have been recognized and final settlement of these audits is not expected to have a material adverse effect on ATSI s financial condition, results of operations, cash flows or liquidity. 10

68 General Taxes Details of general taxes for the two years ended December 31, 2011, are shown below: (In thousands) Real and personal property $ 30,377 $ 29,354 Social security and unemployment Other Total general taxes $ 30,804 $ 29, LEASES ATSI leases fee-owned land, easements, franchises, and other land use rights from Ohio Edison Company (OE), Pennsylvania Power Company (Penn), The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE). Land use is rented to ATSI under the terms and conditions of a ground lease approved by FERC. ATSI, OE, Penn, CEI, and TE reserve the right to use (and to permit authorized others to use) the land for any purpose that does not cause a violation of electrical safety code or applicable law, or does not impair ATSI's ability to satisfy its service obligations. Additional uses of such land for ATSI's facilities requires prior written approval from the applicable operating companies. ATSI purchases directly any new property acquired for transmission use. ATSI makes fixed quarterly lease payments of approximately $5.3 million through December 31, 2049, unless terminated prior to maturity, or extended by ATSI for up to ten additional successive periods of fifty years each. 5. CAPITALIZATION Long-Term Debt - On December 15, 2009, ATSI issued $400 million of 5.25% senior notes with a maturity date of January 15, The fair value of long-term debt as of December 31, 2011 and 2010, was $436 million and $418 million, respectively. Retained Earnings - ATSI currently has no restrictions on its retained earnings available to pay common stock dividends. 6. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT ATSI has the ability to borrow from its regulated affiliates and FirstEnergy to meet its short-term working capital requirements. FirstEnergy Service Company (FESC) administers this money pool and tracks surplus funds of FirstEnergy and its regulated subsidiaries, as well as proceeds available from bank borrowings. Companies receiving a loan under the money pool agreements must repay the principal, together with accrued interest, within 364 days of borrowing the funds. The rate of interest is the same for each company receiving a loan from the pool and is based on the average cost of funds available through the pool. The average interest rate for short-term borrowings was 0.44% and 0.51%, in 2011 and 2010, respectively. ATSI had investments in the money pool of $150 million and $5 million as of December 31, 2011 and, 2010, respectively. An aggregate amount of $2 billion is available to be borrowed under a syndicated revolving credit facility (FirstEnergy Facility), subject to separate borrowing sublimits for each borrower. The borrowers under the FirstEnergy Facility are FE, OE, Penn, CEI, TE, Met-Ed, ATSI, JCP&L, MP, Penelec, PE and WP. Commitments under the FirstEnergy Facility will be available until June 17, 2016, unless the lenders agree, at the request of the applicable borrowers, to up to two additional one-year extensions. Generally, borrowings under the FirstEnergy Facility are available to each borrower separately and mature on the earlier of 364 days from the date of borrowing or the commitment termination date, as the same may be extended. ATSI has regulatory authority to borrow up to $100 million under the facility. 7. REGULATORY MATTERS Reliability Initiatives Federally-enforceable mandatory reliability standards apply to the bulk power system and impose certain operating, recordkeeping and reporting requirements on ATSI. The North American Electric Reliability Corporation (NERC), as the Electric Reliability Organization (ERO) is charged with establishing and enforcing these reliability standards, although it has delegated day-to-day implementation and enforcement of these reliability standards to eight regional entities, including ReliabilityFirst Corporation. All of FirstEnergy s facilities are located within the ReliabilityFirst region. ATSI actively participates in the NERC and ReliabilityFirst stakeholder processes, and otherwise monitors and manages its assets in response to the ongoing 11

69 development, implementation and enforcement of the reliability standards implemented and enforced by the ReliabilityFirst Corporation. ATSI believes that it generally is in compliance with all currently-effective and enforceable reliability standards. Nevertheless, in the course of operating its extensive electric utility systems and facilities, ATSI occasionally learns of isolated facts or circumstances that could be interpreted as excursions from the reliability standards. If and when such items are found, ATSI develops information about the item and develops a remedial response to the specific circumstances, including in appropriate cases self-reporting an item to ReliabilityFirst. Moreover, it is clear that the NERC, ReliabilityFirst and the FERC will continue to refine existing reliability standards as well as to develop and adopt new reliability standards. The financial impact of complying with new or amended standards cannot be determined at this time; however, 2005 amendments to the Federal Power Act (FPA) provide that all prudent costs incurred to comply with the new reliability standards be recovered in rates. Still, any future inability on ATSI s part to comply with the reliability standards for its bulk power system could result in the imposition of financial penalties that could have a material adverse effect on its financial condition, results of operations and cash flows. PJM Transmission Rate In April 2007, FERC issued Opinion 494 order finding that the PJM transmission owners' existing license plate or zonal rate design was just and reasonable and ordered that the current license plate rates for existing transmission facilities be retained. On the issue of rates for new transmission facilities, FERC directed that costs for new transmission facilities that are rated at 500 kv or higher are to be collected from all transmission zones throughout the PJM footprint by means of a postage-stamp rate based on the amount of load served in a transmission zone. Costs for new transmission facilities that are rated at less than 500 kv, however, are to be allocated on a load flow methodology, which is generally referred to as a beneficiary pays approach to allocating the cost of high voltage transmission facilities. FERC's Opinion 494 order was appealed to the U.S. Court of Appeals for the Seventh Circuit, which issued a decision in August The court affirmed FERC's ratemaking treatment for existing transmission facilities, but found that FERC had not supported its decision to allocate costs for new 500 kv and higher voltage facilities on a load ratio share basis and, based on this finding, remanded the rate design issue to FERC. In an order dated January 21, 2010, FERC set the matter for a paper hearing and requested parties to submit written comments pursuant to the schedule described in the order. FERC identified nine separate issues for comments and directed PJM to file the first round of comments on February 22, 2010, with other parties submitting responsive comments and then reply comments on later dates. PJM filed certain studies with FERC on April 13, 2010, in response to the FERC order. PJM's filing demonstrated that allocation of the cost of high voltage transmission facilities on a beneficiary pays basis results in certain load serving entities in PJM bearing the majority of the costs. Numerous parties filed responsive comments or studies on May 28, 2010 and reply comments on June 28, FirstEnergy and a number of other utilities, industrial customers and state commissions supported the use of the beneficiary pays approach for cost allocation for high voltage transmission facilities. Other utilities and state commissions supported continued socialization of these costs on a load ratio share basis. This matter is awaiting action by FERC. FirstEnergy cannot predict the outcome of this matter or estimate the possible loss or range of loss. RTO Realignment On June 1, 2011, ATSI and the ATSI zone entered into PJM. The move was performed as planned with no known operational or reliability issues for ATSI or for the wholesale transmission customers in the ATSI zone. On February 1, 2011, ATSI in conjunction with PJM filed its proposal with FERC for moving its transmission rate into PJM's tariffs. On April 1, 2011, the MISO TOs (including ATSI) filed proposed tariff language that describes the mechanics of collecting and administering MTEP costs from ATSI-zone ratepayers. From March 20, 2011 through April 1, 2011, FirstEnergy, PJM and the MISO submitted numerous filings for the purpose of effecting movement of the ATSI zone to PJM on June 1, These filings include amendments to the MISO's tariffs (to remove the ATSI zone), submission of load and generation interconnection agreements to reflect the move into PJM, and submission of changes to PJM's tariffs to support the move into PJM. On May 31, 2011, FERC issued orders that address the proposed ATSI transmission rate, and certain parts of the MISO tariffs that reflect the mechanics of transmission cost allocation and collection. In its May 31, 2011 orders, FERC approved ATSI's proposal to move the ATSI formula rate into the PJM tariff without significant change. Speaking to ATSI's proposed treatment of the MISO's exit fees and charges for transmission costs that were allocated to the ATSI zone, FERC required ATSI to present a cost-benefit study that demonstrates that the benefits of the move for transmission customers exceed the costs of any such move, which FERC had not previously required. Accordingly, FERC ruled that these costs must be removed from ATSI's proposed transmission rates until such time as ATSI files and FERC approves the cost-benefit study. On June 30, 2011, ATSI submitted the compliance filing that removed the MISO exit fees and transmission cost allocation charges from ATSI's proposed transmission rates. Also on June 30, 2011, ATSI requested rehearing of FERC's decision to require a cost-benefit analysis as part of FERC's evaluation of ATSI's proposed transmission rates. Finally, and also on June 30, 2011, the MISO and the MISO TOs filed a competing compliance filing - one that would require ATSI to pay certain charges related to construction and operation of transmission projects within the MISO even though FERC ruled that ATSI cannot pass these costs on to ATSI's customers. ATSI on the one hand, and the MISO and MISO TOs on the other, have submitted subsequent filings - each 12

70 of which is intended to refute the other's claims. ATSI's compliance filing and request for rehearing, as well as the pleadings that reflect the dispute between ATSI and the MISO/MISO TOs, are currently pending before FERC. Although the ultimate outcome of this matter cannot be determined at this time, ATSI expects that it will fully recover the approximately $41.5 million in deferred MISO exit fees. From late April 2011 through June 2011, FERC issued other orders that address ATSI's move into PJM. Also, ATSI and the MISO were able to negotiate an agreement of ATSI's responsibility for certain charges associated with long term firm transmission rights that, according to the MISO, were payable by the ATSI zone upon its departure from the MISO. ATSI did not and does not agree that these costs should be charged to ATSI but, in order to settle the case and all claims associated with the case, ATSI agreed to a one-time payment of $1.8 million to the MISO. This settlement agreement has been submitted for FERC's review and approval. The final outcome of those proceedings that address the remaining open issues related to ATSI's move into PJM and their impact, if any, on FirstEnergy cannot be predicted at this time. MISO Multi-Value Project Rule Proposal In July 2010, MISO and certain MISO transmission owners jointly filed with FERC their proposed cost allocation methodology for certain new transmission projects. The new transmission projects--described as MVPs - are a class of transmission projects that are approved via the MTEP. The filing parties proposed to allocate the costs of MVPs by means of a usage-based charge that will be applied to all loads within the MISO footprint, and to energy transactions that call for power to be wheeled through the MISO as well as to energy transactions that source in the MISO but sink outside of MISO. The filing parties expect that the MVP proposal will fund the costs of large transmission projects designed to bring wind generation from the upper Midwest to load centers in the east. The filing parties requested an effective date for the proposal of July 16, On August 19, 2010, MISO's Board approved the first MVP project -- the Michigan Thumb Project. Under MISO's proposal, the costs of MVP projects approved by MISO's Board prior to the June 1, 2011 effective date of FirstEnergy's integration into PJM would continue to be allocated to FirstEnergy. MISO estimated that approximately $15 million in annual revenue requirements would be allocated to the ATSI zone associated with the Michigan Thumb Project upon its completion. In September 2010, FirstEnergy filed a protest to the MVP proposal arguing that MISO's proposal to allocate costs of MVPs projects across the entire MISO footprint does not align with the established rule that cost allocation is to be based on cost causation (the beneficiary pays approach). FirstEnergy also argued that, in light of progress that had been made to date in the ATSI integration into PJM, it would be unjust and unreasonable to allocate any MVP costs to the ATSI zone, or to ATSI. Numerous other parties filed pleadings on MISO's MVP proposal. In December 2010, FERC issued an order approving the MVP proposal without significant change. Despite being presented with the issue by FirstEnergy and the MISO, the FERC did not address clearly the question of whether the MVP costs would be payable by ATSI or load in the ATSI zone. FERC stated that the MISO's tariffs obligate ATSI to pay all charges that attached prior to ATSI's exit but ruled that the question of the amount of costs that are to be allocated to ATSI or to load in the ATSI zone were beyond the scope of FERC's order and would be addressed in future proceedings. On January 18, 2011, FirstEnergy requested rehearing of FERC's order. In its rehearing request, FirstEnergy argued that because the MVP rate is usage-based, costs could not be applied to ATSI, which is a stand-alone transmission company that does not use the transmission system. FirstEnergy also renewed its arguments regarding cost causation and the impropriety of allocating costs to the ATSI zone or to ATSI. On October 31, 2011, FESC filed a Petition of Review for the FERC's December 2010 and October 21, 2011 orders with the U.S. Court of Appeals for the D.C. Circuit. Other parties also filed appeals of those orders and, in November, 2011, the cases were consolidated for briefing and disposition in the U.S. Court of Appeals for the Seventh Circuit. On January 27, 2012, the court ordered the FERC to file a proposed briefing format and schedule on or before March 20, On August 3, 2011, FirstEnergy filed a complaint with FERC based on the FERC's December 20, 2010 ruling. In the complaint, FirstEnergy argued that ATSI perfected the legal and financial requirements necessary to exit MISO before any MVP responsibilities could attach and asked FERC to rule that MISO cannot charge ATSI for MVP costs. On September 2, 2011, MISO, its TOs and other parties, filed responsive pleadings. MISO and its TOs argued that liability to pay for a single MVP project (the Michigan Thumb Project) attached to ATSI, before ATSI was able to exit MISO, and argued that FERC should order ATSI to pay a pro rata amount of the Michigan Thumb Project costs. On September 19, 2011, ATSI filed an answer stating its view that there are no legal or factual bases to charge the Michigan Thumb Project costs to ATSI. The complaint, and all subsequent pleadings, are pending before FERC. On December 29, 2011, the MISO and the MISO TOs filed a new Schedule 39 to the MISO's tariff. Schedule 39 purports to establish a process whereby the MISO would bill TOs for MVP costs that, according to the MISO, attached to the utility prior to such TOs withdrawal from the MISO. In its filing, the MISO identifies ATSI as a Transmission Owner that is responsible for the MVP charges associated with the Michigan Thumb project and, on that basis, explained that the MISO would start billing the Michigan Thumb project costs for the 2012 formula rate year to ATSI, beginning in February On January 19, 2012, FESC filed a protest to the MISO's attempt to charge MVP costs to ATSI under the new Schedule 39 tariff. In the protest, FESC argued, among other things, that the MISO has failed to demonstrate that ATSI or the ATSI zone customers will benefit from construction and operation of the Michigan Thumb Project. FESC further argued that the 13

71 Transmission Owners Agreement provides that ATSI is to pay any obligations that it owes upon exit from the MISO; but the contractual language does not impose an obligation to pay MVP charges on ATSI and therefore does not authorize the MISO or the MISO TOs to create new obligations that are to be charged to ATSI after ATSI's exit from the MISO. Finally, FESC argued that the filed rate doctrine does not permit MISO and the MISO TOs to file a new rate for the purpose of collecting the Michigan Thumb project costs from ATSI at a point in time that is more than seven months after ATSI withdrew from the MISO. Various other parties, including Duke and the Public Utilities Commission of Ohio also filed protests. On February 3, 2012, the MISO and the MISO TOs filed motions for leave to answer and answer to the protests, including FESC's. FirstEnergy cannot predict the outcome of these proceedings or estimate the possible loss or range of loss. 8. COMMITMENTS AND CONTINGENCIES ATSI accrues environmental and legal liabilities only when it concludes that it is probable that it has an obligation for such costs and can reasonably estimate the amount of such costs. In cases where ATSI determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss and if such estimate can be made. If it were ultimately determined that ATSI or its subsidiaries have legal liability or are otherwise made subject to liability based on any of the matters referenced above, it could have a material adverse effect on ATSI s or its subsidiaries' financial condition, results of operations and cash flows. Unasserted claims are reflected in ATSI s determination of environmental and legal liabilities and are accrued in the period that they are both probable and reasonably estimable. 9. TRANSACTIONS WITH AFFILIATED COMPANIES In addition to the intercompany income tax allocation and short-term borrowing arrangement, ATSI has other operating expense and interest expense transactions with affiliated companies, primarily OE, CEI, TE, Penn and FESC. The primary affiliated-company transactions, including the effects of the transmission arrangements with OE, CEI, TE, and Penn, are as follows: (in millions) Operating Costs: Ground lease expense $21 $ 21 Service Company support services $22 26 Interest expense 1 1 FirstEnergy does not bill directly or allocate any of its costs to any subsidiary company. Costs are allocated to ATSI from FESC, a subsidiary of FirstEnergy. The majority of costs are directly billed or assigned at no more than cost. The remaining costs are for services that are provided on behalf of more than one company, or costs that cannot be precisely identified and are allocated using formulas developed by FESC. The current allocation or assignment formulas used and their bases include multiple factor formulas: each company's proportionate amount of FirstEnergy's aggregate direct payroll, number of employees, asset balances, revenues, number of customers, other factors and specific departmental charge ratios. Management believes that these allocation methods are reasonable. Intercompany transactions with FirstEnergy and its other subsidiaries are generally settled under commercial terms within thirty days. 14

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73 TRANS-ALLEGHENY INTERSTATE LINE COMPANY FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 2011 THROUGH FEBRUARY 24, 2011, FEBRUARY 25, 2011 THROUGH DECEMBER 31, 2011 AND THE YEAR ENDED DECEMBER 31, 2010

74 TRANS-ALLEGHENY INTERSTATE LINE COMPANY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands) Successor February 25, 2011 through December 31, 2011 January 1, 2011 through February 24, 2011 Predecessor Year ended December 31, 2010 REVENUES $169,762 $28,255 $137,043 OPERATING EXPENSES: Operation and maintenance expenses 12,307 2,561 13,070 Provision for depreciation 20,611 1,022 5,132 General taxes 2, ,004 Total operating expenses 35,334 3,859 20,206 OPERATING INCOME 134,428 24, ,837 OTHER INCOME (EXPENSE): Interest expense (22,681) (5,958) (29,899) Capitalized interest Other income, net ,430 Total other expense (22,414) (5,725) (27,469) INCOME BEFORE INCOME TAXES 112,014 18,671 89,368 INCOME TAXES 42,759 7,856 35,027 NET INCOME AND COMPREHENSIVE INCOME $69,255 $10,815 $54,341 The accompanying Notes to Financial Statements are an integral part of these financial statements. 1

75 TRANS-ALLEGHENY INTERSTATE LINE COMPANY BALANCE SHEETS Successor Predecessor (In thousands) ASSETS December 31, 2011 December 31, 2010 CURRENT ASSETS: Cash and cash equivalents $8,897 $50,198 Receivables- Affiliated companies 95 - Other 13,782 13,088 Taxes receivable - 14,095 Prepaid taxes 5,200 2,267 Regulatory assets - 60,085 Deferred tax assets 65,740 - Other , ,894 PROPERTY, PLANT AND EQUIPMENT: In service 1,270, ,560 Less - Accumulated provision for depreciation 14,838 7,533 1,255, ,027 Construction work in progress 24, ,717 1,280,784 1,179,744 DEFERRED CHARGES AND OTHER ASSETS: Regulatory assets 114,025 28,292 Unamortized debt expense 4,958 7,882 Other - 4, ,983 40,440 $1,494,269 $1,360,078 The accompanying Notes to Financial Statements are an integral part of these financial statements. 2

76 TRANS-ALLEGHENY INTERSTATE LINE COMPANY BALANCE SHEETS (Continued) (In thousands, except share amounts) LIABILITIES AND CAPITALIZATION Successor December 31, 2011 Predecessor December 31, 2010 CURRENT LIABILITIES: Accounts payable- Affiliated companies $13,511 $4,752 Other 20,472 45,346 Short-term borrowings affiliated companies 145,022 - Accumulated deferred income taxes - 23,196 Accrued taxes 5,268 3,210 Accrued interest 8,300 10,288 Other 1,113 3, ,686 90,501 CAPITALIZATION: Common stockholder s equity- Common stock, $1 par value, 5,000 shares authorized and 1,000 shares outstanding 1 1 Other paid-in capital 646, ,962 Retained earnings 19,255 97,575 Total Common Stockholder s equity 665, ,538 Long-term debt and other long-term obligations 457, ,633 1,123,838 1,235,171 NONCURRENT LIABILITIES: Accumulated deferred income taxes 170,804 31,557 Regulatory liabilities Other 5,941 2, ,745 34,406 COMMITMENTS AND CONTINGENCIES (Note 8) $1,494,269 $1,360,078 The accompanying Notes to Financial Statements are an integral part of these financial statements. 3

77 TRANS-ALLEGHENY INTERSTATE LINE COMPANY STATEMENTS OF COMMON STOCKHOLDER S EQUITY Common Stock Other Shares paid-in Retained (In thousands, except share amounts) Outstanding Par Value capital earnings Predecessor: Balance, January 1, ,000 $1 $179,928 $43,233 Net income ,341 Parent company contribution ,000 - Stock-based excess tax benefits Other Balance, December 31, ,000 $1 $318,962 $97,575 Net income ,815 Balance, February 24, ,000 $1 $318,962 $108,390 Successor: Purchase accounting adjustments ,670 (108,390) Parent company contribution ,000 - Cash dividends as return of capital - - (80,000) - Cash dividends declared on common stock (50,000) Net income ,255 Balance, December 31, ,000 $1 $646,632 $19,255 The accompanying Notes to Financial Statements are an integral part of these financial statements. 4

78 TRANS-ALLEGHENY INTERSTATE LINE COMPANY STATEMENTS OF CASH FLOWS (In thousands) Successor February 25, 2011 through December 31, 2011 Predecessor January 1, 2011 through February 24, 2011 Year ended December 31, 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $69,255 $10,815 $54,341 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation 20,611 1,022 5,132 Deferred income taxes 53,133 (1,587) 26,625 Uncollected transmission revenue (37,727) (3,625) (32,502) Pensions and OPEB mark-to-market adjustment 1, Decrease (increase) in operating assets- Accounts receivable (1,571) 782 (8,399) Prepaid taxes (4,945) - (1,047) Other current assets (77) Increase (decrease) in operating liabilities- Accounts payable 7,001 1,520 (7,575) Accrued taxes 6,708 9,462 11,407 Accrued interest 5,173 (7,161) 9,210 Other 6, Net cash provided from operating activities 125,838 12,109 57,448 CASH FLOWS FROM FINANCING ACTIVITIES: New financing - long-term debt 10, ,661 Redemptions and repayments - long-term debt (380,000) - (485,000) Short-term borrowings affiliated companies 145,022 Parent company equity contribution 300, ,000 Common stock dividend payments (130,000) - - Other (234) (3) 34 Net cash provided from (used for) financing activities (55,212) (3) 491,695 CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (80,175) (43,858) (510,669) Cash used for investing activities (80,175) (43,858) (510,669) Net change in cash and cash equivalents (9,549) (31,752) 38,474 Cash and cash equivalents at beginning of period 18,446 50,198 11,724 Cash and cash equivalents at end of period $8,897 $18,446 $50,198 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid (received) - Interest (net of amounts capitalized) $13,032 $12,086 $15,161 Income taxes $(14,857) $(169) $(981) The accompanying Notes to Financial Statements are an integral part of these financial statements. 5

79 TRANS-ALLEGHENY INTERSTATE LINE COMPANY NOTES TO FINANCIAL STATEMENTS Note No. 1 Organization, Basis of Presentation and Significant Accounting Policies 7 2 Merger 9 3 Taxes 9 4 Intangible Assets 12 5 Fair Value Measurements 12 6 Debt and Credit Facilities 12 7 Regulatory Matters 13 8 Commitments and Contingencies 13 9 Transactions With Affiliated Companies 13 Page No. 6

80 TRANS-ALLEGHENY INTERSTATE LINE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Trans-Allegheny Interstate Line Company (TrAIL) is a wholly owned indirect subsidiary of Allegheny Energy, Inc. (AE). Effective February 25, 2011, AE became a wholly owned subsidiary of FirstEnergy Corp. (FirstEnergy), a public utility holding company (See Note 2, Merger, for additional information). TrAIL was formed to construct, manage and finance transmission expansion projects, including a 500 kv transmission line from southwestern Pennsylvania through West Virginia and into Virginia (TrAIL Line). All segments of the TrAIL Line were energized and placed into service on May 19, TrAIL is subject to regulation by the Federal Energy Regulatory Commission (FERC). 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 FirstEnergy s personnel who provide services to TrAIL and other FirstEnergy subsidiaries. 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 under the purchase method of accounting 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 have been pushed down to AE and TrAIL, resulting in the assets and liabilities of TrAIL being recorded at their respective fair values as of February 25, 2011 (See Note 2, Merger, for additional information). The financial statements subsequent to the merger include amortization relating to purchase accounting adjustments and reflect reclassifications as of the merger date of retained earnings to other paid-in-capital and accumulated depreciation to property, plant and equipment. In addition, TrAIL has conformed its accounting policies to those of FirstEnergy as of the merger date, including policies relating to the capitalization of overhead charges. TrAIL s financial statements and certain notes separately present TrAIL s financial information in two distinct periods, the period before the consummation of the merger (labeled Predecessor) and the period after that date (labeled Successor), because of the application of a different basis of accounting between the periods presented. TrAIL 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, TrAIL has evaluated events and transactions for potential recognition or disclosure through March 14, 2012, the date the financial statements were issued. ACCOUNTING FOR THE EFFECTS OF REGULATION TrAIL 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. TrAIL records regulatory assets and liabilities that result from the regulated rate-making process that would not be recorded under GAAP by non-regulated entities. These assets and liabilities are amortized in the Statements of Income concurrent with their recovery or refund through customer rates. TrAIL believes that it is probable that its regulatory assets and liabilities will be recovered and settled, respectively, through future rates. 7

81 TRANS-ALLEGHENY INTERSTATE LINE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) Net regulatory assets on the Balance Sheets are comprised of the following: (In millions) Successor December 31, 2011 Predecessor December 31, 2010 Transmission revenue requirement under-collection... $102.0 $74.5 Receivable from customers for future income taxes Loss on reacquired debt Asset removal costs... (6.7) (0.8) Other Net regulatory assets... $114.0 $87.6 REVENUES AND RECEIVABLES Under a formula rate mechanism approved by the Federal FERC, TrAIL makes annual filings in order to recover incurred costs and an allowed return. An initial rate filing is made for each calendar year using estimated costs, which is used to determine the initial billings to customers. All prudently incurred allowable operation and maintenance costs, a return earned on rate base and an income tax allowance are recovered or refunded through a subsequent true-up mechanism. As such, TrAIL recognizes revenue as it incurs recoverable costs and earns the allowed return. Any differences between revenues earned based on actual costs and the amounts billed based on estimated costs are recognized as a regulatory asset or liability and will be recovered or refunded, respectively, in subsequent periods. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment reflects original cost (net of any impairment recognized), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and Allowance for Funds Used During Construction (AFUDC) on certain projects incurred to place the assets in service. The costs of normal maintenance, repairs and minor replacements are expensed as incurred. TrAIL recognizes liabilities for planned major maintenance projects as they are incurred. TrAIL provides depreciation on a straight-line basis at various rates over the estimated lives of property included in plan in service. The annual composite rate for TrAIL's transmission facilities was approximately 2.7% in TrAIL has been granted certain incentives by FERC, including the inclusion of construction work in progress (CWIP) in rate base for most components of the TrAIL Line. As a result, AFUDC is not applicable to such components of the TrAIL Line. TrAIL 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. INVESTMENTS All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Balance Sheet at cost, which approximates their fair market value. NEW ACCOUNTING PRONOUNCEMENTS New accounting pronouncements, not yet effective, are not expected to have a material effect on TrAIL's financial statements. 8

82 TRANS-ALLEGHENY INTERSTATE LINE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) 2. MERGER On February 25, 2011, 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, 2011, of which approximately $426 million was attributable to TrAIL. The following table summarizes the differences between the fair values and the carrying values of TrAIL s assets and liabilities that were pushed down as of the date of the merger: (In millions) Purchase price attributable to TrAIL $426 Less: TrAIL net book value at merger date 427 Purchase price below net book value $(1) Fair value adjustments to assets acquired: Increase in regulatory assets recovery of long-term debt fair value adjustment $10 Fair value adjustments to liabilities assumed: Increase in long-term debt (10) Unamortized long-term debt discounts (1) Net fair value adjustments $(1) The estimated fair values of the assets acquired and liabilities assumed were 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 as of the measurement date. For purposes of measuring the fair value of regulated property, plant and equipment and regulatory assets acquired and regulatory liabilities assumed, the fair values of these items approximates their book values due to historical costbased ratemaking. It is expected that current regulated operations will remain in a regulated environment for the foreseeable future and this represents the highest and best use of those assets. Fair value adjustments relating to TrAIL s regulated debt have been reflected on the Balance Sheet with an offsetting regulatory asset based upon the established regulatory authority regarding rate treatment for those specific liabilities. 3. TAXES Income Taxes TrAIL 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: 9

83 TRANS-ALLEGHENY INTERSTATE LINE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) (In millions) Successor February 25, 2011 through December 31, 2011 Predecessor January 1, 2011 through February 24, 2011 Year ended December 31, 2010 Currently payable (receivable)- Federal $(16.3) $7.5 $6.7 State (10.3) Deferred, net- Federal 53.6 (1.3) 23.5 State (0.5) (0.2) (1.5) 26.6 Total provision for income taxes $42.8 $7.9 $35.0 TrAIL is party to an intercompany income tax allocation agreement with FirstEnergy and FirstEnergy s other subsidiaries 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 by 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 for the periods February 25, 2011 through December 31, 2011, January 1, 2011 through February 24, 2011 and the year ended December 31, Successor Predecessor February 25, January 1, 2011 (In millions) 2011 through December 31, 2011 through February 24, 2011 Year ended December 31, 2010 Book income before provision for income taxes $112.0 $18.7 $89.4 Federal income tax expense at statutory rate $39.2 $6.7 $31.2 Increases (reductions) resulting from: AFUDC (0.3) - (0.8) State income tax, net of federal income tax benefit Other, net Total provision for income taxes $42.8 $7.9 $

84 TRANS-ALLEGHENY INTERSTATE LINE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) Accumulated deferred income taxes as of December 31, 2011 and 2010, were as follows: Successor Predecessor (In millions) Accumulated deferred income tax assets: Tax effect of net operating loss carryforwards $205.4 $ - Other Total accumulated deferred income tax assets Accumulated deferred income tax liabilities: Property basis differences Regulatory assets Other Total accumulated deferred income tax liabilities Total net deferred income tax liability Deferred income taxes included in current assets (current liabilities) 65.7 (23.2) Total noncurrent net accumulated deferred income tax liability $170.8 $31.6 In September 2010, President Obama signed into law the Small Business Jobs Act. That legislation includes an extension of the bonus depreciation provision into 2011 for certain qualified property. This provision allowed TrAIL to accelerate its depreciation deductions on qualifying property for federal income tax purposes. TrAIL has recorded as deferred tax assets the effect of net operating losses that will more likely than not be realized through future operations and through the reversal of existing temporary differences. In 2011, the tax benefit of operating loss carryforwards included in deferred tax expense was $205 million. Of this amount, $65.7 million is expected to be utilized in As of December 31, 2011, the deferred income tax assets consisted of $174 million of federal net operating loss carryforwards that expire in 2031 and $31 million of state net operating loss carryforwards that expire in General Taxes General taxes consisted of the following: (In millions) Successor February 25, 2011 through December 31, 2011 Predecessor January 1, 2011 through February 24, 2011 Year ended December 31, 2010 Real and personal property $1.5 $0.2 $1.4 Social security and unemployment Other Total general taxes $2.4 $0.3 $2.0 11

85 TRANS-ALLEGHENY INTERSTATE LINE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) 4. INTANGIBLE ASSETS Intangible assets included in Property, plant and equipment, net on the Balance Sheets as of December 31, 2011 and 2010, were as follows: (In millions) Successor Predecessor December 31, 2011 December 31, 2010 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Software $19.0 $1.3 $5.8 $- Land easements Total $57.4 $1.7 $8.7 $- Future amortization expense for intangible assets as of December 31, 2011, is estimated to be $2.4 million annually from 2012 through FAIR VALUE MEASUREMENTS The following table provides the approximate fair value and related carrying amounts of long-term debt as of December 31, 2011, and December 31, 2010: Successor Predecessor (In millions) Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt $458.0 $478.4 $818.6 $828.6 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 TrAIL. 6. DEBT AND CREDIT FACILITIES DEBT TrAIL s long-term debt consisted of the following: Successor Predecessor As of December 31, 2011 December 31, December 31, (Dollar amounts in millions) Maturity Date Interest Rate % Medium-Term Notes $458.0 $450.0 Revolving Loan (variable rate) Total long-term debt Net unamortized debt discount - (1.4) Total long-term debt and other long-term obligations $458.0 $

86 TRANS-ALLEGHENY INTERSTATE LINE COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) CREDIT FACILITY TrAIL had in place the following revolving credit facility as of December 31, 2011: Total Letters of Available (Dollar amounts in millions) Matures Capacity Borrowed Credit Issued Capacity Revolving credit facility $450.0 $- $- $ REGULATORY MATTERS State Regulation Matters Pennsylvania By order entered on December 12, 2008, the Pennsylvania Public Utility Commission (PPUC) authorized TrAIL to construct a 1.2 mile portion of TrAIL in Pennsylvania from the proposed 502 Junction Substation in Greene County to the Pennsylvania-West Virginia state line. In the same order, the PPUC also authorized TrAIL to engage in a collaborative process to identify possible solutions to reliability problems in the Washington County, Pennsylvania area in lieu of the Prexy Facilities that had been a part of the original TrAIL proposal. As a result of the collaborative process, a settlement and an amendment to the application based on a consensus of the participants in the collaborative process was approved by the PPUC on November 19, COMMITMENTS AND CONTINGENCIES There are various lawsuits, claims and proceedings related to TrAIL s normal business operations pending against TrAIL. TrAIL accrues legal liabilities only when it concludes that it is probable that it has an obligation for such costs and can reasonably estimate the amount of such costs. In cases where TrAIL determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss if such estimate can be made. If it were ultimately determined that TrAIL has legal liability or is otherwise made subject to liability it could have a material adverse effect on TrAIL's financial condition, results of operations and cash flows. 9. TRANSACTIONS WITH AFFILIATED COMPANIES The affiliated company transactions for TrAIL are as follows: (In millions) Successor February 25, 2011 through December 31, 2011 Predecessor January 1, 2011 through February 24, Total billings by AESC for pension and OPEB costs $1.8 $- $2.4 Total billings by FESC for other operating costs $2.4 $- $- 13

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