As filed with the Securities and Exchange Commission on March 23, 2010

Registration No. 333-

 

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

 

 

Form S-4

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

FIRSTENERGY CORP.

(Exact name of registrant as specified in its charter)

 

 

76 South Main Street
Akron, Ohio 44308
(800) 631-8945
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Leila L. Vespoli, Esq.
Executive Vice President and General Counsel
FirstEnergy Corp.
76 South Main Street
Akron, Ohio 44308
(800) 631-8945
(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies To:

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions to the completion of the merger described herein.

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

PRELIMINARY COPY — SUBJECT TO COMPLETION, DATED MARCH 23, 2010

 

 

MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT

 

To the Shareholders of FirstEnergy Corp.:

 

The boards of directors of FirstEnergy Corp., referred to as FirstEnergy, and Allegheny Energy, Inc., referred to as Allegheny Energy, have each unanimously approved an agreement and plan of merger pursuant to which Element Merger Sub, Inc., a wholly owned subsidiary of FirstEnergy, will merge with and into Allegheny Energy with Allegheny Energy becoming a wholly owned subsidiary of FirstEnergy. Upon completion of the merger, FirstEnergy will issue to Allegheny Energy stockholders 0.667 of a share of FirstEnergy common stock for each share of Allegheny Energy common stock held prior to the merger. This exchange ratio is fixed and will not be adjusted to reflect stock price changes prior to completion of the merger. Based on the closing price of FirstEnergy common stock on the New York Stock Exchange, referred to as the NYSE, on February 10, 2010, the last trading day before public announcement of the merger, the exchange ratio represented approximately $27.65 in value for each share of Allegheny Energy common stock. Based on the closing price of FirstEnergy common stock on the NYSE on          , 2010, the latest practicable trading day before the date of this joint proxy statement/prospectus, the exchange ratio represented approximately $           in value for each share of Allegheny Energy common stock.

 

Shares of FirstEnergy common stock trade on the NYSE under the symbol “FE.” We estimate that based on the number of outstanding shares of Allegheny Energy common stock on          , 2010, immediately after the effective time of the merger, current FirstEnergy shareholders will hold shares of FirstEnergy common stock representing approximately 73% of the then outstanding shares of FirstEnergy common stock and former Allegheny Energy stockholders will hold shares of FirstEnergy common stock representing approximately 27% of the then outstanding shares of FirstEnergy common stock.

 

We are asking FirstEnergy shareholders to approve (1) the proposal to issue shares of FirstEnergy common stock to the former Allegheny Energy stockholders in the merger, (2) the proposal to adopt an amendment to the FirstEnergy amended articles of incorporation to increase the number of authorized shares of FirstEnergy common stock, referred to as the charter amendment, and (3) the proposal to adjourn the special meeting to another time or place, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the share issuance or the charter amendment. The approval of the issuance of shares of FirstEnergy common stock to Allegheny Energy stockholders in the merger requires the affirmative vote of the holders of at least a majority of the shares of FirstEnergy common stock voting on the proposal, provided that the total number of shares represented in person or by proxy constitutes a majority of the outstanding shares of FirstEnergy common stock entitled to vote at the FirstEnergy special meeting. The adoption of the charter amendment requires the affirmative vote of the holders of at least a majority of the outstanding shares of FirstEnergy common stock entitled to vote on the proposal. The approval of the adjournment proposal requires the affirmative vote of the holders of a majority of the shares represented in person or by proxy at the FirstEnergy special meeting.

 

The FirstEnergy board of directors unanimously approved the merger agreement and the transactions contemplated by the merger agreement and recommends that FirstEnergy shareholders vote FOR the proposal to approve the issuance of shares of FirstEnergy common stock pursuant to the merger agreement, FOR the proposal to adopt the charter amendment and FOR the proposal to adjourn the FirstEnergy special meeting, if necessary or appropriate, to solicit additional proxies.

 

The accompanying joint proxy statement/prospectus contains important information about the merger, the merger agreement and the FirstEnergy special meeting. We encourage FirstEnergy shareholders to read this joint proxy statement/prospectus carefully before voting, including the section entitled “Risk Factors” beginning on page 30.

 

Your vote is very important.  Whether or not you plan to attend the FirstEnergy special meeting, please take the time to submit your proxy by completing and mailing the enclosed proxy card or by granting your proxy electronically over the Internet or by telephone.

 

Anthony J. Alexander

President and Chief Executive Officer

FirstEnergy Corp.

 

Neither the Securities and Exchange Commission, nor any state securities commission has approved or disapproved of the merger or the securities to be issued under this joint proxy statement/prospectus or has passed upon the adequacy or accuracy of the disclosure in this joint proxy statement/prospectus. Any representation to the contrary is a criminal offense.

 

This joint proxy statement/prospectus is dated          , 2010, and is first being mailed to FirstEnergy shareholders on or about          , 2010 and to Allegheny Energy stockholders on or about          , 2010.

 

 

800 Cabin Hill Drive
Greensburg, Pennsylvania 15601

, 2010

 

MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT

 

Dear Stockholders:

 

On February 11, 2010, we announced our proposed merger with FirstEnergy Corp. Our board of directors unanimously determined that the merger agreement and the merger are advisable and are fair to and in the best interests of Allegheny Energy’s stockholders and has approved the merger agreement and the merger.

 

This merger should significantly enhance value for our stockholders. You will receive a meaningful premium for your shares based on the trading price of FirstEnergy and Allegheny Energy shares prior to the announcement of the merger and a substantial dividend increase based on FirstEnergy’s current dividend policy.

 

We believe the merger is in the best interests of our stockholders and will create a strong combined company with substantial upside. With a more diversified generation fleet that is less dependent on coal, your investment will be less exposed to the risk of carbon legislation or onerous environmental regulations. The combined company’s increased size should create opportunities for efficiencies of all kinds. Importantly, the combined company will be well positioned to benefit from a recovery in the economy and higher power prices.

 

Allegheny Energy will hold a special meeting of its stockholders at          , on          , 2010 at          , local time, to consider and vote on the proposal to approve the merger agreement and the merger. The proposal requires the affirmative vote of the holders of at least a majority of the outstanding shares of Allegheny Energy’s common stock entitled to vote. If the merger is completed, Allegheny Energy stockholders will receive 0.667 of a share of FirstEnergy’s common stock for each share of Allegheny Energy common stock held.

 

We urge you to read carefully the accompanying joint proxy statement/prospectus which includes important information about the merger agreement, the proposed merger and the Allegheny Energy special meeting. For a discussion of risk factors that you should consider in evaluating the merger, see the section entitled “Risk Factors” beginning on page 30.

 

Your vote is important.  I invite you to attend the special meeting. Please submit your proxy or voting instructions by telephone or on the Internet promptly by following the instructions on your proxy/voting instruction card so that your shares can be voted, regardless of whether you expect to attend Allegheny Energy’s special meeting. Alternatively, you may mark, date, sign and return the enclosed proxy/voting instruction card. If you attend, you may withdraw your proxy and vote in person.

 

We enthusiastically support this combination of our companies, and I ask that you join with Allegheny Energy’s board of directors and vote FOR the approval of the merger agreement and the merger.

 

Paul J. Evanson

Chairman, President and Chief Executive Officer

Allegheny Energy, Inc.

 

76 South Main Street
Akron, Ohio 44308
(800) 631-8945

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON          , 2010

 

To the Shareholders of FirstEnergy Corp.:

 

A special meeting of the shareholders of FirstEnergy Corp., an Ohio corporation (“FirstEnergy”), will be held at          ,          ,           on          , 2010, at          , local time, for the following purposes:

 

 

Only FirstEnergy shareholders of record at the close of business on          , 2010, the record date for the FirstEnergy special meeting, are entitled to notice of, and to vote at, the FirstEnergy special meeting and any adjournments or postponements of the FirstEnergy special meeting.

 

The FirstEnergy board of directors has unanimously approved the merger agreement and the transactions contemplated by the merger agreement and recommends that you vote FOR the proposal to approve the issuance of shares of FirstEnergy common stock pursuant to the merger agreement, FOR the proposal to adopt the charter amendment and FOR the proposal to adjourn the FirstEnergy special meeting, if necessary or appropriate, to solicit additional proxies in favor of such approvals.

 

YOUR VOTE IS IMPORTANT

 

Whether or not you plan to attend the special meeting, please submit a proxy as soon as possible.  Please read the joint proxy statement/prospectus accompanying this notice and the instructions on the enclosed proxy card for more complete information regarding the merger and the FirstEnergy special meeting. Whether or not you plan to attend the special meeting in person, and no matter how many shares you own, please submit your proxy promptly by telephone or via the Internet in accordance with the instructions on the enclosed proxy card, or by completing, dating and returning your proxy card in the postage-prepaid envelope provided. Voting by proxy will not prevent you from voting in person at the special meeting. It will, however, help to ensure a quorum and to avoid added proxy solicitation costs.

 

If your shares are held in the name of a bank, broker or other nominee, you will receive instructions from the holder of record that you must follow for your shares to be voted. Please follow their instructions carefully. Also, please note that if the holder of record of your shares is a broker, bank or other nominee and you wish to vote in person at the FirstEnergy special meeting, you must request a legal proxy from your bank, broker or other nominee that holds your shares, and in addition to proof of identification, present that legal proxy identifying you as the beneficial owner of your shares of FirstEnergy common stock and authorizing you to vote those shares at the FirstEnergy special meeting.

 

You may revoke your proxy or change your vote at any time before the vote is taken by following the procedures set forth in the section entitled “Information Regarding the FirstEnergy Special Meeting — How to Change Your Vote” beginning on page 43 of the joint proxy statement/prospectus that accompanies this notice.

 

By Order of the Board of Directors of
FirstEnergy Corp.

 

Rhonda S. Ferguson

Corporate Secretary

 

Akron, Ohio

          , 2010

 

800 Cabin Hill Drive
Greensburg, Pennsylvania 15601

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON     , 2010

 

To the Stockholders of Allegheny Energy, Inc.:

 

A special meeting of the stockholders of Allegheny Energy, Inc., a Maryland corporation (“Allegheny Energy”), will be held at          ,          ,          on          , 2010 at          , local time, to consider and vote on the proposals listed below and any other matters that may properly come before the special meeting or any adjournment or postponement of the special meeting:

 

 

The items of business listed above are more fully described in the joint proxy statement/prospectus that accompanies this notice.

 

Only Allegheny Energy stockholders of record at the close of business on          , 2010, the record date for the Allegheny Energy special meeting, will receive this notice of, and be entitled to vote at, the Allegheny Energy special meeting and any adjournments or postponements of the Allegheny Energy special meeting.

 

The Allegheny Energy board of directors has unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair to and in the best interests of Allegheny Energy and its stockholders and recommends that Allegheny Energy stockholders vote FOR the proposal to approve the merger agreement and the merger and FOR the proposal to adjourn the Allegheny Energy special meeting, if necessary or appropriate, to solicit additional proxies in favor of such approval.

 

YOUR VOTE IS IMPORTANT

 

Approval of the merger agreement and the merger by Allegheny Energy stockholders is a condition to the merger and requires the affirmative vote of holders of at least a majority of the shares of Allegheny Energy common stock outstanding and entitled to vote. Therefore, your vote is very important. Your failure to vote your shares will have the same effect as a vote AGAINST approval of the merger agreement and the merger.

 

Whether or not you plan to attend the special meeting, please submit a proxy as soon as possible.  Please read the joint proxy statement/prospectus accompanying this notice and the instructions on the enclosed proxy card for more complete information regarding the merger and the Allegheny Energy special meeting. Whether or not you plan to attend the special meeting in person, and no matter how many shares you own, please submit your proxy promptly by telephone or via the Internet in accordance with the instructions on the enclosed proxy card, or by completing, dating and returning your proxy card in the envelope provided. Voting by proxy will not prevent you from voting in person at the special meeting. It will, however, help to ensure a quorum and to avoid added proxy solicitation costs.

 

If your shares of Allegheny Energy common stock are held in “street name” by your broker or other nominee, only that holder can vote your shares of Allegheny Energy common stock and only upon receiving your specific instructions. Please follow the directions provided by your broker or other nominee regarding how to instruct your broker or other nominee to vote your shares of Allegheny Energy common stock. Please note that if your shares are held in “street name” and you wish to vote in person at the Allegheny Energy special meeting, you must provide a legal proxy from your nominee, and you should contact your nominee for directions on how to obtain such a proxy.

 

You may revoke your proxy or change your vote at any time before the vote is taken by following the procedures set forth in the section entitled “Information Regarding the Allegheny Energy Special Meeting — How to Change Your Vote” beginning on page 47 of the joint proxy statement/prospectus that accompanies this notice.

 

By Order of the Board of Directors,

 

David M. Feinberg

Vice President, General Counsel and
Secretary

 

ADDITIONAL INFORMATION

 

This joint proxy statement/prospectus incorporates by reference important business and financial information about FirstEnergy and Allegheny Energy from other documents filed with the Securities and Exchange Commission, referred to as the SEC, that are not included or delivered with this joint proxy statement/prospectus. Please see the section entitled “Where You Can Find More Information; Incorporation by Reference” beginning on page 166 for a more detailed description of the information incorporated by reference in this joint proxy statement/prospectus.

 

Documents incorporated by reference are available to you without charge upon written or oral request. You can obtain copies of any of these documents or answers to your questions about the applicable special meeting and proposals, from Innisfree M&A Incorporated, FirstEnergy’s proxy solicitor, or D.F. King & Co., Inc., Allegheny Energy’s proxy solicitor, at the following addresses and telephone numbers:

 

 

You also can obtain copies of any of these documents by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:

 

 

Please note that copies of the documents provided to you will not include exhibits, unless the exhibits are specifically incorporated by reference in the documents or in this joint proxy statement/prospectus.

 

To receive timely delivery of the requested documents in advance of the applicable special meeting, you should make your request no later than          , 2010, if you are a FirstEnergy shareholder and          , 2010, if you are an Allegheny Energy stockholder.

 

TABLE OF CONTENTS

 

 

 

Following are brief answers to certain questions that you may have regarding the proposals being considered at the FirstEnergy special meeting and the Allegheny Energy special meeting. FirstEnergy and Allegheny Energy urge you to read carefully this entire joint proxy statement/prospectus, including the annexes, and the other documents to which this joint proxy statement/prospectus refers or incorporates by reference, because this section does not provide all the information that might be important to you. Unless stated otherwise, all references in this joint proxy statement/prospectus to FirstEnergy are to FirstEnergy Corp., an Ohio corporation; all references to the combined company are to FirstEnergy after the completion of the merger; all references to Allegheny Energy or the surviving entity are to Allegheny Energy, Inc., a Maryland corporation; all references to Merger Sub are to Element Merger Sub, Inc., a Maryland corporation and a wholly owned subsidiary of FirstEnergy; and all references to the merger agreement are to the Agreement and Plan of Merger, dated as of February 10, 2010, by and among FirstEnergy, Merger Sub and Allegheny Energy, as it may be amended from time to time, a copy of which is attached as Annex A to this joint proxy statement/prospectus.

 

ABOUT THE MERGER

 

 

 

 

ABOUT THE SPECIAL MEETINGS AND VOTING YOUR SHARES

 

 

For FirstEnergy shareholders:

 

 

For Allegheny Energy stockholders:

 

 

 

 

 

If your shares of FirstEnergy common stock or Allegheny Energy common stock are held in an account at a broker or other nominee and you desire to change your vote, you should contact your broker or other nominee for instructions on how to do so. See the sections entitled “Information Regarding the FirstEnergy Special Meeting — How to Change Your Vote” beginning on page 43 and “Information Regarding the Allegheny Energy Special Meeting — How to Change Your Vote” beginning on page 47.

 

 

ADDITIONAL INFORMATION

 

 

 

SUMMARY

	Ownership of FirstEnergy Common Stock After the Merger

	Directors and Executive Officers of FirstEnergy After the Merger

	Additional Interests of the Allegheny Energy Directors and Executive Officers in the Merger

	•	The merger agreement includes an agreement that two members of the Allegheny Energy board be added to the FirstEnergy board effective upon completion of the merger.           and           have been designated by FirstEnergy, upon consultation with, and in consideration of the views of, Allegheny Energy, to become members of the FirstEnergy board. The other members of Allegheny Energy’s board will no longer serve as directors of Allegheny Energy (and will not serve as directors of FirstEnergy) upon completion of the merger.
	•	Paul J. Evanson, currently chairman, president and chief executive officer of Allegheny Energy, will become executive vice chairman of the combined company and report to Mr. Alexander.
	•	Equity incentive compensation awards will be subject to vesting and other special treatment in some circumstances.
	•	The executive officers of Allegheny Energy, other than Mr. Evanson, are participants in Allegheny Energy’s Executive Change in Control Severance Plan under which, if their employment is terminated with good reason or without cause within 24 months following completion of the merger (or before the merger if the circumstances of the termination are attributable to FirstEnergy), they will be entitled to (1) a cash severance payment equal to either three times or two times (depending on their level in the organization) their base salary and target annual bonus, (2) a pro-rata annual bonus at target for the year of termination, (3) a lump-sum cash payment in lieu of continued medical and dental coverage equal to $60,000 or $40,000 (depending on their level in the organization), (4) forgiveness of any obligation to repay earlier relocation benefits, (5) full vesting in Allegheny Energy’s Supplemental Executive Retirement Plan and an additional three or two years of service credit under that plan (depending on their level in the organization), and (6) for all but one of such executive officers, a gross-up payment for any “golden parachute” excise taxes for which the executive may be liable in respect of the benefits to be received by the executive that are contingent upon the completion of the merger unless such amount does not exceed 110% of the smallest amount that would be subject to that tax.
	•	Mr. Evanson’s employment agreement with Allegheny Energy provides that if he terminates his employment following completion of the merger for good reason, or his employment is terminated involuntarily without cause, he will be entitled to (1) a cash severance payment equal to the sum of his base salary and target annual bonus, (2) a pro-rata annual bonus at target for the year of termination, (3) continued welfare benefits for one year (or cash payments to purchase such benefits for such period), and (4) a lump sum payment of the amount of supplemental pension benefit otherwise due him but determined (in the case of a termination before the end of the employment agreement term, June 15, 2011) as if he had continued to serve through the end of the term.
	•	The merger agreement provides for the continuation of indemnification existing in favor of the current and former directors, officers and employees of Allegheny Energy and its subsidiaries, with such indemnification obligations being guaranteed by FirstEnergy. The merger agreement also contains certain obligations related to the purchase of directors’ and officers’ liability insurance and fiduciary liability insurance tail policies with respect to matters existing or occurring at or prior to the effective time of the merger for persons who are currently covered under Allegheny Energy’s existing policies.

	•	options to purchase Allegheny Energy common stock will become fully vested and exercisable, and any options that are not exercised before completion of the merger will be converted upon completion of the merger into fully vested and exercisable options to purchase FirstEnergy common stock on a basis intended to preserve the intrinsic value of the option and otherwise on the terms and conditions applicable under the options;
	•	restricted Allegheny Energy common stock (other than that held by members of Allegheny Energy’s board) will vest in full; and
	•	performance awards will be deemed earned at the target performance level and will be settled in shares of Allegheny Energy common stock not more than 30 days following stockholder approval of the merger agreement and the merger.

	Listing of Shares of FirstEnergy Common Stock; Delisting of Shares of Allegheny Energy Common Stock

	Appraisal or Dissenter’s Rights in Connection with the Merger

	Accounting Treatment

	Material U.S. Federal Income Tax Consequences of the Merger

	Litigation Relating to the Merger

	•	approval by Allegheny Energy stockholders of the merger agreement and the merger;
	•	approval by FirstEnergy shareholders of the issuance of FirstEnergy common stock pursuant to the merger agreement and the adoption of the charter amendment;
	•	the absence of any order issued by any court or any other legal restraint preventing or restraining the completion of the merger;
	•	the effectiveness of the registration statement of which this joint proxy statement/prospectus is a part;
	•	the approval for listing on the NYSE of the FirstEnergy common stock to be issued in the merger;
	•	the accuracy of the representations and warranties made by FirstEnergy and Allegheny Energy in the merger agreement, except where the failure to be accurate does not have and would not reasonably be expected to have a “material adverse effect”;
	•	the performance in all material respects of each party’s obligations under the merger agreement;
	•	the absence of any change or event that has had or would reasonably be expected to have a material adverse effect on FirstEnergy or Allegheny Energy; and
	•	the receipt by each party of a tax opinion from such party’s legal counsel.

	•	solicit, initiate, seek, knowingly encourage or knowingly take any other action designed to facilitate any acquisition proposal;
	•	furnish any nonpublic information in connection with any acquisition proposal;
	•	engage or participate in any discussions or negotiations with any person with respect to any acquisition proposal;
	•	approve, endorse or recommend any acquisition proposal; or
	•	enter into any agreement for an acquisition transaction;

	•	if the merger is not completed on or prior to April 10, 2011 (subject to possible extension);
	•	if a final and nonappealable governmental action preventing the merger is in effect;
	•	if the FirstEnergy or Allegheny Energy shareholder approval is not obtained;
	•	if the non-terminating party has materially breached the merger agreement and such breach is not timely cured and gives rise to a failure to satisfy a closing condition;
	•	if the non-terminating party has materially breached its non-solicitation obligations under the merger agreement;
	•	under specific circumstances if the terminating party receives an unsolicited takeover proposal from a third party; or
	•	if there has been a change of recommendation by the board of directors of the other party.

	•	approve the share issuance;
	•	adopt the charter amendment; and

	•	authorize the adjournment of the FirstEnergy special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to approve the share issuance and/or adopt the charter amendment at the time of the FirstEnergy special meeting.

	•	approve the merger agreement and the merger; and
	•	authorize the adjournment of the Allegheny Energy special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to approve the merger agreement and the merger at the time of the Allegheny Energy special meeting.

 

FIRSTENERGY
SELECTED HISTORICAL FINANCIAL DATA

As of or For the Years Ended December 31,		2009				2008				2007				2006				2005
		(In millions, except per share amounts)
Revenues		$	12,967			$	13,627			$	12,802			$	11,501			$	11,358
Income From Continuing Operations		$	1,006			$	1,342			$	1,309			$	1,258			$	879
Earnings Available to FirstEnergy Corp.		$	1,006			$	1,342			$	1,309			$	1,254			$	861
Basic Earnings per Share of Common Stock:
Income from continuing operations		$	3.31			$	4.41			$	4.27			$	3.85			$	2.68
Earnings per basic share		$	3.31			$	4.41			$	4.27			$	3.84			$	2.62
Diluted Earnings per Share of Common Stock:
Income from continuing operations		$	3.29			$	4.38			$	4.22			$	3.82			$	2.67
Earnings per diluted share		$	3.29			$	4.38			$	4.22			$	3.81			$	2.61
Dividends Declared per Share of Common Stock		$	2.20			$	2.20			$	2.05			$	1.85			$	1.705
Weighted Average Number of Basic
Shares Outstanding			304				304				306				324				328
Weighted Average Number of Diluted
Shares Outstanding			306				307				310				327				330
Total Assets		$	34,304			$	33,521			$	32,311			$	31,196			$	31,841
Capitalization:
Total Equity		$	8,557			$	8,315			$	9,007			$	9,069			$	9,225
Preferred Stock			—				—				—				—				184
Long-Term Debt and Other Long-Term Obligations			11,908				9,100				8,869				8,535				8,155
Total Capitalization		$	20,465			$	17,415			$	17,876			$	17,604			$	17,564

 

ALLEGHENY ENERGY
SELECTED HISTORICAL FINANCIAL DATA

Income statement data for the year ended December 31:		2009				2008				2007				2006				2005
		(In millions, except per share amounts)
Operating revenues		$	3,426.8			$	3,385.9			$	3,307.0			$	3,121.5			$	3,037.9
Operating expenses		$	2,507.0			$	2,576.4			$	2,489.7			$	2,389.2			$	2,501.1
Operating income		$	919.8			$	809.5			$	817.3			$	732.3			$	536.8
Income from continuing operations attributable to Allegheny Energy, Inc.		$	392.8			$	395.4			$	412.2			$	318.7			$	75.1
Income (loss) from discontinued operations, net of tax		$	—			$	—			$	—			$	0.6			$	(6.1	)
Net income attributable to Allegheny Energy, Inc.		$	392.8			$	395.4			$	412.2			$	319.3			$	63.1
Weighted average number of diluted shares outstanding			170.0				170.0				169.5				168.7				158.6
Earnings per share attributable to Allegheny Energy, Inc.:
Income from continuing operations attributable to Allegheny Energy, Inc.
-Basic		$	2.32			$	2.35			$	2.48			$	1.94			$	0.48
-Diluted		$	2.31			$	2.33			$	2.43			$	1.89			$	0.47
Net income attributable to Allegheny Energy, Inc.
-Basic		$	2.32			$	2.35			$	2.48			$	1.94			$	0.40
-Diluted		$	2.31			$	2.33			$	2.43			$	1.89			$	0.40
Dividends per share		$	0.60			$	0.60			$	0.15			$	—			$	—
Balance sheet data as of December 31:
Property, plant and equipment, net		$	8,957.1			$	8,002.2			$	7,196.6			$	6,512.9			$	6,277.4
Total assets		$	11,589.1			$	10,811.0			$	9,906.6			$	8,552.4			$	8,558.8
Short-term debt		$	—			$	—			$	10.0			$	—			$	—
Long-term debt due within one year		$	140.8			$	93.9			$	95.4			$	201.2			$	477.2
Long-term debt		$	4,417.0			$	4,115.9			$	3,943.9			$	3,384.0			$	3,624.5
Total equity		$	3,128.1			$	2,855.7			$	2,548.6			$	2,115.1			$	1,741.3

 

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION

		Year Ended
		December 31, 2009
		(In millions, except
		per share data)
Pro Forma Condensed Combined Consolidated Statement of Income Data:
Revenues		$	16,394
Income From Continuing Operations			1,367
Net Income			1,367
Earnings Available to FirstEnergy Corp.			1,382
Basic Earnings Per Share of Common Stock		$	3.30
Diluted Earnings Per Share of Common Stock		$	3.28
		As of
		December 31,
		2009
Pro Forma Condensed Combined Consolidated Balance Sheet Data:
Cash and Cash Equivalents		$	1,161
Total Assets			48,359
Long-Term Debt and Other Long-Term Obligations			16,496
Total Liabilities			35,326
Total Equity			13,033

 

UNAUDITED COMPARATIVE PER SHARE DATA

										Pro Forma
		Year Ended								Combined
		December 31, 2009								Equivalent
		FirstEnergy				Allegheny Energy				Data
Basic Earnings Per Share of Common Stock(1)		$	3.31			$	2.32			$	3.30
Diluted Earnings Per Share of Common Stock(1)			3.29				2.31				3.28
Cash Dividends Declared Per Share			2.20				0.60
Book Value Per Share of Common Stock(2)			28.08				18.36				31.03

(1)		The pro forma combined consolidated statement of income for the year ended December 31, 2009 was prepared by combining the FirstEnergy historical consolidated statement of income for the year ended December 31, 2009 and the Allegheny Energy historical consolidated statement of income for the year ended December 31, 2009, adjusted to give effect to pro forma events that are (a) directly attributable to the merger, (b) factually supportable and (c) expected to have a continuing impact on combined results.
(2)		Historical book value per share is computed by dividing common stockholders’ equity by the number of shares of FirstEnergy or Allegheny Energy common stock outstanding, as applicable. Pro forma book value per share is computed by dividing pro forma total equity by the pro forma number of shares of FirstEnergy common stock that would have been outstanding as of December 31, 2009.

 

COMPARATIVE FIRSTENERGY AND ALLEGHENY ENERGY MARKET PRICE AND DIVIDEND DATA

										Equivalent
										Per Share of
										Allegheny Energy
		FirstEnergy				Allegheny Energy				Common
		Common Stock				Common Stock				Stock
February 10, 2010		$	41.46			$	21.02			$	27.65
, 2010		$				$				$

		FirstEnergy
		Common Stock
										Cash Dividends
		High				Low				Declared(1)
Fiscal Year Ended December 31, 2010:
First Quarter (through March 22, 2010)		$	47.06			$	38.40			$	0.55
Fiscal Year Ended December 31, 2009:
Fourth Quarter		$	47.77			$	41.57			$	0.55
Third Quarter		$	47.82			$	36.73			$	1.10
Second Quarter		$	43.29			$	35.26			$	—
First Quarter		$	53.63			$	35.63			$	0.55
Fiscal Year Ended December 31, 2008:
Fourth Quarter		$	66.69			$	41.20			$	0.55
Third Quarter		$	84.00			$	63.03			$	1.10
Second Quarter		$	83.49			$	69.20			$	—
First Quarter		$	78.51			$	64.44			$	0.55
Fiscal Year Ended December 31, 2007:
Fourth Quarter		$	74.98			$	63.39			$	0.55
Third Quarter		$	68.31			$	58.75			$	1.00
Second Quarter		$	72.90			$	62.56			$	—
First Quarter		$	67.11			$	57.77			$	0.50

(1)		Since 2008, the quarterly dividend rate of $0.55 per share has remained unchanged. The dividend declared in the first quarter of 2010 will be paid in the second quarter of 2010. The dividends declared in 2009 and 2008 included three quarterly payments of $0.55 per share in 2009 and 2008, respectively, and one quarterly payment of $0.55 per share in 2010 and 2009, respectively. Dividends declared in 2007 include three quarterly payments of $0.50 per share in 2007 and one quarterly payment of $0.55 per share in 2008.

		Allegheny Energy
		Common Stock
										Cash Dividends
		High				Low				Declared
Fiscal Year Ended December 31, 2010:
First Quarter (through March 22, 2010)		$	23.77			$	20.40			$	0.15
Fiscal Year Ended December 31, 2009:
Fourth Quarter		$	27.15			$	21.84			$	0.15
Third Quarter		$	27.70			$	23.42			$	0.15
Second Quarter		$	29.85			$	22.70			$	0.15
First Quarter		$	35.97			$	20.32			$	0.15
Fiscal Year Ended December 31, 2008:
Fourth Quarter		$	36.61			$	23.86			$	0.15
Third Quarter		$	51.14			$	33.94			$	0.15
Second Quarter		$	55.98			$	49.38			$	0.15
First Quarter		$	64.75			$	45.46			$	0.15
Fiscal Year Ended December 31, 2007:
Fourth Quarter		$	65.48			$	52.37			$	0.15
Third Quarter		$	57.30			$	48.18			$	—
Second Quarter		$	56.13			$	48.67			$	—
First Quarter		$	50.25			$	44.28			$	—

 

This joint proxy statement/prospectus, including information included or incorporated by reference in this joint proxy statement/prospectus, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “budget,” “should,” “continue,” “could,” “forecast,” “may,” “might,” “potential,” “strategy,” “synergies,” “will,” “would,” “seek,” “estimate,” variations of such words and similar expressions, although the absence of any such words or expressions does not mean that a particular statement is not a forward-looking statement. Any statements regarding the benefits of the merger, or FirstEnergy’s or Allegheny Energy’s future financial condition, results of operations and business are also forward-looking statements. Without limiting the generality of the preceding sentence, certain statements contained in the sections entitled “The Merger — Background of the Merger,” “The Merger — Recommendation of the FirstEnergy Board of Directors and Its Reasons for the Merger,” “The Merger — Recommendation of the Allegheny Energy Board of Directors and Its Reasons for the Merger,” “The Merger — Opinion of FirstEnergy’s Financial Advisor” and “The Merger — Opinion of Allegheny Energy’s Financial Advisor” constitute forward-looking statements.

 

These forward-looking statements represent FirstEnergy’s and Allegheny Energy’s intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of these factors are outside the control of FirstEnergy and Allegheny Energy and could cause actual results to differ materially from the results expressed or implied by these forward-looking statements. In addition to the risk factors described in the section entitled “Risk Factors” beginning on page 30 of this joint proxy statement/prospectus, these factors include:

 

 

 

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this joint proxy statement/prospectus and should be read in conjunction with the risk factors and other disclosures contained or incorporated by reference into this joint proxy statement/prospectus. The areas of risk and uncertainty described above, which are not exclusive, should be considered in connection with any written or oral forward-looking statements that may be made in this joint proxy statement/prospectus or on, before or after the date of this joint proxy statement/prospectus by FirstEnergy or Allegheny Energy or anyone acting for any or both of them. Except as required by applicable law or regulation, neither FirstEnergy nor Allegheny Energy undertakes any obligation to release publicly or otherwise make any revisions to any forward-looking statements, to report events or circumstances after the date of this joint proxy statement/prospectus or to report the occurrence of unanticipated events.

 

In addition to the other information included or incorporated by reference in this joint proxy statement/prospectus, including the matters addressed in the section entitled “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 28 you should carefully consider the following risks before deciding how to vote.

 

Because the exchange ratio is fixed and the market price of shares of FirstEnergy common stock will fluctuate, Allegheny Energy stockholders cannot be sure of the value of the merger consideration they will receive.

 

Upon completion of the merger, each outstanding share of Allegheny Energy common stock will be converted into the right to receive 0.667 of a share of FirstEnergy common stock. The number of shares of FirstEnergy common stock to be issued pursuant to the merger agreement for each share of Allegheny Energy common stock is fixed and will not change to reflect changes in the market price of FirstEnergy or Allegheny Energy common stock. The market price of FirstEnergy common stock at the time of completion of the merger may vary significantly from the market prices of FirstEnergy common stock on the date the merger agreement was executed, the date of this joint proxy statement/prospectus and the date of the special meetings. Accordingly, at the time of the special meetings, you will not know or be able to calculate the market value of the merger consideration you will receive upon the completion of the merger.

 

In addition, the merger might not be completed until a significant period of time has passed after the special meetings. Because the exchange ratio will not be adjusted to reflect any changes in the market value of FirstEnergy common stock or Allegheny Energy common stock, the market value of the FirstEnergy common stock issued in the merger and the Allegheny Energy common stock surrendered in the merger may be higher or lower than the values of those shares on earlier dates.

 

Stock price changes may result from a variety of factors, many of which are beyond the control of FirstEnergy and Allegheny Energy, including:

 

 

Neither FirstEnergy nor Allegheny Energy is permitted to terminate the merger agreement solely because of changes in the market price of either company’s common stock.

The merger agreement contains provisions that limit FirstEnergy’s and Allegheny Energy’s ability to pursue alternatives to the merger, which could discourage a potential competing acquirer of either Allegheny Energy or FirstEnergy from making an alternative transaction proposal and, in certain circumstances, could require FirstEnergy or Allegheny Energy to pay to the other a termination fee of $350 million or $150 million, respectively, as well as up to $45 million of transaction expenses.

 

Under the merger agreement, FirstEnergy and Allegheny Energy are restricted, subject to limited exceptions, from entering into alternative transactions. Unless and until the merger agreement is terminated, subject to specified exceptions (which are discussed in more detail in the section entitled “The Merger Agreement” beginning on page 108), both FirstEnergy and Allegheny Energy are restricted from soliciting, initiating, seeking, knowingly encouraging or facilitating, or negotiating, any inquiry, proposal or offer for a competing acquisition proposal with any person. Additionally, under the merger agreement, in the event of a potential change by either the FirstEnergy or the Allegheny Energy board of its recommendation with respect to the merger-related proposals, the company changing its recommendation must provide the other with five business days prior notice and if requested, negotiate in good faith an adjustment to the terms and conditions of the merger agreement prior to changing its recommendation. FirstEnergy and Allegheny Energy may terminate the merger agreement and enter into an agreement with respect to a superior proposal only if specified conditions have been satisfied, including, compliance with the non-solicitation provisions of the merger agreement. These provisions could discourage a third party that may have an interest in acquiring all or a significant part of FirstEnergy or Allegheny Energy from considering or proposing that acquisition, even if such third party were prepared to pay consideration with a higher per share cash or market value than that market value proposed to be received or realized in the merger, or might result in a potential competing acquirer proposing to pay a lower price than it would otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances. As a result of these restrictions, neither FirstEnergy nor Allegheny Energy may be able to enter into an agreement with respect to a more favorable alternative transaction without incurring potentially significant liability to the other.

 

Under the merger agreement, FirstEnergy or Allegheny Energy may be required to pay to the other a termination fee of $350 million or $150 million, respectively, if the merger agreement is terminated under certain circumstances, and/or reasonably documented transaction expenses up to $45 million. Should the merger agreement be terminated in circumstances under which such a termination fee or expense reimbursement is payable, the payment of this fee or reimbursement by FirstEnergy or Allegheny Energy (or by a third party acquiror) could have material and adverse consequences to the financial condition and operations of the company making such payment.

 

FirstEnergy and Allegheny Energy will be subject to various uncertainties and contractual restrictions while the merger is pending that could adversely affect their businesses and impact the combined company’s operational and financial performance after the merger.

 

Uncertainty about the effect of the merger on employees, suppliers and customers may have an adverse effect on FirstEnergy and Allegheny Energy. Although FirstEnergy and Allegheny Energy intend to take steps designed to reduce any adverse effects, these uncertainties may impair FirstEnergy’s or Allegheny Energy’s ability to attract, retain and motivate key personnel until the merger is completed and for a period of time thereafter, and could cause customers, suppliers and others that deal with FirstEnergy and Allegheny Energy to seek to change existing business relationships with FirstEnergy and Allegheny Energy.

Employee retention and recruitment may be particularly challenging prior to the completion of the merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company. If, despite FirstEnergy’s and Allegheny Energy’s retention and recruiting efforts, key employees depart or fail to accept employment with either company because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, FirstEnergy’s and Allegheny Energy’s financial results could be affected. Furthermore, FirstEnergy’s operational and financial performance following the merger could be adversely affected if it is unable to retain key employees and skilled workers of Allegheny Energy. The loss of the services of key employees and skilled workers and their experience and knowledge regarding Allegheny Energy’s business could adversely affect FirstEnergy’s future operating results and its successful ongoing operation of the business.

 

The pursuit of the merger and the preparation for the integration may place a significant burden on management and internal resources. The diversion of management attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could affect FirstEnergy’s and Allegheny Energy’s financial results.

 

In addition, the merger agreement restricts either company, without the other’s consent, from making certain acquisitions and taking other specified actions until the merger occurs or the merger agreement terminates. These restrictions may prevent FirstEnergy or Allegheny Energy from pursuing otherwise attractive business opportunities and making other changes to FirstEnergy’s or Allegheny Energy’s business prior to completion of the merger or termination of the merger agreement. See the section entitled “The Merger Agreement — Conduct of Business Pending the Merger” beginning on page 115.

 

Many of the anticipated benefits of combining FirstEnergy and Allegheny Energy may not be realized.

 

FirstEnergy and Allegheny Energy entered into the merger agreement with the expectation that the merger would result in various benefits including, among other things, synergies, cost savings and operating efficiencies. The success of the merger will depend, in part, on the combined company’s ability to realize these anticipated benefits and cost savings from combining the businesses of FirstEnergy and Allegheny Energy. However, to realize these anticipated benefits and cost savings, FirstEnergy and Allegheny Energy must successfully combine their businesses. If FirstEnergy and Allegheny Energy are not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected. The pro forma financial statements presented elsewhere in this joint proxy statement/prospectus do not reflect potential synergies and are not necessarily indicative of results of operations and financial position that would have been achieved had the pro forma events taken place on the dates indicated, or indicative of the future consolidated results of operations or financial position of the combined company.

 

FirstEnergy and Allegheny Energy have operated and, until the completion of the merger, will continue to operate independently. It is possible that the integration process could take longer than anticipated and could result in the loss of valuable employees, the disruption of each company’s ongoing businesses, processes and systems or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect the combined company’s ability to achieve the anticipated benefits of the merger. The combined company’s results of operations could also be adversely affected by any issues attributable to either company’s operations that arise or are based on events or actions that occur prior to the closing of the merger. Further, the size of the merger may make integration difficult, expensive and disruptive,

adversely affecting FirstEnergy’s revenues after the merger. While the merger agreement provides for the establishment of an integration committee, FirstEnergy may have difficulty addressing possible differences in corporate cultures and management philosophies. Integration efforts between the two companies will also divert management attention and resources. These integration activities could have an adverse effect on the businesses of both FirstEnergy and Allegheny Energy during the transition period. The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect FirstEnergy’s future business, financial condition, operating results and prospects. In addition, FirstEnergy may not be able to eliminate duplicative costs or realize other efficiencies from integrating the businesses to offset part or all of the transaction and merger-related costs incurred by FirstEnergy and Allegheny Energy.

 

FirstEnergy and Allegheny Energy may be unable to obtain in the anticipated timeframe, or at all, the regulatory approvals required to complete the merger or, in order to do so, FirstEnergy and Allegheny Energy may be required to comply with material restrictions or conditions that may negatively affect the combined company after the merger is completed or cause them to abandon the merger. Furthermore, FirstEnergy and Allegheny Energy may subsequently agree to conditions without further seeking shareholder approval, even if such conditions could have an adverse impact on FirstEnergy, Allegheny Energy or the combined company.

 

The merger is subject to review by the U.S. Department of Justice Antitrust Division, referred to as the Antitrust Division, and the Federal Trade Commission, referred to as the FTC, under the HSR Act, and the expiration or termination of the waiting period (and any extension of the waiting period) applicable to the merger under the HSR Act is a condition to closing the merger. The merger is also subject to the regulatory requirements of other federal and state agencies and authorities, including the FERC, the MDPSC, the PAPUC, the VSCC, the WVPSC and the FCC. FirstEnergy and Allegheny Energy can provide no assurance that all required regulatory authorizations, approvals or consents will be obtained or that these authorizations, approvals or consents will not contain terms, conditions or restrictions that would be detrimental to FirstEnergy after the completion of the merger. A substantial delay in obtaining the required authorizations, approvals or consents or the imposition of unfavorable terms, conditions or restrictions contained in such authorizations, approvals or consents could have a material adverse effect on the synergies and other anticipated benefits of the merger, thereby impacting the business, financial condition or results of operations of FirstEnergy after the merger. In addition, delays or unfavorable terms could lead FirstEnergy or Allegheny Energy to become involved in litigation with one or more governmental entities or third parties, or may cause FirstEnergy or Allegheny Energy to significantly delay and/or abandon the merger.

 

The special meetings of shareholders at which the merger-related proposals will be considered will likely take place before any or all of the required regulatory approvals have been obtained and before all conditions to such approvals, if any, are known. In this event, if the merger-related proposals are approved, FirstEnergy and Allegheny Energy may subsequently agree to conditions without further seeking shareholder approval, even if such conditions could have an adverse impact on FirstEnergy, Allegheny Energy or the combined company.

 

Even after the statutory waiting period under the HSR Act has expired, and even after completion of the merger, governmental authorities could seek to block or challenge the merger as they deem necessary or desirable in the public interest. In addition, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed. FirstEnergy or

Allegheny Energy may not prevail, or may incur significant costs, in defending or settling any action under the antitrust laws.

 

Any delay in completing the merger may materially adversely affect the synergies and other benefits that FirstEnergy and Allegheny Energy expect to achieve from the merger and the integration of their respective businesses.

 

FirstEnergy may record goodwill that could become impaired and adversely affect its operating results.

 

The merger will be accounted for in accordance with GAAP. Under accounting for business combinations, the assets and liabilities of Allegheny Energy will be recorded, as of completion of the merger, at their respective fair values and added to those of FirstEnergy. The reported financial condition and results of operations of FirstEnergy issued after completion of the merger will reflect Allegheny Energy balances and results after completion of the merger, but will not be restated retroactively to reflect the historical financial position or results of operations of Allegheny Energy for periods prior to the merger. Following completion of the merger, the earnings of FirstEnergy will reflect purchase accounting adjustments. See the section entitled “Pro Forma Financial Information” beginning on page 131.

 

The total purchase price will be allocated to Allegheny Energy’s tangible assets and liabilities and identifiable intangible assets based on their fair values as of the date of completion of the merger. Any excess of the purchase price over those fair values will be recorded as goodwill. To the extent the value of any goodwill or intangibles becomes impaired, FirstEnergy may be required to incur material charges relating to such impairment. Such a potential impairment charge could have a material impact on FirstEnergy’s operating results.

 

FirstEnergy and Allegheny Energy will incur substantial transaction fees and merger-related costs in connection with the merger.

 

FirstEnergy and Allegheny Energy expect to incur a number of non-recurring transaction fees and merger-related costs associated with completing the merger, combining the operations of the two companies and achieving desired synergies. These fees and costs will be substantial. Additional unanticipated costs may be incurred in the integration of the businesses of FirstEnergy and Allegheny Energy. Although it is expected that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses, will offset the incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

 

The opinions obtained by FirstEnergy and Allegheny Energy from their respective financial advisors do not reflect changes in circumstances between the signing of the merger agreement and completion of the merger.

 

Each of the financial advisors of FirstEnergy and Allegheny Energy rendered opinions dated February 10, 2010, with respect to the fairness from a financial point of view, as of February 10, 2010, of the merger consideration to FirstEnergy and to Allegheny Energy’s stockholders, respectively. Each opinion was based on the financial, economic, market and other conditions as in effect on, and the information made available to the opinion giver as of, February 10, 2010. Neither of the opinions will be updated, revised or reaffirmed as of the date of this joint proxy statement/prospectus, the time the merger will be completed or any other date. The opinions do not reflect changes in circumstances of FirstEnergy or Allegheny Energy or in the financial, economic, market and other conditions or other factors affecting FirstEnergy or Allegheny Energy after February 10,

2010. For a description of the opinions that FirstEnergy and Allegheny Energy received from their respective financial advisors, please refer to the sections entitled “The Merger — Opinion of FirstEnergy’s Financial Advisor” beginning on page 71 and “The Merger — Opinion of Allegheny Energy’s Financial Advisor” beginning on page 80.

 

The market price of FirstEnergy common stock after the merger may be affected by factors different from those affecting the shares of Allegheny Energy or FirstEnergy currently.

 

Upon completion of the merger, holders of Allegheny Energy common stock will become holders of FirstEnergy common stock. The businesses of FirstEnergy differ from those of Allegheny Energy in important respects and, accordingly, the results of operations of the combined company and the market price of FirstEnergy’s shares of common stock following the merger may be affected by factors different from those currently affecting the independent results of operations of FirstEnergy and Allegheny Energy. For a discussion of the businesses of FirstEnergy and Allegheny Energy and of certain factors to consider in connection with those businesses, see the documents incorporated by reference in this joint proxy statement/prospectus referred to in the section entitled “Where You Can Find More Information; Incorporation by Reference” beginning on page 166.

 

The merger may not be accretive to earnings and may cause dilution to FirstEnergy’s earnings per share, which may negatively affect the market price of FirstEnergy’s common stock.

 

FirstEnergy currently anticipates that the merger will be accretive to earnings per share in the first year following the completion of the merger. This expectation is based on preliminary estimates which may materially change. FirstEnergy could also encounter additional transaction and integration-related costs, may fail to realize all of the benefits anticipated in the merger or be subject to other factors that affect preliminary estimates. Any of these factors could cause dilution to FirstEnergy’s earnings per share or decrease or delay the expected accretive effect of the merger and contribute to a decrease in the price of FirstEnergy’s common stock.

 

Current FirstEnergy and Allegheny Energy shareholders will have a reduced ownership and voting interest after the merger and will exercise less influence over management.

 

FirstEnergy will issue approximately 115.4 million shares of FirstEnergy common stock to Allegheny Energy stockholders in the merger (including shares to be issued in connection with outstanding Allegheny Energy equity awards). As a result, current FirstEnergy shareholders and Allegheny Energy stockholders are expected to hold approximately 73% and 27% respectively, of FirstEnergy’s common stock outstanding immediately following the completion of the merger.

 

FirstEnergy shareholders and Allegheny Energy stockholders currently have the right to vote for their respective directors and on other matters affecting the applicable company. When the merger occurs, each Allegheny Energy stockholder that receives shares of FirstEnergy common stock will become a shareholder of FirstEnergy with a percentage ownership of the combined organization that is much smaller than the stockholder’s percentage ownership of Allegheny Energy. Correspondingly, each FirstEnergy shareholder will remain a shareholder of FirstEnergy with a percentage ownership of the combined organization that is smaller than the shareholder’s percentage of FirstEnergy prior to the merger. As a result of these reduced ownership percentages, FirstEnergy shareholders will have less influence on the management and policies of FirstEnergy than they now have, and former Allegheny Energy stockholders will have less influence on the management and policies of the combined company than they now have with respect to Allegheny Energy.

Failure to complete the merger could negatively affect the stock prices and the future businesses and financial results of FirstEnergy and Allegheny Energy.

 

Completion of the merger is not assured and is subject to risks, including the risks that approval of the transaction by shareholders of FirstEnergy and Allegheny Energy or by governmental agencies is not obtained or that certain other closing conditions are not satisfied. If the merger is not completed, the ongoing businesses of FirstEnergy and/or Allegheny Energy may be adversely affected and FirstEnergy and Allegheny Energy will be subject to several risks, including:

 

 

Members of the management and boards of directors of FirstEnergy and Allegheny Energy have interests in the merger that are different from, or in addition to, those of other FirstEnergy and Allegheny Energy shareholders and that could have influenced their decision to support or approve the merger.

 

In considering whether to approve the proposals at the special meetings, FirstEnergy and Allegheny Energy shareholders should recognize that some of the members of management and the boards of directors of FirstEnergy and Allegheny Energy have interests in the merger that differ from, or are in addition to, their interests as shareholders of FirstEnergy and stockholders of Allegheny Energy. For a discussion of the interests of directors and executive officers in the merger, see the sections entitled “The Merger — Additional Interests of the FirstEnergy Directors and Executive Officers in the Merger” beginning on page 90 and “The Merger — Additional Interests of the Allegheny Energy Directors and Executive Officers in the Merger” beginning on page 90.

FirstEnergy’s indebtedness following the merger will be higher than FirstEnergy’s existing indebtedness. Notwithstanding improvements in certain key credit metrics, such as debt-to-capitalization ratios, it may be more difficult for FirstEnergy to pay or refinance its debts and FirstEnergy may need to borrow or divert its cash flow from operations to service debt payments. The additional indebtedness could limit FirstEnergy’s ability to pursue other strategic opportunities and increase its vulnerability to adverse economic and industry conditions and may cause FirstEnergy to take other actions that will increase the dilution of its shareholders and former Allegheny Energy stockholders or reduce earnings.

 

In connection with the merger, FirstEnergy will assume Allegheny Energy’s outstanding debt. FirstEnergy’s total indebtedness as of December 31, 2009 was approximately $14.9 billion. FirstEnergy’s pro forma total indebtedness as of December 31, 2009, after giving effect to the merger, would have been approximately $19.7 billion (including approximately $2.0 billion of currently payable long-term debt, approximately $1.2 billion of short-term borrowings and approximately $16.5 billion of long-term debt and other long-term obligations). FirstEnergy’s debt service obligations with respect to this increased indebtedness could have an adverse impact on its earnings and cash flows for as long as the indebtedness is outstanding.

 

FirstEnergy’s increased indebtedness could have important consequences to holders of FirstEnergy common stock. For example, it could:

 

 

Based upon current levels of operations, FirstEnergy expects to be able to obtain sufficient cash on a consolidated basis to make all of the principal and interest payments when such payments are due under FirstEnergy’s and its current subsidiaries’ existing credit facilities, indentures and other instruments governing their outstanding indebtedness, and under the indebtedness of Allegheny

Energy and its subsidiaries that may remain outstanding after the merger, but there can be no assurance that FirstEnergy will be able to repay or refinance such borrowings and obligations.

 

FirstEnergy is committed to maintaining and improving its credit ratings. In order to maintain and improve these credit ratings, FirstEnergy may consider it appropriate to reduce the amount of indebtedness outstanding following the merger. This may be accomplished in several ways, including issuing additional shares of common stock or securities convertible into shares of common stock, selling assets, reducing discretionary uses of cash, or a combination of these and other measures. Issuances of additional shares of common stock or securities convertible into shares of common stock would have the effect of diluting the ownership percentage that current FirstEnergy shareholders and former Allegheny Energy stockholders hold in the combined company and might reduce the reported earnings per share. Sales of additional assets could reduce the earnings of the combined company, depending on the earnings attributable to the divested assets. The specific measures that FirstEnergy may ultimately decide to use to maintain or improve its credit ratings and their timing will depend upon a number of factors, including market conditions and forecasts at the time those decisions are made.

 

The merger will combine two companies that are currently affected by developments in the electric utility industry, including changes in regulation. A failure to adapt to the changing regulatory environment after the merger could adversely affect the stability of earnings and could result in the erosion of the combined company’s revenues and profits.

 

Because FirstEnergy, Allegheny Energy and their respective subsidiaries are regulated in the United States at the federal level and in a number of states, the two companies have been and will continue to be impacted by legislative and regulatory developments in those jurisdictions, as will the combined company following the merger. After the merger, FirstEnergy and/or its subsidiaries will be subject in the United States to extensive federal regulation, including environmental regulation, as well as to state and local regulation in Ohio, Pennsylvania, West Virginia, New York, New Jersey, Maryland and Virginia. The costs and burdens associated with complying with the increased number of regulatory jurisdictions may have a material adverse effect on FirstEnergy. Moreover, the likelihood that federal and/or state legislation or regulation with respect to carbon emissions will be passed or implemented may adversely affect the market price of FirstEnergy’s common stock, or its business, financial condition or results of operation.

 

The combined company will have a higher percentage of coal-fired generation capacity compared to FirstEnergy’s current generation mix. As a result, FirstEnergy may be exposed to greater risk from regulations of coal and coal combustion by-products than it faces as a stand-alone company prior to the merger.

 

After the completion of the merger, the combined company’s generation fleet will have a higher percentage of coal-fired generation capacity compared to FirstEnergy’s current generation mix. As a result, FirstEnergy’s exposure to new or changing legislation, regulation or other legal requirements related to greenhouse gas or other emissions may be increased compared to its current exposure. Approximately 52% of FirstEnergy’s current generation fleet capacity is coal-fired, with the remainder being low-emitting natural gas, oil fired or non-emitting nuclear and pumped storage. Approximately 78% of Allegheny Energy’s current generation fleet capacity is coal-fired. After the completion of the merger, approximately 62% of FirstEnergy’s fleet capacity would be coal-fired. Historically, coal-fired generating plants face greater exposure to the costs of complying with federal, state and local environmental statutes, rules and regulations relating to emissions of substances such as sulfur dioxide, nitrogen oxide and mercury. In addition, there are currently a

number of federal, state and international initiatives under consideration to, among other things, require reductions in greenhouse gas emissions from power generation or other facilities, and to regulate coal combustion by-products, such as coal ash, as hazardous waste. These legal requirements and initiatives could require substantial additional costs, extensive mitigation efforts and, in the case of greenhouse gas legislation, would raise uncertainty about the future viability of fossil fuels as an energy source for new and existing electric generation facilities. Failure to comply with any such existing or future legal requirements may also result in the assessment of fines and penalties. Significant resources also may be expended to defend against allegations of violations of any such requirements. FirstEnergy expects approximately 78% of its generation fleet to be non-emitting or low-emitting by the end of 2010. All of Allegheny’s supercritical coal-fired generation assets are scrubbed, and its generation portfolio also includes pumped storage and natural gas generation capacity. The combined company’s generation fleet nevertheless could face greater exposure to risks relating to the foregoing legal requirements than FirstEnergy’s current fleet due to the combined company’s increased percentage of coal-fired generation facilities.

 

Following the merger, Allegheny Energy stockholders will own equity interests in a company that owns and operates nuclear generating facilities, which can present unique risks.

 

FirstEnergy’s ownership interest in and operation of nuclear facilities subjects it to various risks to which Allegheny Energy is not currently subject, including the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials; limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives; and costs associated with regulatory oversight by the Nuclear Regulatory Commission, referred to as the NRC, including NRC imposed fines, lost revenues as a result of any NRC ordered shutdown of FirstEnergy nuclear facilities, or increased capital costs as a result of increased NRC safety and security regulations. As shareholders of FirstEnergy following the merger, Allegheny Energy stockholders may be adversely affected by these risks.

 

Upon receipt of shares of FirstEnergy common stock upon completion of the merger, Allegheny Energy stockholders will become shareholders in FirstEnergy, an Ohio corporation, which may change certain rights and privileges they hold as stockholders of Allegheny Energy, a Maryland corporation.

 

FirstEnergy is an Ohio corporation and is governed by the laws of the State of Ohio and by its amended articles of incorporation and amended code of regulations. Ohio corporation law extends to shareholders certain rights and privileges that may not exist under Maryland law and, conversely, does not extend certain rights and privileges that a stockholder of a company, such as Allegheny Energy, governed by Maryland law, may have. For a detailed discussion of the rights of FirstEnergy shareholders versus the rights of Allegheny Energy stockholders, see the section entitled “Comparison of Rights of FirstEnergy’s Shareholders and Allegheny Energy’s Stockholders” beginning on page 142.

Pending litigation against FirstEnergy and Allegheny Energy could result in an injunction preventing the completion of the merger, the payment of damages in the event the merger is completed, and/or may adversely affect FirstEnergy’s business, financial condition or results of operations following the merger.

 

In connection with the merger, purported shareholders of Allegheny Energy have filed putative shareholder class action and/or derivative lawsuits in Pennsylvania and Maryland state courts, as well as in the United States District Court for the Western District of Pennsylvania, against Allegheny Energy and its directors and certain officers, which we refer to as the Allegheny Energy defendants, FirstEnergy and Merger Sub. The lawsuits allege, among other things, that the Allegheny Energy directors breached their fiduciary duties by approving the merger agreement, and that Allegheny Energy, FirstEnergy and Merger Sub aided and abetted in these alleged breaches of fiduciary duty. The plaintiffs allege that the merger consideration is unfair, that other terms in the merger agreement including the termination fee and the non-solicitation provisions are unfair, and that certain individual defendants are financially interested in the merger. Among other remedies, the plaintiffs seek to enjoin the merger and they have demanded jury trials. The Allegheny Energy defendants moved to consolidate the Maryland lawsuits and filed motions to dismiss and answers to each of the Maryland complaints. The court consolidated the Maryland lawsuits and an amended complaint has been filed. The Pennsylvania state court has consolidated the lawsuits filed in that court. While FirstEnergy and Allegheny Energy believe the lawsuits are without merit and intend to defend vigorously against the claims, the outcome of any such litigation is inherently uncertain. If a dismissal is not granted or a settlement is not reached, these lawsuits could prevent or delay the completion of the merger and result in substantial costs to FirstEnergy and Allegheny Energy. In accordance with its bylaws, Allegheny Energy will advance expenses to and, as necessary, indemnify all of its directors in connection with the foregoing proceedings. All applicable insurance policies may not provide sufficient coverage for the claims under these lawsuits, and rights of indemnification with respect to these lawsuits will continue whether or not the merger is completed. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger closes may adversely affect FirstEnergy’s business, financial condition or results of operations.

 

Risks relating to FirstEnergy and Allegheny Energy

 

FirstEnergy and Allegheny Energy are, and will continue to be, subject to the risks described in Part I, Item 1A — “Risk Factors” in FirstEnergy’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed by FirstEnergy on February 19, 2010 with the SEC and Part I, Item 1A, “Risk Factors” of Allegheny Energy’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed by Allegheny Energy on March 1, 2010 with the SEC, and in each case incorporated by reference in this joint proxy statement/prospectus. Please see the section entitled “Where You Can Find More Information; Incorporation by Reference” beginning on page 166 for how you can obtain information incorporated by reference in this joint proxy statement/prospectus.

 

The special meeting of the shareholders of FirstEnergy will be held at          ,          on          , 2010, at          , local time. The purpose of the FirstEnergy special meeting is:

 

1. to consider and vote on the proposal to approve the issuance of shares of FirstEnergy common stock pursuant to the merger agreement;

 

2. to consider and vote on the proposal to adopt the charter amendment;

 

3. to consider and vote on the proposal to adjourn the special meeting to another time or place, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the share issuance or the charter amendment; and

 

4. to transact any other business that may properly come before the special meeting or any adjournment or postponement of the special meeting by or at the direction of the board of directors of FirstEnergy.

 

The FirstEnergy board of directors unanimously approved the merger agreement and the transactions contemplated by the merger agreement and recommends that you vote FOR the proposal to approve the issuance of shares of FirstEnergy common stock pursuant to the merger agreement, FOR the proposal to adopt the charter amendment and FOR the proposal to adjourn the FirstEnergy special meeting, if necessary or appropriate, to solicit additional proxies in favor of such approvals. For the reasons for this recommendation, see the section entitled “The Merger — Recommendation of the FirstEnergy Board of Directors and Its Reasons for the Merger” beginning on page 58.

 

Only holders of record of FirstEnergy common stock at the close of business on          , 2010, the FirstEnergy record date, are entitled to notice of, and to vote at, the FirstEnergy special meeting and any adjournments or postponements of the FirstEnergy special meeting. At the close of business on that date, there were             shares of FirstEnergy common stock outstanding and entitled to vote at the FirstEnergy special meeting, held by approximately           shareholders of record.

 

Each share of FirstEnergy common stock is entitled to one vote on each proposal to be considered at the FirstEnergy special meeting.

 

In order to conduct business at the FirstEnergy special meeting, the holders of at least a majority of the total number of shares of FirstEnergy common stock issued and outstanding and entitled to vote as of the record date for the FirstEnergy special meeting must be present in person or represented by proxy. This requirement is called a quorum. Proxies marked “Abstain” and broker non-votes, if any, will be treated as shares that are present for purposes of determining the presence of a quorum. An “abstention” occurs when a shareholder sends in a proxy with explicit instructions to decline to vote regarding a particular matter. Broker “non-votes” are shares held by brokers or nominees for which voting instructions have not been received from the beneficial owners or the persons entitled to vote those shares and the broker or nominee does not have discretionary voting power under rules applicable to broker-dealers.

 

Under rules applicable to broker-dealers, none of the proposals to be voted on at the FirstEnergy special meeting is an item on which brokerage firms may vote in their discretion on behalf of their clients if such clients have not furnished voting instructions within ten days of the FirstEnergy special meeting.

 

The approval of the issuance of shares of FirstEnergy common stock pursuant to the merger agreement and the adoption of the charter amendment are conditions to the completion of the merger.

 

Approval of the share issuance requires the affirmative vote of the holders of at least a majority of the shares of FirstEnergy common stock voting on the proposal, provided that the total number of shares represented in person or by proxy constitutes a majority of the outstanding shares of FirstEnergy common stock entitled to vote at the FirstEnergy special meeting. A shareholder’s failure to submit a proxy card (or to vote in person at the FirstEnergy special meeting, if not submitting a proxy card) or an abstention from voting, or the failure of a shareholder who holds his or her shares in “street name” through a broker or other nominee to give voting instructions to such broker or other nominee, will have no effect on the outcome of the vote on the share issuance proposal, unless they cause the total votes cast on the matter to be 50% or less of the outstanding shares of FirstEnergy common stock entitled to vote at the special meeting.

 

The adoption of the charter amendment requires the affirmative vote of the holders of at least a majority of the outstanding shares of FirstEnergy common stock entitled to vote on the proposal. Because adoption of the charter amendment requires the affirmative vote of the holders of at least a majority of the outstanding shares of FirstEnergy common stock entitled to vote on the proposal, a failure to vote or an abstention from voting, or a failure of a shareholder who holds his or her shares in “street name” through a broker or other nominee to give voting instructions to such broker or other nominee, will have the same effect as a vote cast AGAINST adoption of the charter amendment. Accordingly, beneficial owners of FirstEnergy shares should instruct their brokers or nominees how to vote.

 

Approval of the proposal to adjourn the FirstEnergy special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of the holders of a majority of the shares represented in person or by proxy at the FirstEnergy special meeting and entitled to vote on the proposal, regardless of whether a quorum is present. Abstentions and broker non-votes will have the same effect as a vote cast AGAINST approval of the proposal. A failure to submit a proxy (or to vote in person at the FirstEnergy special meeting, if not submitting a proxy card) will have no effect on the outcome of any vote to adjourn the FirstEnergy special meeting.

 

Shares Held in Your Own Name

 

If you hold your shares in your own name, you may submit a proxy by telephone, via the Internet or by mail or vote by attending the FirstEnergy special meeting and voting in person.

 

 

 

By casting your vote in any of the three ways listed above, you are authorizing the individuals listed on the proxy to vote your shares in accordance with your instructions.

 

If you provide specific voting instructions, your shares will be voted at the special meeting in accordance with your instructions. If you hold shares in your name and sign and return a proxy card or submit a proxy by telephone or via the Internet without giving specific voting instructions, your shares will be voted as follows: FOR the proposal to approve the issuance of shares of FirstEnergy common stock pursuant to the merger agreement, FOR the proposal to adopt the charter amendment and FOR the proposal to adjourn the FirstEnergy special meeting, if necessary or appropriate, to solicit additional proxies in favor of such approvals.

 

Proxies solicited may be voted only at the FirstEnergy special meeting and any adjournment or postponement of the FirstEnergy special meeting and will not be used for any other FirstEnergy meeting of shareholders.

 

Shares Held in “Street Name”

 

If your shares are held in the name of a bank, broker or other nominee, you will receive instructions from the holder of record that you must follow for your shares to be voted. Please follow their instructions carefully. Also, please note that if the holder of record of your shares is a broker, bank or other nominee and you wish to vote in person at the FirstEnergy special meeting, you must request a legal proxy from your bank, broker or other nominee that holds your shares and, in addition to proof of identification, present that legal proxy identifying you as the beneficial owner of your shares of FirstEnergy common stock and authorizing you to vote those shares at the FirstEnergy special meeting.

 

FirstEnergy shareholders may revoke their proxy at any time before it is exercised by timely sending written notice to FirstEnergy’s corporate secretary that they would like to revoke their proxy, by timely delivering a properly executed, later-dated proxy (including over the Internet or telephone) or by voting by ballot at the FirstEnergy special meeting. Simply attending the FirstEnergy special meeting without voting will not revoke their proxy. However, shares held by participants in the FirstEnergy Corp. Savings Plan may only be voted by the plan’s trustee on behalf of such participants, and such participants may not vote their shares in person at the FirstEnergy special meeting. If you do not provide the plan trustee instructions by          Eastern time on          , 2010, unvoted shares will be voted by the trustee in the same proportion as the voted shares.

 

If your shares are held in the name of a bank, broker or other nominee, you must follow the directions you receive from your bank, broker or other nominee in order to revoke or change your vote.

 

FirstEnergy will appoint an inspector of election for the FirstEnergy special meeting to tabulate affirmative and negative votes and abstentions.

 

FirstEnergy will pay the cost of soliciting proxies. Directors, officers and employees of FirstEnergy may solicit proxies on behalf of FirstEnergy in person or by telephone, facsimile or other means for which such person will receive no additional compensation. FirstEnergy has engaged Innisfree M&A Incorporated to assist it in the distribution and solicitation of proxies.

FirstEnergy has agreed to pay Innisfree M&A Incorporated a fee of $      plus payment of certain fees and expenses for its services to solicit proxies.

 

In accordance with the regulations of the SEC and the NYSE, FirstEnergy also will reimburse brokerage firms and other custodians, nominees and fiduciaries for their expenses incurred in sending proxies and proxy materials to beneficial owners of shares of FirstEnergy common stock.

 

At the close of business on the record date for the FirstEnergy special meeting, FirstEnergy’s directors and executive officers collectively beneficially owned approximately           shares of FirstEnergy common stock (inclusive of shares subject to stock options which may be exercised within 60 days following that date), which represents approximately     % of the FirstEnergy common stock entitled to vote at the FirstEnergy special meeting. It is expected that FirstEnergy’s directors and executive officers will vote their shares FOR approval of the share issuance and the adoption of the charter amendment, although none of them has entered into any agreement requiring them to do so. See the section entitled “Security Ownership of Certain Beneficial Owners and Management of FirstEnergy” beginning on page 156.

 

The FirstEnergy special meeting may be adjourned to another time or place, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the FirstEnergy special meeting to approve the share issuance or the charter amendment. Any adjournment may be made from time to time with the affirmative vote of a majority of the shares represented in person or by proxy, whether or not a quorum exists. FirstEnergy is not required to notify shareholders of any adjournment if the time and place of the adjourned meeting are announced at the meeting at which the adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At any adjourned meeting, FirstEnergy may transact any business that it might have transacted at the original meeting, provided that a quorum is present at such adjourned meeting. Proxies submitted by FirstEnergy shareholders for use at the FirstEnergy special meeting will be used at any adjournment or postponement of the meeting. References to the FirstEnergy special meeting in this joint proxy statement/prospectus are to such special meeting as adjourned or postponed.

 

At this time, FirstEnergy is unaware of any matters, other than as set forth above, that may properly come before the FirstEnergy special meeting. If any other matters properly come before the FirstEnergy special meeting, the persons named in the enclosed proxy, or their duly constituted substitutes acting at the FirstEnergy special meeting or any adjournment or postponement of the FirstEnergy special meeting, will be deemed authorized to vote or otherwise act on such matters in accordance with their judgment.

 

If you need assistance in voting your shares or have questions regarding the FirstEnergy special meeting, the share issuance proposal or the charter amendment proposal, please contact Innisfree M&A Incorporated toll free at (877) 687-1866. Banks and brokers may call collect (212) 750-5833.

 

A special meeting of Allegheny Energy stockholders will be held at          ,          on          , 2010, at          , local time, to consider and vote on the proposals listed below:

 

1. the proposal to approve the merger agreement and the merger; and

 

2. the proposal to adjourn the special meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to approve the merger agreement and the merger at the time of the special meeting.

 

At the Allegheny Energy special meeting, Allegheny Energy stockholders will also be asked to consider and vote on any other matter that may properly come before the Allegheny Energy special meeting or any adjournment or postponement of the Allegheny Energy special meeting. At this time, the Allegheny Energy board of directors is unaware of any matters, other than those set forth above, that may properly come before the Allegheny Energy special meeting.

 

The Allegheny Energy board of directors unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair to and in the best interests of Allegheny Energy and its stockholders and recommends that Allegheny Energy stockholders vote FOR the proposal to approve the merger agreement and the merger and FOR the proposal to adjourn the Allegheny Energy special meeting, if necessary or appropriate, to solicit additional proxies in favor of such approval. For the reasons for this recommendation, see the section entitled “The Merger— Recommendation of the Allegheny Energy Board of Directors and Its Reasons for the Merger” beginning on page 63.

 

Only holders of record of Allegheny Energy common stock at the close of business on          , 2010, the Allegheny Energy special meeting record date, are entitled to notice of, and to vote at, the Allegheny Energy special meeting and any adjournments or postponements of the Allegheny Energy special meeting. At the close of business on that date, there were           shares of Allegheny Energy common stock outstanding and entitled to vote at the Allegheny Energy special meeting.

 

Each share of Allegheny Energy common stock is entitled to one vote on each proposal to be considered at the Allegheny Energy special meeting.

 

In order to conduct business at the Allegheny Energy special meeting (other than action to adjourn the Allegheny Energy special meeting), the holders of at least a majority of the total number of shares of Allegheny Energy common stock issued and outstanding and entitled to vote as of the record date for the Allegheny Energy special meeting, must be present in person or represented by proxy. This requirement is called a quorum. A quorum of stockholders is required to take action to approve the merger agreement and the merger at the Allegheny Energy special meeting, but not to approve any adjournment of the Allegheny Energy special meeting. Proxies marked “Abstain” and broker “non-votes,” if any, will be treated as shares that are present for purposes of determining the presence of a quorum. An “abstention” occurs when a stockholder sends in a proxy with explicit

instructions to decline to vote regarding a particular matter. Broker “non-votes” are shares held by brokers or nominees for which voting instructions have not been received from the beneficial owners or the persons entitled to vote those shares and the broker or nominee does not have discretionary voting power under rules applicable to broker-dealers.

 

Under rules applicable to broker-dealers, none of the proposals to be voted on at the Allegheny Energy special meeting is an item on which brokerage firms may vote in their discretion on behalf of their clients if such clients have not furnished voting instructions within ten days of the Allegheny Energy special meeting.

 

Approval of the merger agreement and the merger by Allegheny Energy stockholders is a condition to the completion of the merger.

 

The proposal to approve the merger agreement and the merger requires the affirmative vote of holders of at least a majority of the shares of Allegheny Energy common stock outstanding and entitled to vote on the proposal. Because approval is based on the affirmative vote of a majority of the outstanding shares of Allegheny Energy common stock, an Allegheny Energy stockholder’s failure to submit a proxy card (or to vote in person at the Allegheny Energy special meeting, if not submitting a proxy card) or an abstention from voting (or the failure of an Allegheny Energy stockholder who holds his or her shares in “street name” through a broker or other nominee to give voting instructions to such broker or other nominee), will have the same effect as a vote cast AGAINST approval of the merger agreement and the merger. Accordingly, beneficial owners of Allegheny Energy shares should instruct their brokers or nominees how to vote.

 

The proposal to adjourn the Allegheny Energy special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to approve the merger agreement and the merger at the time of the Allegheny Energy special meeting, requires the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the Allegheny Energy special meeting and entitled to vote on the proposal, regardless of whether a quorum is present. Abstentions and broker non-votes, if any, will have the same effect as a vote cast AGAINST approval of the proposal. A failure to submit a proxy (or to vote in person at the Allegheny Energy special meeting, if not submitting a proxy card) will have no effect on the outcome of any vote to adjourn the Allegheny Energy special meeting.

 

Shares Held in Your Own Name

 

If you hold your shares in your own name, you may submit a proxy by telephone, via the Internet or by mail or vote by attending the Allegheny Energy special meeting and voting in person.

 

 

 

By casting your vote in any of the three ways listed above, you are authorizing the individuals listed on the proxy to vote your shares in accordance with your instructions.

 

If you provide specific voting instructions, your shares will be voted at the Allegheny Energy special meeting in accordance with your instructions. If you hold shares in your name and sign and return a proxy card or submit a proxy by telephone or via the Internet without giving specific voting instructions, your shares will be voted as follows: FOR the proposal to approve the merger agreement and the merger and FOR the proposal to adjourn the Allegheny Energy special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes to approve the merger agreement and the merger at the time of the Allegheny Energy special meeting.

 

Proxies solicited may be voted only at the Allegheny Energy special meeting and any adjournment or postponement of the Allegheny Energy special meeting and will not be used for any other Allegheny Energy meeting of stockholders.

 

Shares Held in “Street Name”

 

If your shares are held in the name of a bank, broker or other nominee, you will receive instructions from the holder of record that you must follow for your shares to be voted. Please follow their instructions carefully. Also, please note that if the holder of record of your shares is a broker, bank or other nominee and you wish to vote in person at the Allegheny Energy special meeting, you must request a legal proxy from your bank, broker or other nominee that holds your shares and, in addition to proof of identification, present that legal proxy identifying you as the beneficial owner of your shares of Allegheny Energy common stock and authorizing you to vote those shares at the Allegheny Energy special meeting.

 

If you hold your shares in your own name, you will have the power to revoke your proxy and/or change your vote at any time before it is exercised at the Allegheny Energy special meeting. You can do this by:

 

 

Any written notice of revocation, or later dated proxy, should be delivered to:

 

Secretary of Allegheny Energy, Inc.
c/o Allegheny Energy, Inc.
800 Cabin Hill Drive
Greensburg, Pennsylvania 15601

 

Alternatively, you may hand deliver a written revocation notice, or a later dated proxy, to the secretary at the Allegheny Energy special meeting before we begin voting.

 

If your shares are held in the name of a bank, broker or other nominee, you must follow the directions you receive from your bank, broker or other nominee in order to revoke or change your vote.

 

Allegheny Energy will appoint an inspector of election for the Allegheny Energy special meeting to tabulate affirmative and negative votes and abstentions.

 

This joint proxy statement/prospectus is being furnished in connection with the solicitation of proxies from Allegheny Energy stockholders by the Allegheny Energy board of directors to be voted at the Allegheny Energy special meeting. Allegheny Energy will pay for all costs incurred by it in connection with the solicitation. In addition to solicitation by mail, the directors, officers and employees of Allegheny Energy, FirstEnergy and their respective subsidiaries may solicit proxies from stockholders of Allegheny Energy in person or by telephone, facsimile or other electronic methods without additional compensation other than reimbursement for their actual expenses.

 

Allegheny Energy has retained D.F. King & Co., Inc., a proxy solicitation firm, to assist it in the solicitation of proxies for the Allegheny Energy special meeting. Allegheny Energy estimates it will pay D.F. King & Co., Inc. a fee of $      for its services. In addition, Allegheny Energy will reimburse D.F. King & Co., Inc. for its reasonable out-of-pocket expenses.

 

Arrangements also will be made with brokerage firms and other custodians, nominees and fiduciaries for the forwarding of solicitation material to the beneficial owners of stock held of record by such persons, and Allegheny Energy will reimburse such custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses in connection with forwarding the materials.

 

Stockholders should not send stock certificates with their proxies. A letter of transmittal and instructions for the surrender of Allegheny Energy common stock certificates will be mailed to Allegheny Energy stockholders shortly after completion of the merger.

 

At the close of business on the record date for the Allegheny Energy special meeting, Allegheny Energy’s directors and executive officers and their affiliates collectively beneficially owned approximately           shares of Allegheny Energy common stock (inclusive of shares subject to stock options which may be exercised within 60 days following that date), which represents approximately     % of the Allegheny Energy common stock entitled to vote at the Allegheny Energy special meeting. It is expected that Allegheny Energy’s directors and executive officers will vote their shares FOR approval of the merger agreement and the merger, although none of them has entered into any agreement requiring them to do so. See the section entitled “Security

Ownership of Certain Beneficial Owners and Management of Allegheny Energy” beginning on page 158.

 

The Allegheny Energy special meeting may be adjourned to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Allegheny Energy special meeting to approve the merger agreement and the merger at the time of the special meeting. Under Allegheny Energy’s bylaws, any adjournment may be made from time to time by the Chairman of the Allegheny Energy board of directors or with the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the Allegheny Energy special meeting and entitled to vote on the proposal, whether or not a quorum exists. Allegheny Energy is not required to notify stockholders of any adjournment of 120 days or less if the time and place of the adjourned meeting are announced at the meeting at which the adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At any adjourned meeting, Allegheny Energy may transact any business that it might have transacted at the original meeting, provided that a quorum is present at such adjourned meeting. Proxies submitted by Allegheny Energy stockholders for use at the Allegheny Energy special meeting will be used at any adjournment or postponement of the meeting. References to the Allegheny Energy special meeting in this joint proxy statement/prospectus are to such special meeting as adjourned or postponed.

 

At this time, Allegheny Energy is unaware of any matters, other than as set forth above, that may properly come before the Allegheny Energy special meeting. If any other matters properly come before the Allegheny Energy special meeting, the persons named in the enclosed proxy, or their duly constituted substitutes acting at the Allegheny Energy special meeting or any adjournment or postponement of the Allegheny Energy special meeting, will be deemed authorized to vote or otherwise act on such matters in accordance with their judgment.

 

If you need assistance in voting your shares or have questions regarding the Allegheny Energy special meeting, the proposals to be considered at the Allegheny Energy special meeting, or the merger, please contact D.F. King & Co., Inc. toll-free at (800) 549-6650 (banks and brokers call collect at (212) 269-5550).

 

The following is a description of the material aspects of the merger and the material terms of the merger agreement. While FirstEnergy and Allegheny Energy believe that the following description covers the material terms of the merger, the description may not contain all of the information that is important to you. FirstEnergy and Allegheny Energy encourage you to carefully read this entire joint proxy statement/prospectus, including the merger agreement attached as Annex A and incorporated by reference into this section of the joint proxy statement/prospectus, for a more complete understanding of the merger.

 

Each of the FirstEnergy and Allegheny Energy boards of directors has unanimously approved the merger agreement and the transactions contemplated by it. In the merger, Merger Sub will merge with and into Allegheny Energy with Allegheny Energy surviving the merger as a wholly owned subsidiary of FirstEnergy. Allegheny Energy stockholders will receive the merger consideration described below in the section entitled “The Merger Agreement — Merger Consideration” beginning on page 109.

 

The management of FirstEnergy and Allegheny Energy are each generally familiar with the business and operations of the other company as participants in the electric utility industry. Executives from FirstEnergy, Allegheny Energy and other electric utility companies periodically interact with each other at industry meetings and at other events. For example, on June 4, 2009, Paul J. Evanson, Chief Executive Officer and President of Allegheny Energy, and Anthony J. Alexander, Chief Executive Officer and President of FirstEnergy, served on a panel together at a conference sponsored by Citibank. During 2009, Mr. Evanson had general discussions with various industry executives, including with Mr. Alexander at a social event on August 25, 2009, and on other occasions with other individuals, including the Chief Executive Officer of another large publicly-traded electric utility company referred to as Company A, regarding the industry and their businesses.

 

On an ongoing basis, FirstEnergy evaluates options for achieving its long-term strategic goals and enhancing shareholder value. For several years, the FirstEnergy board of directors and management have been engaged in a strategic planning process designed to position FirstEnergy to take advantage of growth opportunities in the electric utility industry and to enhance its position in the competitive generation market. As part of this process, FirstEnergy management has periodically made presentations to the FirstEnergy board regarding a variety of possible business combinations in light of its evolving acquisition criteria and opportunities presented by various potential transactions. During the November 2009 strategic planning process, FirstEnergy management presented to the FirstEnergy board strategic alternatives that included a possible combination with Allegheny Energy. The FirstEnergy board authorized Mr. Alexander at a time he deemed appropriate to contact Mr. Evanson to learn if Allegheny Energy had any interest in a possible transaction.

 

The senior management team and board of directors of Allegheny Energy periodically monitor and assess developments in the electric utility industry and are generally aware of the business activities of other major electric utility companies, including FirstEnergy. From time to time, Allegheny Energy’s board reviews strategic opportunities in the electric utility industry in response to developments within its businesses, industry trends, competitive conditions and changes in legislation and regulation.

At Allegheny Energy’s annual board strategy session in July 2009, the Allegheny Energy board reviewed key industry, legislative and regulatory trends and their potential impacts on the company’s businesses and evaluated various options for achieving long-term strategic goals and enhancing stockholder value. As part of the Allegheny Energy board’s strategic planning process, this review included the consideration of possible strategic opportunities in an effort to better position Allegheny Energy for future growth in light of industry and regulatory developments.

 

In mid-2009, Allegheny Energy had exploratory discussions with a large publicly-traded electric utility company to consider on a preliminary basis a potential business combination. Shortly thereafter, such discussions were mutually abandoned.

 

At its regularly scheduled meetings on September 10, 2009 and October 15, 2009, the Allegheny Energy board reviewed the company’s prospects for growth and long-term goals and discussed various strategic opportunities for the company. At these meetings, the Allegheny Energy board discussed, but determined not to pursue, expansion in the independent power producer sector to enhance the company’s scale and generation portfolio.

 

In the weeks prior to an industry conference in the fall of 2009, the Chief Executive Officer of Company A contacted Mr. Evanson to arrange a meeting during the conference to discuss general industry matters, including climate change issues. Ultimately, this meeting did not occur.

 

In its regularly scheduled board meeting on December 3, 2009, Mr. Evanson discussed with the Allegheny Energy board the potential impact of carbon legislation and more stringent environmental regulations on the company and the potential benefits of an increased scale and scope, including improved access to capital. At this meeting, he also discussed with the Allegheny Energy board various strategic options for the company, including the possibility of a business combination transaction and the potential strategic rationale for such a transaction. He described two companies, FirstEnergy and Company A, that could represent a potential strategic fit for Allegheny Energy and compared for the Allegheny Energy board the financial metrics, operational metrics, service territories and generation assets of FirstEnergy and Company A. The Allegheny Energy board indicated its support for Mr. Evanson, when he deemed it appropriate, to contact the chief executive officers of FirstEnergy and Company A and, if these executives were interested in exploring the possibility of a business combination transaction, to entertain such discussions. On this same day, Allegheny Energy contacted Skadden, Arps, Slate, Meagher & Flom LLP, referred to as Skadden, in connection with serving as Allegheny Energy’s outside legal counsel for such a potential transaction.

 

On December 10, 2009, representatives of Goldman Sachs met with members of Allegheny Energy senior management to discuss a possible combination with FirstEnergy or Company A.

 

On December 14, 2009, Mr. Evanson contacted Company A’s Chief Executive Officer, who at that time asked to reschedule the meeting to discuss general industry matters that had been previously scheduled for the fall industry conference but had been cancelled. On December 22, 2009, Mr. Evanson had a lunch meeting with Company A’s Chief Executive Officer in Pittsburgh, Pennsylvania. At this meeting, Company A’s Chief Executive Officer raised the subject of a possible transaction between the two companies, and Mr. Evanson indicated that he would discuss the potential opportunity with the Allegheny Energy board. No specific terms or proposals for a possible transaction were discussed at this meeting.

 

In early December 2009, Mr. Alexander had discussions with representatives of Morgan Stanley in New York concerning a possible business combination with Allegheny Energy and the timing of a contact with Mr. Evanson. During the week of December 14, 2009, a representative of Morgan Stanley contacted both Mr. Alexander and Mr. Evanson suggesting a possible meeting date in late

December between the two executives, and in the conversation with Mr. Evanson suggested that Mr. Alexander was interested in discussing a possible business combination with Allegheny Energy. The representative from Morgan Stanley followed up with both Mr. Alexander and Mr. Evanson shortly thereafter and arranged a meeting for December 29, 2009 in North Palm Beach, Florida. At this meeting, Mr. Alexander expressed his interest in pursuing a possible transaction between the two companies, and Mr. Evanson indicated that he would discuss the potential opportunity with the Allegheny Energy board. No specific terms or proposals for a possible transaction were discussed at this meeting.

 

On January 4, 2010, Mr. Evanson and other members of Allegheny Energy senior management discussed by telephone with representatives of Goldman Sachs and Skadden, the possibility of a transaction with either FirstEnergy or Company A and a process for pursuing and considering such a transaction.

 

On January 5, 2010, Allegheny Energy’s board held a special telephonic meeting, which was attended by representatives from Goldman Sachs. Mr. Evanson updated the Allegheny Energy board regarding his discussions with both Mr. Alexander and Company A’s Chief Executive Officer and the interest of both companies in pursuing a potential business combination transaction with Allegheny Energy. After a thorough discussion, the Allegheny Energy board authorized Mr. Evanson to approach both FirstEnergy and Company A to propose a process in which both companies would be permitted to conduct due diligence leading to the submission of a non-binding indicative proposal by each for Allegheny Energy’s consideration. This board meeting included an executive session of the non-management directors.

 

Following the meeting between Mr. Evanson and Mr. Alexander on December 29, 2009, and before January 6, 2010, Mr. Alexander called Mr. Smart, Chairman of the FirstEnergy board, to inform him of his discussion with Mr. Evanson and of the potential for a response in early January.

 

On January 6, 2010, Mr. Evanson separately contacted each of Mr. Alexander and Company A’s Chief Executive Officer and preliminarily discussed Allegheny Energy’s proposed process for submission of a non-binding indicative proposal regarding a potential business combination. Both executives indicated to Mr. Evanson that their companies wished to engage in the proposed process.

 

On January 6, 2010, Mr. Evanson informed Mr. Alexander that the Allegheny Energy board would consider a transaction, if it was better than the stand-alone options available to Allegheny Energy. Mr. Evanson further informed Mr. Alexander that the Allegheny Energy board was supportive of going forward, provided that: (1) FirstEnergy would agree to an expeditious process in which all preliminary due diligence, management presentations and a non-binding letter of intent would be completed within three weeks, and if the Allegheny Energy board desired to proceed further, that final due diligence and all other matters would be completed to permit the signing and announcement by February 11, 2010, and (2) FirstEnergy would agree to a process in which another potential party would participate in parallel. Following Mr. Evanson’s call, Mr. Alexander discussed the Allegheny Energy response and conditions with each FirstEnergy board member individually by phone, commencing on January 6, 2010, and received their individual concurrence with the recommendation to proceed with further discussions.

 

On January 6, 2010, Morgan Stanley was retained by FirstEnergy as its financial advisor. On January 7, 2010, Akin Gump Strauss Hauer & Feld LLP, referred to as Akin Gump, was officially retained as FirstEnergy’s legal advisor. On January 8, 2010, PricewaterhouseCoopers LLP, FirstEnergy’s independent accountant, was retained by FirstEnergy for the potential transaction.

On January 6, 2010, Skadden retained two economic consultants with electric utility industry expertise to assist with competition analysis relating to a potential business combination between Allegheny Energy and either FirstEnergy or Company A.

 

FirstEnergy and Company A separately entered into confidentiality agreements with Allegheny Energy on January 8, 2010 and January 11, 2010, respectively. Among other things, each confidentiality agreement contained mutual standstill restrictions that, in accordance with and subject to the terms of the confidentiality agreement, prohibited either party from making an unsolicited offer to acquire the other party’s stock for a period of two years. After the execution of these confidentiality agreements, Allegheny Energy began to exchange confidential financial and legal information with each of FirstEnergy and Company A.

 

During the week of January 11, 2010, Akin Gump retained a consulting firm with electric utility industry expertise to assist with the competition analysis relating to a potential business combination between FirstEnergy and Allegheny Energy and FirstEnergy retained a consulting firm to assist FirstEnergy management with its analysis of potential synergies from a merger transaction with Allegheny Energy.

 

On January 15, 2010, members of FirstEnergy’s management and their representatives from Morgan Stanley met with Allegheny Energy’s management and their representatives from Goldman Sachs at Skadden’s Washington, D.C. offices. At this meeting, executives from each company made presentations regarding their respective businesses and operations. The discussions at this meeting also included a timeline for the activities leading to the announcement of a potential transaction, including due diligence, analysis of the required regulatory approvals, the submission of a non-binding indicative proposal and the preparation and negotiation of a merger agreement. Allegheny Energy had held a similar meeting with Company A’s management at Skadden’s Washington, D.C. offices on January 14, 2010. After each management presentation, the parties exchanged lists of materials that they wished to review in connection with their due diligence investigations. In the course of their respective management presentations, Mr. Evanson met separately with both Mr. Alexander and Company A’s Chief Executive Officer and talked through general terms of a possible transaction. In addition, Mr. Evanson told each executive that, although not a requirement for a proposal and only if so desired by such company, he would be willing to consider a role as non-executive chairman of the board of the combined company to assist with the integration of the companies. Mr. Alexander expressed to Mr. Evanson an interest in having him serve in some continuing role with the combined company.

 

After the management presentations, representatives from Allegheny Energy, Goldman Sachs and Skadden discussed the next steps of the process, including matters related to due diligence and the timetable leading to receipt of a non-binding indicative proposal from each company.

 

On January 19, 2010, Allegheny Energy formally engaged Goldman Sachs to act as its financial advisor with respect to a possible transaction. On that same date, at Allegheny Energy’s direction, Goldman Sachs distributed a formal bid instruction letter to the financial advisors for each of FirstEnergy and Company A as well as a proposed term sheet prepared by Allegheny Energy and its advisors outlining various financial, regulatory, deal protection, governance and other proposed terms. The proposed term sheet did not include specific economic terms with respect to a potential transaction. The bid instruction letter outlined the process for the submission of a non-binding indicative proposal and mark-up of the proposed term sheet by January 28, 2010. Goldman Sachs communicated to the parties’ respective financial advisors that FirstEnergy and Company A should submit their best and final offer, with the understanding that there would be no further bids requested from the companies.

Also on January 19, 2010, FirstEnergy, Company A and their respective representatives were granted access to Allegheny Energy’s online dataroom to continue their due diligence investigations. At this time, each of FirstEnergy and Company A also granted Allegheny Energy and its representatives access to their respective online datarooms. These datarooms contained additional confidential due diligence materials regarding various business, commercial, legal, regulatory and other matters. Over the next several weeks, Allegheny Energy and its representatives continued to exchange information, update the datarooms and hold conference calls for due diligence purposes with each of FirstEnergy and Company A.

 

At a regularly scheduled meeting of the FirstEnergy board on January 19, 2010, FirstEnergy management briefed the FirstEnergy board members on the strategic rationale for a potential merger transaction, discussions with Allegheny Energy to date and the proposed transaction timeline, and responded to questions from the board. Representatives of FirstEnergy’s financial advisor, Morgan Stanley, and legal advisor, Akin Gump, were present for the portion of the meeting during which a potential transaction with Allegheny Energy was discussed. Representatives of Morgan Stanley presented a high-level preliminary financial analysis of a potential merger transaction and representatives of Akin Gump reviewed the duties and obligations of directors in the context of significant corporate transactions such as a merger. At this meeting, FirstEnergy’s board discussed the possibility of a transaction with Allegheny Energy and authorized management to continue due diligence and discussions with Allegheny Energy regarding a possible merger.

 

During the period when FirstEnergy and Company A were developing their proposals, Mr. Evanson had conversations from time to time with both Mr. Alexander and Company A’s Chief Executive Officer to discuss matters relating to a possible transaction.

 

On or about January 25, 2010, Mr. Alexander indicated to Mr. Evanson that FirstEnergy was considering proposing that Mr. Evanson serve as Executive Vice Chairman of the combined company and report to Mr. Alexander. Mr. Evanson was receptive to the concept of this continuing position.

 

On January 27, 2010, DLA Piper LLP (US), referred to as DLA Piper, Allegheny Energy’s Maryland counsel, was retained by Allegheny Energy for the potential transaction.

 

On January 27, 2010, the FirstEnergy board met with members of FirstEnergy management and representatives of Morgan Stanley and Akin Gump for the purposes of reviewing a proposed non-binding indicative proposal for a transaction with Allegheny Energy. At this meeting, members of FirstEnergy management briefed the FirstEnergy board on the strategic rationale for a merger with Allegheny Energy, the potential financial benefits of a merger including the potential synergies that could be achieved, the status of discussions between FirstEnergy and Allegheny Energy, the ongoing due diligence review of Allegheny Energy and the regulatory approvals that would be required in connection with a merger. Representatives of Morgan Stanley reviewed with the FirstEnergy board its preliminary financial analysis with respect to a potential merger transaction. The FirstEnergy management team also reviewed with the FirstEnergy board the proposed non-binding indicative proposal to be submitted to Allegheny Energy, which contemplated (i) a merger transaction with a fixed exchange ratio pursuant to which each share of Allegheny Energy common stock would be converted into the right to receive 0.667 of a share of FirstEnergy common stock, (ii) a proposed corporate governance structure for FirstEnergy after the merger, including Mr. Alexander serving as the Chief Executive Officer and Mr. Evanson potentially serving as Executive Vice Chairman reporting to Mr. Alexander and that after the merger the FirstEnergy board would be expanded from 11 to 13 members with two of the current Allegheny Energy directors appointed to the board, and (iii) a proposed termination fee of $175 million if the merger agreement were terminated under

certain circumstances. The FirstEnergy board authorized FirstEnergy management to deliver the non-binding indicative proposal to Allegheny Energy.

 

On January 28, 2010, Allegheny Energy received each of FirstEnergy’s and Company A’s non-binding indicative proposal and mark-up of the proposed term sheet. Company A’s proposed exchange ratio represented a lower implied premium to Allegheny Energy stockholders than the implied premium of FirstEnergy’s proposal. Later that day, Mr. Alexander telephoned Mr. Evanson to discuss the terms of FirstEnergy’s non-binding indicative proposal and the potential benefits of a transaction between FirstEnergy and Allegheny Energy.

 

On January 29, 2010, Goldman Sachs distributed to the financial advisors for each of Company A and FirstEnergy a draft merger agreement for review by their respective clients, and asked that each be prepared to submit their comments on the merger agreement by mid-week of the following week. In addition, on January 29, 2010, representatives of Goldman Sachs and Skadden had discussions with representatives of Morgan Stanley and Akin Gump regarding various terms of FirstEnergy’s non-binding indicative proposal, including the standard for federal and state regulatory approvals, the circumstances under which the parties would be able to terminate the merger agreement or change their recommendation of the transaction and the amount of the termination fee.

 

On January 30, 2010, after further discussions among Allegheny Energy, Goldman Sachs and Skadden regarding timing, Goldman Sachs contacted the financial advisors for each of Company A and FirstEnergy and requested return of a mark-up of the merger agreement by February 2, 2010.

 

On February 1, 2010, Mr. Alexander contacted Mr. Evanson to discuss the status of FirstEnergy’s bid and to further discuss, on more substantive terms, the role envisioned for Mr. Evanson as Executive Vice Chairman of the combined company reporting to Mr. Alexander. On the same day, Company A’s Chief Executive Officer contacted Mr. Evanson to discuss the status of Company A’s bid. Company A’s Chief Executive Officer offered a small increase in its proposed exchange ratio, which still represented a lower implied premium to Allegheny Energy stockholders than the implied premium of FirstEnergy’s proposal.

 

Also on February 1, 2010, prior to their return of a mark-up of the merger agreement, FirstEnergy’s outside legal counsel, Akin Gump, informed Allegheny Energy’s outside legal counsel, Skadden, of certain high level issues raised in the initial draft of the merger agreement, including the standard for federal and state regulatory approvals and fiduciary and breakup fee provisions.

 

On February 2, 2010, Allegheny Energy’s board held a special all-day meeting at Skadden’s offices in Washington, D.C. to discuss the proposals from each of FirstEnergy and Company A and to determine whether to continue to explore a business combination transaction and, if so, an appropriate course of action for moving forward. At the meeting, the board members received information about their duties under Maryland law and related matters in connection with their consideration of a potential transaction. Mr. Evanson updated the board on the process that led to the submission of non-binding indicative proposals from each of FirstEnergy and Company A. Representatives from Goldman Sachs reviewed the financial aspects of a potential transaction. Allegheny Energy management and its legal advisors reviewed with the Allegheny Energy board the status of due diligence with respect to FirstEnergy and Company A. The Allegheny Energy board discussed significant events and challenges that Allegheny Energy faced during the prior decade, Allegheny Energy’s current valuation and growth drivers, and reviewed data for a stand-alone scenario, and data and rationales for a possible business combination. The Allegheny Energy board also discussed the business, operations and regulatory issues of each of FirstEnergy and Company A and compared the implied premium offered to Allegheny Energy stockholders in each of the proposals. Representatives from Skadden reviewed and compared for the board the FirstEnergy and

Company A term sheet mark-ups on financial, regulatory, deal protection, governance (including number of board seats offered on the combined company) and other terms. Representatives from Talisman International, LLC, Allegheny Energy’s nuclear consultant, described the nuclear sites in a potential transaction and assessed the strengths, weaknesses and potential issues regarding each site. Representatives of Skadden met separately with the non-management directors in executive session to discuss the consequences of a possible transaction under Allegheny Energy’s executive compensation plans and arrangements and the potential role for Mr. Evanson with the combined company. Next steps and a timeline for consideration of a potential transaction were discussed with the full board. The meeting was then adjourned until the morning of February 3, 2010.

 

In the evening of February 2, 2010, outside legal counsel for each of FirstEnergy and Company A delivered their mark-ups of the draft merger agreement to Skadden.

 

On February 3, 2010, the special meeting of Allegheny Energy’s board resumed. The board reviewed and requested follow-up information regarding certain due diligence matters, including nuclear matters. Representatives for Skadden reviewed the contemplated process for negotiating and finalizing a merger agreement and the importance, during such time, of maintaining confidentiality and in protecting against any premature leaks regarding the negotiations. At the conclusion of the meeting, the board expressed support for pursuing negotiations with FirstEnergy and, for the moment, suspending discussions with Company A. The Allegheny Energy board’s decision in this regard took into account the superior value of the FirstEnergy proposal, as well as the proposed terms of the non-binding indicative proposal, the mark-up of the proposed term sheet, the due diligence findings to date and the likelihood of the completion of the transaction. Taking into account the risk of a premature leak regarding merger discussions, the board authorized Allegheny Energy management and its advisors to proceed in an expeditious manner.

 

On that same day, Mr. Evanson called Mr. Alexander to inform him that the Allegheny Energy board had determined to pursue negotiations with FirstEnergy. Mr. Evanson also contacted Company A’s Chief Executive Officer to inform him that, at such time, Allegheny Energy would not be further pursuing Company A’s proposal, but that the situation was dynamic.

 

On February 3, 2010, based on matters discussed at the Allegheny Energy board meeting, Skadden informed Akin Gump of certain of the more significant issues presented in FirstEnergy’s mark-up of the merger agreement that would require further negotiation among the parties, including the standard for federal and state regulatory approvals and fiduciary and breakup fee provisions, and scheduled a meeting between the parties for the following day.

 

On February 3, 2010, a telephonic meeting of the FirstEnergy board of directors was convened. At the meeting, FirstEnergy’s management informed the FirstEnergy board that Allegheny Energy was proceeding with negotiations regarding a potential merger with FirstEnergy and the proposed timeline. The FirstEnergy board authorized management to proceed with negotiations regarding a potential transaction with Allegheny Energy.

 

On February 4, 2010, Deloitte & Touche LLP, Allegheny Energy’s independent accountant was engaged to assist Allegheny Energy in connection with a potential transaction regarding FirstEnergy.

 

On February 4, 2010, representatives of FirstEnergy, Akin Gump, Allegheny Energy and Skadden met at Skadden’s offices in Washington, D.C. to review and discuss the revised version of the draft merger agreement. From February 5, 2010 through February 10, 2010, FirstEnergy and Allegheny Energy and their respective legal advisors had extensive discussions with respect to contractual issues in the draft merger agreement, including (i) the nature and scope of the representations and warranties to be given by each party, (ii) the scope of negative covenants

applicable to each party during the period of time prior to the closing of the merger, (iii) the definition of material adverse effect, (iv) the standard for federal and state regulatory approvals, (v) the circumstances under which termination fees and expense reimbursement would be payable by either party, and (vi) the amount of the termination fee that would be payable by each party in the event that the merger agreement was terminated under certain circumstances.

 

On February 8, 2010, Mr. Evanson informed Company A’s Chief Executive Officer that, in view of the status of negotiations with another party, it was unlikely that Allegheny Energy would be further pursuing Company A’s proposal.

 

Additionally, on February 8, 2010, Mr. Evanson spoke with Mr. Alexander and requested clarifications relating to the Executive Vice Chairman employment arrangement being offered to him with the combined company and asked that the arrangement be put into writing. On that same date, Mr. Evanson received from Mr. Alexander a draft letter outlining the proposed employment arrangement.

 

On February 8, 2010, Allegheny Energy’s treasury group contacted the lenders under certain credit facilities of Allegheny Energy and its subsidiaries and secured amendments to such agreements having the effect of delaying for 90 days the triggering of a change in control (as defined in the credit agreements) after execution of a merger agreement, instead of upon signing. These lenders subsequently provided their consent to the transaction such that the merger will not cause any change in control, default or similar event under the credit agreements.

 

On February 9, 2010, a meeting of the FirstEnergy board was convened to review the status of the proposed merger with Allegheny Energy. At the meeting, FirstEnergy management reviewed certain aspects of the proposed transaction with the board and responded to various questions from members of the board. Representatives of Morgan Stanley made a presentation regarding the financial aspects of the proposed merger and informed the FirstEnergy board that on February 10, 2010 they would be prepared to deliver an oral opinion that the proposed exchange ratio was fair from a financial point of view to FirstEnergy. Akin Gump reviewed certain legal matters with the FirstEnergy board, including the terms and conditions of the draft merger agreement and the proposed charter amendment. The board scheduled a meeting for the following day to consider the proposed transaction.

 

On February 10, 2010, FirstEnergy, Allegheny Energy and their respective legal advisors finalized a proposed merger agreement to be executed by the parties.

 

On February 10, 2010, Allegheny Energy’s board held a special meeting at Skadden’s offices in New York City to review and consider the proposed transaction. The meeting was attended by members of Allegheny Energy management and representatives of Goldman Sachs and Skadden, as well as DLA Piper. Allegheny Energy’s outside legal advisors reviewed the duties of directors under Maryland law in connection with the consideration of the proposed transaction. Allegheny Energy management provided the Allegheny Energy board with an update regarding confirmatory due diligence items and discussed the negotiations that had taken place with FirstEnergy and its legal advisors. Representatives from Skadden described in detail the material terms of the proposed merger agreement. Representatives of Goldman Sachs reviewed the financial terms of the proposed transaction and Goldman Sachs’ financial analyses with respect to the proposed transaction and delivered Goldman Sachs’ oral opinion, which was subsequently confirmed in writing, that, as of February 10, 2010 and based upon and subject to the assumptions, considerations, qualifications and limitations set forth therein, the exchange ratio of 0.667 of a share of FirstEnergy common stock for each share of Allegheny Energy common stock was fair, from a financial point of view, to Allegheny Energy’s stockholders (other than FirstEnergy and its affiliates). See the section entitled “— Opinion of Allegheny Energy’s Financial Advisor” beginning on page 80 and the opinion which

is attached as Annex D and incorporated by reference to this section of the joint proxy statement/prospectus. Representatives from Skadden then reviewed and discussed with the non-management directors meeting in executive session the proposed continuing role for Mr. Evanson with the combined company after the merger. After further discussion, the full board of directors of Allegheny Energy unanimously determined that the proposed merger agreement and the merger were advisable, fair and in the best interests of Allegheny Energy and its stockholders and authorized Allegheny Energy management to execute the merger agreement on the terms described to the Allegheny Energy board.

 

Also on February 10, 2010, a telephonic meeting of the FirstEnergy board was convened to review and consider the proposed transaction and the charter amendment. At the meeting, FirstEnergy management informed the FirstEnergy board that the merger agreement had been finalized and that the Allegheny Energy board had approved the proposed merger. Also at the meeting Morgan Stanley delivered its oral opinion, later confirmed in writing, that as of February 10, 2010 and based upon and subject to the various assumptions, considerations, qualifications and limitations set forth in the opinion, the exchange ratio pursuant to the proposed merger agreement was fair from a financial point of view to FirstEnergy. See the section entitled “— Opinion of FirstEnergy’s Financial Advisor” beginning on page 71 and the opinion which is attached as Annex C and incorporated by reference to this section of the joint proxy statement/prospectus. The members of the FirstEnergy board considered and discussed the information presented at the meeting and at prior meetings regarding the proposed merger. Following such discussions, the FirstEnergy board, by unanimous vote, determined that the merger agreement and the transactions contemplated by the merger agreement were advisable and in the best interests of the FirstEnergy shareholders and approved the merger agreement and the transactions contemplated thereby including the charter amendment, and determined to recommend that the FirstEnergy shareholders approve the issuance of FirstEnergy common stock in connection with the merger and the charter amendment.

 

Promptly after the meetings of the boards of directors of FirstEnergy and Allegheny Energy, the management of FirstEnergy and Allegheny Energy executed the merger agreement and FirstEnergy delivered an executed letter to Mr. Evanson which described the anticipated role that Mr. Evanson would play as Executive Vice Chairman of FirstEnergy following the merger reporting to Mr. Alexander. A joint press release announcing the merger was issued on the morning of February 11, 2010.

 

By unanimous vote at a meeting held on February 10, 2010, the FirstEnergy board of directors determined that the merger agreement and the transactions contemplated by it, including the merger and the charter amendment, are advisable and in the best interests of FirstEnergy and its shareholders and approved the merger agreement, the issuance of shares of FirstEnergy common stock pursuant to the merger agreement and the charter amendment. The FirstEnergy board of directors recommends that FirstEnergy shareholders vote FOR the proposal to approve the issuance of shares of FirstEnergy common stock pursuant to the merger agreement and FOR the proposal to adopt the charter amendment.

 

In reaching its decision to approve the merger agreement and to recommend that FirstEnergy shareholders vote to approve the issuance of FirstEnergy common stock to Allegheny Energy stockholders pursuant to the merger agreement and adopt the charter amendment, the FirstEnergy board consulted with FirstEnergy’s management, legal and financial advisors, and considered a variety of factors with respect to the merger. The following discussion of the factors considered by

the FirstEnergy board is not exhaustive. In view of the wide variety of factors considered by the FirstEnergy board in connection with its evaluation of the merger, the FirstEnergy board did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign relative weights to the specific factors that it considered in reaching its decision. Rather, it reviewed the collection of factors in the aggregate. In considering the factors described below, individual members of the FirstEnergy board may have given different weight to different factors. The FirstEnergy board did not reach any specific conclusion with respect to any of the factors considered and instead conducted an overall analysis of such factors and determined that, in the aggregate, the potential benefits considered outweighed the potential risks or possible negative consequences of approving the merger agreement, the issuance of shares of FirstEnergy common stock pursuant to the merger agreement and the adoption of the charter amendment. The FirstEnergy board considered this information as a whole, and overall considered the information and factors to be favorable to, and in support of, its determinations and recommendations.

 

Among the material information and factors considered by the FirstEnergy board were the following:

 

 

The FirstEnergy board considered a number of factors pertaining to the strategic rationale for the merger, including the following:

 

 

 

 

 

 

The FirstEnergy board also considered the potential risks of the merger, including the following:

 

 

 

The FirstEnergy board realized that there can be no assurance about future results, including results considered or expected as described in the factors listed above, such as assumptions regarding potential synergies. It should be noted that this explanation of the reasoning of the FirstEnergy board and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Cautionary Statement Concerning Forward-Looking Statements’’ beginning on page 28.

 

By unanimous vote, the Allegheny Energy board of directors, at a meeting held on February 10, 2010, determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, were advisable, fair to and in the best interests of Allegheny Energy and its stockholders and approved the merger agreement and the transactions contemplated thereby, including the merger. The Allegheny Energy board of directors recommends that Allegheny Energy stockholders vote FOR the proposal to approve the merger agreement and the merger at the Allegheny Energy special meeting and FOR the proposal to adjourn the Allegheny Energy special meeting, if necessary or appropriate, to solicit additional proxies in favor of such approval.

In reaching its determination to recommend the approval of the merger agreement and the merger, the Allegheny Energy board consulted with management, as well as Goldman Sachs, Allegheny Energy’s financial advisor, and Allegheny Energy’s internal and outside legal counsel and outside consultants, and considered various material factors, which are discussed below. The following discussion of the information and factors considered by the Allegheny Energy board is not intended to be exhaustive. In view of the wide variety of factors considered in connection with the merger, the Allegheny Energy board did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific material factors it considered in reaching its decision. In addition, individual members of the Allegheny Energy board may have given different weight or priority to different factors. The Allegheny Energy board considered this information and these factors as a whole, and overall considered the relevant information and factors to be favorable to, and in support of, its determination and recommendation.

 

Among the material information and factors considered by the Allegheny Energy board were the following:

 

 

 

The combined company will create a significant presence in its region and industry sector. The combined company will own and/or operate approximately 24,000 megawatts of electric generation, of which 21,000 megawatts will be in competitive markets. This combined company’s generation portfolio will be more diversified in terms of geography and fuel mix. The combined company will also create a stronger portfolio of utility businesses, with approximately 6.1 million retail electric customers and enhanced retail marketing capability.

 

The increased scale and scope is ultimately expected to enhance the financial strength and flexibility of the combined company, which should have greater access to capital then Allegheny Energy as a stand-alone company.

 

 

 

 

During the course of the February 10, 2010 meeting, the Allegheny Energy board was provided updated premium information based on the February 10, 2010 closing prices.

 

 

 

 

 

 

 

The Allegheny Energy board also considered certain potentially negative factors in its deliberations concerning the merger, including but not limited to the following:

 

 

 

 

 

The Allegheny Energy board concluded that the potentially negative factors associated with the proposed merger were outweighed by the potential benefits that it expected the Allegheny Energy stockholders would achieve as a result of the merger, including the belief of the Allegheny Energy board that the proposed merger would maximize the value of Allegheny Energy’s stockholders’ shares and mitigate the risks and uncertainties affecting the future prospects of Allegheny Energy. Accordingly, the Allegheny Energy board determined that the merger agreement and the transactions

contemplated thereby, including the merger, are advisable, fair to, and in the best interests of, Allegheny Energy and its stockholders.

 

In addition, the Allegheny Energy board was aware of and considered the interests that Allegheny Energy’s directors and executive officers may have with respect to the merger that differ from, or are in addition to, their interests as stockholders of Allegheny Energy generally, as described in the section entitled “— Additional Interests of Allegheny Energy Directors and Executive Officers in the Merger” beginning on page 90 of this joint proxy statement/prospectus.

 

This explanation of Allegheny Energy’s reasons for the merger and other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors described in the section entitled “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 28 of this joint proxy statement/prospectus.

 

FirstEnergy retained Morgan Stanley to provide it with financial advisory services and a financial opinion in connection with the transaction. FirstEnergy selected Morgan Stanley to act as its financial advisor based on Morgan Stanley’s qualifications, expertise and reputation and its knowledge of the business and affairs of FirstEnergy. At the meeting of the FirstEnergy board of directors on February 10, 2010, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, that as of such date and based upon and subject to the various assumptions, considerations, qualifications and limitations set forth in its written opinion, the exchange ratio pursuant to the merger agreement was fair, from a financial point of view, to FirstEnergy.

 

The full text of the written opinion of Morgan Stanley, dated February 10, 2010, which discusses, among other things, the assumptions made, procedures followed, matters considered, and qualifications and limitations of the review undertaken by Morgan Stanley in rendering its opinion, is attached as Annex C and incorporated by reference into this section of the joint proxy statement/prospectus. The summary of the Morgan Stanley fairness opinion provided in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion. FirstEnergy shareholders are urged to read the opinion carefully and in its entirety. The Morgan Stanley opinion is directed to the FirstEnergy board of directors and addresses only the fairness, from a financial point of view, of the exchange ratio pursuant to the merger agreement. The Morgan Stanley opinion does not address any other aspect of the merger and does not constitute a recommendation to any FirstEnergy or Allegheny Energy shareholder as to how any such shareholder should vote with respect to the proposed merger or any other matter. The opinion also does not address the prices at which shares of FirstEnergy common stock will trade following the completion of the merger or at any other time.

 

For the purposes of its opinion, Morgan Stanley, among other things:

 

 

 

In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information supplied or otherwise made available to it by Allegheny Energy and FirstEnergy, and formed a substantial basis for the opinion. With respect to the financial projections, including information relating to certain strategic, financial and operational benefits anticipated from the merger, Morgan Stanley assumed that they were reasonably prepared by or on behalf of the managements of Allegheny Energy and FirstEnergy, respectively, on bases reflecting the best currently available estimates and judgments of the future financial performance of Allegheny Energy and FirstEnergy, respectively. Morgan Stanley relied upon, without independent verification, the assessment by the managements of Allegheny Energy and FirstEnergy of: (i) the strategic, financial and operational benefits expected to result from the merger; (ii) the timing and risks associated with the integration of Allegheny Energy and FirstEnergy; (iii) their ability to retain key employees of Allegheny Energy and FirstEnergy, respectively; and (iv) the validity of, and risks associated with, Allegheny Energy’s and FirstEnergy’s existing and future products, services, business models and technologies. In addition, Morgan Stanley assumed that the merger will be consummated in accordance with the terms set forth in the merger agreement without any waiver, amendment or delay of any terms or conditions, including, among other things, that the merger will be treated as a tax-free reorganization and/or exchange, each pursuant to the Internal Revenue Code. Morgan Stanley assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed merger, no delays, limitations, conditions or restrictions will be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the proposed merger.

 

Morgan Stanley is not a legal, tax or regulatory advisor. Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of FirstEnergy and Allegheny

Energy and their respective legal, tax or regulatory advisors with respect to legal, tax or regulatory matters. Morgan Stanley expressed no opinion with respect to the fairness of the amount or nature of the compensation to any of Allegheny Energy’s officers, directors or employees, or any class of such persons, relative to the consideration to be paid to the holders of shares of Allegheny Energy’s common stock in the transaction. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of Allegheny Energy, nor was it furnished with any such appraisals. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of, February 10, 2010. Events occurring after February 10, 2010 may affect Morgan Stanley’s opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm its opinion.

 

The following is a summary of the material financial analyses performed by Morgan Stanley in connection with its oral opinion and the preparation of its written opinion, dated as of February 10, 2010. Although each analysis was provided to the FirstEnergy board of directors, in connection with arriving at its opinion, Morgan Stanley considered all of its analysis as a whole and did not attribute any particular weight to any analysis described below. Some of these summaries include information in tabular format. In order to understand fully the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the analyses.

 

Historical Trading and Exchange Ratio Analysis.  Morgan Stanley reviewed the ranges of closing prices of FirstEnergy common stock and Allegheny Energy common stock for various periods ending on February 8, 2010. Morgan Stanley noted that for the 52-week period ending February 8, 2010, the ranges of closing prices per share for FirstEnergy common stock and Allegheny Energy common stock were $35.26 to $53.63 and $20.32 to $35.03, respectively. Morgan Stanley also calculated the average trading ratio of the price of Allegheny Energy common stock to the price of FirstEnergy common stock over the following periods:

 

 

Morgan Stanley also calculated the high and low trading ratios to be 0.889x and 0.474x, respectively, over the three years ending February 8, 2010. Morgan Stanley noted that the merger exchange ratio of 0.667x resulted in implied consideration of $27.34 per share of Allegheny Energy common stock, based on the closing price of FirstEnergy common stock of $40.99 as of February 8, 2010.

 

Equity Research Analysts’ Price Targets.  Morgan Stanley reviewed the most recent equity research analysts’ per-share target prices for Allegheny Energy common stock and FirstEnergy common stock. These targets reflect each analyst’s estimate of the future public market trading price for Allegheny Energy common stock and FirstEnergy common stock. Target prices for Allegheny Energy common stock ranged from $22.00 to $37.00, compared with the implied offer value per share of $27.34 as of February 8, 2010. Target prices for FirstEnergy common stock ranged from $38.00 to $53.00, compared with the closing price of FirstEnergy common stock of $40.99 as of February 8, 2010.

The public market trading price targets published by equity research analysts do not necessarily reflect current market trading prices for Allegheny Energy common stock or FirstEnergy common stock and these estimates are subject to uncertainties, including the future financial performance of Allegheny Energy and FirstEnergy and future financial market conditions.

 

Comparable Public Companies Analysis.  Morgan Stanley reviewed and compared certain publicly available and internal financial information, ratios and publicly available market multiples relating to Allegheny Energy and FirstEnergy, respectively, to corresponding financial data for publicly-traded utility companies that shared characteristics with Allegheny Energy and FirstEnergy to derive an implied valuation range for each company.

 

The companies included in the FirstEnergy comparable companies analysis were:

 

 

The companies included in the Allegheny Energy comparable companies analysis were:

 

 

Morgan Stanley then reviewed both publicly available and internal financial information for each of Allegheny Energy and FirstEnergy to compare financial information and multiples of market value of the companies included in the comparable companies analysis to the following metrics for Allegheny Energy and FirstEnergy:

 

 

The multiples and ratios for Allegheny Energy, FirstEnergy and for each of the comparable companies were calculated using the closing price of each company’s common stock on February 8, 2010 and were based on the most recent publicly available information and I/B/E/S estimates for calendar years 2010 and 2011.

 

The following table reflects the results of this analysis, as compared to the multiples for Allegheny Energy and FirstEnergy based on median statistics of earnings for these companies obtained from I/B/E/S, a data service that monitors and publishes a compilation of earnings estimates produced by selected research analysts on companies of interest to investors:

 

Applying a representative range of multiples derived from the comparable public companies analysis, Morgan Stanley calculated a range of implied equity values per share of Allegheny Energy common stock and FirstEnergy common stock with respect to the following metrics based on I/B/E/S estimates and projected financial results for each of Allegheny Energy and FirstEnergy, taking into account the different commodity curve forecasts of FirstEnergy and Allegheny Energy:

 

 

Based on this analysis, Morgan Stanley derived a range of implied equity value per share of Allegheny Energy common stock of $20.81 to $26.14 and a range of implied equity value per share of FirstEnergy common stock of $39.38 to $44.88. Morgan Stanley noted that based on a closing price of FirstEnergy common stock of $40.99 as of February 8, 2010, the exchange ratio of 0.667x resulted in implied consideration of $27.34 per share of Allegheny Energy common stock.

 

No company utilized in the comparable public companies analysis is identical to Allegheny Energy or FirstEnergy. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of Allegheny Energy and FirstEnergy and other factors that could affect the public trading value of the companies to which they are being compared. In evaluating the comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Allegheny Energy and FirstEnergy, such as the impact of competition on Allegheny Energy or FirstEnergy and the industry generally, industry growth and the absence of any adverse material change in the financial conditions and prospects of Allegheny Energy or FirstEnergy or the industry or in the financial markets in general. Mathematical analysis, such as determining the mean, median or average, is not in itself a meaningful method of using comparable company data.

 

Sum-of-the-Parts Discounted Cash Flow Analyses.  Given the different nature of the businesses in which Allegheny Energy and FirstEnergy participate, Morgan Stanley also analyzed each company as the sum of its constituent businesses, or as the “sum of the parts,” and performed a discounted cash flow analysis on each of its constituent businesses. A discounted cash flow analysis is designed to provide insight into the value of a company as a function of its future cash flows and terminal value. Morgan Stanley’s discounted cash flow analysis was based on:

 

 

Unlevered free cash flows were calculated by tax-affecting earnings before interest and taxes and adding back the aggregate of depreciation and amortization, deferred taxes, and other noncash expenses less the sum of capital expenditures and investment in noncash working capital. The free cash flows and range of terminal values were then discounted to present values using a range of discount rates which were chosen by Morgan Stanley based upon an analysis of market discount rates applicable to comparable companies in the electric utility sector.

Allegheny Energy.  For the Allegheny Energy discounted cash flow analysis, Morgan Stanley performed discounted cash flow analysis on the following business units with the noted assumptions and considerations.

 

 

From this analysis, Morgan Stanley calculated a range of equity values per share of Allegheny Energy common stock of $29.03 to $36.70 on the basis of Allegheny Energy’s forecast of relevant commodity curves. Applying FirstEnergy’s forecast of relevant commodity curves to Allegheny Energy’s projections yielded a range of equity values per share of Allegheny Energy common stock of $39.84 to $49.38. Morgan Stanley noted that the implied consideration to be paid for each share of Allegheny Energy common stock was $27.34 as of February 8, 2010.

 

FirstEnergy.  For the FirstEnergy discounted cash flow analysis, Morgan Stanley performed discounted cash flow analysis on the following business units with the noted assumptions and considerations.