FIRSTENERGY CORP - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
| Commission | Registrant; State of Incorporation; | I.R.S. Employer | |||||||||||||||||||||
| File Number | Address; and Telephone Number | Identification No. | |||||||||||||||||||||
| 333-21011 | FIRSTENERGY CORP. | 34-1843785 | |||||||||||||||||||||
| (An | Ohio | Corporation) | |||||||||||||||||||||
| 76 South Main Street | |||||||||||||||||||||||
| Akron | OH | 44308 | |||||||||||||||||||||
| Telephone | (800) | 736-3402 | |||||||||||||||||||||
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
| Common Stock, $0.10 par value | FE | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes | ☑ | No | ☐ | |||||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| Yes | ☑ | No | ☐ | |||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☑ | ||||
| Accelerated Filer | ☐ | ||||
| Non-accelerated Filer | ☐ | ||||
| Smaller Reporting Company | ☐ | ||||
| Emerging Growth Company | ☐ | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | ☐ | No | ☑ | |||||||||||
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| OUTSTANDING | ||||||||
| CLASS | AS OF SEPTEMBER 30, 2022 | |||||||
| Common Stock, $0.10 par value | 571,753,195 | |||||||
FirstEnergy Website and Other Social Media Sites and Applications
FirstEnergy’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports, and all other documents filed with or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 are made available free of charge on or through the “Investors” page of FirstEnergy’s website at www.firstenergycorp.com. These documents are also available to the public from commercial document retrieval services and the website maintained by the SEC at www.sec.gov.
These SEC filings are posted on the website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Additionally, FirstEnergy routinely posts additional important information, including press releases, investor presentations, investor factbook, and notices of upcoming events under the “Investors” section of FirstEnergy’s website and recognizes FirstEnergy’s website as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under Regulation FD. Investors may be notified of postings to the website by signing up for email alerts and Rich Site Summary feeds on the “Investors” page of FirstEnergy’s website. FirstEnergy also uses Twitter® and Facebook® as additional channels of distribution to reach public investors and as a supplemental means of disclosing material non-public information for complying with its disclosure obligations under Regulation FD. Information contained on FirstEnergy’s website, Twitter® handle or Facebook® page, and any corresponding applications of those sites, shall not be deemed incorporated into, or to be part of, this report.
Forward-Looking Statements: This Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 based on information currently available to management. Such statements are subject to certain risks and uncertainties and readers are cautioned not to place undue reliance on these forward-looking statements. These statements include declarations regarding management's intents, beliefs and current expectations. These statements typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” "forecast," "target," "will," "intend," “believe,” "project," “estimate," "plan" and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, which may include the following (see Glossary of Terms for definitions of capitalized terms):
•The potential liabilities, increased costs and unanticipated developments resulting from government investigations and agreements, including those associated with compliance with or failure to comply with the DPA.
•The risks and uncertainties associated with government investigations and audits regarding HB 6 and related matters, including potential adverse impacts on federal or state regulatory matters, including, but not limited to, matters relating to rates.
•The risks and uncertainties associated with litigation, arbitration, mediation, and similar proceedings, particularly regarding HB 6 related matters, including risks associated with obtaining dismissal of the derivative shareholder lawsuits.
•Changes in national and regional economic conditions, including recession, inflationary pressure, supply chain disruptions, higher energy costs, and workforce impacts, affecting us and/or our customers and those vendors with which we do business.
• Weather conditions, such as temperature variations and severe weather conditions, or other natural disasters affecting future operating results and associated regulatory actions or outcomes in response to such conditions.
• Legislative and regulatory developments, including, but not limited to, matters related to rates, compliance and enforcement activity, cybersecurity, and climate change.
• The ability to accomplish or realize anticipated benefits from our FE Forward initiative and our other strategic and financial goals, including, but not limited to, overcoming current uncertainties and challenges associated with the ongoing government investigations, executing our transmission and distribution investment plans, greenhouse gas reduction goals, controlling costs, improving our credit metrics, growing earnings and strengthening our balance sheet.
• Changing market conditions affecting the measurement of certain liabilities and the value of assets held in our pension trusts may negatively impact our forecasted growth rate, results of operations, and may also cause us to make contributions to our pension sooner or in amounts that are larger than currently anticipated.
• The risks associated with cyber-attacks and other disruptions to our, or our vendors’, information technology system, which may compromise our operations, and data security breaches of sensitive data, intellectual property and proprietary or personally identifiable information.
• Mitigating exposure for remedial activities associated with retired and formerly owned electric generation assets.
• The ability to access the public securities and other capital and credit markets in accordance with our financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us, including the increasing number of financial institutions evaluating the impact of climate change on their investment decisions.
• Actions that may be taken by credit rating agencies that could negatively affect either our access to or terms of financing or our financial condition and liquidity.
• Changes in assumptions regarding factors such as economic conditions within our territories, the reliability of our transmission and distribution system, or the availability of capital or other resources supporting identified transmission and distribution investment opportunities.
• Changes in customers’ demand for power, including, but not limited to, economic conditions, the impact of climate change, or energy efficiency and peak demand reduction mandates.
• The potential of non-compliance with debt covenants in our credit facilities.
• The ability to comply with applicable reliability standards and energy efficiency and peak demand reduction mandates.
• Changes to environmental laws and regulations, including, but not limited to, those related to climate change.
• Labor disruptions by our unionized workforce.
• Changes to significant accounting policies.
• Any changes in tax laws or regulations, including, but not limited to, the IRA of 2022, or adverse tax audit results or rulings.
• The risks and other factors discussed from time to time in our SEC filings.
Dividends declared from time to time on our common stock during any period may in the aggregate vary from prior periods due to circumstances considered by the FE Board at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
These forward-looking statements are also qualified by, and should be read together with, the risk factors included in FirstEnergy’s filings with the SEC, including, but not limited to, the most recent Annual Report on Form 10-K, this Form 10-Q and any subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The foregoing review of factors also should not be construed as exhaustive. New factors emerge from time to time, and it is not possible for management to predict all such
factors, nor assess the impact of any such factor on FirstEnergy’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. FirstEnergy expressly disclaims any obligation to update or revise, except as required by law, any forward-looking statements contained herein or in the information incorporated by reference as a result of new information, future events or otherwise.
TABLE OF CONTENTS
| Page | |||||
| Part I. Financial Information | |||||
| Consolidated Statements of Equity | |||||
i
GLOSSARY OF TERMS
The following abbreviations and acronyms are used in this report to identify FirstEnergy Corp. and its current and former subsidiaries:
| AE Supply | Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary | ||||
| AGC | Allegheny Generating Company, a generation subsidiary of MP | ||||
| ATSI | American Transmission Systems, Incorporated, a subsidiary of FET, which owns and operates transmission facilities | ||||
| CEI | The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary | ||||
| FE | FirstEnergy Corp., a public utility holding company | ||||
| FELHC, Inc. | FirstEnergy License Holding Company | ||||
| FENOC | Energy Harbor Nuclear Corp. (formerly known as FirstEnergy Nuclear Operating Company), a subsidiary of EH, which operates EH’s nuclear generating facilities | ||||
| FES | Energy Harbor LLC (formerly known as FirstEnergy Solutions Corp.), a subsidiary of EH, which provides energy-related products and services | ||||
| FES Debtors | FENOC, FES, and FES’ subsidiaries as of March 31, 2018 | ||||
| FESC | FirstEnergy Service Company, which provides legal, financial, and other corporate support services | ||||
| FET | FirstEnergy Transmission, LLC, the parent company of ATSI, MAIT and TrAIL, and has a joint venture in PATH | ||||
| FEV | FirstEnergy Ventures Corp., which invests in certain unregulated enterprises and business ventures | ||||
| FirstEnergy | FirstEnergy Corp., together with its consolidated subsidiaries | ||||
| Global Holding | Global Mining Holding Company, LLC, a joint venture between FEV, WMB Marketing Ventures, LLC and Pinesdale LLC | ||||
| GPU | GPU, Inc., former parent of JCP&L, ME and PN, that merged with FE on November 7, 2001 | ||||
| JCP&L | Jersey Central Power & Light Company, a New Jersey electric utility operating subsidiary | ||||
| KATCo | Keystone Appalachian Transmission Company, a former subsidiary of FET which, in May 2022, became a subsidiary of FE | ||||
| MAIT | Mid-Atlantic Interstate Transmission, LLC, a subsidiary of FET, which owns and operates transmission facilities | ||||
| ME | Metropolitan Edison Company, a Pennsylvania electric utility operating subsidiary | ||||
| MP | Monongahela Power Company, a West Virginia electric utility operating subsidiary | ||||
| OE | Ohio Edison Company, an Ohio electric utility operating subsidiary | ||||
| Ohio Companies | CEI, OE and TE | ||||
| PATH | Potomac-Appalachian Transmission Highline, LLC, a joint venture between FE and a subsidiary of AEP | ||||
| PATH-Allegheny | PATH Allegheny Transmission Company, LLC | ||||
| PATH-WV | PATH West Virginia Transmission Company, LLC | ||||
| PE | The Potomac Edison Company, a Maryland and West Virginia electric utility operating subsidiary | ||||
| Penn | Pennsylvania Power Company, a Pennsylvania electric utility operating subsidiary of OE | ||||
| Pennsylvania Companies | ME, PN, Penn and WP | ||||
| PN | Pennsylvania Electric Company, a Pennsylvania electric utility operating subsidiary | ||||
| Signal Peak | Signal Peak Energy, LLC, an indirect subsidiary of Global Holding that owns mining operations near Roundup, Montana | ||||
| TE | The Toledo Edison Company, an Ohio electric utility operating subsidiary | ||||
| TrAIL | Trans-Allegheny Interstate Line Company, a subsidiary of FET, which owns and operates transmission facilities | ||||
| Transmission Companies | ATSI, MAIT and TrAIL | ||||
| Utilities | OE, CEI, TE, Penn, JCP&L, ME, PN, MP, PE, and WP | ||||
| WP | West Penn Power Company, a Pennsylvania electric utility operating subsidiary | ||||
ii
| The following abbreviations and acronyms may be used to identify frequently used terms in this report: | ||||||||||||||
| 2021 Credit Facilities | Collectively, the six separate senior unsecured five-year syndicated revolving credit facilities entered into by FE, FET, the Utilities, and the Transmission Companies, on October 18, 2021 | DPA | Deferred Prosecution Agreement entered into on July 21, 2021 between FE and U.S. Attorney’s Office for the Southern District of Ohio | |||||||||||
| 2023 Notes | FE’s 4.25% Notes, Series B, due 2023 | DSIC | Distribution System Improvement Charge | |||||||||||
| 2031 Notes | FE’s 7.375% Notes, Series C, due 2031 | DSP | Default Service Plan | |||||||||||
| 2047 Notes | FE’s 4.85% Notes, Series C, due 2047 | EDC | Electric Distribution Company | |||||||||||
| ACE | Affordable Clean Energy | EDCP | Executive Deferred Compensation Plan | |||||||||||
| ADIT | Accumulated Deferred Income Taxes | EE&C | Energy Efficiency and Conservation | |||||||||||
| AEP | American Electric Power Company, Inc. | EEI | Edison Electric Institute | |||||||||||
| AEPSC | American Electric Power Service Corporation | EGS | Electric Generation Supplier | |||||||||||
| AFS | Available-for-sale | EGU | Electric Generation Units | |||||||||||
| AFSI | Adjusted Financial Statement Income | EH | Energy Harbor Corp. | |||||||||||
| AFUDC | Allowance for Funds Used During Construction | ELG | Effluent Limitation Guidelines | |||||||||||
| AMI | Advance Metering Infrastructure | EmPOWER Maryland | EmPOWER Maryland Energy Efficiency Act | |||||||||||
| AOCI | Accumulated Other Comprehensive Income (Loss) | ENEC | Expanded Net Energy Cost | |||||||||||
| ARO | Asset Retirement Obligation | EPA | United States Environmental Protection Agency | |||||||||||
| ARP | Alternative Revenue Program | EPS | Earnings per Share | |||||||||||
| ASC | Accounting Standards Codification | ERO | Electric Reliability Organization | |||||||||||
| ASU | Accounting Standards Update | ESG | Environmental, Social, Corporate Governance | |||||||||||
| BGS | Basic Generation Service | ESP IV | Electric Security Plan IV | |||||||||||
| Brookfield | North American Transmission Company II LLC, a controlled investment vehicle entity of Brookfield Infrastructure Partners | Exchange Act | Securities and Exchange Act of 1934, as amended | |||||||||||
| Brookfield Guarantors | Brookfield Super-Core Infrastructure Partners L.P., Brookfield Super-Core Infrastructure Partners (NUS) L.P., and Brookfield Super-Core Infrastructure Partners (ER) SCSp | Facebook® | Facebook is a registered trademark of Facebook, Inc. | |||||||||||
| CAA | Clean Air Act | FASB | Financial Accounting Standards Board | |||||||||||
| CCR | Coal Combustion Residuals | FCA | Financial Conduct Authority | |||||||||||
| CERCLA | Comprehensive Environmental Response, Compensation, and Liability Act of 1980 | FE Board | FE Board of Directors | |||||||||||
| CFR | Code of Federal Regulations | FE Revolving Facility | FE and the Utilities’ former five-year syndicated revolving credit facility, as amended, and replaced by the 2021 Credit Facilities on October 18, 2021 | |||||||||||
CO2 | Carbon Dioxide | FERC | Federal Energy Regulatory Committee | |||||||||||
| COVID-19 | Coronavirus disease | FET Board | The Board of Directors of FET | |||||||||||
| CPP | EPA's Clean Power Plan | FET LLC Agreement | Third Amended and Restated Limited Liability Company Operating Agreement of FET | |||||||||||
| CSAPR | Cross-State Air Pollution Rule | FET P&SA | Purchase and Sale Agreement entered into on November 6, 2021, by and between FE, FET, Brookfield and Brookfield Guarantors | |||||||||||
| CSR | Conservation Support Rider | FET Revolving Facility | FET and certain of its subsidiaries’ former five-year syndicated revolving credit facility, as amended, and replaced by the 2021 Credit Facilities on October 18, 2021 | |||||||||||
| CTA | Consolidated Tax Adjustment | Fitch | Fitch Ratings Service | |||||||||||
| CWA | Clean Water Act | FMB | First Mortgage Bond | |||||||||||
| DCR | Delivery Capital Recovery | FPA | Federal Power Act | |||||||||||
| D.C. Circuit | United States Court of Appeals for the District of Columbia Circuit | FTR | Financial Transmission Right | |||||||||||
| DMR | Distribution Modernization Rider | GAAP | Accounting Principles Generally Accepted in the United States of America | |||||||||||
iii
| GHG | Greenhouse Gases | POLR | Provider of Last Resort | |||||||||||
| HB 6 | House Bill 6, as passed by Ohio's 133rd General Assembly | PPA | Purchase Power Agreement | |||||||||||
| IRA of 2022 | Inflation Reduction Act of 2022 | PPUC | Pennsylvania Public Utility Commission | |||||||||||
| IRS | Internal Revenue Service | PUCO | Public Utilities Commission of Ohio | |||||||||||
| LED | Light Emitting Diode | RCRA | Resource Conservation and Recovery Act | |||||||||||
| LIBOR | London Inter-Bank Offered Rate | Recoupment Policy | FirstEnergy Executive Compensation Recoupment Policy | |||||||||||
| LOC | Letter of Credit | Regulation FD | Regulation Fair Disclosure promulgated by the SEC | |||||||||||
| LTIIPs | Long-Term Infrastructure Improvement Plans | RFC | ReliabilityFirst Corporation | |||||||||||
| MDPSC | Maryland Public Service Commission | RFP | Request for Proposal | |||||||||||
| MGP | Manufactured Gas Plants | RGGI | Regional Greenhouse Gas Initiative | |||||||||||
| MISO | Midcontinent Independent System Operator, Inc. | ROE | Return on Equity | |||||||||||
| Moody’s | Moody’s Investors Service, Inc. | RTO | Regional Transmission Organization | |||||||||||
| MW | Megawatt | SBC | Societal Benefits Charge | |||||||||||
| MWH | Megawatt-hour | S.D. Ohio | Federal District Court, Southern District of Ohio | |||||||||||
| NAAQS | National Ambient Air Quality Standards | SEC | United States Securities and Exchange Commission | |||||||||||
| NCI | Noncontrolling Interest | SEET | Significantly Excessive Earnings Test | |||||||||||
| N.D. Ohio | Federal District Court, Northern District of Ohio | SF6 | Sulfur Hexafluoride | |||||||||||
| NERC | North American Electric Reliability Corporation | SIP | State Implementation Plan(s) Under the Clean Air Act | |||||||||||
| NJBPU | New Jersey Board of Public Utilities | SLC | Special Litigation Committee of the FE Board | |||||||||||
| NJ Rate Counsel | New Jersey Division of Rate Counsel | SO2 | Sulfur Dioxide | |||||||||||
| NOL | Net Operating Loss | SOFR | Secured Overnight Financing Rate | |||||||||||
| NOx | Nitrogen Oxide | SOS | Standard Offer Service | |||||||||||
| NUG | Non-Utility Generation | SREC | Solar Renewable Energy Credit | |||||||||||
| NYPSC | New York State Public Service Commission | SSO | Standard Service Offer | |||||||||||
| OAG | Ohio Attorney General | S&P | Standard & Poor’s Ratings Service | |||||||||||
| OCA | Office of Consumer Advocate | Tax Act | Tax Cuts and Jobs Act adopted December 22, 2017 | |||||||||||
| OCC | Ohio Consumers' Counsel | TMI-1 | Three Mile Island Unit 1 | |||||||||||
| ODSA | Ohio Development Service Agency | TO | Transmission Owner | |||||||||||
| Ohio Stipulation | Stipulation and Recommendation, dated November 1, 2021, entered into by and among the Ohio Companies, the OCC, PUCO Staff, and several other signatories | Twitter® | Twitter is a registered trademark of Twitter, Inc. | |||||||||||
| OPEB | Other Post-Employment Benefits | VAR | Volt-Amps Reactive, the measuring unit for reactive power | |||||||||||
| OPIC | Other Paid-in Capital | VIE | Variable Interest Entity | |||||||||||
| OVEC | Ohio Valley Electric Corporation | VSCC | Virginia State Corporation Commission | |||||||||||
| PJM | PJM Interconnection, LLC | WVPSC | Public Service Commission of West Virginia | |||||||||||
| PJM Tariff | PJM Open Access Transmission Tariff | |||||||||||||
iv
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| (In millions, except per share amounts) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| REVENUES: | ||||||||||||||||||||||||||
| Distribution services and retail generation | $ | 2,767 | $ | 2,550 | $ | 7,334 | $ | 6,882 | ||||||||||||||||||
| Transmission | 502 | 411 | 1,393 | 1,223 | ||||||||||||||||||||||
| Other | 206 | 163 | 555 | 367 | ||||||||||||||||||||||
Total revenues(1) | 3,475 | 3,124 | 9,282 | 8,472 | ||||||||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||||||
| Fuel | 209 | 132 | 539 | 362 | ||||||||||||||||||||||
| Purchased power | 1,109 | 874 | 2,786 | 2,206 | ||||||||||||||||||||||
| Other operating expenses | 1,111 | 856 | 2,827 | 2,326 | ||||||||||||||||||||||
| Provision for depreciation | 332 | 326 | 1,020 | 972 | ||||||||||||||||||||||
| Amortization (deferral) of regulatory assets, net | (86) | 30 | (252) | 171 | ||||||||||||||||||||||
| General taxes | 295 | 275 | 851 | 812 | ||||||||||||||||||||||
| DPA penalty (Note 8) | — | — | — | 230 | ||||||||||||||||||||||
| Gain on sale of Yards Creek (Note 9) | — | — | — | (109) | ||||||||||||||||||||||
| Total operating expenses | 2,970 | 2,493 | 7,771 | 6,970 | ||||||||||||||||||||||
| OPERATING INCOME | 505 | 631 | 1,511 | 1,502 | ||||||||||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||||
| Debt redemption costs (Note 6) | 1 | — | (155) | — | ||||||||||||||||||||||
| Miscellaneous income, net | 168 | 136 | 434 | 379 | ||||||||||||||||||||||
| Interest expense | (248) | (283) | (788) | (855) | ||||||||||||||||||||||
| Capitalized financing costs | 23 | 20 | 59 | 54 | ||||||||||||||||||||||
| Total other expense | (56) | (127) | (450) | (422) | ||||||||||||||||||||||
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 449 | 504 | 1,061 | 1,080 | ||||||||||||||||||||||
| INCOME TAXES | 105 | 88 | 237 | 271 | ||||||||||||||||||||||
| INCOME FROM CONTINUING OPERATIONS | 344 | 416 | 824 | 809 | ||||||||||||||||||||||
Discontinued operations (Note 10)(2) | — | 47 | — | 47 | ||||||||||||||||||||||
| NET INCOME | $ | 344 | $ | 463 | $ | 824 | $ | 856 | ||||||||||||||||||
| Income attributable to noncontrolling interest (continuing operations) | 10 | — | 15 | — | ||||||||||||||||||||||
| EARNINGS ATTRIBUTABLE TO FIRSTENERGY CORP. | $ | 334 | $ | 463 | $ | 809 | $ | 856 | ||||||||||||||||||
| EARNINGS PER SHARE ATTRIBUTABLE TO FIRSTENERGY CORP. (Note 3): | ||||||||||||||||||||||||||
| Basic - Continuing Operations | $ | 0.58 | $ | 0.76 | $ | 1.42 | $ | 1.48 | ||||||||||||||||||
| Basic - Discontinued Operations | — | 0.09 | — | 0.09 | ||||||||||||||||||||||
| Basic - Earnings Per Share Attributable to FirstEnergy Corp. | $ | 0.58 | $ | 0.85 | $ | 1.42 | $ | 1.57 | ||||||||||||||||||
| Diluted - Continuing Operations | $ | 0.58 | $ | 0.76 | $ | 1.41 | $ | 1.48 | ||||||||||||||||||
| Diluted - Discontinued Operations | — | 0.09 | — | 0.09 | ||||||||||||||||||||||
| Diluted - Earnings Per Share Attributable to FirstEnergy Corp. | $ | 0.58 | $ | 0.85 | $ | 1.41 | $ | 1.57 | ||||||||||||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | ||||||||||||||||||||||||||
| Basic | 571 | 544 | 571 | 544 | ||||||||||||||||||||||
| Diluted | 572 | 545 | 572 | 545 | ||||||||||||||||||||||
(1) Includes excise and gross receipts tax collections of $111 million and $103 million during the three months ended September 30, 2022 and 2021, respectively, and $305 million and $283 million during the nine months ended September 30, 2022 and 2021, respectively.
(2) Net of income tax benefits of $47 million for the three and nine months ended September 30, 2021.
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
1
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| NET INCOME | $ | 344 | $ | 463 | $ | 824 | $ | 856 | ||||||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||||||||||||
| Pension and OPEB prior service costs | (2) | (3) | (6) | (10) | ||||||||||||||||||||||
| Amortized losses on derivative hedges | — | — | 8 | 1 | ||||||||||||||||||||||
| Other comprehensive income (loss) | (2) | (3) | 2 | (9) | ||||||||||||||||||||||
| Income taxes (benefits) on other comprehensive income (loss) | (1) | (1) | — | (3) | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (1) | (2) | 2 | (6) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME | $ | 343 | $ | 461 | $ | 826 | $ | 850 | ||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | 10 | — | 15 | — | ||||||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO FIRSTENERGY CORP. | $ | 333 | $ | 461 | $ | 811 | $ | 850 | ||||||||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
2
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (In millions, except share amounts) | September 30, 2022 | December 31, 2021 | ||||||||||||
| ASSETS | ||||||||||||||
| CURRENT ASSETS: | ||||||||||||||
| Cash and cash equivalents | $ | 251 | $ | 1,462 | ||||||||||
| Restricted cash | 26 | 49 | ||||||||||||
| Receivables- | ||||||||||||||
| Customers | 1,318 | 1,192 | ||||||||||||
| Less — Allowance for uncollectible customer receivables | 136 | 159 | ||||||||||||
| 1,182 | 1,033 | |||||||||||||
Other, net of allowance for uncollectible accounts of $10 in 2022 and 2021 | 264 | 246 | ||||||||||||
| Materials and supplies, at average cost | 361 | 260 | ||||||||||||
| Prepaid taxes and other | 228 | 187 | ||||||||||||
| 2,312 | 3,237 | |||||||||||||
| PROPERTY, PLANT AND EQUIPMENT: | ||||||||||||||
| In service | 46,917 | 46,002 | ||||||||||||
| Less — Accumulated provision for depreciation | 13,075 | 12,672 | ||||||||||||
| 33,842 | 33,330 | |||||||||||||
| Construction work in progress | 1,730 | 1,414 | ||||||||||||
| 35,572 | 34,744 | |||||||||||||
| INVESTMENTS AND OTHER NONCURRENT ASSETS: | ||||||||||||||
| Goodwill | 5,618 | 5,618 | ||||||||||||
| Investments (Note 6) | 621 | 655 | ||||||||||||
| Regulatory assets | 14 | 71 | ||||||||||||
| Other | 714 | 1,107 | ||||||||||||
| 6,967 | 7,451 | |||||||||||||
| $ | 44,851 | $ | 45,432 | |||||||||||
| LIABILITIES AND CAPITALIZATION | ||||||||||||||
| CURRENT LIABILITIES: | ||||||||||||||
| Currently payable long-term debt | $ | 353 | $ | 1,606 | ||||||||||
| Accounts payable | 1,125 | 943 | ||||||||||||
| Accrued interest | 255 | 283 | ||||||||||||
| Accrued taxes | 643 | 647 | ||||||||||||
| Accrued compensation and benefits | 255 | 313 | ||||||||||||
| Dividends payable | 223 | 222 | ||||||||||||
| Other | 639 | 402 | ||||||||||||
| 3,493 | 4,416 | |||||||||||||
| CAPITALIZATION: | ||||||||||||||
| Common stockholders’ equity- | ||||||||||||||
Common stock, $0.10 par value, authorized 700,000,000 shares - 571,753,195 and 570,261,104 shares outstanding as of September 30, 2022 and December 31, 2021, respectively | 57 | 57 | ||||||||||||
| Other paid-in capital | 11,526 | 10,238 | ||||||||||||
| Accumulated other comprehensive loss | (13) | (15) | ||||||||||||
| Accumulated deficit | (796) | (1,605) | ||||||||||||
| Total common stockholders’ equity | 10,774 | 8,675 | ||||||||||||
| Noncontrolling interest | 464 | — | ||||||||||||
| Total equity | 11,238 | 8,675 | ||||||||||||
| Long-term debt and other long-term obligations | 20,905 | 22,248 | ||||||||||||
| 32,143 | 30,923 | |||||||||||||
| NONCURRENT LIABILITIES: | ||||||||||||||
| Accumulated deferred income taxes | 3,428 | 3,437 | ||||||||||||
| Retirement benefits | 2,496 | 2,669 | ||||||||||||
| Regulatory liabilities | 1,982 | 2,124 | ||||||||||||
| Other | 1,309 | 1,863 | ||||||||||||
| 9,215 | 10,093 | |||||||||||||
| COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 8) | ||||||||||||||
| $ | 44,851 | $ | 45,432 | |||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
3
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | OPIC | AOCI | Accumulated Deficit | Total Common Stockholders’ Equity | NCI | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | 570 | $ | 57 | $ | 10,238 | $ | (15) | $ | (1,605) | $ | 8,675 | $ | — | $ | 8,675 | |||||||||||||||||||||||||||||||||||
| Net income | 288 | 288 | 288 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (1) | (1) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock Investment Plan and share-based benefit plans | 1 | 20 | 20 | 20 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.39 per share in March) | (223) | (223) | (223) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | (4) | (4) | (4) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 571 | 57 | 10,031 | (16) | (1,317) | 8,755 | — | 8,755 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 187 | 187 | 5 | 192 | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | 4 | 4 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock Investment Plan and share-based benefit plans | 25 | 25 | 25 | |||||||||||||||||||||||||||||||||||||||||||||||
| FET minority interest sale, net of transaction costs (Note 1) | 1,887 | 1,887 | 451 | 2,338 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 571 | 57 | 11,943 | (12) | (1,130) | 10,858 | 456 | 11,314 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 334 | 334 | 10 | 344 | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (1) | (1) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock Investment Plan and share-based benefit plans | 1 | 33 | 33 | 33 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.39 per share in July and September) | (446) | (446) | (446) | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to FET minority interest | — | (15) | (15) | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from FET minority interest | — | 9 | 9 | |||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated tax benefit allocation | (4) | (4) | 4 | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | 572 | $ | 57 | $ | 11,526 | $ | (13) | $ | (796) | $ | 10,774 | $ | 464 | $ | 11,238 | |||||||||||||||||||||||||||||||||||
4
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | OPIC | AOCI | Accumulated Deficit | Total Common Stockholders’ Equity | NCI | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2021 | 543 | $ | 54 | $ | 10,076 | $ | (5) | $ | (2,888) | $ | 7,237 | $ | — | $ | 7,237 | |||||||||||||||||||||||||||||||||||
| Net income | 335 | 335 | 335 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (2) | (2) | (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based benefit plans | 1 | 2 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.39 per share in March) | (212) | (212) | (212) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 544 | 54 | 9,866 | (7) | (2,553) | 7,360 | — | 7,360 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | 58 | 58 | 58 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (2) | (2) | (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based benefit plans | 14 | 14 | 14 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 544 | $ | 54 | $ | 9,880 | $ | (9) | $ | (2,495) | $ | 7,430 | $ | — | $ | 7,430 | |||||||||||||||||||||||||||||||||||
| Net income | $ | 463 | 463 | 463 | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (2) | (2) | (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based benefit plans | 13 | 13 | 13 | |||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.39 per share in July and September) | (425) | (425) | (425) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 544 | $ | 54 | $ | 9,468 | $ | (11) | $ | (2,032) | $ | 7,479 | — | 7,479 | |||||||||||||||||||||||||||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
5
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||||||||
| (In millions) | 2022 | 2021 | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
| Net income | $ | 824 | $ | 856 | ||||||||||
| Adjustments to reconcile net income to net cash from operating activities- | ||||||||||||||
| Depreciation, amortization and impairments | 1,043 | 1,219 | ||||||||||||
| Deferred income taxes and investment tax credits, net | 221 | 255 | ||||||||||||
| Retirement benefits, net of payments | (283) | (310) | ||||||||||||
| Transmission revenue collections, net | 89 | 120 | ||||||||||||
| Gain on sale of Yards Creek | — | (109) | ||||||||||||
| Gain on disposal, net of tax (Note 10) | — | (47) | ||||||||||||
| Changes in current assets and liabilities- | ||||||||||||||
| Receivables | (167) | 76 | ||||||||||||
| Materials and supplies | (101) | 73 | ||||||||||||
| Prepaid taxes and other current assets | (46) | (34) | ||||||||||||
| Accounts payable | 182 | 49 | ||||||||||||
| Accrued taxes | (135) | (124) | ||||||||||||
| Accrued interest | (27) | 9 | ||||||||||||
| Accrued compensation and benefits | (82) | (2) | ||||||||||||
| Other current liabilities | 3 | (19) | ||||||||||||
| Collateral, net | 240 | 101 | ||||||||||||
| Other | 76 | (9) | ||||||||||||
| Net cash provided from operating activities | 1,837 | 2,104 | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
| New financing- | ||||||||||||||
| Long-term debt | 300 | 1,500 | ||||||||||||
| Redemptions and repayments- | ||||||||||||||
| Long-term debt | (2,903) | (58) | ||||||||||||
| Short-term borrowings, net | — | (2,200) | ||||||||||||
| Discounts (premiums) on debt issuances and redemptions, net | (137) | 29 | ||||||||||||
| Proceeds from FET minority interest sale, net of transaction costs | 2,348 | — | ||||||||||||
| Distributions to FET minority interest | (15) | — | ||||||||||||
| Capital contributions from FET minority interest | 9 | — | ||||||||||||
| Common stock dividend payments | (667) | (636) | ||||||||||||
| Other | (3) | (45) | ||||||||||||
| Net cash used for financing activities | (1,068) | (1,410) | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
| Property additions | (1,788) | (1,768) | ||||||||||||
| Proceeds from sale of Yards Creek | — | 155 | ||||||||||||
| Sales of investment securities held in trusts | 31 | 29 | ||||||||||||
| Purchases of investment securities held in trusts | (40) | (37) | ||||||||||||
| Asset removal costs | (151) | (178) | ||||||||||||
| Other | (55) | (12) | ||||||||||||
| Net cash used for investing activities | (2,003) | (1,811) | ||||||||||||
| Net change in cash, cash equivalents, and restricted cash | (1,234) | (1,117) | ||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 1,511 | 1,801 | ||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 277 | $ | 684 | ||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
6
FIRSTENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note Number | Page Number | |||||||
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Terms.
FE was incorporated under Ohio law in 1996. FE’s principal business is the holding, directly or indirectly, of all of the outstanding equity of its principal subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), JCP&L, ME, PN, FESC, MP, AGC (a wholly owned subsidiary of MP), PE, WP, and FET and its principal subsidiaries (ATSI, MAIT and TrAIL). In addition, FE holds all of the outstanding equity of other direct subsidiaries including: AE Supply, FirstEnergy Properties, Inc., FEV, FELHC, Inc., Allegheny Ventures, Inc., and Suvon, LLC, doing business as both FirstEnergy Home and FirstEnergy Advisors.
FE and its subsidiaries are principally involved in the transmission, distribution and generation of electricity. FirstEnergy’s ten utility operating companies comprise one of the nation’s largest investor-owned electric systems, based on serving over six million customers in the Midwest and Mid-Atlantic regions. FirstEnergy’s transmission operations include approximately 24,000 miles of lines and two regional transmission operation centers. AGC and MP control 3,580 MWs of total capacity.
PN, as lessee of the property of its subsidiary, The Waverly Electric Light & Power Company, serves approximately 4,000 customers in the Waverly, New York vicinity. On February 10, 2021, PN entered into an agreement to transfer its customers and the related assets in Waverly, New York to Tri-County Rural Electric Cooperative. PN and Tri-County Rural Electric Cooperative have jointly decided not to move forward with the transfer. As a result, on September 30, 2022 both parties notified the NYPSC that the transaction would not occur.
These interim financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2021.
FE and its subsidiaries follow GAAP and comply with the related regulations, orders, policies and practices prescribed by the SEC, FERC, and, as applicable, the PUCO, the PPUC, the MDPSC, the NYPSC, the WVPSC, the VSCC and the NJBPU. The accompanying interim financial statements are unaudited, but reflect all adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair statement of the financial statements. The preparation of financial statements in conformity with GAAP requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The reported results of operations are not necessarily indicative of results of operations for any future period. FE and its subsidiaries have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
FE and its subsidiaries consolidate all majority-owned subsidiaries over which they exercise control and, when applicable, entities for which they have a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation as appropriate and permitted pursuant to GAAP. FE and its subsidiaries consolidate a VIE when it is determined that it is the primary beneficiary. Investments in affiliates over which FE and its subsidiaries have the ability to exercise significant influence, but do not have a controlling financial interest, follow the equity method of accounting. Under the equity method, the interest in the entity is reported as an investment in the Consolidated Balance Sheets and the percentage of FE’s ownership share of the entity’s earnings is reported in the Consolidated Statements of Income and Comprehensive Income.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Capitalized Financing Costs
For the three months ended September 30, 2022 and 2021, capitalized financing costs on FirstEnergy’s Consolidated Statements of Income include $15 million and $13 million, respectively, of allowance for equity funds used during construction and $8 million and $7 million, respectively, of capitalized interest. For the nine months ended September 30, 2022 and 2021, capitalized financing costs on FirstEnergy’s Consolidated Statements of Income include $39 million and $34 million, respectively, of allowance for equity funds used during construction and $20 million of capitalized interest for both periods.
Economic Conditions
Economic conditions following the COVID-19 pandemic, have increased lead times across numerous material categories, with some as much as doubling from previous times. Some key suppliers have struggled with labor shortages and raw material availability, which along with increasing inflationary pressure, have increased the costs of certain materials, equipment and contractors. FirstEnergy has taken steps to mitigate these risks and does not currently expect service disruptions or any material impact on its capital spending plan. However, the situation remains fluid and a prolonged continuation or further increase in supply chain disruptions could have an adverse effect on FirstEnergy’s results of operations, cash flow and financial condition.
8
Goodwill
FirstEnergy evaluates goodwill for impairment annually on July 31 and more frequently if indicators of impairment arise. For 2022, FirstEnergy performed a qualitative assessment of the Regulated Distribution and Regulated Transmission reporting units' goodwill, assessing economic, industry and market considerations in addition to the reporting units' overall financial performance. Key factors used in the assessment included: growth rates, interest rates, expected capital expenditures, utility sector market performance, regulatory and legal developments, and other market considerations. It was determined that the fair values of these reporting units were, more likely than not, greater than their carrying values and a quantitative analysis was not necessary.
Sale of Minority Interest in FirstEnergy Transmission, LLC
On November 6, 2021, FirstEnergy, along with FET, entered into the FET P&SA, with Brookfield and Brookfield Guarantors, pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction closed on May 31, 2022. The difference between the cash consideration received, net of transaction costs of approximately $37 million, and the carrying value of the noncontrolling interest of $451 million was recorded as an increase to OPIC. KATCo, which was a subsidiary of FET, became a wholly owned subsidiary of FE prior to the closing of the transaction and remains in the Regulated Transmission segment.
Pursuant to the terms of the FET P&SA, on May 31, 2022, Brookfield, FET and FE entered into the FET LLC Agreement. The FET LLC Agreement, among other things, provides for the governance, exit, capital and distribution, and other arrangements for FET from and following the closing. Under the FET LLC Agreement, Brookfield is entitled to appoint a number of directors to the FET Board, in approximate proportion to Brookfield’s ownership percentage in FET (rounded to the next whole number). The FET Board now consists of five directors, one appointed by Brookfield and four appointed by FE. The FET LLC Agreement contains certain investor protections, including, among other things, requiring Brookfield's approval for FET and its subsidiaries to take certain major actions. Under the terms of the FET LLC Agreement, for so long as Brookfield holds a 9.9% interest in FET, Brookfield’s consent is required for FET or any of its subsidiaries to incur indebtedness (other than the refinancing of existing indebtedness on commercially reasonable terms reflecting then-current credit market conditions) that would reasonably be expected to result in FET’s consolidated Debt-to-Capital Ratio (as defined in the FET LLC Agreement) equaling or exceeding (i) prior to the fifth anniversary of the effective date, 65%, and (ii) thereafter, 70%.
New Accounting Pronouncements
Recently Issued Pronouncements - The following new authoritative accounting guidance issued by the FASB has not yet been adopted. Unless otherwise indicated, FirstEnergy is currently assessing the impact such guidance may have on its financial statements and disclosures, as well as the potential to early adopt where applicable. FirstEnergy has assessed other FASB issuances of new standards not described below based upon the current expectation that such new standards will not significantly impact FirstEnergy's financial reporting.
ASU 2022-03, "Fair Value Measurements of Equity Securities Subject to Contractual Sale Restrictions " (Issued in June 2022): ASU 2022-03 clarifies current guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, and introduces new disclosure requirements for those equity securities subject to contractual restrictions. For FirstEnergy, the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted.
9
2. REVENUE
The following represents a disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Regulated Distribution | |||||||||||||||||||||||
| Retail generation and distribution services | |||||||||||||||||||||||
| Residential | $ | 1,756 | $ | 1,666 | $ | 4,608 | $ | 4,410 | |||||||||||||||
| Commercial | 686 | 619 | 1,858 | 1,722 | |||||||||||||||||||
| Industrial | 348 | 284 | 943 | 810 | |||||||||||||||||||
| Other | 23 | 19 | 61 | 55 | |||||||||||||||||||
| Wholesale | 159 | 117 | 408 | 260 | |||||||||||||||||||
| Other revenue from contracts with customers | 27 | 30 | 82 | 89 | |||||||||||||||||||
| Total revenues from contracts with customers | 2,999 | 2,735 | 7,960 | 7,346 | |||||||||||||||||||
ARP(1) | — | — | — | (27) | |||||||||||||||||||
| Other revenue unrelated to contracts with customers | 24 | 24 | 78 | 68 | |||||||||||||||||||
| Total Regulated Distribution | $ | 3,023 | $ | 2,759 | $ | 8,038 | $ | 7,387 | |||||||||||||||
| Regulated Transmission | |||||||||||||||||||||||
| ATSI | $ | 252 | $ | 206 | $ | 686 | $ | 604 | |||||||||||||||
| TrAIL | 78 | 59 | 205 | 176 | |||||||||||||||||||
| MAIT | 97 | 75 | 253 | 222 | |||||||||||||||||||
| JCP&L | 45 | 41 | 151 | 126 | |||||||||||||||||||
| MP, PE and WP | 30 | 30 | 98 | 95 | |||||||||||||||||||
| Total revenues from contracts with customers | 502 | 411 | 1,393 | 1,223 | |||||||||||||||||||
| Other revenue unrelated to contracts with customers | 1 | 4 | 4 | 10 | |||||||||||||||||||
| Total Regulated Transmission | $ | 503 | $ | 415 | $ | 1,397 | $ | 1,233 | |||||||||||||||
Corporate/Other and Reconciling Adjustments(2) | |||||||||||||||||||||||
| Wholesale | $ | 7 | $ | 5 | $ | 21 | $ | 12 | |||||||||||||||
Retail generation and distribution services (2) | (46) | (38) | (136) | (115) | |||||||||||||||||||
Other revenue unrelated to contracts with customers (2) | (12) | (17) | (38) | (45) | |||||||||||||||||||
| Total Corporate/Other and Reconciling | $ | (51) | $ | (50) | $ | (153) | $ | (148) | |||||||||||||||
| FirstEnergy Total Revenues | $ | 3,475 | $ | 3,124 | $ | 9,282 | $ | 8,472 | |||||||||||||||
(1) Reflects amount the Ohio Companies refunded to customers that was previously collected under decoupling mechanisms, with interest. See Note 7, “Regulatory Matters,” for further discussion on Ohio decoupling rates.
(2) Includes eliminations and reconciling adjustments of inter-segment revenues.
Other revenue unrelated to contracts with customers includes revenue from late payment charges of $10 million and $9 million for the three months ended September 30, 2022 and 2021, respectively. Other revenue unrelated to contracts with customers also includes revenue from derivatives of $2 million and $3 million for the three months ended September 30, 2022 and 2021, respectively.
Other revenue unrelated to contracts with customers includes revenue from late payment charges of $29 million and $27 million for the nine months ended September 30, 2022 and 2021, respectively. Other revenue unrelated to contracts with customers also includes revenue from derivatives of $13 million and $5 million for the nine months ended September 30, 2022 and 2021, respectively.
Customer Receivables
Receivables from contracts with customers include distribution services and retail generation sales to residential, commercial
10
and industrial customers of the Utilities. Billed and unbilled customer receivables as of September 30, 2022 and December 31, 2021, are included below.
| Customer Receivables | September 30, 2022 | December 31, 2021 | ||||||||||||
| (In millions) | ||||||||||||||
| Billed | $ | 800 | $ | 616 | ||||||||||
| Unbilled | 518 | 576 | ||||||||||||
| 1,318 | 1,192 | |||||||||||||
| Less: Uncollectible Reserve | 136 | 159 | ||||||||||||
| Total Customer Receivables | $ | 1,182 | $ | 1,033 | ||||||||||
The allowance for uncollectible customer receivables is based on historical loss information comprised of a rolling 36-month average net write-off percentage of revenues, in conjunction with a qualitative assessment of elements that impact the collectability of receivables to determine if allowances for uncollectible accounts should be further adjusted in accordance with the accounting guidance for credit losses.
FirstEnergy reviews its allowance for uncollectible customer receivables utilizing a quantitative and qualitative assessment. Management contemplates available current information such as changes in economic factors, regulatory matters, industry trends, customer credit factors, amount of receivable balances that are past-due, payment options and programs available to customers, and the methods that the Utilities are able to utilize to ensure payment. This analysis includes consideration of the outbreak of COVID-19 and the impact on customer receivable balances outstanding and write-offs since the pandemic began and economic slow down. During 2022, various regulatory actions including extensions on moratoriums, certain restrictions on disconnections, and extended installment plan offerings continue to impact the level of past due balances in certain states. However, certain states have resumed normal collections activity and arrears levels have declined towards pre-pandemic levels. As a result of this analysis, FirstEnergy recognized a $25 million decrease to its allowance for uncollectible customer receivables during the first quarter of 2022, of which $15 million was applied to existing deferred regulatory assets. There were no material changes as a result of this analysis during the second and third quarters of 2022. Additionally, as a result of these pandemic-related moratoriums and certain customer installment or extended payment plans offered, the allowance for uncollectible accounts on receivables in 2022 continues to be elevated due to the extension of when certain write-offs would have otherwise occurred.
Receivables from contracts with customers also includes PJM receivables resulting from transmission and wholesale sales. FirstEnergy’s uncollectible risk on PJM receivables is minimal due to the nature of PJM’s settlement process whereby members of PJM legally agree to share the cost of defaults and as a result there is no allowance for doubtful accounts.
Activity in the allowance for uncollectible accounts on customer receivables for the nine months ended September 30, 2022 and for the year ended December 31, 2021 are as follows:
| (In millions) | ||||||||
| Balance, January 1, 2021 | $ | 164 | ||||||
Provision for expected credit losses (1) | 54 | |||||||
Charged to other accounts (2) | 42 | |||||||
| Write-offs | (101) | |||||||
| Balance, December 31, 2021 | $ | 159 | ||||||
Provision for expected credit losses (3) | 29 | |||||||
Charged to other accounts (2) | 54 | |||||||
| Write-offs | (106) | |||||||
| Balance, September 30, 2022 | $ | 136 | ||||||
(1) Approximately $12 million of which was deferred for future recovery in the twelve months ended December 31, 2021.
(2) Represents recoveries and reinstatements of accounts written off for uncollectible accounts.
(3) Approximately $2 million of which was deferred for future refund to customers in the nine months ended September 30, 2022.
3. EARNINGS PER SHARE
EPS is calculated by dividing earnings attributable to FE by the weighted average number of common shares outstanding.
Basic EPS is computed using the weighted average number of common shares outstanding during the relevant period as the denominator. The denominator for diluted EPS of common stock reflects the weighted average of common shares outstanding
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plus the potential additional common shares that could result if dilutive securities and other agreements to issue common stock were exercised.
Diluted EPS reflects the dilutive effect of potential common shares from share-based awards. The dilutive effect of outstanding share-based awards was computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of the award would be used to purchase common stock at the average market price for the period.
The following table reconciles basic and diluted EPS attributable to FE:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| Reconciliation of Basic and Diluted EPS | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| (In millions, except per share amounts) | ||||||||||||||||||||||||||
| Earnings attributable to FE - continuing operations | $ | 334 | $ | 416 | $ | 809 | $ | 809 | ||||||||||||||||||
| Earnings attributable to FE - discontinued operations, net of tax | — | 47 | — | 47 | ||||||||||||||||||||||
| Earnings attributable to FE | $ | 334 | $ | 463 | $ | 809 | $ | 856 | ||||||||||||||||||
| Share count information: | ||||||||||||||||||||||||||
| Weighted average number of basic shares outstanding | 571 | 544 | 571 | 544 | ||||||||||||||||||||||
| Assumed exercise of dilutive stock options and awards | 1 | 1 | 1 | 1 | ||||||||||||||||||||||
| Weighted average number of diluted shares outstanding | 572 | 545 | 572 | 545 | ||||||||||||||||||||||
| EPS Attributable to FE: | ||||||||||||||||||||||||||
| Income from continuing operations, basic | $ | 0.58 | $ | 0.76 | $ | 1.42 | $ | 1.48 | ||||||||||||||||||
| Discontinued operations, basic | — | 0.09 | — | 0.09 | ||||||||||||||||||||||
| Basic EPS | $ | 0.58 | $ | 0.85 | $ | 1.42 | $ | 1.57 | ||||||||||||||||||
| Income from continuing operations, basic | $ | 0.58 | $ | 0.76 | $ | 1.41 | $ | 1.48 | ||||||||||||||||||
| Discontinued operations, basic | — | 0.09 | — | 0.09 | ||||||||||||||||||||||
| Diluted EPS | $ | 0.58 | $ | 0.85 | $ | 1.41 | $ | 1.57 | ||||||||||||||||||
For the three and nine months ended September 30, 2022 and 2021, no shares from stock options and awards were excluded from the calculation of diluted shares outstanding, as their inclusion would have been antidilutive.
4. PENSION AND OTHER POST-EMPLOYMENT BENEFITS
The components of FirstEnergy’s net periodic benefit costs (credits) for pension and OPEB were as follows:
| Components of Net Periodic Benefit Costs (Credits) | Pension | OPEB | ||||||||||||||||||||||||
| For the Three Months Ended September 30, | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Service costs | $ | 46 | $ | 48 | $ | 1 | $ | 1 | ||||||||||||||||||
| Interest costs | 68 | 57 | 3 | 3 | ||||||||||||||||||||||
| Expected return on plan assets | (164) | (163) | (10) | (10) | ||||||||||||||||||||||
Amortization of prior service costs (credits)(1) | 1 | 1 | (3) | (4) | ||||||||||||||||||||||
| Net periodic benefit credits | $ | (49) | $ | (57) | $ | (9) | $ | (10) | ||||||||||||||||||
| Net periodic benefit credits, net of amounts capitalized | $ | (77) | $ | (80) | $ | (9) | $ | (10) | ||||||||||||||||||
(1) The income tax benefits associated with pension and OPEB prior service costs amortized out of AOCI were $1 million for the three months ended September 30, 2022 and 2021.
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| Components of Net Periodic Benefit Costs (Credits) | Pension | OPEB | ||||||||||||||||||||||||
| For the Nine Months Ended September 30, | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Service costs | $ | 138 | 145 | 3 | 3 | |||||||||||||||||||||
| Interest costs | 204 | 170 | 8 | 8 | ||||||||||||||||||||||
| Expected return on plan assets | (492) | (489) | (30) | (27) | ||||||||||||||||||||||
Amortization or prior service costs (credits)(1) | 2 | 3 | (8) | (13) | ||||||||||||||||||||||
| Net periodic benefit credits | $ | (148) | $ | (171) | $ | (27) | $ | (29) | ||||||||||||||||||
| Net periodic benefit credits, net of amounts capitalized | $ | (218) | $ | (243) | $ | (28) | $ | (30) | ||||||||||||||||||
(1) The income tax benefits associated with the pension and OPEB prior service costs amortized out of AOCI were $2 million and $3 million for the nine months ended September 30, 2022 and 2021, respectively.
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, which among other things, extended shortfall amortization periods and modification of the interest rate stabilization rules for single-employer plans thereby impacting funding requirements. As a result, FirstEnergy does not currently expect to have a required contribution to the pension plan based on various assumptions, including an expected future annual return on assets of 7.50%. However, FirstEnergy may elect to contribute to the pension plan voluntarily.
Service costs, net of capitalization, are reported within Other operating expenses on FirstEnergy’s Consolidated Statements of Income. Non-service costs, other than the pension and OPEB mark-to-market adjustment, which is separately shown, are reported within “Miscellaneous income, net”, within “Other Income (Expense)” on FirstEnergy’s Consolidated Statements of Income.
5. INCOME TAXES
FirstEnergy’s interim effective tax rates reflect the estimated annual effective tax rates for 2022 and 2021. These tax rates are affected by estimated annual permanent items, such as AFUDC equity and other flow-through items, as well as certain discrete items. The following tables reconcile the effective tax rate to the federal income tax statutory rate for the three and nine months ended September 30, 2022 and 2021:
| For the Three Months | For the Nine Months | |||||||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||||||
| Reconciliation of federal income tax expense: | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Income from Continuing Operations, before income taxes | $ | 449 | $ | 504 | $ | 1,061 | $ | 1,080 | ||||||||||||
| Federal income tax expense at statutory rate (21%) | $ | 94 | $ | 106 | $ | 223 | $ | 227 | ||||||||||||
| Increases (reductions) in taxes resulting from: | ||||||||||||||||||||
| State income taxes, net of federal tax benefit | 25 | 31 | 68 | 80 | ||||||||||||||||
| AFUDC equity and other flow-through | (8) | (9) | (23) | (26) | ||||||||||||||||
| Excess deferred tax amortization due to the Tax Act | (15) | (13) | (46) | (39) | ||||||||||||||||
| Federal tax credits claimed | (3) | (6) | (3) | (34) | ||||||||||||||||
| Valuation allowances | (8) | — | 26 | — | ||||||||||||||||
| Remeasurement of state deferred taxes | 4 | — | (22) | 9 | ||||||||||||||||
| Nondeductible DPA monetary penalty | — | — | — | 52 | ||||||||||||||||
| Uncertain tax positions | 2 | (25) | 2 | (19) | ||||||||||||||||
| Other, net | 14 | 4 | 12 | 21 | ||||||||||||||||
| Total income taxes | $ | 105 | $ | 88 | $ | 237 | $ | 271 | ||||||||||||
| Effective income tax rate | 23.4 | % | 17.5 | % | 22.3 | % | 25.1 | % | ||||||||||||
During the three months ended September 30, 2022, FirstEnergy recorded a $2 million increase to the reserve for uncertain tax positions related to certain federal tax credits claimed on FirstEnergy’s 2021 federal income tax return. As of September 30, 2022, it remains reasonably possible that approximately $31 million of unrecognized tax benefits may be resolved in the next twelve months as a result of settlements with taxing authorities or the statute of limitations expiring, of which $24 million would ultimately affect FirstEnergy’s effective tax rate.
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In February 2022, the IRS completed its examination of FirstEnergy’s 2020 federal income tax return and issued a Full Acceptance Letter with no adjustment to FirstEnergy’s taxable income.
On July 8, 2022, Pennsylvania’s Governor signed into law Pennsylvania House Bill 1342, which reduces Pennsylvania’s corporate net income tax rate from 9.99% to 8.99% beginning January 1, 2023, and an additional 0.5% annually through 2031, when it reaches 4.99%. Enactment of the law during the third quarter resulted in a $225 million net decrease to FirstEnergy’s ADIT liabilities, with a corresponding increase in regulatory liabilities of $229 million, which are expected to be settled through future customer rates, and a $4 million increase in income tax expense. The decrease in the Pennsylvania income tax rate is not expected to have a material impact to FirstEnergy’s future financial statements.
On August 16, 2022, President Biden signed into law the IRA of 2022, which, among other things, imposes a new 15% corporate alternative minimum tax based on “adjusted financial statement income”, applicable to corporations with a three-year average adjusted financial statement income over $1 billion. The alternative minimum tax is effective for the 2023 tax year and, if applicable, corporations must pay the greater of the regular corporate income tax or the alternative minimum tax. Although NOL carryforwards created through the regular corporate income tax system cannot be used to reduce the alternative minimum tax, financial statement net operating losses can be used to reduce adjusted financial statement income and the amount of alternative minimum tax owed. Additionally, for alternative minimum taxes paid, corporations will receive a tax credit to be carried forward without limitation and applied against future regular corporate income tax liability. The IRA of 2022 as enacted requires the U.S. Treasury to provide regulations and other guidance necessary to administer the alternative minimum tax, including further defining allowable adjustments to determine adjusted financial statement income, which directly impacts the amount of alternative minimum tax to be paid. Currently, FirstEnergy believes that it is more likely than not that it will be subject to the alternative minimum tax beginning in 2023, however, until such U.S. Treasury guidance is issued, the amount of alternative minimum tax FirstEnergy would pay could be significantly different than current estimates or it may not be a payer at all. Further, due to the existing limitations on NOL carryforward utilization, FirstEnergy already expected to pay some regular corporate income tax so the amount of any potential incremental cash tax it may pay beginning in 2023 is not expected to have a material financial impact based on its current analysis. As of September 30, 2022, FirstEnergy has approximately $7 billion in Federal NOL carryforwards ($1.5 billion, net of tax) a portion of which begin to expire in 2031 and $4.9 billion ($1.0 billion, net of tax) of which has no expiration.
6. FAIR VALUE MEASUREMENTS
RECURRING FAIR VALUE MEASUREMENTS
Authoritative accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The three levels of the fair value hierarchy and a description of the valuation techniques are as follows:
| Level 1 | - | Quoted prices for identical instruments in active market. | ||||||
| Level 2 | - | Quoted prices for similar instruments in active market. | ||||||
| - | Quoted prices for identical or similar instruments in markets that are not active. | |||||||
| - | Model-derived valuations for which all significant inputs are observable market data. | |||||||
Models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
| Level 3 | - | Valuation inputs are unobservable and significant to the fair value measurement. | ||||||
FirstEnergy produces a long-term power and capacity price forecast annually with periodic updates as market conditions change. When underlying prices are not observable, prices from the long-term price forecast are used to measure fair value.
FTRs are financial instruments that entitle the holder to a stream of revenues (or charges) based on the hourly day-ahead congestion price differences across transmission paths. FTRs are acquired by FirstEnergy in the annual, monthly and long-term PJM auctions and are initially recorded using the auction clearing price less cost. After initial recognition, FTRs’ carrying values are periodically adjusted to fair value using a mark-to-model methodology, which approximates market. The primary inputs into the model, which are generally less observable than objective sources, are the most recent PJM auction clearing prices and the FTRs’ remaining hours. The model calculates the fair value by multiplying the most recent auction clearing price by the remaining FTR hours less the prorated FTR cost. Significant increases or decreases in inputs in isolation may have resulted in a higher or lower fair value measurement.
FirstEnergy primarily applies the market approach for recurring fair value measurements using the best information available. Accordingly, FirstEnergy maximizes the use of observable inputs and minimizes the use of unobservable inputs. There were no changes in valuation methodologies used as of September 30, 2022, from those used as of December 31, 2021. The
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determination of the fair value measures takes into consideration various factors, including but not limited to, nonperformance risk, counterparty credit risk and the impact of credit enhancements (such as cash deposits, LOCs and priority interests). The impact of these forms of risk was not significant to the fair value measurements.
The following tables set forth the recurring assets and liabilities that are accounted for at fair value by level within the fair value hierarchy:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||
| Assets | (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets FTRs(1) | $ | — | $ | — | $ | 17 | $ | 17 | $ | — | $ | — | $ | 9 | $ | 9 | |||||||||||||||||||||||||||||||
| Equity securities | 2 | — | — | 2 | 2 | — | — | 2 | |||||||||||||||||||||||||||||||||||||||
| U.S. state debt securities | — | 256 | — | 256 | — | 273 | — | 273 | |||||||||||||||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash(2) | 277 | — | — | 277 | 1,511 | — | — | 1,511 | |||||||||||||||||||||||||||||||||||||||
Other(3) | — | 40 | — | 40 | — | 42 | — | 42 | |||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 279 | $ | 296 | $ | 17 | $ | 592 | $ | 1,513 | $ | 315 | $ | 9 | $ | 1,837 | |||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Derivative liabilities FTRs(1) | $ | — | $ | — | $ | (2) | $ | (2) | $ | — | $ | — | $ | (1) | $ | (1) | |||||||||||||||||||||||||||||||
| Total liabilities | $ | — | $ | — | $ | (2) | $ | (2) | $ | — | $ | — | $ | (1) | $ | (1) | |||||||||||||||||||||||||||||||
| Net assets | $ | 279 | $ | 296 | $ | 15 | $ | 590 | $ | 1,513 | $ | 315 | $ | 8 | $ | 1,836 | |||||||||||||||||||||||||||||||
(1) Contracts are subject to regulatory accounting treatment and changes in market values do not impact earnings.
(2) Restricted cash of $26 million and $49 million as of September 30, 2022 and December 31, 2021, respectively, primarily relates to cash collected from MP, PE and the Ohio Companies’ customers that is specifically used to service debt of their respective securitization or funding companies.
(3) Primarily consists of short-term investments.
Level 3 Quantitative Information
The following table provides quantitative information for FTRs contracts that are classified as Level 3 in the fair value hierarchy for the period ended September 30, 2022:
| Fair Value, Net (In millions) | Valuation Technique | Significant Input | Range | Weighted Average | Units | |||||||||||||||||||||||||||||||||||||||
| FTRs | $ | 15 | Model | RTO auction clearing prices | $ | 2.40 | to | $ | 7.40 | $4.00 | Dollars/MWH | |||||||||||||||||||||||||||||||||
INVESTMENTS
All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Investments other than cash and cash equivalents include equity securities, AFS debt securities and other investments. FirstEnergy has no debt securities held for trading purposes.
Generally, unrealized gains and losses on equity securities are recognized in income whereas unrealized gains and losses on AFS debt securities are recognized in AOCI. However, the spent nuclear fuel disposal trusts of JCP&L are subject to regulatory accounting with all gains and losses on equity and AFS debt securities offset against regulatory assets.
Spent Nuclear Fuel Disposal Trusts
JCP&L holds debt securities within the spent nuclear fuel disposal trust, which are classified as AFS securities, recognized at fair market value. The trust is intended for funding spent nuclear fuel disposal fees to the United States Department of Energy associated with the previously owned Oyster Creek and TMI-1 nuclear power plants.
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The following table summarizes the amortized cost basis, unrealized gains, unrealized losses and fair values of investments held in spent nuclear fuel disposal trusts as of September 30, 2022, and December 31, 2021:
September 30, 2022(1) | December 31, 2021(2) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cost Basis | Unrealized Gains | Unrealized Losses | Fair Value | Cost Basis | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities | $ | 290 | $ | — | $ | (34) | $ | 256 | $ | 280 | $ | 2 | $ | (9) | $ | 273 | ||||||||||||||||||||||||||||||||||
(1) Excludes short-term cash investments of $7 million.
(2) Excludes short-term cash investments of $11 million.
Proceeds from the sale of investments in AFS debt securities, realized gains and losses on those sales and interest and dividend income for the three and nine months ended September 30, 2022 and 2021, were as follows:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Sale proceeds | $ | 15 | $ | 16 | $ | 31 | $ | 29 | ||||||||||||||||||
| Realized gains | — | — | 1 | — | ||||||||||||||||||||||
| Realized losses | (2) | (1) | (4) | (2) | ||||||||||||||||||||||
| Interest and dividend income | 3 | 3 | 9 | 8 | ||||||||||||||||||||||
Other Investments
Other investments include employee benefit trusts, which are primarily invested in corporate-owned life insurance policies and equity method investments. Earnings and losses associated with corporate-owned life insurance policies and equity method investments are reflected in the “Miscellaneous Income, net” line of FirstEnergy’s Consolidated Statements of Income. The total carrying value of other investments were $358 million and $371 million as of September 30, 2022, and December 31, 2021, respectively, and are excluded from the amounts reported above.
For the three months ended September 30, 2022 and 2021, pre-tax income (expense) related to corporate-owned life insurance policies were $(6) million and $(1) million, respectively, and $(28) million and $7 million for the nine months ended September 30, 2022 and 2021, respectively. Corporate-owned life insurance policies are valued using the cash surrender value and any changes in value during the period are recognized as income or expense.
FEV holds a 33-1/3% equity ownership in Global Holding, the holding company for a joint venture in the Signal Peak mining and coal transportation operations with coal sales primarily focused on international markets. FEV is not the primary beneficiary of the joint venture. FEV's ownership interest is subject to the equity method of accounting. For the three months ended September 30, 2022 and 2021, pre-tax income related to FEV’s ownership in Global Holding were $57 million and $8 million, respectively, and $133 million and $12 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022 and December 31, 2021, the carrying value of the equity method investment was $72 million and $59 million, respectively. During 2022, FEV received cash dividends from Global Holding totaling $120 million ($50 million in the third quarter of 2022), which were classified with “Cash from Operating Activities” on FirstEnergy’s Consolidated Statements of Cash Flow.
LONG-TERM DEBT AND OTHER LONG-TERM OBLIGATIONS
All borrowings with initial maturities of less than one year are defined as short-term financial instruments under GAAP and are reported as Short-term borrowings on the Consolidated Balance Sheets at cost. Since these borrowings are short-term in nature, FirstEnergy believes that their costs approximate their fair market value. The following table provides the approximate fair value and related carrying amounts of long-term debt, which excludes finance lease obligations and net unamortized debt issuance costs, unamortized fair value adjustments, premiums and discounts as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In millions) | |||||||||||
| Carrying value | $ | 21,343 | $ | 23,946 | |||||||
| Fair value | $ | 19,203 | $ | 27,043 | |||||||
The fair values of long-term debt and other long-term obligations reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective period. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to those of FirstEnergy. FirstEnergy classified short-term borrowings, long-term debt and other long-term obligations as Level 2 in the fair value hierarchy as of September 30, 2022, and December 31, 2021.
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FirstEnergy had the following redemptions and issuances during the nine months ended September 30, 2022:
| Company | Type | Redemption / Issuance Date | Interest Rate | Maturity | Amount (in Millions) | Description | ||||||||||||||
| Redemptions | ||||||||||||||||||||
| FE | Unsecured Notes | January, 2022 | 4.25% | 2023 | $850 | In December 2021, FE provided notice of redemption with a make-whole premium of approximately $38 million ($30 million after-tax). | ||||||||||||||
| TE | Senior Secured Notes | February, 2022 | 2.65% | 2028 | $25 | On January 27, 2022, TE instructed its indenture trustee to provide notice of partial redemption. | ||||||||||||||
| CEI | Senior Notes, Series A | March, 2022 | 2.77% | 2034 | $150 | On February 11, 2022, CEI instructed its indenture trustee to provide notice of full redemption. | ||||||||||||||
| WP | FMBs | April, 2022 | 3.34% | 2022 | $100 | WP redeemed FMBs that became due. | ||||||||||||||
| FE | Unsecured Notes | June, 2022 | 2.85% | 2022 | $500 | On May 23, 2022 FE provided notice of redemption. | ||||||||||||||
| FE | Unsecured Notes | June, 2022 | 7.375% | 2031 | $715 | On May 25, 2022, FE commenced an offer to purchase for cash a portion of its 2031 Notes and 2047 Notes, which had $1.5 billion and $1 billion principal amounts outstanding, respectively. A portion of these notes were redeemed for approximately $1.1 billion, including a tender premium of approximately $101 million ($80 million after-tax). In addition, FE recognized approximately $7 million ($5 million after-tax) of deferred cash flow hedge losses and $10 million ($8 million after-tax) in other unamortized debt costs and fees associated with the FE debt redemptions. | ||||||||||||||
| FE | Unsecured Notes | June, 2022 | 4.85% | 2047 | $284 | |||||||||||||||
| Penn | FMBs | June, 2022 | 6.09% | 2022 | $100 | Penn redeemed FMBs that became due. | ||||||||||||||
| FE | Unsecured Notes | August-September 2022 | 7.375% | 2031 | $27 | During the third quarter of 2022, FE repurchased a portion of the principal amount of its 2031 Notes and 2047 Notes through the open market for approximately $134 million including a discount of approximately $3 million ($2 million after tax). In addition, FE recognized approximately $2 million ($1 million after-tax) in other unamortized debt costs related to the FE open market repurchases. | ||||||||||||||
| FE | Unsecured Notes | August-September 2022 | 4.85% | 2047 | $110 | |||||||||||||||
| Issuances | ||||||||||||||||||||
| Penn | FMBs | April, 2022 | 3.79% | 2032 | $150 | Proceeds are expected to be received on November 29, 2022, and used to repay short-term borrowings. | ||||||||||||||
| OE | Senior Unsecured Notes | September, 2022 | 5.50% | 2033 | $300 | Proceeds were used to repay borrowings outstanding under the regulated money pool, to finance capital expenditures, to fund working capital needs and for other general corporate purposes. | ||||||||||||||
7. REGULATORY MATTERS
STATE REGULATION
Each of the Utilities' retail rates, conditions of service, issuance of securities and other matters are subject to regulation in the states in which it operates - in Maryland by the MDPSC, in New Jersey by the NJBPU, in Ohio by the PUCO, in Pennsylvania by the PPUC, in West Virginia by the WVPSC and in New York by the NYPSC. The transmission operations of PE in Virginia, ATSI in Ohio, and the Transmission Companies in Pennsylvania are subject to certain regulations of the VSCC, PUCO and PPUC, respectively. In addition, under Ohio law, municipalities may regulate rates of a public utility, subject to appeal to the PUCO if not acceptable to the utility. Further, if any of the FirstEnergy affiliates were to engage in the construction of significant new transmission facilities, depending on the state, they may be required to obtain state regulatory authorization to site, construct and operate the new transmission facility.
MARYLAND
PE operates under MDPSC approved base rates that were effective as of March 23, 2019. PE also provides SOS pursuant to a combination of settlement agreements, MDPSC orders and regulations, and statutory provisions. SOS supply is competitively procured in the form of rolling contracts of varying lengths through periodic auctions that are overseen by the MDPSC and a third-party monitor. Although settlements with respect to SOS supply for PE customers have expired, service continues in the same manner until changed by order of the MDPSC. PE recovers its costs plus a return for providing SOS. PE expects to file a new base rate case in early 2023, consistent with the MDPSC’s order issued on March 22, 2019.
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The EmPOWER Maryland program requires each electric utility to file a plan to reduce electric consumption and demand 0.2% per year, up to the ultimate goal of 2% annual savings, for the duration of the 2021-2023 EmPOWER Maryland program cycles to the extent the MDPSC determines that cost-effective programs and services are available. PE's approved 2021-2023 EmPOWER Maryland plan continues and expands upon prior years' programs for a projected total investment of approximately $148 million over the three-year period. PE recovers program investments with a return through an annually reconciled surcharge, with most costs subject to recovery over a five-year period with a return on the unamortized balance. On August 16, 2022, the MDPSC ordered each utility to file, by October 28, 2022, a set of plans for paying down all amortization balances by the scheduled expiration of the EmPOWER program on December 31, 2029. PE expects to submit its required plan by October 28, 2022. Maryland law only allows for the utility to recover lost distribution revenue attributable to energy efficiency or demand reduction programs through a base rate case proceeding, and to date, such recovery has not been sought or obtained by PE.
NEW JERSEY
JCP&L operates under NJBPU approved rates that took effect as of January 1, 2021, and were effective for customers as of November 1, 2021. JCP&L provides BGS for retail customers who do not choose a third-party EGS and for customers of third-party EGSs that fail to provide the contracted service. All New Jersey EDCs participate in this competitive BGS procurement process and recover BGS costs directly from customers as a charge separate from base rates.
JCP&L has instituted energy efficiency and peak demand reduction programs in accordance with the New Jersey Clean Energy Act as approved by the NJBPU in April 2021. The NJBPU approved plans include recovery of lost revenues resulting from the programs and a three-year plan including total program costs of $203 million, of which $158 million of investment is recovered over a ten-year amortization period with a return as well as operations and maintenance expenses and financing costs of $45 million recovered on an annual basis.
In December 2017, the NJBPU issued proposed rules to modify its current CTA policy in base rate cases to: (i) calculate savings using a five-year look back from the beginning of the test year; (ii) allocate savings with 75% retained by the company and 25% allocated to customers; and (iii) exclude transmission assets of electric distribution companies in the savings calculation. On January 17, 2019, the NJBPU approved the proposed CTA rules with no changes. On May 17, 2019, the NJ Rate Counsel filed an appeal with the Appellate Division of the Superior Court of New Jersey and on June 7, 2021, the Superior Court issued an order reversing the NJBPU’s CTA rules and remanded the case back to the NJBPU. Specifically, the Court’s ruling requires 100% of the CTA savings to be credited to customers in lieu of the NJBPU’s current policy requiring 25%. On September 19, 2022, the NJBPU issued a notice to re-adopt its rules of practice, including proposed changes to the rules regarding CTA policy in base rate cases consistent with the Superior Court’s June 7, 2021 order. Once the proposed rules of practice are final, they will be applied on a prospective basis in a future base rate case, however, it is not expected to have a material adverse effect on FirstEnergy’s results or financial condition.
On October 28, 2020, the NJBPU approved a stipulated settlement between JCP&L and various parties, resolving JCP&L’s request for distribution base rate increase. The settlement provided for a $94 million annual base distribution revenues increase for JCP&L based on an ROE of 9.6%, which became effective for customers on November 1, 2021. The settlement additionally provided that JCP&L would be subject to a management audit, which began in May 2021 and is currently ongoing. JCP&L anticipates that the management report will be issued by the end of the year.
On September 14, 2021, JCP&L submitted a supplemental filing with the NJBPU to revise a previously filed AMI Program, which proposed the deployment of approximately 1.2 million advanced meters. Under the revised AMI Program, during the first six years of the AMI Program from 2022 through 2027, JCP&L estimates costs of $494 million, consisting of capital investments of approximately $390 million, incremental operations and maintenance expenses of approximately $73 million and cost of removal of $31 million. On February 8, 2022, JCP&L filed with the NJBPU a stipulation entered into with the NJBPU staff, NJ Rate Counsel and others, that, pending NJBPU approval, would affirm the terms of the revised AMI Program. The Stipulation, which was approved by NJBPU order on February 23, 2022, also provides that the revised AMI Program-related capital costs, the legacy meter stranded costs, and the operations and maintenance expense will be deferred and placed in regulatory assets, with such amounts sought to be recovered in the JCP&L’s subsequent base rate cases.
On July 2, 2020, the NJBPU issued an order allowing New Jersey utilities to track and create a regulatory asset for future recovery of all prudently incurred incremental costs arising from the COVID-19 pandemic beginning March 9, 2020 and continuing until the New Jersey Governor issues an order stating that the COVID-19 pandemic is no longer in effect. New Jersey utilities can request recovery of such regulatory asset in a stand-alone COVID-19 regulatory asset filing or future base rate case. On October 28, 2020, the NJBPU issued an order expanding the scope of the proceeding to examine all pandemic issues, including recovery of the COVID-19 regulatory assets, by way of a generic proceeding. Through various executive orders issued by the New Jersey Governor, the moratorium period was extended to December 31, 2021. On December 21, 2021, the moratorium on residential disconnections for certain entities providing utility service was extended until March 15, 2022. The moratorium on residential disconnections was not extended for investor-owned electric utilities such as JCP&L, but does require that investor-owned electric public utilities offer qualifying residential customers deferred payment arrangements meeting certain minimum criteria prior to disconnecting service. Additionally, while the moratorium on residential disconnections for certain entities providing electric service was not extended after March 15, 2022, new legislation was enacted on March 25, 2022,
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prohibiting utilities from disconnecting electric service to customers that have applied for utility bill assistance before June 15, 2022 until such time as the state agency administering the assistance program makes a decision on the application and further requiring that all utilities offer a deferred payment arrangement meeting certain minimum criteria after the state agency’s decision on the application has been made.
Pursuant to an NJBPU order requiring all New Jersey electric distribution companies to file electric vehicle programs, JCP&L filed its program on March 1, 2021. JCP&L’s proposed electric vehicle program consisted of six sub-programs, including a consumer education and outreach initiative that would begin on January 1, 2022, and continue over a four-year period. On May 2, 2022, JCP&L filed with the NJBPU a stipulation entered into with the NJBPU staff, NJ Rate Counsel and others that provided a total budget of approximately $40 million for JCP&L’s electric vehicle program, including investments of approximately $29 million and operations and maintenance expenses of approximately $11 million. Electric vehicle related capital and operations and maintenance costs shall be deferred and placed in separate regulatory assets for recovery in JCP&L’s next base rate case. The stipulation was approved without modification by the NJBPU on June 8, 2022.
OHIO
The Ohio Companies operate under PUCO-approved base distribution rates that became effective in 2009. The Ohio Companies currently operate under ESP IV, effective June 1, 2016 and continuing through May 31, 2024, that continues the supply of power to non-shopping customers at a market-based price set through an auction process. ESP IV also continues the Rider DCR, which supports continued investment related to the distribution system for the benefit of customers, with increased revenue caps of $20 million per year from June 1, 2019 through May 31, 2022; and $15 million per year from June 1, 2022 through May 31, 2024. In addition, ESP IV includes: (1) continuation of a base distribution rate freeze through May 31, 2024; (2) a goal across FirstEnergy to reduce CO2 emissions by 90% below 2005 levels by 2045; and (3) contributions, totaling $51 million to: (a) fund energy conservation programs, economic development and job retention in the Ohio Companies’ service territories; (b) establish a fuel-fund in each of the Ohio Companies’ service territories to assist low-income customers; and (c) establish a Customer Advisory Council to ensure preservation and growth of the competitive market in Ohio.
On May 16, 2022, the Ohio Companies filed their application for determination of the existence of SEET under ESP IV for calendar year 2021, which demonstrated that each of the individual Ohio Companies did not have significantly excessive earnings.
On July 15, 2022, the Ohio Companies filed an application with the PUCO for approval of phase two of their distribution grid modernization plan that would, among other things, provide for the installation of an additional 700,000 smart meters, distribution automation equipment on approximately 240 distribution circuits, voltage regulating equipment on approximately 220 distribution circuits, and other investments and pilot programs in related technologies designed to provide enhanced customer benefits. The Ohio Companies propose that phase two will be implemented over a four-year budget period with estimated capital investments of approximately $626 million and operations and maintenance expenses of approximately $144 million over the deployment period. Under the proposal, costs of phase two of the grid modernization plan would be recovered through the Ohio Companies’ AMI rider, pursuant to the terms and conditions approved in ESP IV.
On November 1, 2021, the Ohio Companies, together with the OCC, PUCO Staff, and several other signatories, entered into an Ohio Stipulation with the intent of resolving the ongoing energy efficiency rider audits, various SEET proceedings, including the Ohio Companies’ 2017 SEET proceeding, and the Ohio Companies’ quadrennial ESP review, each of which was pending before the PUCO. Specifically, the Ohio Stipulation provides that the Ohio Companies’ current ESP IV passes the required statutory test for their prospective SEET review as part of the Quadrennial Review of ESP IV, and except for limited circumstances, the signatory parties have agreed not to challenge the Ohio Companies’ SEET return on equity calculation methodology for their 2021-2024 SEET proceedings. The Ohio Stipulation additionally affirms that: (i) the Ohio Companies’ ESP IV shall continue through its previously authorized term of May 31, 2024; and (ii) the Ohio Companies will file their next base rate case in May 2024, and further, no signatory party will seek to adjust the Ohio Companies’ base distribution rates before that time, except in limited circumstances. The Ohio Companies further agreed to refund $96 million to customers in connection with the 2017-2019 SEET cases, and to provide $210 million in future rate reductions for all customers, including $80 million in 2022, $60 million in 2023, $45 million in 2024, and $25 million in 2025. The PUCO approved the 2017-2019 SEET refunds and 2022 rate reductions on December 1, 2021, and refunds began in December 2021. Current and future rate reductions are recognized as a reduction to regulated distribution segment’s revenue in the Consolidated Statements of Income as they are provided to the Ohio Companies’ customers.
On September 8, 2020, the OCC filed motions in the Ohio Companies’ corporate separation audit and DMR audit dockets, requesting the PUCO to open an investigation and management audit, hire an independent auditor, and require FirstEnergy to show it did not improperly use money collected from consumers or violate any utility regulatory laws, rules or orders in its activities regarding HB 6. On December 30, 2020, in response to the OCC's motion, the PUCO reopened the DMR audit docket, and directed PUCO staff to solicit a third-party auditor and conduct a full review of the DMR to ensure funds collected from customers through the DMR were only used for the purposes established in ESP IV. On June 2, 2021, the PUCO selected an auditor and the auditor filed the final audit report on January 14, 2022, which made certain findings and recommendations. The report found that spending of DMR revenues was not required to be tracked, and that DMR revenues, like all rider revenues, are placed into the regulated money pool as a matter of routine, where the funds lose their identity. Therefore, the report could not
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suggest that DMR funds were used definitively for direct or indirect support for grid modernization. The report also concluded that there was no documented evidence that ties revenues from the DMR to lobbying for the passage of HB 6, but also could not rule out with certainty uses of DMR funds to support the passage of HB 6. The report further recommended that the regulated companies' money pool be audited more frequently and the Ohio Companies adopt formal dividend policies. Final comments and responses were filed by parties during the second quarter of 2022.
On September 15, 2020, the PUCO opened a new proceeding to review the political and charitable spending by the Ohio Companies in support of HB 6 and the subsequent referendum effort, and directing the Ohio Companies to show cause, demonstrating that the costs of any political or charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any rates or charges paid by customers. The Ohio Companies initially filed a response stating that the costs of any political or charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any rates or charges paid by customers, but on August 6, 2021, filed a supplemental response explaining that, in light of the facts set forth in the DPA and the findings of the Rider DCR audit report further discussed below, political or charitable spending in support of HB 6, or the subsequent referendum effort, affected pole attachment rates paid by approximately $15 thousand. On October 26, 2021, the OCC filed a motion requesting the PUCO to order an independent external audit to investigate FE’s political and charitable spending related to HB 6, and to appoint an independent review panel to retain and oversee the auditor. In November and December 2021, parties filed comments and reply comments regarding the Ohio Companies’ original and supplemental responses to the PUCO’s September 15, 2020, show cause directive. On May 4, 2022, the PUCO selected a third-party auditor to determine whether the show cause demonstration submitted by the Ohio Companies is sufficient to ensure that the cost of any political or charitable spending in support of HB 6 or the subsequent referendum effort was not included, directly or indirectly, in any rates or charges paid by ratepayers.
In connection with an ongoing audit of the Ohio Companies’ policies and procedures relating to the code of conduct rules between affiliates, on November 4, 2020, the PUCO initiated an additional corporate separation audit as a result of the FirstEnergy leadership transition announcement made on October 29, 2020, as further discussed below. The additional audit is to ensure compliance by the Ohio Companies and their affiliates with corporate separation laws and the Ohio Companies’ corporate separation plan. The additional audit is for the period from November 2016 through October 2020. The final audit report was filed on September 13, 2021. The audit report makes no findings of major non-compliance with Ohio corporate separation requirements, minor non-compliance with eight requirements, and findings of compliance with 23 requirements. Parties filed comments and reply comments on the audit report.
In connection with an ongoing annual audit of the Ohio Companies’ Rider DCR for 2020, and as a result of disclosures in FirstEnergy’s Form 10-K for the year ended December 31, 2020 (filed on February 18, 2021), the PUCO expanded the scope of the audit on March 10, 2021, to include a review of certain transactions that were either improperly classified, misallocated, or lacked supporting documentation, and to determine whether funds collected from customers were used to pay the vendors, and if so, whether or not the funds associated with those payments should be returned to customers through Rider DCR or through an alternative proceeding. On August 3, 2021, the auditor filed its final report on this phase of the audit, and the parties submitted comments and reply comments on this audit report in October 2021. Additionally, on September 29, 2021, the PUCO expanded the scope of the audit in this proceeding to determine if the costs of the naming rights for FirstEnergy Stadium have been recovered from the Ohio Companies’ customers. On November 19, 2021, the auditor filed its final report, in which the auditor concluded that the FirstEnergy Stadium naming rights expenses were not recovered from Ohio customers. On December 15, 2021, the PUCO further expanded the scope of the audit to include an investigation into an apparent nondisclosure of a side agreement in the Ohio Companies’ ESP IV settlement proceedings, but stayed its expansion of the audit until otherwise ordered by the PUCO.
On August 16, 2022, the U.S. Attorney for the Southern District of Ohio requested that the PUCO stay the above pending HB 6-related matters for a period of six months, which request was granted by the PUCO on August 24, 2022. Unless otherwise ordered by the PUCO, the four cases are stayed in their entirety, including discovery and motions, and all related procedural schedules are vacated.
In the fourth quarter of 2020, motions were filed with the PUCO requesting that the PUCO amend the Ohio Companies’ riders for collecting the OVEC-related charges required by HB 6 to provide for refunds in the event such provisions of HB 6 are repealed. Neither the Ohio Companies nor FE benefit from the OVEC-related charges the Ohio Companies collect. Instead, the Ohio Companies are further required by HB 6 to remit all the OVEC-related charges they collect to non-FE Ohio electric distribution utilities. The Ohio Companies contested the motions, which are pending before the PUCO.
See Note 8, “Commitments, Guarantees and Contingencies” below for additional details on the government investigations and subsequent litigation surrounding the investigation of HB 6.
PENNSYLVANIA
The Pennsylvania Companies operate under rates approved by the PPUC, effective as of January 27, 2017. On November 18, 2021, the PPUC issued orders to each of the Pennsylvania Companies directing they operate under DSPs for the June 1, 2019 through May 31, 2023 delivery period, which DSPs provide for the competitive procurement of generation supply for customers who do not receive service from an alternative EGS. Under the 2019-2023 DSPs, supply will be provided by wholesale suppliers
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through a mix of 3, 12 and 24-month energy contracts, as well as two RFPs for 2-year SREC contracts for ME, PN and Penn. On December 14, 2021, the Pennsylvania Companies filed proposed DSPs for provision of generation for the June 1, 2023 through May 31, 2027 delivery period, to be sourced through competitive procurements for customers who do not receive service from an alternative EGS. An evidentiary hearing was held on April 13, 2022, and on April 20, 2022, the parties filed a partial settlement with the PPUC resolving certain of the issues in the proceeding and setting aside the remainder of the issues to be resolved through briefing. PPUC approved the partial settlement, without modification, on August 4, 2022. Under the 2023-2027 DSPs, supply is proposed to be provided through a mix of 12 and 24-month energy contracts, as well as long-term solar PPAs.
In March 2018, the PPUC approved adjusted customer rates of the Pennsylvania Companies to reflect the net impact of the Tax Act. As a result, the Pennsylvania Companies established riders that, beginning July 1, 2018, refunded to customers tax savings attributable to the Tax Act as compared to the amounts established in their most recent base rate proceedings on a current and going forward basis. The amounts recorded as savings for the total period of January 1 through June 30, 2018, were tracked and were to be addressed for treatment in a future proceeding. On May 17, 2021, the Pennsylvania Companies filed petitions with the PPUC proposing to refund the net savings for the January through June 2018 period to customers beginning January 1, 2022. On November 18, 2021, the PPUC approved the Pennsylvania Companies' proposed refunds, but also revised a previous methodology for calculating the net tax savings, which resulted in additional tax savings attributable to the Tax Act to be refunded to customers and directed the Pennsylvania Companies to file new petitions to propose the timing and methodology to provide these additional refunds to customers. The Pennsylvania Companies recalculated the net impact for 2018 through 2021 under the revised PPUC methodology in comparison to amounts already refunded to customers under the existing riders, which resulted in an additional $61 million in savings, with interest, to be provided to customers. As a result, FirstEnergy recognized a pre-tax charge of $61 million in the fourth quarter of 2021, associated with the additional refund and based on the November 2021 PPUC order and methodology. The Pennsylvania Companies filed petitions to propose the timing and methodology of the refund of these amounts on February 17, 2022. The Pennsylvania Companies’ petitions and the proposed refunds addressed within were approved by the PPUC on June 16, 2022, without modification, effective July 1, 2022, and are expected to be refunded by the end of the year.
Pursuant to Pennsylvania Act 129 of 2008 and PPUC orders, Pennsylvania EDCs implemented energy efficiency and peak demand reduction programs. On June 18, 2020, the PPUC entered a Final Implementation Order for a Phase IV EE&C Plan, operating from June 2021 through May 2026. The Final Implementation Order set demand reduction targets, relative to 2007 to 2008 peak demands, at 2.9% MW for ME, 3.3% MW for PN, 2.0% MW for Penn, and 2.5% MW for WP; and energy consumption reduction targets, as a percentage of the Pennsylvania Companies’ historic 2009 to 2010 reference load at 3.1% MWH for ME, 3.0% MWH for PN, 2.7% MWH for Penn, and 2.4% MWH for WP. The Pennsylvania Companies’ Phase IV plans were approved by PPUC without modification on March 25, 2021.
Pennsylvania EDCs are permitted to seek PPUC approval of an LTIIP for infrastructure improvements and costs related to highway relocation projects, after which a DSIC may be approved to recover LTIIP costs. On January 16, 2020, the PPUC approved the Pennsylvania Companies’ LTIIPs for the five-year period beginning January 1, 2020 and ending December 31, 2024 for a total capital investment of approximately $572 million for certain infrastructure improvement initiatives. On June 25, 2021, the Pennsylvania OCA filed a complaint against Penn’s quarterly DSIC rate, disputing the recoverability of the Companies’ automated distribution management system investment under the DSIC mechanism. On January 26, 2022, the parties filed a joint petition for settlement that resolves all issues in this matter, which was approved by the PPUC without modification on April 14, 2022.
Following the Pennsylvania Companies’ 2016 base rate proceedings, the PPUC ruled in a separate proceeding related to the DSIC mechanisms that the Pennsylvania Companies were not required to reflect federal and state income tax deductions related to DSIC-eligible property in DSIC rates. The decision was appealed to the Pennsylvania Supreme Court and in July 2021 the court upheld the Pennsylvania Commonwealth Court’s reversal of the PPUC’s decision and remanded the matter back to the PPUC for determination as to how DSIC calculations shall account for ADIT and state taxes. The matter awaits further action by the PPUC. The adverse ruling by the Pennsylvania Supreme Court is not expected to result in a material impact to FirstEnergy.
WEST VIRGINIA
MP and PE provide electric service to all customers through traditional cost-based, regulated utility ratemaking and operate under WVPSC-approved rates that became effective in February 2015. MP and PE recover net power supply costs, including fuel costs, purchased power costs and related expenses, net of related market sales revenue through the ENEC. MP’s and PE’s ENEC rate is updated annually.
On December 30, 2020, MP and PE filed with the WVPSC a determination of the rate impact of the Tax Act with respect to ADIT. The filing proposed an annual revenue reduction of $2.6 million, effective January 1, 2022, with reconciliation and any resulting adjustments incorporated into annual ENEC proceedings. On August 12, 2021, a unanimous settlement was reached with all the parties agreeing to a $7.7 million rate reduction beginning January 1, 2022, with a true-up in the ENEC proceeding each year. On November 30, 2021, the WVPSC approved the settlement on all terms, except for the proposed effective date of the rate reduction, which was held in abeyance until further notice.
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On December 29, 2021, the WVPSC issued an order granting MP and PE’s requested $19.6 million increase in ENEC rates, requiring, among other things, that MP and PE refund to its large industrial customers their respective portion of the $7.7 million rate reduction discussed above and also requires MP and PE to negotiate a PPA for its capacity shortfall and a reasonable reserve margin if certain conditions are met. By order dated March 2, 2022, the WVPSC reopened the case to determine whether rates should be increased to recover growing ENEC under-recoveries. On May 17, 2022, the WVPSC issued an order approving an interim rate increase of $94 million, effective for customer rates on May 18, 2022, subject to a prudence review during MP and PE’s 2022 ENEC case.
On August 25, 2022, MP and PE filed with the WVPSC their annual ENEC case requesting an increase in ENEC rates of $183.8 million beginning January 1, 2023, which represents a 12.2% increase to the rates currently in effect. The increase is driven by an underrecovery during the review period (July 1, 2021 to June 30, 2022) of $144.9 million due to higher coal, reagent, and allowance expenses. This filing additionally addresses, among other things, the WVPSC’s May 2022 request for a prudence review of current rates. An order is expected by the end of 2022.
On December 3, 2021 and on December 27, 2021, the WVPSC approved settlements granting MP and PE a $16 million increase in rates effective January 1, 2022, and permitting the continuation of the vegetation management program and surcharge for another two years. WVPSC additionally ordered MP and PE to perform equipment inspections within a reasonable time after vegetation management occurs on a circuit.
On November 22, 2021, MP and PE filed with the WVPSC their plan to construct 50 MWs of solar generation at five sites in West Virginia. The plan includes a tariff to offer solar power to West Virginia customers and cost recovery for MP and PE from other customers through a surcharge for any solar investment not fully subscribed by their customers. A hearing was held in mid-March 2022 and on April 21, 2022, the WVPSC issued an order approving, effective May 1, 2022, the requested tariff and requiring MP and PE to subscribe at least 85% of the planned 50 MWs before seeking final tariff approval. MP and PE must seek separate approval from the WVPSC to recover any solar generation costs in excess of the approved tariff. The first solar generation site is expected to be in-service by the end of 2023 and all construction completed at the other sites no later than the end of 2025 at a total investment cost of approximately $100 million.
On December 17, 2021, MP and PE filed with the WVPSC for approval of environmental compliance projects at the Ft. Martin and Harrison Power Stations to comply with the EPA’s ELG and operate these plants beyond 2028. The request includes a surcharge to recover the expected $142 million capital investment and $3 million in annual operation and maintenance expense. MP and PE reached a settlement agreement with WVPSC staff and certain intervenors, recommending: (i) approval of the ELG compliance plan submitted by MP and PE and (ii) recovery of costs through a surcharge. A ruling approving the settlement without modification was issued by the WVPSC on September 12, 2022, and construction is expected to be completed by the end of 2025. See Note 8, “Commitments, Guarantees and Contingencies - Environmental Matters - Clean Water Act" below, for additional details on the EPA's ELG.
FERC REGULATORY MATTERS
Under the FPA, FERC regulates rates for interstate wholesale sales and transmission of electric power, regulatory accounting and reporting under the Uniform System of Accounts, and other matters, including construction and operation of hydroelectric projects. With respect to their wholesale services and rates, the Utilities, AE Supply and the Transmission Companies are subject to regulation by FERC. FERC regulations require JCP&L, MP, PE, WP and the Transmission Companies to provide open access transmission service at FERC-approved rates, terms and conditions. Transmission facilities of JCP&L, MP, PE, WP and the Transmission Companies are subject to functional control by PJM and transmission service using their transmission facilities is provided by PJM under the PJM Tariff.
FERC regulates the sale of power for resale in interstate commerce in part by granting authority to public utilities to sell wholesale power at market-based rates upon showing that the seller cannot exert market power in generation or transmission or erect barriers to entry into markets. The Utilities and AE Supply each have been authorized by FERC to sell wholesale power in interstate commerce at market-based rates and have a market-based rate tariff on file with FERC, although in the case of the Utilities major wholesale purchases remain subject to review and regulation by the relevant state commissions.
Federally enforceable mandatory reliability standards apply to the bulk electric system and impose certain operating, record-keeping and reporting requirements on the Utilities, AE Supply, and the Transmission Companies. NERC is the ERO designated by FERC to establish and enforce these reliability standards, although NERC has delegated day-to-day implementation and enforcement of these reliability standards to six regional entities, including RFC. All of the facilities that FirstEnergy operates are located within the RFC region. FirstEnergy actively participates in the NERC and RFC stakeholder processes, and otherwise monitors and manages its companies in response to the ongoing development, implementation and enforcement of the reliability standards implemented and enforced by RFC.
FirstEnergy believes that it is in material compliance with all currently effective and enforceable reliability standards. Nevertheless, in the course of operating its extensive electric utility systems and facilities, FirstEnergy occasionally learns of isolated facts or circumstances that could be interpreted as excursions from the reliability standards. If and when such occurrences are found, FirstEnergy develops information about the occurrence and develops a remedial response to the specific
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circumstances, including in appropriate cases “self-reporting” an occurrence to RFC. Moreover, it is clear that NERC, RFC and FERC will continue to refine existing reliability standards as well as to develop and adopt new reliability standards. Any inability on FirstEnergy’s part to comply with the reliability standards for its bulk electric system could result in the imposition of financial penalties, or obligations to upgrade or build transmission facilities, that could have a material adverse effect on its financial condition, results of operations, and cash flows.
FERC Audit
FERC’s Division of Audits and Accounting initiated a nonpublic audit of FESC in February 2019. Among other matters, the audit is evaluating FirstEnergy’s compliance with certain accounting and reporting requirements under various FERC regulations. On February 4, 2022, FERC filed the final audit report for the period of January 1, 2015 through September 30, 2021, which included several findings and recommendations that FirstEnergy has accepted. The audit report included a finding and related recommendation on FirstEnergy’s methodology for allocation of certain corporate support costs to regulatory capital accounts under certain FERC regulations and reporting. Effective in the first quarter of 2022 and in response to the finding, FirstEnergy had implemented a new methodology for the allocation of these corporate support costs to regulatory capital accounts for its regulated distribution and transmission companies on a prospective basis. With the assistance of an independent outside firm, FirstEnergy completed an analysis during the third quarter of 2022 of these costs and how it impacted certain FERC-jurisdictional wholesale transmission customer rates for the audit period of 2015 through 2021. As a result of this analysis, FirstEnergy recorded in the third quarter of 2022 approximately $45 million ($34 million after-tax) in expected customer refunds, plus interest, due to its wholesale transmission customers and reclassified approximately $195 million of certain transmission capital assets to operating expenses for the audit period, of which $90 million ($67 million after-tax) are not expected to be recoverable and impacted FirstEnergy’s earnings since they relate to costs capitalized during stated transmission rate time periods. These reclassifications also resulted in a reduction to the Regulated Transmission segment’s rate base by approximately $160 million, which is not expected to materially impact FirstEnergy or the segment’s future earnings. The expected wholesale transmission customer refunds were recognized as a reduction to revenue, and the amount of reclassified transmission capital assets that are not expected to be recoverable were recognized within “Other operating expenses” at the Regulated Transmission segment and on FirstEnergy’s Consolidated Statements of Income.
ATSI Transmission Formula Rate
On May 1, 2020, ATSI filed amendments to its formula rate to recover regulatory assets for certain costs that ATSI incurred as a result of its 2011 move from MISO to PJM, certain costs allocated to ATSI by FERC for transmission projects that were constructed by other MISO transmission owners, and certain costs for transmission-related vegetation management programs. A portion of these costs would have been charged to the Ohio Companies. Additionally, ATSI proposed certain income tax-related adjustments and certain tariff changes addressing the revenue credit components of the formula rate template. On June 30, 2020, FERC issued an initial order accepting the tariff amendments subject to refund and setting the matter for hearing and settlement proceedings. ATSI and the parties to the FERC proceeding subsequently were able to reach settlement, and on October 14, 2021, filed the settlement with FERC. As a result of the filed settlement, FirstEnergy recognized a $21 million pre-tax charge during the third quarter of 2021, which reflects the difference between amounts originally recorded as regulatory assets and amounts which will ultimately be recovered as a result of the pending settlement. From a segment perspective, during the third quarter of 2021, the Regulated Transmission segment recorded a pre-tax charge of $48 million and the Regulated Distribution segment recognized a $27 million reduction to a reserve previously recorded in 2010. In addition, the settlement provides for partial recovery of future incurred costs allocated to ATSI by MISO for the above-referenced transmission projects that were constructed by other MISO transmission owners, which is not expected to have a material impact on FirstEnergy or ATSI. The uncontested settlement was approved by FERC on March 24, 2022 without modification. ATSI’s compliance filing to implement the terms of the settlement was accepted by FERC without modification on June 23, 2022.
FERC Actions on the Tax Act
On March 15, 2018, FERC initiated proceedings on the question of how to address possible changes to ADIT and bonus depreciation as a result of the Tax Act. Such possible changes could impact FERC-jurisdictional rates, including transmission rates. On November 21, 2019, FERC issued a final rule (Order No. 864). Order No. 864 requires utilities with transmission formula rates to update their formula rate templates to include mechanisms to: (i) deduct any excess ADIT from or add any deficient ADIT to their rate base; (ii) raise or lower their income tax allowances by any amortized excess or deficient ADIT; and (iii) incorporate a new permanent worksheet into their rates that will annually track information related to excess or deficient ADIT. Per FERC directives, ATSI submitted its compliance filing on May 1, 2020. MAIT submitted its compliance filing on June 1, 2020. On November 18, 2021, FERC issued an order that: (i) accepted ATSI’s proposed tariff amendments to its rate base adjustment mechanism, effective January 27, 2020; (ii) directed ATSI to make a further compliance filing by January 17, 2022; and (iii) set the amount of ATSI’s recorded ADIT balances as of December 31, 2017, for hearing and settlement procedures. ATSI submitted the compliance filing, and following settlement negotiations, filed an uncontested settlement agreement with FERC on October 18, 2022. There is no timetable for FERC to rule on the settlement agreement. On December 3, 2021, FERC issued an order that (i) accepted MAIT’s proposed tariff amendments to its rate base adjustment mechanism, effective January 27, 2020; (ii) directed MAIT to make a further compliance filing by February 1, 2022; and (iii) set the amount of MAIT’s recorded ADIT balances as of December 31, 2017 for hearing and settlement procedures. MAIT submitted the compliance filing, and following settlement negotiations, filed an uncontested settlement agreement with FERC on October 18, 2022. There is no timetable for
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FERC to rule on the settlement agreement. On May 15, 2020, TrAIL submitted its compliance filing and on June 1, 2020, PATH submitted its required compliance filing. On May 4, 2021, FERC staff requested additional information about PATH’s proposed rate base adjustment mechanism, and PATH submitted the requested information on June 3, 2021. On July 12, 2021, FERC staff requested additional information about TrAIL’s proposed rate base adjustment mechanism. TrAIL filed its response on August 6, 2021. On March 31, 2022, FERC issued an order, ruling that TrAIL’s compliance filing partially complied with the requirements of Order No. 864 and directing TrAIL to submit a further compliance filing to address certain additional items that according to FERC will further enhance transparency. TrAIL submitted the compliance filing on May 31, 2022, and FERC accepted the compliance filing by letter order dated August 30, 2022. On April 27, 2022, FERC issued an order on PATH’s compliance filing, ruling that it partially complied with the requirements of Order No. 864 and directing PATH to submit a further compliance filing to address certain additional items. PATH submitted the compliance filing on June 27, 2022. MP, WP and PE (as holders of a “stated” transmission rate when Order No. 864 issued) are addressing these requirements in the transmission formula rates amendments that were filed on October 29, 2020, and which have been accepted by FERC effective January 1, 2021, subject to refund, pending further hearing and settlement procedures. MP, WP and PE are engaged in settlement negotiations with the parties to the transmission formula rate amendments proceeding.
ATSI ROE – Ohio Consumers Counsel v. ATSI, et al.
On February 24, 2022, the OCC filed a complaint with FERC against ATSI, AEP’s Ohio affiliates and AEPSC, and Duke Energy Ohio, LLC asserting that FERC should reduce the ROE utilized in the utilities’ transmission formula rates by eliminating the 50 basis point adder associated with RTO membership, effective February 24, 2022. The OCC contends that this result is required because Ohio law mandates that transmission owning utilities join an RTO and that the 50 basis point adder is applicable only where RTO membership is voluntary. ATSI disagrees with the OCC’s characterization and set forth its reasons for such disagreement in a combined motion to dismiss and answer that was filed with FERC on March 31, 2022. On that same date, AEP and Duke filed separate motions to dismiss and answers to the OCC complaint, and several other parties filed comments. ATSI filed a response to certain intervenors’ filings on April 28, 2022. FirstEnergy is unable to predict the outcome of this proceeding, but it is not expected to have a material impact.
Transmission ROE Methodology
On March 20, 2020, FERC initiated a rulemaking proceeding on the transmission rate incentives provisions of Section 219 of the 2005 Energy Policy Act. FirstEnergy submitted comments through EEI and as part of a consortium of PJM Transmission Owners. In a supplemental rulemaking proceeding that was initiated on April 15, 2021, FERC requested comments on, among other things, whether to require utilities that have been members of an RTO for three years or more and that have been collecting an “RTO membership” ROE incentive adder to file tariff updates that would terminate collection of the incentive adder. Initial comments on the proposed rule were filed on June 25, 2021, and reply comments were filed on July 26, 2021. The rulemaking remains pending before FERC. FirstEnergy is a member of PJM and its transmission subsidiaries could be affected by the supplemental proposed rule. FirstEnergy participated in comments on the supplemental rulemaking that were submitted by a group of PJM transmission owners and by various industry trade groups. If there were to be any changes to FirstEnergy transmission incentive ROE, such changes will be applied on a prospective basis.
Allegheny Power Zone Transmission Formula Rate Filings
On October 29, 2020, MP, PE and WP filed tariff amendments with FERC to implement a forward-looking formula transmission rate, to be effective January 1, 2021. In addition, on October 30, 2020, KATCo filed a proposed new tariff to establish a forward-looking formula rate and requested that the new rate become effective January 1, 2021. In its filing, KATCo explained that while it currently owns no transmission assets, it may build new transmission facilities in the Allegheny zone, and that it may seek required state and federal authorizations to acquire transmission assets from PE and WP by January 1, 2022. These transmission rate filings were accepted for filing by FERC on December 31, 2020, effective January 1, 2021, subject to refund, pending further hearing and settlement procedures and were consolidated into a single proceeding. MP, PE and WP, and KATCo are engaged in settlement negotiations with the other parties to the formula rate proceedings.
8. COMMITMENTS, GUARANTEES AND CONTINGENCIES
GUARANTEES AND OTHER ASSURANCES
FirstEnergy has various financial and performance guarantees and indemnifications, which are issued in the normal course of business. These contracts include performance guarantees, stand-by letters of credit, debt guarantees, surety bonds and indemnifications. FirstEnergy enters into these arrangements to facilitate commercial transactions with third parties by enhancing the value of the transaction to the third party.
As of September 30, 2022, outstanding guarantees and other assurances aggregated approximately $1.1 billion, consisting of parental guarantees on behalf of its consolidated subsidiaries ($591 million) and other assurances ($460 million).
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COLLATERAL AND CONTINGENT-RELATED FEATURES
In the normal course of business, FE and its subsidiaries may enter into physical or financially settled contracts for the sale and purchase of electric capacity, energy, fuel and emission allowances. Certain agreements contain provisions that require FE or its subsidiaries to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon FE’s or its subsidiaries’ credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty.
As of September 30, 2022, $36 million of collateral has been posted by FE or its subsidiaries and is included in “Prepaid taxes and other current assets” on FirstEnergy’s Consolidated Balance Sheets. FE or its subsidiaries are holding $321 million of cash collateral as of September 30, 2022, from certain generation suppliers, primarily due to the rise in power prices, and such amount is included in “Other current liabilities” on FirstEnergy’s Consolidated Balance Sheets.
These credit-risk-related contingent features stipulate that if the subsidiary were to be downgraded or lose its investment grade credit rating (based on its senior unsecured debt rating), it would be required to provide additional collateral. The following table discloses the potential additional credit rating contingent contractual collateral obligations as of September 30, 2022:
| Potential Collateral Obligations | Utilities and Transmission Companies | FE | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Contractual Obligations for Additional Collateral | |||||||||||||||||||||||
| Upon Further Downgrade | $ | 64 | $ | — | $ | 64 | |||||||||||||||||
Surety Bonds (Collateralized Amount) (1) | 61 | 249 | 310 | ||||||||||||||||||||
| Total Exposure from Contractual Obligations | $ | 125 | $ | 249 | $ | 374 | |||||||||||||||||
(1) Surety Bonds are not tied to a credit rating. Surety Bonds’ impact assumes maximum contractual obligations, which is ordinarily 100% of the face amount of the surety bond except with the respect to $39 million of surety bond obligations for which the collateral obligation is capped at 60% of the face amount, and typical obligations require 30 days to cure.
ENVIRONMENTAL MATTERS
Various federal, state and local authorities regulate FirstEnergy with regard to air and water quality, hazardous and solid waste disposal, and other environmental matters. While FirstEnergy’s environmental policies and procedures are designed to achieve compliance with applicable environmental laws and regulations, such laws and regulations are subject to periodic review and potential revision by the implementing agencies. FirstEnergy cannot predict the timing or ultimate outcome of any of these reviews or how any future actions taken as a result thereof may materially impact its business, results of operations, cash flows and financial condition.
Clean Air Act
FirstEnergy complies with SO2 and NOx emission reduction requirements under the CAA and SIP(s) by burning lower-sulfur fuel, utilizing combustion controls and post-combustion controls and/or using emission allowances.
CSAPR requires reductions of NOx and SO2 emissions in two phases (2015 and 2017), ultimately capping SO2 emissions in affected states to 2.4 million tons annually and NOx emissions to 1.2 million tons annually. CSAPR allows trading of NOx and SO2 emission allowances between power plants located in the same state and interstate trading of NOx and SO2 emission allowances with some restrictions. On July 28, 2015, the D.C. Circuit ordered the EPA to reconsider the CSAPR caps on NOx and SO2 emissions from power plants in 13 states, including West Virginia. This followed the 2014 U.S. Supreme Court ruling generally upholding the EPA’s regulatory approach under CSAPR but questioning whether the EPA required upwind states to reduce emissions by more than their contribution to air pollution in downwind states. The EPA issued a CSAPR Update on September 7, 2016, reducing summertime NOx emissions from power plants in 22 states in the eastern U.S., including West Virginia, beginning in 2017. Various states and other stakeholders appealed the CSAPR Update to the D.C. Circuit in November and December 2016. On September 13, 2019, the D.C. Circuit remanded the CSAPR Update to the EPA citing that the rule did not eliminate upwind states’ significant contributions to downwind states’ air quality attainment requirements within applicable attainment deadlines.
Also in March 2018, the State of New York filed a CAA Section 126 petition with the EPA alleging that NOx emissions from nine states (including West Virginia) significantly contribute to New York’s inability to attain the ozone NAAQS. The petition sought suitable emission rate limits for large stationary sources that are allegedly affecting New York’s air quality within the three years allowed by CAA Section 126. On September 20, 2019, the EPA denied New York’s CAA Section 126 petition. On October 29, 2019, the State of New York appealed the denial of its petition to the D.C. Circuit. On July 14, 2020, the D.C. Circuit reversed and remanded the New York petition to the EPA for further consideration. On March 15, 2021, the EPA issued a revised CSAPR Update that addresses, among other things, the remands of the prior CSAPR Update and the New York Section 126 petition. In December 2021, MP purchased NOx emissions allowances to comply with 2021 ozone season requirements. On April 6, 2022,
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the EPA published proposed rules seeking to impose further significant reductions in EGU NOx emissions in 25 states, including West Virginia. The EPA held a virtual public hearing regarding the proposed rules on April 21, 2022, and MP submitted written comments on June 21, 2022. Depending on the outcome of any appeals and how the EPA and the states ultimately implement the revised CSAPR Update, the future cost of compliance may materially impact FirstEnergy’s operations, cash flows and financial condition.
Climate Change
There are several initiatives to reduce GHG emissions at the state, federal and international level. Certain northeastern states are participating in the RGGI and western states led by California, have implemented programs, primarily cap and trade mechanisms, to control emissions of certain GHGs. Additional policies reducing GHG emissions, such as demand reduction programs, renewable portfolio standards and renewable subsidies have been implemented across the nation.
In September 2016, the U.S. joined in adopting the agreement reached on December 12, 2015, at the United Nations Framework Convention on Climate Change meetings in Paris to reduce GHGs. The Paris Agreement’s non-binding obligations to limit global warming to below two degrees Celsius became effective on November 4, 2016. On June 1, 2017, the Trump Administration announced that the U.S. would cease all participation in the Paris Agreement. On January 20, 2021, President Biden signed an executive order re-adopting the agreement on behalf of the U.S. In November 2020, FirstEnergy published its Climate Story which includes its climate position and strategy, as well as a new comprehensive and ambitious GHG emission goal. FirstEnergy pledged to achieve carbon neutrality by 2050 and set an interim goal for a 30% reduction in GHGs within FirstEnergy’s direct operational control by 2030, based on 2019 levels. Future resource plans to achieve carbon reductions, including any determination of retirement dates of the regulated coal-fired generation, will be developed by working collaboratively with regulators in West Virginia. Determination of the useful life of the regulated coal-fired generation could result in changes in depreciation, and/or continued collection of net plant in rates after retirement, securitization, sale, impairment, or regulatory disallowances. If MP is unable to recover these costs, it could have a material adverse effect on FirstEnergy’s and/or MP’s financial condition, results of operations, and cash flow. Furthermore, FirstEnergy cannot currently estimate the financial impact of climate change policies, although potential legislative or regulatory programs restricting CO2 emissions, or litigation alleging damages from GHG emissions, could require material capital and other expenditures or result in changes to its operations.
In December 2009, the EPA released its final “Endangerment and Cause or Contribute Findings for GHGs under the Clean Air Act,” concluding that concentrations of several key GHGs constitute an “endangerment” and may be regulated as “air pollutants” under the CAA and mandated measurement and reporting of GHG emissions from certain sources, including electric generating plants. Subsequently, the EPA released its final CPP regulations in August 2015 to reduce CO2 emissions from existing fossil fuel-fired EGUs and finalized separate regulations imposing CO2 emission limits for new, modified, and reconstructed fossil fuel-fired EGUs. Numerous states and private parties filed appeals and motions to stay the CPP with the D.C. Circuit in October 2015. On February 9, 2016, the U.S. Supreme Court stayed the rule during the pendency of the challenges to the D.C. Circuit and U.S. Supreme Court. On March 28, 2017, an executive order, entitled “Promoting Energy Independence and Economic Growth,” instructed the EPA to review the CPP and related rules addressing GHG emissions and suspend, revise or rescind the rules if appropriate. On June 19, 2019, the EPA repealed the CPP and replaced it with the ACE rule that established guidelines for states to develop standards of performance to address GHG emissions from existing coal-fired generation. On January 19, 2021, the D.C. Circuit vacated and remanded the ACE rule declaring that the EPA was “arbitrary and capricious” in its rule making and, as such, the ACE rule is no longer in effect and all actions thus far taken by states to implement the federally mandated rule are now null and void. Vacating the ACE Rule had the unintended effect of reinstating the CPP because the repeal of the CPP was a provision within the ACE Rule. The D.C. Circuit decision was appealed by several states and interested parties, including West Virginia, arguing that the EPA did not have the authorization under Section 111(d) of the Clean Air Act to require “generation shifting” as a way to limit GHGs. On June 30, 2022, the U.S. Supreme Court held that the EPA’s regulation of GHGs under Section 111(d) of the Clean Air Act was not authorized by Congress and remanded the Rule to the EPA for further reconsideration.
Clean Water Act
Various water quality regulations, the majority of which are the result of the federal CWA and its amendments, apply to FirstEnergy’s facilities. In addition, the states in which FirstEnergy operates have water quality standards applicable to FirstEnergy’s operations.
On September 30, 2015, the EPA finalized new, more stringent effluent limits for the Steam Electric Power Generating category (40 CFR Part 423) for arsenic, mercury, selenium and nitrogen for wastewater from wet scrubber systems and zero discharge of pollutants in ash transport water. The treatment obligations were to phase-in as permits are renewed on a five-year cycle from 2018 to 2023. However, on April 13, 2017, the EPA granted a Petition for Reconsideration and on September 18, 2017, the EPA postponed certain compliance deadlines for two years. On August 31, 2020, the EPA issued a final rule revising the effluent limits for discharges from wet scrubber systems, retaining the zero-discharge standard for ash transport water, (with some limited discharge allowances), and extending the deadline for compliance to December 31, 2025 for both. In addition, the EPA allows for less stringent limits for sub-categories of generating units based on capacity utilization, flow volume from the scrubber system, and unit retirement date. The EPA is reconsidering the ELG rule with a publicly announced target of issuing a proposed revised rule in the Fall of 2022 and a final rule by the Spring of 2023. In the interim, the rule issued on August 31, 2020, remains in effect.
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Depending on the outcome of appeals and how final rules are ultimately implemented, the compliance with these standards, could require additional capital expenditures or changes in operations at Ft. Martin and Harrison power stations from what was filed with the WVPSC in December 2021 that seeks approval of environmental compliance projects to comply with the EPA’s 2020 ELG Rule.
Regulation of Waste Disposal
Federal and state hazardous waste regulations have been promulgated as a result of the RCRA, as amended, and the Toxic Substances Control Act. Certain CCRs, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA’s evaluation of the need for future regulation.
In April 2015, the EPA finalized regulations for the disposal of CCRs (non-hazardous), establishing national standards for landfill design, structural integrity design and assessment criteria for surface impoundments, groundwater monitoring and protection procedures and other operational and reporting procedures to assure the safe disposal of CCRs from electric generating plants. On September 13, 2017, the EPA announced that it would reconsider certain provisions of the final regulations. On July 29, 2020, the EPA published a final rule again revising the date that certain CCR impoundments must cease accepting waste and initiate closure to April 11, 2021. The final rule also allows for an extension of the closure deadline based on meeting proscribed site-specific criteria. On November 30, 2020, AE Supply submitted a closure deadline extension request to the EPA seeking to extend the closure date of McElroy's Run CCR impoundment facility until 2024, which request is pending technical review by the EPA. AE Supply continues to operate McElroy’s Run as a disposal facility for FG’s Pleasants Power Station.
FE or its subsidiaries have been named as potentially responsible parties at waste disposal sites, which may require cleanup under the CERCLA. Allegations of disposal of hazardous substances at historical sites and the liability involved are often unsubstantiated and subject to dispute; however, federal law provides that all potentially responsible parties for a particular site may be liable on a joint and several basis. Environmental liabilities that are considered probable have been recognized on the Consolidated Balance Sheets as of September 30, 2022, based on estimates of the total costs of cleanup, FirstEnergy’s proportionate responsibility for such costs and the financial ability of other unaffiliated entities to pay. Total liabilities of approximately $103 million have been accrued through September 30, 2022, of which, approximately $65 million are for environmental remediation of former MGP and gas holder facilities in New Jersey, which are being recovered by JCP&L through a non-bypassable SBC. FE or its subsidiaries could be found potentially responsible for additional amounts or additional sites, but the loss or range of losses cannot be determined or reasonably estimated at this time.
OTHER LEGAL PROCEEDINGS
United States v. Larry Householder, et al.
On July 21, 2020, a complaint and supporting affidavit containing federal criminal allegations were unsealed against the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. Also, on July 21, 2020, and in connection with the investigation, FirstEnergy received subpoenas for records from the U.S. Attorney’s Office for the Southern District Ohio. FirstEnergy was not aware of the criminal allegations, affidavit or subpoenas before July 21, 2020.
On July 21, 2021, FE entered into a three-year DPA with the U.S. Attorney’s Office that, subject to court proceedings, resolves this matter. Under the DPA, FE has agreed to the filing of a criminal information charging FE with one count of conspiracy to commit honest services wire fraud. The DPA requires that FirstEnergy, among other obligations: (i) continue to cooperate with the U.S. Attorney’s Office in all matters relating to the conduct described in the DPA and other conduct under investigation by the U.S. government; (ii) pay a criminal monetary penalty totaling $230 million within sixty days, which shall consist of (x) $115 million paid by FE to the United States Treasury and (y) $115 million paid by FE to the ODSA to fund certain assistance programs, as determined by the ODSA, for the benefit of low-income Ohio electric utility customers; (iii) publish a list of all payments made in 2021 to either 501(c)(4) entities or to entities known by FirstEnergy to be operating for the benefit of a public official, either directly or indirectly, and update the same on a quarterly basis during the term of the DPA; (iv) issue a public statement, as dictated in the DPA, regarding FE’s use of 501(c)(4) entities; and (v) continue to implement and review its compliance and ethics program, internal controls, policies and procedures designed, implemented and enforced to prevent and detect violations of the U.S. laws throughout its operations, and to take certain related remedial measures. The $230 million payment will neither be recovered in rates or charged to FirstEnergy customers nor will FirstEnergy seek any tax deduction related to such payment. The entire amount of the monetary penalty was recognized as expense in the second quarter of 2021 and paid in the third quarter of 2021. Under the terms of the DPA, the criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA.
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Legal Proceedings Relating to United States v. Larry Householder, et al.
On August 10, 2020, the SEC, through its Division of Enforcement, issued an order directing an investigation of possible securities laws violations by FE, and on September 1, 2020, issued subpoenas to FE and certain FE officers. On April 28, 2021, and July 11, 2022, the SEC issued additional subpoenas to FE, with which FE has complied. While no contingency has been reflected in its consolidated financial statements, FE believes that it is probable that it will incur a loss in connection with the resolution of the SEC investigation. Given the ongoing nature and complexity of the review, inquiries and investigations, FE cannot yet reasonably estimate a loss or range of loss that may arise from the resolution of the SEC investigation.
In addition to the subpoenas referenced above under “—United States v. Larry Householder, et. al.” and the SEC investigation, certain FE stockholders and FirstEnergy customers filed several lawsuits against FirstEnergy and certain current and former directors, officers and other employees, and the complaints in each of these suits is related to allegations in the complaint and supporting affidavit relating to HB 6 and the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. The plaintiffs in each of the below cases seek, among other things, to recover an unspecified amount of damages (unless otherwise noted). Unless otherwise indicated, no contingency has been reflected in FirstEnergy’s consolidated financial statements with respect to these lawsuits as a loss is neither probable, nor is a loss or range of a loss reasonably estimable.
•In re FirstEnergy Corp. Securities Litigation (S.D. Ohio); on July 28, 2020 and August 21, 2020, purported stockholders of FE filed putative class action lawsuits alleging violations of the federal securities laws. Those actions have been consolidated and a lead plaintiff, the Los Angeles County Employees Retirement Association, has been appointed by the court. A consolidated complaint was filed on February 26, 2021. The consolidated complaint alleges, on behalf of a proposed class of persons who purchased FE securities between February 21, 2017 and July 21, 2020, that FE and certain current or former FE officers violated Sections 10(b) and 20(a) of the Exchange Act by issuing misrepresentations or omissions concerning FE’s business and results of operations. The consolidated complaint also alleges that FE, certain current or former FE officers and directors, and a group of underwriters violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 as a result of alleged misrepresentations or omissions in connection with offerings of senior notes by FE in February and June 2020. FE believes that it is probable that it will incur a loss in connection with the resolution of this lawsuit. Given the ongoing nature and complexity of such litigation, FE cannot yet reasonably estimate a loss or range of loss.
•MFS Series Trust I, et al. v. FirstEnergy Corp., et al. and Brighthouse Funds II – MFS Value Portfolio, et al. v. FirstEnergy Corp., et al. (S.D. Ohio) on December 17, 2021 and February 21, 2022, purported stockholders of FE filed complaints against FE, certain current and former officers, and certain current and former officers of EH. The complaints allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act by issuing alleged misrepresentations or omissions regarding FE’s business and its results of operations, and seek the same relief as the In re FirstEnergy Corp. Securities Litigation described above. FE believes that it is probable that it will incur losses in connection with the resolution of these lawsuits. Given the ongoing nature and complexity of such litigation, FE cannot yet reasonably estimate a loss or range of loss.
•State of Ohio ex rel. Dave Yost, Ohio Attorney General v. FirstEnergy Corp., et al. and City of Cincinnati and City of Columbus v. FirstEnergy Corp. (Common Pleas Court, Franklin County, OH, all actions have been consolidated); on September 23, 2020 and October 27, 2020, the OAG and the cities of Cincinnati and Columbus, respectively, filed complaints against several parties including FE (the OAG also named FES as a defendant), each alleging civil violations of the Ohio Corrupt Activity Act in connection with the passage of HB 6. On January 13, 2021, the OAG filed a motion for a temporary restraining order and preliminary injunction against FirstEnergy seeking to enjoin FirstEnergy from collecting the Ohio Companies' decoupling rider. On January 31, 2021, FE reached a partial settlement with the OAG and the cities of Cincinnati and Columbus with respect to the temporary restraining order and preliminary injunction request and related issues. In connection with the partial settlement, the Ohio Companies filed an application on February 1, 2021, with the PUCO to set their respective decoupling riders (CSR) to zero. On February 2, 2021, the PUCO approved the application of the Ohio Companies setting the rider to zero and no additional customer bills will include new decoupling rider charges after February 8, 2021. The cases are stayed pending final resolution of the United States v. Larry Householder, et al. criminal proceeding described above, although on August 13, 2021, new defendants were added to the complaint, including two former officers of FirstEnergy. On November 9, 2021, the OAG filed a motion to lift the agreed-upon stay, which FE opposed on November 19, 2021; the motion remains pending. On December 2, 2021, the cities and FE entered a stipulated dismissal with prejudice of the cities’ suit.
•Smith v. FirstEnergy Corp. et al., Buldas v. FirstEnergy Corp. et al., and Hudock and Cameo Countertops, Inc. v. FirstEnergy Corp. et al. (S.D. Ohio, all actions have been consolidated); on July 27, 2020, July 31, 2020, and August 5, 2020, respectively, purported customers of FE filed putative class action lawsuits against FE and FESC, as well as certain current and former FE officers, alleging civil Racketeer Influenced and Corrupt Organizations Act violations and related state law claims. FE agreed to a class settlement to resolve these claims on April 11, 2022. In the fourth quarter of 2021, FirstEnergy recognized a pre-tax reserve of $37.5 million in the aggregate with respect to these lawsuits and the Emmons lawsuit below. On June 22, 2022, the court preliminarily approved the class settlement and scheduled the final fairness hearing for November 9, 2022.
•Emmons v. FirstEnergy Corp. et al. (Common Pleas Court, Cuyahoga County, OH); on August 4, 2020, a purported customer of FirstEnergy filed a putative class action lawsuit against FE, FESC, the Ohio Companies, along with FES, alleging several causes of action, including negligence and/or gross negligence, breach of contract, unjust enrichment,
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and unfair or deceptive consumer acts or practices. FE agreed to a class settlement to resolve these claims on April 11, 2022. In the fourth quarter of 2021, FirstEnergy recognized a pre-tax reserve of $37.5 million in the aggregate with respect to this lawsuit and the lawsuits above consolidated with Smith in the S.D. Ohio alleging, among other things, civil violations of the Racketeer Influenced and Corrupt Organizations Act. On June 22, 2022, the court preliminarily approved the class settlement and scheduled the final fairness hearing for November 9, 2022.
On February 9, 2022, FE, acting through the SLC, agreed to a settlement term sheet to resolve the following shareholder derivative lawsuits relating to HB 6 and the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder that were filed in the S.D. Ohio, the N.D. Ohio, and the Ohio Court of Common Pleas, Summit County:
•Gendrich v. Anderson, et al. and Sloan v. Anderson, et al. (Common Pleas Court, Summit County, OH, all actions have been consolidated); on July 26, 2020 and July 31, 2020, respectively, purported stockholders of FE filed shareholder derivative action lawsuits against certain FE directors and officers, alleging, among other things, breaches of fiduciary duty.
•Miller v. Anderson, et al. (N.D. Ohio); Bloom, et al. v. Anderson, et al.; Employees Retirement System of the City of St. Louis v. Jones, et al.; Electrical Workers Pension Fund, Local 103, I.B.E.W. v. Anderson et al.; Massachusetts Laborers Pension Fund v. Anderson et al.; The City of Philadelphia Board of Pensions and Retirement v. Anderson et al.; Atherton v. Dowling et al.; Behar v. Anderson, et al. (S.D. Ohio, all actions have been consolidated); beginning on August 7, 2020, purported stockholders of FE filed shareholder derivative actions alleging the FE Board and officers breached their fiduciary duties and committed violations of Section 14(a) of the Exchange Act.
On March 11, 2022, the parties executed a stipulation and agreement of settlement, and filed a motion the same day requesting preliminary settlement approval in the S.D. Ohio, which the S.D Ohio granted on May 9, 2022. Subsequently, following a hearing on August 4, 2022, the S.D. Ohio granted final approval of the settlement on August 24, 2022. The settlement agreement is expected to resolve fully these shareholder derivative lawsuits and includes a series of corporate governance enhancements, that have resulted in the following:
•Six members of the FE Board, Messrs. Michael J. Anderson, Donald T. Misheff, Thomas N. Mitchell, Christopher D. Pappas and Luis A. Reyes, and Ms. Julia L. Johnson did not stand for re-election at FE’s 2022 annual shareholder meeting;
•A special FE Board committee of at least three recently appointed independent directors was formed to initiate a review process of the then current senior executive team. The review of the senior executive team by the special FE Board committee and the FE Board was completed in September 2022;
•The FE Board will oversee FE’s lobbying and political activities, including periodically reviewing and approving political and lobbying action plans prepared by management;
•An FE Board committee of recently appointed independent directors will oversee the implementation and third-party audits of the FE Board-approved action plans with respect to political and lobbying activities;
•FE will implement enhanced disclosure to shareholders of political and lobbying activities, including enhanced disclosure in its annual proxy statement; and
•FE will further align financial incentives of senior executives to proactive compliance with legal and ethical obligations.
The settlement also includes a payment to FE of $180 million, to be paid by insurance after the judgment has become final, less $36 million in court-ordered attorney’s fees awarded to plaintiffs. On September 20, 2022, a purported FE stockholder filed a motion for reconsideration of the S.D. Ohio’s final settlement approval. The parties filed oppositions to that motion on October 11, 2022. The N.D. Ohio matter remains pending. On June 2, 2022, the N.D. Ohio entered an order to show cause why the court should not appoint new plaintiffs’ counsel, and thereafter, on June 10, 2022, the parties filed a joint motion to dismiss the matter without prejudice, which the N.D. Ohio denied on July 5, 2022. On August 15, 2022, the N.D. Ohio issued an order stating its intention to appoint one group of applicants as new plaintiffs’ counsel, and on August 22, 2022, the N.D. Ohio ordered that any objections to the appointment be submitted by August 26, 2022. The parties filed their objections by that deadline, and on September 2, 2022, the applicants responded to those objections. In the meantime, on August 25, 2022, a purported FE stockholder represented by the applicants filed a motion to intervene, attaching a proposed complaint-in-intervention purporting to assert claims that the FE Board and officers breached their fiduciary duties and committed violations of Section 14(a) of the Exchange Act as well as a claim against a third party for professional negligence and malpractice. The parties filed oppositions to that motion to intervene on September 8, 2022, and the proposed intervenor's reply in support of his motion to intervene was filed on September 22, 2022.
On August 24, 2022, the parties filed a joint motion to dismiss the action pending in the N.D. Ohio based upon and in light of the final approval of the settlement by the S.D. Ohio. On August 30, 2022, the parties filed a joint motion to dismiss the state court action, which the court dismissed with prejudice on September 2, 2022.
In letters dated January 26, and February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the Division is conducting an investigation of FirstEnergy’s lobbying and governmental affairs activities concerning HB 6, and staff directed FirstEnergy to preserve and maintain all documents and information related to the same as such have been developed as part of an ongoing non-public audit being conducted by FERC's Division of Audits and Accounting. FirstEnergy believes that it
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is probable that it will incur a loss in connection with the resolution of the FERC investigation. As FirstEnergy has entered into settlement discussions with FERC, it currently expects that its loss in connection with the resolution of the FERC investigation would not exceed $5 million.
FE terminated Charles E. Jones as its chief executive officer effective October 29, 2020. As a result of Mr. Jones’ termination, and due to the determination of a committee of independent members of the FE Board that Mr. Jones violated certain FirstEnergy policies and its code of conduct, all grants, awards and compensation under FirstEnergy’s short-term incentive compensation program and long-term incentive compensation program with respect to Mr. Jones that were outstanding on the date of termination were forfeited. In November 2021, after a determination by the Compensation Committee of the FE Board that a demand for recoupment was warranted pursuant to the Recoupment Policy, FE made a recoupment demand to Mr. Jones of compensation previously paid to him totaling approximately $56 million, the maximum amount permissible under the Recoupment Policy. As such, any amounts payable to Mr. Jones under the EDCP will be set off against FE’s recoupment demand. There can be no assurance that the efforts to seek recoupment from Mr. Jones will be successful and no portion of the approximately $56 million recoupment demand has been recognized in FirstEnergy’s financial statements as of September 30, 2022.
The outcome of any of these lawsuits, governmental investigations and audit is uncertain and could have a material adverse effect on FE’s or its subsidiaries’ reputation, business, financial condition, results of operations, liquidity, and cash flows.
Other Legal Matters
There are various lawsuits, claims (including claims for asbestos exposure) and proceedings related to FirstEnergy’s normal business operations pending against FE or its subsidiaries. The loss or range of loss in these matters is not expected to be material to FE or its subsidiaries. The other potentially material items not otherwise discussed above are described under Note 7, “Regulatory Matters.”
FirstEnergy accrues legal liabilities only when it concludes that it is probable that it has an obligation for such costs and can reasonably estimate the amount of such costs. In cases where FirstEnergy determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss if such estimate can be made. If it were ultimately determined that FE or its subsidiaries have legal liability or are otherwise made subject to liability based on any of the matters referenced above, it could have a material adverse effect on FE’s or its subsidiaries’ financial condition, results of operations, and cash flows.
9. SEGMENT INFORMATION
FE and its subsidiaries are principally involved in the transmission, distribution and generation of electricity through its reportable segments, Regulated Distribution and Regulated Transmission. FirstEnergy evaluates segment performance based on Earnings attributable to FE.
The Regulated Distribution segment distributes electricity through FirstEnergy’s ten utility operating companies, serving approximately six million customers within 65,000 square miles of Ohio, Pennsylvania, West Virginia, Maryland, New Jersey and New York, and purchases power for its POLR, SOS, SSO and default service requirements in Ohio, Pennsylvania, New Jersey and Maryland. This segment also controls 3,580 MWs of regulated electric generation capacity located primarily in West Virginia and Virginia. The segment’s results reflect the costs of securing and delivering electric generation from transmission facilities to customers, including the deferral and amortization of certain related costs.
On April 6, 2020, JCP&L signed an asset purchase agreement with Yards Creek Energy, LLC, a subsidiary of LS Power to sell its 50% interest in the Yards Creek pumped-storage hydro generation facility. With the receipt of all required regulatory approvals, the transaction was consummated on March 5, 2021 and resulted in a $109 million gain within the Regulated Distribution segment in the first quarter of 2021. The gain from the transaction was applied against and reduced JCP&L’s existing regulatory asset for previously deferred storm costs and, as a result, was offset by expense in the “Amortization (deferral) of regulatory assets, net”, line on the Consolidated Statements of Income, resulting in no earnings impact to FirstEnergy or JCP&L.
The Regulated Transmission segment provides transmission infrastructure owned and operated by the Transmission Companies and certain of FirstEnergy’s utilities (JCP&L, MP, PE and WP) to transmit electricity from generation sources to distribution facilities. The segment’s revenues are primarily derived from forward-looking formula rates. Under forward-looking formula rates, the revenue requirement is updated annually based on a projected rate base and projected costs, which is subject to an annual true-up based on actual rate base and costs. The segment’s results also reflect the net transmission expenses related to the delivery of electricity on FirstEnergy’s transmission facilities. On November 6, 2021, FirstEnergy, along with FET, entered into the FET P&SA, with Brookfield and Brookfield Guarantors pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction closed on May 31, 2022. KATCo, which was a subsidiary of FET, became a wholly owned subsidiary of FE prior to the closing of the transaction and remains in the Regulated Transmission segment.
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Corporate/Other reflects corporate support and other costs not charged or attributable to the Utilities or Transmission Companies, including FE’s retained Pension and OPEB assets and liabilities of the FES Debtors, interest expense on FE’s holding company debt and other investments or businesses that do not constitute an operating segment. Reconciling adjustments for the elimination of inter-segment transactions are shown separately in the following table of Segment Financial Information. As of September 30, 2022, 67 MWs of electric generating capacity, representing AE Supply’s OVEC capacity entitlement, was also included in Corporate/Other for segment reporting. As of September 30, 2022, Corporate/Other had approximately $5.4 billion of FE holding company debt.
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Financial information for FirstEnergy’s business segments and reconciliations to consolidated amounts is presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| External revenues | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 2,965 | $ | 2,708 | $ | 7,867 | $ | 7,237 | ||||||||||||||||||
| Regulated Transmission | 503 | 411 | 1,394 | 1,223 | ||||||||||||||||||||||
| Corporate/Other | 7 | 5 | 21 | 12 | ||||||||||||||||||||||
| Reconciling Adjustments | — | — | — | — | ||||||||||||||||||||||
| Total external revenues | $ | 3,475 | $ | 3,124 | $ | 9,282 | $ | 8,472 | ||||||||||||||||||
| Internal revenues | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 58 | $ | 51 | $ | 171 | $ | 150 | ||||||||||||||||||
| Regulated Transmission | — | 4 | 3 | 10 | ||||||||||||||||||||||
| Corporate/Other | — | — | — | — | ||||||||||||||||||||||
| Reconciling Adjustments | (58) | (55) | (174) | (160) | ||||||||||||||||||||||
| Total internal revenues | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Total revenues | $ | 3,475 | $ | 3,124 | $ | 9,282 | $ | 8,472 | ||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 242 | $ | 229 | $ | 719 | $ | 684 | ||||||||||||||||||
| Regulated Transmission | 72 | 82 | 245 | 240 | ||||||||||||||||||||||
| Corporate/Other | 3 | (1) | 6 | 1 | ||||||||||||||||||||||
| Reconciling Adjustments | 15 | 16 | 50 | 47 | ||||||||||||||||||||||
| Total depreciation | $ | 332 | $ | 326 | $ | 1,020 | $ | 972 | ||||||||||||||||||
| Amortization (deferral) of regulatory assets, net | ||||||||||||||||||||||||||
| Regulated Distribution | $ | (85) | $ | 29 | $ | (250) | $ | 159 | ||||||||||||||||||
| Regulated Transmission | (1) | 1 | (2) | 12 | ||||||||||||||||||||||
| Corporate/Other | — | — | — | — | ||||||||||||||||||||||
| Reconciling Adjustments | — | — | — | — | ||||||||||||||||||||||
| Total amortization (deferral) of regulatory assets, net | $ | (86) | $ | 30 | $ | (252) | $ | 171 | ||||||||||||||||||
| DPA penalty | ||||||||||||||||||||||||||
| Corporate/Other | $ | — | $ | — | $ | — | $ | 230 | ||||||||||||||||||
| Total DPA penalty | $ | — | $ | — | $ | — | $ | 230 | ||||||||||||||||||
| Miscellaneous income (expense), net | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 90 | $ | 102 | $ | 269 | $ | 297 | ||||||||||||||||||
| Regulated Transmission | 17 | 12 | 30 | 34 | ||||||||||||||||||||||
| Corporate/Other | 85 | 23 | 167 | 59 | ||||||||||||||||||||||
| Reconciling Adjustments | (24) | (1) | (32) | (11) | ||||||||||||||||||||||
| Total miscellaneous income (expense), net | $ | 168 | $ | 136 | $ | 434 | $ | 379 | ||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 132 | $ | 133 | $ | 389 | $ | 392 | ||||||||||||||||||
| Regulated Transmission | 41 | 62 | 155 | 186 | ||||||||||||||||||||||
| Corporate/Other | 99 | 89 | 276 | 288 | ||||||||||||||||||||||
| Reconciling Adjustments | (24) | (1) | (32) | (11) | ||||||||||||||||||||||
| Total interest expense | $ | 248 | $ | 283 | $ | 788 | $ | 855 | ||||||||||||||||||
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| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Income taxes (benefits) | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 92 | $ | 108 | $ | 213 | $ | 261 | ||||||||||||||||||
| Regulated Transmission | 5 | 23 | 85 | 93 | ||||||||||||||||||||||
| Corporate/Other | 8 | (43) | (61) | (83) | ||||||||||||||||||||||
| Reconciling Adjustments | — | — | — | — | ||||||||||||||||||||||
| Total income taxes (benefits) | $ | 105 | $ | 88 | $ | 237 | $ | 271 | ||||||||||||||||||
| Net income (loss) | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 361 | $ | 416 | $ | 828 | $ | 1,003 | ||||||||||||||||||
| Regulated Transmission | 37 | 70 | 290 | 295 | ||||||||||||||||||||||
| Corporate/Other | (54) | (23) | (294) | (442) | ||||||||||||||||||||||
| Reconciling Adjustments | — | — | — | — | ||||||||||||||||||||||
| Total net income (loss) | $ | 344 | $ | 463 | $ | 824 | $ | 856 | ||||||||||||||||||
| Income attributable to noncontrolling interest | ||||||||||||||||||||||||||
| Regulated Transmission | $ | 10 | $ | — | $ | 15 | $ | — | ||||||||||||||||||
| Total income attributable to noncontrolling interest | $ | 10 | $ | — | $ | 15 | $ | — | ||||||||||||||||||
| Earnings attributable to FE | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 361 | $ | 416 | $ | 828 | $ | 1,003 | ||||||||||||||||||
| Regulated Transmission | 27 | 70 | 275 | 295 | ||||||||||||||||||||||
| Corporate/Other | (54) | (23) | (294) | (442) | ||||||||||||||||||||||
| Reconciling Adjustments | — | — | — | — | ||||||||||||||||||||||
| Total earnings attributable to FE | $ | 334 | $ | 463 | $ | 809 | $ | 856 | ||||||||||||||||||
| Property additions | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 390 | $ | 326 | $ | 1,063 | $ | 993 | ||||||||||||||||||
| Regulated Transmission | 236 | 202 | 700 | 732 | ||||||||||||||||||||||
| Corporate/Other | 15 | 14 | 25 | 43 | ||||||||||||||||||||||
| Reconciling Adjustments | — | — | — | — | ||||||||||||||||||||||
| Total property additions | $ | 641 | $ | 542 | $ | 1,788 | $ | 1,768 | ||||||||||||||||||
| (In millions) | As of September 30, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 30,959 | $ | 30,812 | ||||||||||||||||||||||
| Regulated Transmission | 13,211 | 13,237 | ||||||||||||||||||||||||
| Corporate/Other | 681 | 1,383 | ||||||||||||||||||||||||
| Reconciling Adjustments | — | — | ||||||||||||||||||||||||
| Total assets | $ | 44,851 | $ | 45,432 | ||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||||
| Regulated Distribution | $ | 5,004 | $ | 5,004 | ||||||||||||||||||||||
| Regulated Transmission | 614 | 614 | ||||||||||||||||||||||||
| Corporate/Other | — | — | ||||||||||||||||||||||||
| Reconciling Adjustments | — | — | ||||||||||||||||||||||||
| Total goodwill | $ | 5,618 | $ | 5,618 | ||||||||||||||||||||||
10. DISCONTINUED OPERATIONS
FES and FENOC Chapter 11 Bankruptcy Filing
On March 31, 2018, the FES Debtors announced that, in order to facilitate an orderly financial restructuring, they filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court. By eliminating a significant portion of its competitive generation fleet with the deconsolidation of the FES Debtors, FirstEnergy has concluded the FES Debtors meet
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the criteria for discontinued operations, as this represents a significant event in management’s strategic review to exit commodity-exposed generation and transition to a fully regulated company.
Summarized Results of Discontinued Operations
For both the three and nine months ended September 30, 2021, income related to discontinued operations was $47 million primarily related to income tax benefits from the final true-up to the worthless stock deduction and a final federal NOL allocation between the FES Debtors and FirstEnergy resulting from the filing of the 2020 FirstEnergy federal income tax return during the third quarter of 2021. Discontinued operations for the three and nine months ended September 30, 2021 is included within the Corp/Other segment.
FirstEnergy’s Consolidated Statements of Cash Flows combine cash flows from discontinued operations with cash flows from continuing operations within each cash flow category. For the nine months ended September 30, 2021, cash flows from operating activities includes income from discontinued operations of $47 million. There were no cash flows from investing or financing activities from discontinued operations for the nine months ended September 30, 2021.
Income Taxes
For U.S. federal income taxes, the FES Debtors were included in FirstEnergy’s consolidated tax return until emergence from bankruptcy on February 27, 2020. In conjunction with filing the 2020 consolidated federal income tax return during the third quarter of 2021, FirstEnergy computed a final federal NOL allocation between the FES Debtors and FirstEnergy consolidated that resulted in FirstEnergy recording an increase to the consolidated NOL carryforward of approximately $289 million ($61 million tax-effected).
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FIRSTENERGY CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRSTENERGY’S BUSINESS
FE and its subsidiaries are principally involved in the transmission, distribution and generation of electricity through its reportable segments, Regulated Distribution and Regulated Transmission.
The Regulated Distribution segment distributes electricity through FirstEnergy’s ten utility operating companies, serving approximately six million customers within 65,000 square miles of Ohio, Pennsylvania, West Virginia, Maryland, New Jersey and New York, and purchases power for its POLR, SOS, SSO and default service requirements in Ohio, Pennsylvania, New Jersey and Maryland. This segment also controls 3,580 MWs of regulated electric generation capacity located primarily in West Virginia and Virginia. The segment’s results reflect the costs of securing and delivering electric generation from transmission facilities to customers, including the deferral and amortization of certain related costs.
The Regulated Transmission segment provides transmission infrastructure owned and operated by the Transmission Companies and certain of FirstEnergy’s utilities (JCP&L, MP, PE and WP) to transmit electricity from generation sources to distribution facilities. The segment’s revenues are primarily derived from forward-looking formula rates. Under forward-looking formula rates, the revenue requirement is updated annually based on a projected rate base and projected costs, which is subject to an annual true-up based on actual rate base and costs. The segment’s results also reflect the net transmission expenses related to the delivery of electricity on FirstEnergy’s transmission facilities. On November 6, 2021, FirstEnergy, along with FET, entered into the FET P&SA, with Brookfield and Brookfield Guarantors pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction closed on May 31, 2022.
Corporate/Other reflects corporate support and other costs not charged or attributable to the Utilities or Transmission Companies, including FE’s retained Pension and OPEB assets and liabilities of the FES Debtors, interest expense on FE’s holding company debt and other investments or businesses that do not constitute an operating segment. Additionally, reconciling adjustments for the elimination of inter-segment transactions are included in Corporate/Other. As of September 30, 2022, 67 MWs of electric generating capacity, representing AE Supply’s OVEC capacity entitlement, was also included in Corporate/Other for segment reporting. As of September 30, 2022, Corporate/Other had approximately $5.4 billion of FE holding company debt.
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EXECUTIVE SUMMARY
FirstEnergy is a forward-thinking, electric utility centered on integrity, powered by a diverse team of employees, committed to making customers’ lives brighter, the environment better and our communities stronger.
FirstEnergy's core values encompass what matters most to the company. They guide the decisions we make and the actions we take. FirstEnergy's core values should inspire our actions today and shine a light on who we aspire to be in the future.
FirstEnergy Core Values:
•Integrity: We always act ethically with honesty, humility and accountability.
•Safety: We keep ourselves and others safe.
•Diversity, Equity and Inclusion: We embrace differences, ensure every employee is treated fairly and create a culture where everyone feels they belong.
•Performance Excellence: We pursue excellence and seek opportunities for growth, innovation and continuous improvement.
•Stewardship: We positively impact our customers, communities and other stakeholders, and strive to protect the environment.
Employees are encouraged and expected to have conversations with their leaders and peers about the core values and FirstEnergy's commitment to building a culture centered on integrity.
At FirstEnergy, we are dedicated to staying true to our mission and core values. We understand the impact our company can make in the world around us, which means pursuing initiatives and goals that align with our foundational principles, support our ESG and strategic priorities, and positively impact our stakeholders.
To solidify our role as an industry leader, we have developed a long-term strategy with priorities that are centered on our mission statement. These priorities reflect a strong foundation with a customer-centered focus that emphasizes modern experiences, new growth and affordable energy bills, and enables the energy transition to a clean, resilient and secure electric grid.
We are proud of the steps we have already taken to demonstrate our commitment to our strategy and look forward to improving our performance and executing on these strategic priorities.
FirstEnergy's Business
As a fully regulated electric utility, FirstEnergy is focused on stable and predictable earnings and cash flow from its Regulated Distribution and Regulated Transmission businesses that deliver enhanced customer service and reliability.
FirstEnergy's Regulated Distribution business is comprised of a geographically and regulatory diverse collection of electric utilities delivering customer-focused sustainable growth. This business operates in a territory of 65,000 square miles, across the Midwest & Mid-Atlantic regions, one of the largest contiguous territories in the United States, and allows the Utilities to be uniquely positioned for growth through investments that strengthen the grid and enable the clean energy transition, with approximately $9 billion in investment plans (or 53% of the total FirstEnergy investment plan) from 2021 to 2025. Through its investment plan, Regulated Distribution has improved reliability and added operating flexibility to the distribution infrastructure, which provide benefits to the customers and communities those Utilities serve.
In addition to our investments to rebuild critical infrastructure and improve reliability, current and future distribution investment opportunities that support our ESG and strategic priorities include:
•Advanced Metering Infrastructure – install smart meters and related infrastructure;
•Grid Modernization Investments that support distribution automation and voltage and var optimization;
•Installation of electric vehicle charging stations;
•Connected LED Streetlights – strategic goal to convert 100% of streetlights owned by the Utilities to smart LEDs by 2030;
•Alternative Generation that lowers our carbon footprint;
•Information Systems – enhance our core information infrastructure of our distribution systems; and
•Supporting economic development to attract new business.
FirstEnergy's Regulated Transmission business is a premier, high quality transmission business, with approximately 24,000 miles of transmission lines in operation and one of the largest transmission systems in PJM. The Transmission Companies and certain of FirstEnergy's utilities (JCP&L, MP, PE and WP) are focused on "Energizing the Future" with investments that support clean
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energy, improve grid reliability and resiliency and support a carbon neutral future. "Energizing the Future" is the centerpiece of FirstEnergy’s regulated investment strategy with all investments recovered under FERC-regulated forward-looking formula rates, and approximately $8 billion in investment plans (or 45% of the total FirstEnergy investment plan) from 2021 to 2025. FirstEnergy believes there are incremental investment opportunities for its existing transmission infrastructure of over $20 billion beyond those identified through 2025, which are expected to strengthen grid and cyber-security and make the transmission system more reliable, robust, secure and resistant to extreme weather events, with improved operational flexibility.
In addition to our Energizing the Future investments, current and future transmission investment opportunities that support our ESG and strategic priorities include:
•Transmission Asset Health Center: real-time monitoring to reduce outages and lower expenses;
•Integrating digital technology to enhance equipment monitoring and lower costs;
•Exploring real-time technologies: emerging technologies to enhance data collection; and
•Making smart investments to modernize the grid to integrate future renewables.
On November 6, 2021, FirstEnergy, along with FET, entered into the FET P&SA with Brookfield and the Brookfield Guarantors, pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction closed on May 31, 2022.
On December 13, 2021, FE privately issued to BIP Securities II-B L.P., an affiliate of Blackstone Infrastructure Partners L.P., 25,588,535 shares of FE’s common stock, par value $0.10 per share, at a price of $39.08 per share, representing an investment of $1.0 billion. On April 21, 2022, FERC approved the Blackstone representative’s ability to participate as a voting member of the FE Board. Sean T. Klimczak, the Blackstone Infrastructure Partners-selected representative, was elected to the FE Board at the 2022 annual shareholders’ meeting.
On October 18, 2021, FE, FET, the Utilities, and the Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses. See “Capital Resources and Liquidity" below for additional details.
Together, these transactions enhance FirstEnergy’s credit profile, provide funding for the strategic investments discussed above, and address all of FirstEnergy’s equity plans, with the exception of annual issuances of up to $100 million under regular dividend reinvestment plans and employee benefit stock investment plans, through at least 2025. Also, as with the recently completed FET transaction, premium valuations of our distribution and transmission businesses, together with growth in cash flow from operations resulting from the investment opportunities described above, could provide FirstEnergy future optionality to accelerate further strengthening of the balance sheet and enhance shareholder value. As such, we are pursuing a sale of a minority stake in one of our transmission or distribution businesses.
On September 15, 2022, FirstEnergy announced that the FE Board had appointed Mr. John W. Somerhalder II to serve as Interim President and Chief Executive Officer of FirstEnergy, effective as of September 16, 2022. In connection with his appointment as Interim President and Chief Executive Officer, Mr. Somerhalder will continue to serve as Chairman of the FE Board. The FE Board has begun to conduct a search of external candidates to identify a permanent President and Chief Executive Officer of FirstEnergy. Mr. Somerhalder’s appointment follows the decision of Mr. Steven E. Strah on September 15, 2022, to retire as Director and President and Chief Executive Officer of FirstEnergy, effective as of September 16, 2022.
FE Forward
FirstEnergy is also working to transform how it conducts business and serves its customers to achieve value potential in a sustainable way and help FirstEnergy achieve its strategic priorities. In February 2021, FirstEnergy announced a new initiative to build upon FirstEnergy’s strong operations and business fundamentals and deliver immediate value and resilience, with substantial working capital improvements and capital efficiencies reaching full impact by 2024. Called "FE Forward," the initiative plays a critical first step in FirstEnergy’s transformation journey as it looks to enhance the organization, focus on performance excellence, and refocus the investment strategy through a range of opportunities.
By 2024, FE Forward is projected to generate approximately $380 million in annualized capital expenditure efficiencies, as well as approximately $250 million in working capital improvements by 2023. This program includes an estimated $150 million of costs to achieve through 2023, which are expected to be self-funded through these efficiencies. FirstEnergy is redeploying the capital expenditure efficiencies in a more diverse capital program that over the long-term continues to support our strategy as discussed above, and using 2022 as baseline operating expenses are projected to naturally decline 1% annually allowing for strategic flexibility and customer affordability. Specifically, FirstEnergy is redeploying these capital efficiencies into several projects, including, grid modernization, energy efficiency programs, smart meter and electric vehicle charging, and solar generation investments. FE Forward is not a downsizing effort and there will not be any involuntary employee reductions in connection with this program. FirstEnergy expects that FE Forward will be a significant catalyst to augment its growth potential by taking a more strategic approach to operating expenditures and reinvesting in a more diverse capital program that over the
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long-term continues to support a smarter and cleaner electric grid, and maintain affordable customer bills. FirstEnergy is additionally evaluating the legal, financial, operational and branding benefits of consolidating the Ohio Companies and Pennsylvania Companies into single entities per state. As part of these efforts, FirstEnergy will evaluate the appropriate cadence to initiate rates cases on a state-by-state basis to best support FirstEnergy’s customer-focused strategic priorities.
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| FE Forward Expected Capital Expenditure Efficiencies and Working Capital Improvements | 2021 Actual | 2022 Forecast | 2023 Forecast | 2024 Forecast | 2025 Forecast | 5-Year Forecast | ||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||
| Gross Capital Expenditure Efficiencies | $ | 210 | $ | 280 | $ | 380 | $ | 380 | $ | 380 | $ | 1,630 | ||||||||||||||||||||||||||
| Cost to Achieve (+/- 10%) | (40) | (80) | (30) | — | — | (150) | ||||||||||||||||||||||||||||||||
| Net Capital Expenditure Efficiencies | $ | 170 | $ | 200 | $ | 350 | $ | 380 | $ | 380 | $ | 1,480 | ||||||||||||||||||||||||||
| Working Capital Improvements | 130 | 120 | — | — | — | 250 | ||||||||||||||||||||||||||||||||
| Total Cash Flow Improvements | $ | 300 | $ | 320 | $ | 350 | $ | 380 | $ | 380 | $ | 1,730 | ||||||||||||||||||||||||||
Climate Story
Our long-term strategy reiterates and supports our position that climate change is among the most important issues of our time and our commitment to doing our part to ensure a bright and sustainable future for the communities we serve. As part of our Climate Strategy, we are focused on enabling our customers to thrive in a reduced carbon future. This includes transmission and distribution investments discussed above, investments in solar generation and supporting clean energy options, our efforts towards electrifying the economy, and driving energy efficiency.
Additionally, we plan to reduce our company-wide GHG emissions within our direct operational control (Scope 1) by 30% by 2030 (from our 2019 baseline), as we work toward carbon neutrality by 2050. Key steps in reducing our emissions and improving the efficiency of our operations include:
•Replacing Aging Equipment: We are responsibly replacing aging equipment on our transmission system that contains SF6, a greenhouse gas commonly used in electric utility equipment;
•Electrifying our Vehicle Fleet: We are targeting 30% electrification of our light-duty and aerial truck fleet by 2030 and 100% electrification by 2050. To reach our electrification goal, we aim for 100% electric or hybrid vehicle purchases for our light-duty and aerial truck fleet moving forward;
•Using Generation Efficiencies and Flexibility: We are utilizing operational flexibilities, such as heat rate improvements through equipment upgrades, operational monitoring systems, and auxiliary power reductions at our generation facilities that will enable us to reach our interim 2030 goal of a 30% GHG reduction from 2019 levels, while continuing to provide customers with safe and reliable electricity; and
•Transitioning Away from Coal Generation: We expect to thoughtfully transition away from our regulated coal generation fleet no later than 2050, and in April 2022, FirstEnergy received approval to construct 50 MWs of solar generation in West Virginia. In 2022, FirstEnergy received approval from the WVPSC for its proposed projects to comply with EPA ELG rules and keep MP’s generation plants responsibly operating beyond 2028. FirstEnergy also intends to begin a broad stakeholder dialogue regarding planned operational end dates of 2035 and 2040 for Ft. Martin and Harrison, respectively.
Future resource plans to achieve carbon reductions, including potential changes in operations or any determination of retirement dates of the regulated coal-fired generating facilities, will be developed by working collaboratively with regulators in West Virginia. Determination of the useful life of the regulated coal-fired generating facilities could result in changes in depreciation, and/or continued collection of net plant in rates after retirement, securitization, sale, impairment or regulatory disallowances. If MP is unable to recover these costs, it could have a material adverse effect on FirstEnergy’s and/or MP’s financial condition, results of operations, and cash flow.
HB 6 and Related Investigations
On July 21, 2021, FE entered into a three-year DPA with the U.S. Attorney’s Office that, subject to court proceedings, resolves the U.S. Attorney’s Office investigation into FirstEnergy relating to FirstEnergy’s lobbying and governmental affairs activities concerning HB 6 related to the federal criminal allegations made in July 2020, against former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. Among other things, the DPA required FE to pay a monetary penalty of $230 million, which FE paid in the third quarter of 2021. Under the DPA, FE agreed to the filing of a criminal information charging FE with one count of conspiracy to commit honest services wire fraud. The $230 million payment will neither be recovered in rates or charged to FirstEnergy customers nor will FirstEnergy seek any tax deduction
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related to such payment. The criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA.
The OAG, certain FE shareholders and FE customers filed several lawsuits against FirstEnergy and certain current and former directors, officers and other employees, each relating to the allegations against the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. On February 9, 2022, FE, acting through the SLC, agreed to a settlement term sheet to resolve multiple shareholder derivative lawsuits that were filed in the S.D. Ohio, the N.D. Ohio, and the Ohio Court of Common Pleas, Summit County. On March 11, 2022, the parties executed a stipulation and agreement of settlement, and filed a motion the same day requesting preliminary settlement approval in the S.D. Ohio. On August 23, 2022, the S.D. Ohio granted final approval of the settlement. On September 20, 2022, a purported FE stockholder filed a motion for reconsideration of the S.D. Ohio’s final settlement approval. The parties filed oppositions to that motion on October 11, 2022. The N.D. Ohio matter remains pending. The settlement agreement is expected to fully resolve these shareholder derivative lawsuits and includes a series of corporate governance enhancements, that have resulted in the following:
•Six members of the FE Board, Messrs. Michael J. Anderson, Donald T. Misheff, Thomas N. Mitchell, Christopher D. Pappas and Luis A. Reyes, and Ms. Julia L. Johnson did not stand for re-election at FE’s 2022 annual shareholder meeting;
•A special FE Board committee of at least three recently appointed independent directors was formed to initiate a review process of the then current senior executive team. The review of the senior executive team by the special FE Board committee and the FE Board was completed in September 2022;
•The FE Board will oversee FE’s lobbying and political activities, including periodically reviewing and approving political and lobbying action plans prepared by management;
•An FE Board committee of recently appointed independent directors will oversee the implementation and third-party audits of the FE Board-approved action plans with respect to political and lobbying activities;
•FE will implement enhanced disclosure to shareholders of political and lobbying activities, including enhanced disclosure in its annual proxy statement; and
•FE will further align financial incentives of senior executives to proactive compliance with legal and ethical obligations.
The settlement also includes a payment to FE of $180 million, to be paid by insurance after the judgment has become final, less $36 million in court-ordered attorney’s fees awarded to plaintiffs.
In addition, on August 10, 2020, the SEC, through its Division of Enforcement, issued an order directing an investigation of possible securities laws violations by FE, and on September 1, 2020, issued subpoenas to FE and certain FE officers. Subsequently, on April 28, 2021, and July 11, 2022, the SEC issued additional subpoenas to FE. Further, in letters dated January 26, and February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that it is investigating FirstEnergy’s lobbying and governmental affairs activities concerning HB 6.
FirstEnergy has taken numerous steps to address challenges posed by the HB 6 investigations and improve its compliance culture, including the refreshment of the FE Board, the hiring of key senior executives committed to supporting transparency and integrity, and strengthening and enhancing FirstEnergy’s compliance culture through several initiatives. Although the outcome of the HB 6 investigations and state regulatory audits remain unknown, FirstEnergy has also taken several proactive steps to reduce regulatory uncertainty affecting the Ohio Companies.
FE terminated Charles E. Jones as its chief executive officer effective October 29, 2020. As a result of Mr. Jones’ termination, and due to the determination of a committee of independent members of the FE Board that Mr. Jones violated certain FirstEnergy policies and its code of conduct, all grants, awards and compensation under FirstEnergy’s short-term incentive compensation program and long-term incentive compensation program with respect to Mr. Jones that were outstanding on the date of termination were forfeited. In November 2021, after a determination by the Compensation Committee of the FE Board that a demand for recoupment was warranted pursuant to the Recoupment Policy, FE made a recoupment demand to Mr. Jones of compensation previously paid to him totaling approximately $56 million, the maximum amount permissible under the Recoupment Policy. As such, any amounts payable to Mr. Jones under the EDCP will be set off against FE’s recoupment demand. There can be no assurance that the efforts to seek recoupment from Mr. Jones will be successful and no portion of the approximately $56 million recoupment demand has been recognized in FirstEnergy’s financial statements as of September 30, 2022.
Despite the many disruptions FirstEnergy is currently facing, the leadership team remains committed and focused on executing its strategy and running the business. See “Outlook - Other Legal Proceedings” below for additional details on the government investigations, the DPA, and subsequent litigation surrounding the investigation of HB 6. See also “Outlook - State Regulation - Ohio” below for details on the PUCO proceeding reviewing political and charitable spending and legislative activity in response to the investigation of HB 6. The outcome of the government investigations, PUCO proceedings, legislative activity, and any of these lawsuits is uncertain and could have a material adverse effect on FirstEnergy’s financial condition, results of operations, and cash flows.
39
FINANCIAL OVERVIEW AND RESULTS OF OPERATIONS
| (In millions) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 3,475 | $ | 3,124 | $ | 351 | 11 | % | $ | 9,282 | $ | 8,472 | $ | 810 | 10 | % | ||||||||||||||||||||||||||||||||||
| Operating expenses | 2,970 | 2,493 | 477 | 19 | % | 7,771 | 6,970 | 801 | 11 | % | ||||||||||||||||||||||||||||||||||||||||
| Operating income | 505 | 631 | (126) | (20) | % | 1,511 | 1,502 | 9 | 1 | % | ||||||||||||||||||||||||||||||||||||||||
| Other expenses, net | (56) | (127) | 71 | 56 | % | (450) | (422) | (28) | (7) | % | ||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before income taxes | 449 | 504 | (55) | (11) | % | 1,061 | 1,080 | (19) | (2) | % | ||||||||||||||||||||||||||||||||||||||||
| Income taxes | 105 | 88 | 17 | 19 | % | 237 | 271 | (34) | (13) | % | ||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations | 344 | 416 | (72) | (17) | % | 824 | 809 | 15 | 2 | % | ||||||||||||||||||||||||||||||||||||||||
| Discontinued operations, net of tax | — | 47 | (47) | NM | — | 47 | (47) | NM | ||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 344 | $ | 463 | $ | (119) | (26) | % | $ | 824 | $ | 856 | $ | (32) | (4) | % | ||||||||||||||||||||||||||||||||||
| Income attributable to noncontrolling interest (continuing operations) | 10 | — | 10 | NM | 15 | — | 15 | NM | ||||||||||||||||||||||||||||||||||||||||||
| Earnings attributable to FE | $ | 334 | $ | 463 | $ | (129) | (28) | % | $ | 809 | $ | 856 | $ | (47) | (5) | % | ||||||||||||||||||||||||||||||||||
| * NM = not meaningful | ||||||||||||||||||||||||||||||||||||||||||||||||||
The financial results discussed below include revenues and expenses from transactions among FirstEnergy’s business segments. A reconciliation of segment financial results is provided in Note 9, “Segment Information,” of the Notes to Consolidated Financial Statements.
40
Summary of Results of Operations — Third Quarter 2022 Compared with Third Quarter 2021
Financial results for FirstEnergy’s business segments in the third quarter of 2022 and 2021 were as follows:
| Third Quarter 2022 Financial Results | Regulated Distribution | Regulated Transmission | Corporate/Other and Reconciling Adjustments | FirstEnergy Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Electric | $ | 2,972 | $ | 502 | $ | (39) | $ | 3,435 | ||||||||||||||||||
| Other | 51 | 1 | (12) | 40 | ||||||||||||||||||||||
| Total Revenues | 3,023 | 503 | (51) | 3,475 | ||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||
| Fuel | 209 | — | — | 209 | ||||||||||||||||||||||
| Purchased power | 1,105 | — | 4 | 1,109 | ||||||||||||||||||||||
| Other operating expenses | 848 | 315 | (52) | 1,111 | ||||||||||||||||||||||
| Provision for depreciation | 242 | 72 | 18 | 332 | ||||||||||||||||||||||
| Deferral of regulatory assets, net | (85) | (1) | — | (86) | ||||||||||||||||||||||
| General taxes | 219 | 64 | 12 | 295 | ||||||||||||||||||||||
| Total Operating Expenses | 2,538 | 450 | (18) | 2,970 | ||||||||||||||||||||||
| Operating Income (Loss) | 485 | 53 | (33) | 505 | ||||||||||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||||
| Debt redemption costs | — | — | 1 | 1 | ||||||||||||||||||||||
| Miscellaneous income, net | 90 | 17 | 61 | 168 | ||||||||||||||||||||||
| Interest expense | (132) | (41) | (75) | (248) | ||||||||||||||||||||||
| Capitalized financing costs | 10 | 13 | — | 23 | ||||||||||||||||||||||
| Total Other Expense | (32) | (11) | (13) | (56) | ||||||||||||||||||||||
| Income (Loss) Before Income Taxes (Benefits) | 453 | 42 | (46) | 449 | ||||||||||||||||||||||
| Income taxes (benefits) | 92 | 5 | 8 | 105 | ||||||||||||||||||||||
| Net Income (Loss) | $ | 361 | $ | 37 | $ | (54) | $ | 344 | ||||||||||||||||||
| Income attributable to noncontrolling interest | — | 10 | — | 10 | ||||||||||||||||||||||
| Earnings (Loss) Attributable to FE | $ | 361 | $ | 27 | $ | (54) | $ | 334 | ||||||||||||||||||
41
| Third Quarter 2021 Financial Results | Regulated Distribution | Regulated Transmission | Corporate/Other and Reconciling Adjustments | FirstEnergy Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Electric | $ | 2,705 | $ | 411 | $ | (33) | $ | 3,083 | ||||||||||||||||||
| Other | 54 | 4 | (17) | 41 | ||||||||||||||||||||||
| Total Revenues | 2,759 | 415 | (50) | 3,124 | ||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||
| Fuel | 132 | — | — | 132 | ||||||||||||||||||||||
| Purchased power | 869 | — | 5 | 874 | ||||||||||||||||||||||
| Other operating expenses | 747 | 138 | (29) | 856 | ||||||||||||||||||||||
| Provision for depreciation | 229 | 82 | 15 | 326 | ||||||||||||||||||||||
| Amortization of regulatory assets, net | 29 | 1 | — | 30 | ||||||||||||||||||||||
| General taxes | 206 | 62 | 7 | 275 | ||||||||||||||||||||||
| Total Operating Expenses | 2,212 | 283 | (2) | 2,493 | ||||||||||||||||||||||
| Operating Income (Loss) | 547 | 132 | (48) | 631 | ||||||||||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||||
| Miscellaneous income, net | 102 | 12 | 22 | 136 | ||||||||||||||||||||||
| Interest expense | (133) | (62) | (88) | (283) | ||||||||||||||||||||||
| Capitalized financing costs | 8 | 11 | 1 | 20 | ||||||||||||||||||||||
| Total Other Expense | (23) | (39) | (65) | (127) | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations Before Income Taxes (Benefits) | 524 | 93 | (113) | 504 | ||||||||||||||||||||||
| Income taxes (benefits) | 108 | 23 | (43) | 88 | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations | 416 | 70 | (70) | 416 | ||||||||||||||||||||||
| Discontinued operations, net of tax | — | — | 47 | 47 | ||||||||||||||||||||||
| Net Income (Loss) | $ | 416 | $ | 70 | $ | (23) | $ | 463 | ||||||||||||||||||
42
| Changes Between Third Quarter 2022 and Third Quarter 2021 Financial Results | Regulated Distribution | Regulated Transmission | Corporate/Other and Reconciling Adjustments | FirstEnergy Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Electric | $ | 267 | $ | 91 | $ | (6) | $ | 352 | ||||||||||||||||||
| Other | (3) | (3) | 5 | (1) | ||||||||||||||||||||||
| Total Revenues | 264 | 88 | (1) | 351 | ||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||
| Fuel | 77 | — | — | 77 | ||||||||||||||||||||||
| Purchased power | 236 | — | (1) | 235 | ||||||||||||||||||||||
| Other operating expenses | 101 | 177 | (23) | 255 | ||||||||||||||||||||||
| Provision for depreciation | 13 | (10) | 3 | 6 | ||||||||||||||||||||||
| Amortization (deferral) of regulatory assets, net | (114) | (2) | — | (116) | ||||||||||||||||||||||
| General taxes | 13 | 2 | 5 | 20 | ||||||||||||||||||||||
| Total Operating Expenses | 326 | 167 | (16) | 477 | ||||||||||||||||||||||
| Operating Income (Loss) | (62) | (79) | 15 | (126) | ||||||||||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||||
| Debt redemption costs | — | — | 1 | 1 | ||||||||||||||||||||||
| Miscellaneous income, net | (12) | 5 | 39 | 32 | ||||||||||||||||||||||
| Interest expense | 1 | 21 | 13 | 35 | ||||||||||||||||||||||
| Capitalized financing costs | 2 | 2 | (1) | 3 | ||||||||||||||||||||||
| Total Other Expense | (9) | 28 | 52 | 71 | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations Before Income Taxes (Benefits) | (71) | (51) | 67 | (55) | ||||||||||||||||||||||
| Income taxes (benefits) | (16) | (18) | 51 | 17 | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations | (55) | (33) | 16 | (72) | ||||||||||||||||||||||
| Discontinued operations, net of tax | — | — | (47) | (47) | ||||||||||||||||||||||
| Net Income (Loss) | $ | (55) | $ | (33) | $ | (31) | $ | (119) | ||||||||||||||||||
| Income attributable to noncontrolling interest (continuing operations) | — | 10 | — | 10 | ||||||||||||||||||||||
| Earnings (Loss) Attributable to FE | $ | (55) | $ | (43) | $ | (31) | $ | (129) | ||||||||||||||||||
43
Regulated Distribution — Third Quarter 2022 Compared with Third Quarter 2021
Regulated Distribution’s net income decreased $55 million in the third quarter of 2022, as compared to the same period of 2021, primarily resulting from higher other operating expenses, customer rate credits associated with the PUCO-approved Ohio Stipulation, higher pension and OPEB expenses, partially offset by higher weather-related demand and earnings benefits from capital investment programs in Pennsylvania.
Revenues —
The $264 million increase in total revenues resulted from the following sources:
| For the Three Months Ended September 30, | ||||||||||||||||||||
| Revenues by Type of Service | 2022 | 2021 | Increase (Decrease) | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Distribution | $ | 1,457 | $ | 1,534 | $ | (77) | ||||||||||||||
| Generation sales: | ||||||||||||||||||||
| Retail | 1,356 | 1,054 | 302 | |||||||||||||||||
| Wholesale | 159 | 117 | 42 | |||||||||||||||||
| Total generation sales | 1,515 | 1,171 | 344 | |||||||||||||||||
| Other | 51 | 54 | (3) | |||||||||||||||||
| Total Revenues | $ | 3,023 | $ | 2,759 | $ | 264 | ||||||||||||||
Distribution revenues decreased $77 million in the third quarter of 2022, as compared to the same period of 2021, primarily resulting from customer rate credits associated with the PUCO-approved Ohio Stipulation, lower recovery of transmission expenses, which has no material impact to earnings, lower weather-adjusted demand in Ohio and Pennsylvania as well as adjusted customer rates of the Pennsylvania Companies associated with the Tax Act, which has no material impact to current period earnings, partially offset by higher weather-related demand and higher rates associated with riders in Ohio and Pennsylvania for the recovery of certain capital investment programs.
Distribution services by customer class are summarized in the following table:
| For the Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | Actual | Weather-Adjusted | ||||||||||||||||||||||||||||||||||||
| Electric Distribution MWH Deliveries | 2022 | 2021 | Increase (Decrease) | 2022 | 2021 | Increase (Decrease) | ||||||||||||||||||||||||||||||||
| Residential | 15,500 | 15,652 | (1.0) | % | 14,945 | 15,200 | (1.7) | % | ||||||||||||||||||||||||||||||
Commercial(1) | 9,662 | 9,785 | (1.3) | % | 9,514 | 9,672 | (1.6) | % | ||||||||||||||||||||||||||||||
| Industrial | 14,274 | 14,018 | 1.8 | % | 14,274 | 14,018 | 1.8 | % | ||||||||||||||||||||||||||||||
| Total Electric Distribution MWH Deliveries | 39,436 | 39,455 | — | % | 38,733 | 38,890 | (0.4) | % | ||||||||||||||||||||||||||||||
(1) Includes street lighting.
Lower residential and commercial distribution deliveries were partially offset by higher weather-related customer demand in all states and higher weather-adjusted demand in New Jersey. Cooling degree days were 2% above 2021 and 12% above normal. Lower weather-adjusted residential deliveries primarily reflect a continuing trend of usage returning to pre-pandemic levels. Increases in industrial deliveries were primarily from the fabricated metal, auto, food manufacturing, education services and plastics and rubber products sectors.
Compared to pre-pandemic levels in 2019, weather-adjusted residential distribution deliveries in the third quarter of 2022 increased by 4%, while commercial and industrial deliveries decreased 4% and 1%, respectively.
44
The following table summarizes the price and volume factors contributing to the $344 million increase in generation revenues for the third quarter of 2022, as compared to the same period of 2021:
| Source of Change in Generation Revenues | Increase (Decrease) | |||||||
| (In millions) | ||||||||
| Retail: | ||||||||
| Change in sales volumes | $ | 109 | ||||||
| Change in prices | 193 | |||||||
| 302 | ||||||||
| Wholesale: | ||||||||
| Change in sales volumes | (4) | |||||||
| Change in prices | 77 | |||||||
| Capacity revenue | (31) | |||||||
| 42 | ||||||||
| Change in Generation Revenues | $ | 344 | ||||||
The increase in retail generation sales volumes was primarily due to decreased customer shopping in New Jersey, Ohio and Pennsylvania. Total generation provided by alternative suppliers as a percentage of total MWH deliveries in the third quarter of 2022, as compared to the same period of 2021, decreased to 36% from 43% in New Jersey, to 81% from 87% in Ohio, and to 60% from 63% in Pennsylvania. The increase in retail generation prices primarily resulted from higher non-shopping generation auction rates. Retail generation sales, excluding those in West Virginia, have no material impact to earnings.
Wholesale generation revenues increased $42 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to an increase in spot market energy prices partially offset by lower capacity revenues and sales volumes. The difference between current wholesale generation revenues and certain energy costs incurred are deferred for future recovery or refund, with no material impact to earnings.
Operating Expenses —
Total operating expenses increased $326 million, primarily due to the following:
•Fuel expense increased $77 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to higher unit costs and increased generation output. Due to the ENEC, fuel expense has no material impact on current period earnings.
•Purchased power costs, which have no material impact on current period earnings, increased $236 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to higher market prices and increased volumes as described above, partially offset by lower capacity expenses.
| Source of Change in Purchased Power | Increase (Decrease) | |||||||
| (In millions) | ||||||||
| Purchases | ||||||||
| Change due to unit costs | $ | 225 | ||||||
| Change due to volumes | 42 | |||||||
| 267 | ||||||||
| Capacity expense | (31) | |||||||
| Change in Purchased Power Costs | $ | 236 | ||||||
45
•Other operating expenses increased $101 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to the following:
•Higher network transmission expenses of $29 million. These costs are deferred for future recovery, resulting in no material impact on current period earnings.
•Higher expenses of $18 million resulting from lower capitalization of vegetation management costs.
•Higher expenses of $15 million resulting from lower capitalization of corporate support costs.
•Lower storm expenses of $37 million, of which $30 million were deferred for future recovery.
•Higher vegetation management in West Virginia, energy efficiency and other state mandated program costs of $30 million, which are deferred for future recovery, resulting in no material impact on earnings.
•Higher other operating and maintenance expenses of $24 million, primarily resulting from accelerated maintenance work from future years into 2022 and higher materials costs.
•Higher expense due to the absence of a $27 million reduction to a reserve that was recognized in the third quarter of 2021.
•Lower uncollectible expenses of $5 million, primarily in Pennsylvania.
•Depreciation expense increased $13 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to a higher asset base.
•Amortization (deferral) of regulatory assets, net decreased $114 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to:
•$92 million decrease due to generation and transmission related deferrals primarily as a result of lower recovery of transmission related expenses, and
•$52 million decrease due to the return of certain Tax Act savings to Pennsylvania customers, partially offset by
•$30 million increase due to lower deferred storm expenses
•General taxes increased $13 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to higher Pennsylvania gross receipt taxes and higher Ohio property taxes.
Other Expenses —
Other expense increased $9 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to higher pension and OPEB non-service costs and borrowings under the regulated money pool, partially offset by lower long-term debt interest from redemptions and lower borrowings under the revolving credit facilities.
Income Taxes —
Regulated Distribution’s effective tax rate was 20.3% and 20.6% for the three months ended September 30, 2022 and 2021, respectively.
Regulated Transmission — Third Quarter 2022 Compared with Third Quarter 2021
Regulated Transmission’s net income decreased $33 million in the third quarter of 2022, as compared to the same period of 2021 primarily due to customer refunds and the reclassification of certain transmission capital assets that are not expected to be recoverable resulting from the FERC Audit, as further discussed below, partially offset by higher rate base and lower net financing costs.
Revenues —
Total revenues increased $88 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to the recovery of higher operating expenses and rate base, partially offset by expected customer refunds associated with the FERC Audit, as further discussed below.
46
The following table shows revenues by transmission asset owner:
| For the Three Months Ended September 30, | Increase | |||||||||||||||||||
| Revenues by Transmission Asset Owner | 2022 | 2021 | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||
| ATSI | $ | 252 | $ | 208 | $ | 44 | ||||||||||||||
| TrAIL | 79 | 61 | 18 | |||||||||||||||||
| MAIT | 97 | 75 | 22 | |||||||||||||||||
| JCP&L | 45 | 41 | 4 | |||||||||||||||||
| MP, PE and WP | 30 | 30 | — | |||||||||||||||||
| Total Revenues | $ | 503 | $ | 415 | $ | 88 | ||||||||||||||
Operating Expenses —
Total operating expenses increased $167 million in the third quarter of 2022, as compared to the same period of 2021, primarily due to the reclassification of certain transmission capital assets to operating expenses as a result of the FERC Audit, as further discussed below, partially offset by a charge in the third quarter of 2021 resulting from the filed ATSI settlement. Other than a portion of the reclassification of certain transmission capital assets that are not expected to be recoverable and the filed ATSI settlement charge in the third quarter of 2021, nearly all operating expenses are recovered through formula rates, resulting in no material impact on current period earnings.
Other Expenses —
Total other expense decreased $28 million in the three months ended September 30, 2022, as compared to the same period of 2021, primarily due to higher unregulated money pool interest income at FET.
Income Taxes —
Regulated Transmission’s effective tax rate was 11.9% and 24.7% for the three months ended September 30, 2022 and 2021, respectively.
Corporate / Other — Third Quarter 2022 Compared with Third Quarter 2021
Financial results at Corporate/Other resulted in a $31 million decrease in net loss in the third quarter of 2022, as compared to the same period of 2021, primarily due to higher net investment income on certain equity method and other investments and lower interest expense due to the FE debt redemptions discussed further below, partially offset by higher unregulated money pool interest expense and lower discrete income tax benefits.
For the three months ended September 30, 2021, FirstEnergy recorded a gain from discontinued operations, net of tax, of $47 million. The gain is primarily due to income tax benefits from the final true-up to the worthless stock deduction and a final federal NOL allocation between the FES Debtors and FirstEnergy resulting from the filing of the 2020 FirstEnergy federal income tax return during the third quarter of 2021.
47
Summary of Results of Operations — First Nine Months of 2022 Compared with Nine Months of 2021
Financial results for FirstEnergy’s business segments in the first Nine months of 2022 and 2021 were as follows:
| First Nine Months 2022 Financial Results | Regulated Distribution | Regulated Transmission | Corporate/Other and Reconciling Adjustments | FirstEnergy Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Electric | $ | 7,878 | $ | 1,393 | $ | (115) | $ | 9,156 | ||||||||||||||||||
| Other | 160 | 4 | (38) | 126 | ||||||||||||||||||||||
| Total Revenues | 8,038 | 1,397 | (153) | 9,282 | ||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||
| Fuel | 539 | — | — | 539 | ||||||||||||||||||||||
| Purchased power | 2,772 | — | 14 | 2,786 | ||||||||||||||||||||||
| Other operating expenses | 2,496 | 496 | (165) | 2,827 | ||||||||||||||||||||||
| Provision for depreciation | 719 | 245 | 56 | 1,020 | ||||||||||||||||||||||
| Deferral of regulatory assets, net | (250) | (2) | — | (252) | ||||||||||||||||||||||
| General taxes | 626 | 191 | 34 | 851 | ||||||||||||||||||||||
| Total Operating Expenses | 6,902 | 930 | (61) | 7,771 | ||||||||||||||||||||||
| Operating Income (Loss) | 1,136 | 467 | (92) | 1,511 | ||||||||||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||||
| Debt redemption costs | — | — | (155) | (155) | ||||||||||||||||||||||
| Miscellaneous income, net | 269 | 30 | 135 | 434 | ||||||||||||||||||||||
| Interest expense | (389) | (155) | (244) | (788) | ||||||||||||||||||||||
| Capitalized financing costs | 25 | 33 | 1 | 59 | ||||||||||||||||||||||
| Total Other Expense | (95) | (92) | (263) | (450) | ||||||||||||||||||||||
| Income (Loss) Before Income Taxes (Benefits) | 1,041 | 375 | (355) | 1,061 | ||||||||||||||||||||||
| Income taxes (benefits) | 213 | 85 | (61) | 237 | ||||||||||||||||||||||
| Net Income (Loss) | $ | 828 | $ | 290 | $ | (294) | $ | 824 | ||||||||||||||||||
| Income attributable to noncontrolling interest | — | 15 | — | 15 | ||||||||||||||||||||||
| Earnings (Loss) Attributable to FE | $ | 828 | $ | 275 | $ | (294) | $ | 809 | ||||||||||||||||||
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| First Nine Months 2021 Financial Results | Regulated Distribution | Regulated Transmission | Corporate/Other and Reconciling Adjustments | FirstEnergy Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Electric | $ | 7,230 | $ | 1,223 | $ | (103) | $ | 8,350 | ||||||||||||||||||
| Other | 157 | 10 | (45) | 122 | ||||||||||||||||||||||
| Total Revenues | 7,387 | 1,233 | (148) | 8,472 | ||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||
| Fuel | 362 | — | — | 362 | ||||||||||||||||||||||
| Purchased power | 2,192 | — | 14 | 2,206 | ||||||||||||||||||||||
| Other operating expenses | 2,171 | 278 | (123) | 2,326 | ||||||||||||||||||||||
| Provision for depreciation | 684 | 240 | 48 | 972 | ||||||||||||||||||||||
| Amortization of regulatory assets, net | 159 | 12 | — | 171 | ||||||||||||||||||||||
| General taxes | 599 | 186 | 27 | 812 | ||||||||||||||||||||||
| DPA penalty | — | — | 230 | 230 | ||||||||||||||||||||||
| Gain on sale of Yards Creek | (109) | — | — | (109) | ||||||||||||||||||||||
| Total Operating Expenses | 6,058 | 716 | 196 | 6,970 | ||||||||||||||||||||||
| Operating Income (Loss) | 1,329 | 517 | (344) | 1,502 | ||||||||||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||||
| Miscellaneous income, net | 297 | 34 | 48 | 379 | ||||||||||||||||||||||
| Interest expense | (392) | (186) | (277) | (855) | ||||||||||||||||||||||
| Capitalized financing costs | 30 | 23 | 1 | 54 | ||||||||||||||||||||||
| Total Other Expense | (65) | (129) | (228) | (422) | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations Before Income Taxes (Benefits) | 1,264 | 388 | (572) | 1,080 | ||||||||||||||||||||||
| Income taxes (benefits) | 261 | 93 | (83) | 271 | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations | 1,003 | 295 | (489) | 809 | ||||||||||||||||||||||
| Discontinued operations, net of tax | — | — | 47 | 47 | ||||||||||||||||||||||
| Net Income (Loss) | $ | 1,003 | $ | 295 | $ | (442) | $ | 856 | ||||||||||||||||||
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| Changes Between First Nine Months 2022 and First Nine Months 2021 Financial Results | Regulated Distribution | Regulated Transmission | Corporate/Other and Reconciling Adjustments | FirstEnergy Consolidated | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Electric | $ | 648 | $ | 170 | $ | (12) | $ | 806 | ||||||||||||||||||
| Other | 3 | (6) | 7 | 4 | ||||||||||||||||||||||
| Total Revenues | 651 | 164 | (5) | 810 | ||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||
| Fuel | 177 | — | — | 177 | ||||||||||||||||||||||
| Purchased power | 580 | — | — | 580 | ||||||||||||||||||||||
| Other operating expenses | 325 | 218 | (42) | 501 | ||||||||||||||||||||||
| Provision for depreciation | 35 | 5 | 8 | 48 | ||||||||||||||||||||||
| Amortization (deferral) of regulatory assets, net | (409) | (14) | — | (423) | ||||||||||||||||||||||
| General taxes | 27 | 5 | 7 | 39 | ||||||||||||||||||||||
| DPA penalty | — | — | (230) | (230) | ||||||||||||||||||||||
| Gain on sale of Yards Creek | 109 | — | — | 109 | ||||||||||||||||||||||
| Total Operating Expenses | 844 | 214 | (257) | 801 | ||||||||||||||||||||||
| Operating Income (Loss) | (193) | (50) | 252 | 9 | ||||||||||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||||
| Debt redemption costs | — | — | (155) | (155) | ||||||||||||||||||||||
| Miscellaneous income, net | (28) | (4) | 87 | 55 | ||||||||||||||||||||||
| Interest expense | 3 | 31 | 33 | 67 | ||||||||||||||||||||||
| Capitalized financing costs | (5) | 10 | — | 5 | ||||||||||||||||||||||
| Total Other Expense | (30) | 37 | (35) | (28) | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations Before Income Taxes (Benefits) | (223) | (13) | 217 | (19) | ||||||||||||||||||||||
| Income taxes (benefits) | (48) | (8) | 22 | (34) | ||||||||||||||||||||||
| Income (Loss) from Continuing Operations | (175) | (5) | 195 | 15 | ||||||||||||||||||||||
| Discontinued operations, net of tax | — | — | (47) | (47) | ||||||||||||||||||||||
| Net Income (Loss) | $ | (175) | $ | (5) | $ | 148 | $ | (32) | ||||||||||||||||||
| Income attributable to noncontrolling interest (continuing operations) | — | 15 | — | 15 | ||||||||||||||||||||||
| Earnings (Loss) Attributable to FE | $ | (175) | $ | (20) | $ | 148 | $ | (47) | ||||||||||||||||||
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Regulated Distribution — First Nine Months of 2022 Compared with First Nine Months of 2021
Regulated Distribution’s net income decreased $175 million in the first nine months of 2022, as compared to the same period of 2021, primarily resulting from higher other operating expenses, customer rate credits associated with the PUCO-approved Ohio Stipulation, and higher pension and OPEB expenses, partially offset by higher customer demand and rider revenues from capital investment programs, as well as the absence of a $27 million refund for previously collected decoupling revenues in Ohio, with interest.
Revenues —
The $651 million increase in total revenues resulted from the following sources:
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||||
| Revenues by Type of Service | 2022 | 2021 | Increase (Decrease) | |||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
Distribution services(1) | $ | 4,021 | $ | 4,150 | $ | (129) | ||||||||||||||||||||
| Generation sales: | ||||||||||||||||||||||||||
| Retail | 3,449 | 2,820 | 629 | |||||||||||||||||||||||
| Wholesale | 408 | 260 | 148 | |||||||||||||||||||||||
| Total generation sales | 3,857 | 3,080 | 777 | |||||||||||||||||||||||
| Other | 160 | 157 | 3 | |||||||||||||||||||||||
| Total Revenues | $ | 8,038 | $ | 7,387 | $ | 651 | ||||||||||||||||||||
(1) Includes $(27) million of ARP revenues for the nine months ended September 30, 2021, which is related to the Ohio Companies refund to customers that was previously collected under decoupling mechanisms, with interest. See “Outlook,” below for further discussion on Ohio decoupling rates.
Distribution services revenues decreased $129 million in the first nine months 2022, as compared to the same period of 2021, primarily resulting from customer rate credits associated with the PUCO-approved Ohio Stipulation, as well as adjusted customer rates of the Pennsylvania Companies associated with the Tax Act, which has no material impact to current period earnings, partially offset by the absence of a $27 million refund for previously collected decoupling revenues in Ohio with interest, higher customer usage and higher rates associated with riders in Ohio, Pennsylvania and New Jersey for the recovery of certain capital investment programs.
Distribution services by customer class are summarized in the following table:
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | Actual | Weather-Adjusted | ||||||||||||||||||||||||||||||||||||
| Electric Distribution MWH Deliveries | 2022 | 2021 | Increase (Decrease) | 2022 | 2021 | Increase (Decrease) | ||||||||||||||||||||||||||||||||
| Residential | 42,860 | 42,890 | (0.1) | % | 41,910 | 42,458 | (1.3) | % | ||||||||||||||||||||||||||||||
Commercial(1) | 27,668 | 27,004 | 2.5 | % | 27,406 | 26,990 | 1.5 | % | ||||||||||||||||||||||||||||||
| Industrial | 41,568 | 40,659 | 2.2 | % | 41,569 | 40,659 | 2.2 | % | ||||||||||||||||||||||||||||||
| Total Electric Distribution MWH Deliveries | 112,096 | 110,553 | 1.4 | % | 110,885 | 110,107 | 0.7 | % | ||||||||||||||||||||||||||||||
(1) Includes street lighting.
Residential and commercial distribution deliveries were impacted by higher weather-related customer usage. Lower weather-adjusted residential deliveries primarily reflect a continuing trend of usage returning to pre-pandemic levels. Heating degree days were 3% above 2021 and 1% below normal. Cooling degree days were flat to 2021 and 13% above normal. Increases in industrial deliveries were primarily from the fabricated metal, transportation equipment manufacturing, food manufacturing and primary metal services sectors.
Compared to pre-pandemic levels in 2019, weather-adjusted residential distribution deliveries for the nine months ended September 30, 2022 increased 3%, while commercial and industrial deliveries decreased 5% and 1%, respectively.
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The following table summarizes the price and volume factors contributing to the $777 million increase in generation revenues for the first nine months of 2022, as compared to the same period of 2021:
| Source of Change in Generation Revenues | Increase (Decrease) | |||||||
| (In millions) | ||||||||
| Retail: | ||||||||
| Change in sales volumes | $ | 217 | ||||||
| Change in prices | 412 | |||||||
| 629 | ||||||||
| Wholesale: | ||||||||
| Change in sales volumes | (9) | |||||||
| Change in prices | 162 | |||||||
| Capacity revenue | (5) | |||||||
| 148 | ||||||||
| Change in Generation Revenues | $ | 777 | ||||||
The increase in retail generation sales volumes was primarily due to higher weather-related usage and decreased customer shopping in New Jersey, Ohio and Pennsylvania. Total generation provided by alternative suppliers as a percentage of total MWH deliveries in the first nine months of 2022, as compared to the same period of 2021, decreased to 41% from 45% in New Jersey, to 83% from 86% in Ohio, and to 60% from 63% in Pennsylvania. The increase in retail generation prices primarily resulted from higher non-shopping generation auction rates. Retail generation sales, excluding those in West Virginia, have no material impact to earnings.
Wholesale generation revenues increased $148 million in the first nine months of 2022, as compared to the same period in 2021, primarily due to an increase in spot market energy prices, partially offset by lower capacity revenues and sales volumes. The difference between current wholesale generation revenues and certain energy costs incurred are deferred for future recovery or refund, with no material impact to current period earnings.
Operating Expenses —
Total operating expenses increased $844 million, primarily due to the following:
•Fuel costs increased $177 million during the first nine months of 2022, as compared to the same period of 2021, primarily due to higher unit costs and increased generation output. Due to the ENEC, fuel expense has no material impact on current period earnings.
•Purchased power costs, which have no material impact on current period earnings, increased $580 million during the first nine months of 2022, as compared to the same period of 2021, primarily due to higher market prices and increased volumes as described above.
| Source of Change in Purchased Power | Increase | |||||||
| (In millions) | ||||||||
| Purchases: | ||||||||
| Change due to unit costs | $ | 434 | ||||||
| Change due to volumes | 144 | |||||||
| 578 | ||||||||
| Capacity | 2 | |||||||
| Change in Purchased Power Costs | $ | 580 | ||||||
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•Other operating expenses increased $325 million in the first nine months of 2022, as compared to the same period of 2021, primarily due to:
•Higher network transmission expenses of $72 million. These costs are deferred for future recovery, resulting in no material impact on current period earnings.
•Higher expenses of $64 million resulting from lower capitalization of vegetation management costs.
•Higher expenses of $42 million resulting from lower capitalization of corporate support costs.
•Lower storm expenses of $15 million, of which $9 million was deferred for future recovery.
•Higher vegetation management in West Virginia, energy efficiency and other state mandated program costs of $62 million, which are deferred for future recovery, resulting in no material impact on current period earnings.
•Higher other operating and maintenance expenses of $70 million, primarily associated with higher regulated generation planned outage spend and accelerated maintenance activities into 2022 and higher materials costs.
•Higher expense due to the absence of a $27 million reduction to a reserve recognized in the third quarter of 2021.
•Higher uncollectible expenses of $3 million.
•Depreciation expense increased $35 million in the first nine months of 2022, as compared to the same period of 2021, primarily due to a higher asset base.
•Amortization (deferral) of regulatory assets, net decreased $409 million in the first nine months of 2022, as compared to the same period of 2021, primarily due to:
•$171 million decrease due to generation and transmission related deferrals primarily as a result of higher purchased power and fuel costs related to the ENEC and lower recovery of transmission related expenses,
•$109 million decrease due to the absence of the reduction of the New Jersey storm cost regulatory asset as a result of the Yards Creek sale,
•$68 million decrease due to the return of certain Tax Act savings to Pennsylvania customers,
•$55 million decrease due to customer refunds associated with the Ohio Stipulation,
•$31 million decrease due to lower recovery of previously deferred uncollectible expenses as a result of a return to pre-pandemic levels, partially offset by
•$25 million related to the net increases in other amortizations.
•General taxes increased $27 million in the first nine months of 2022, as compared to the same period of 2021, primarily due to higher gross receipts taxes and Ohio property taxes, partially offset by lower West Virginia Business and Occupation taxes as a result of a state tax law change that became effective July 2021.
•The absence of the gain on sale of the Yards Creek Generating Facility of $109 million, which was netted against the New Jersey storm deferral, as described above, resulting in no impact to earnings.
Other Expense —
Other expense increased $30 million in the first nine months of 2022, as compared to the same period of 2021, primarily due to higher pension and OPEB non-service costs, lower capitalized interest, and higher interest from borrowings under the regulated money pool, partially offset by lower interest on borrowings under the revolving credit facilities and other miscellaneous expenses.
Income Taxes —
Regulated Distribution’s effective tax rate was 20.5% and 20.6% for the nine months ended September 30, 2022 and 2021, respectively.
Regulated Transmission — First Nine Months of 2022 Compared with First Nine Months of 2021
Regulated Transmission’s net income decreased $5 million in the first nine months of 2022, as compared to the same period of 2021, primarily due to customer refunds and the reclassification of certain transmission capital assets that are not expected to be recoverable resulting from the FERC Audit, as further discussed below, partially offset by higher rate base and lower net financing costs.
Revenues —
Total revenues increased $164 million, primarily due to the recovery of higher operating expenses and a higher rate base, partially offset by expected customer refunds associated with the FERC Audit, as further discussed below.
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The following table shows revenues by transmission asset owner:
| For the Nine Months Ended September 30, | ||||||||||||||||||||
| Revenues by Transmission Asset Owner | 2022 | 2021 | Increase | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| ATSI | $ | 686 | $ | 607 | $ | 79 | ||||||||||||||
| TrAIL | 209 | 182 | 27 | |||||||||||||||||
| MAIT | 253 | 222 | 31 | |||||||||||||||||
| JCP&L | 151 | 126 | 25 | |||||||||||||||||
| MP, PE and WP | 98 | 96 | 2 | |||||||||||||||||
| Total Revenues | $ | 1,397 | $ | 1,233 | $ | 164 | ||||||||||||||
Operating Expenses —
Total operating expenses increased $214 million in the first nine months of 2022, as compared to the same period of 2021, primarily due to the reclassification of certain transmission capital asset to operating expenses as a results of the FERC Audit, as further discussed below, and higher operating and maintenance expenses, partially offset by a charge in the third quarter of 2021 resulting from the filed ATSI settlement. Other than the customer refunds and write off of nonrecoverable transmission assets, nearly all operating expenses are recovered through formula rates, resulting in no material impact on current period earnings.
Other Expense —
Total other expense decreased $37 million in the first nine months of 2022, as compared to the same period of 2021, primarily due to lower interest on borrowings under the revolving credit facilities, higher unregulated money pool interest income at FET, and higher capitalized financing cost.
Income Taxes —
Regulated Transmission’s effective tax rate was 22.7% and 24.0% for the nine months ended September 30, 2022 and 2021, respectively.
Corporate / Other — First Nine Months of 2022 Compared with First Nine Months of 2021
Financial results at Corporate/Other resulted in a $148 million decrease in net loss in the first nine months of 2022, as compared to the same period of 2021, primarily due to the absence of the DPA penalty in 2021, higher net investment income on certain equity method and other investments and lower interest expense from the FE debt redemptions discussed further below. These were partially offset by expenses associated with FE debt redemptions discussed below and higher unregulated money pool interest expense.
For the nine months ended September 30, 2021, FirstEnergy recorded a gain from discontinued operations, net of tax, of $47 million. The gain was primarily due to income tax benefits from the final true-up to the worthless stock deduction and a final federal NOL allocation between the FES Debtors and FirstEnergy resulting from the filing of the 2020 FirstEnergy federal income tax return during the third quarter of 2021.
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REGULATORY ASSETS AND LIABILITIES
Regulatory assets represent incurred costs that have been deferred because of their probable future recovery from customers through regulated rates. Regulatory liabilities represent amounts that are expected to be credited to customers through future regulated rates or amounts collected from customers for costs not yet incurred. FirstEnergy, the Utilities and the Transmission Companies net their regulatory assets and liabilities based on federal and state jurisdictions.
Management assesses the probability of recovery of regulatory assets, and settlement of regulatory liabilities, at each balance sheet date and whenever new events occur. Factors that may affect probability relate to changes in the regulatory environment, issuance of a regulatory commission order or passage of new legislation. Upon material changes to these factors, where applicable, FirstEnergy will record new regulatory assets and liabilities and will assess whether it is probable that currently recorded regulatory assets and liabilities will be recovered or settled in future rates.
The following table provides information about the composition of net regulatory assets and liabilities as of September 30, 2022, and December 31, 2021, and the changes during the nine months ended September 30, 2022:
| Net Regulatory Assets (Liabilities) by Source | September 30, 2022 | December 31, 2021 | Change | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Customer payables for future income taxes | $ | (2,515) | $ | (2,345) | $ | (170) | ||||||||||||||
| Spent nuclear fuel disposal costs | (77) | (101) | 24 | |||||||||||||||||
| Asset removal costs | (678) | (646) | (32) | |||||||||||||||||
| Deferred transmission costs | 19 | (3) | 22 | |||||||||||||||||
| Deferred generation costs | 222 | 118 | 104 | |||||||||||||||||
| Deferred distribution costs | 141 | 49 | 92 | |||||||||||||||||
| Storm-related costs | 683 | 660 | 23 | |||||||||||||||||
| Uncollectible and COVID-19 related costs | 63 | 56 | 7 | |||||||||||||||||
| Energy efficiency program costs | 77 | 47 | 30 | |||||||||||||||||
| New Jersey societal benefit costs | 99 | 109 | (10) | |||||||||||||||||
| Vegetation management costs | 57 | 33 | 24 | |||||||||||||||||
| Other | (59) | (30) | (29) | |||||||||||||||||
| Net Regulatory Liabilities included on the Consolidated Balance Sheets | $ | (1,968) | $ | (2,053) | $ | 85 | ||||||||||||||
The following is a description of the regulatory assets and liabilities described above:
Customer payables for future income taxes - Reflects amounts to be recovered or refunded through future rates to pay income taxes that become payable when rate revenue is provided to recover items such as AFUDC-equity and depreciation of property, plant and equipment for which deferred income taxes were not recognized for ratemaking purposes, including amounts attributable to federal and state tax rate changes such as the Tax Act and Pennsylvania House Bill 1342. These amounts are being amortized over the period in which the related deferred tax assets reverse, which is generally over the expected life of the underlying asset.
Spent nuclear fuel disposal costs - Reflects amounts collected from customers, and the investment income, losses and changes in fair value of the trusts for spent nuclear fuel disposal costs related to the former nuclear generating facilities, Oyster Creek and TMI-1.
Asset removal costs - Primarily represents the rates charged to customers that include a provision for the cost of future activities to remove assets, including obligations for which an ARO has been recognized, that are expected to be incurred at the time of retirement.
Deferred transmission costs - Reflects differences between revenues earned based on actual costs for the formula-rate Transmission Companies and the amounts billed, including amounts expected to be refunded to, or recoverable from, wholesale transmission customers resulting from the FERC Audit, as further described below, which amounts are recorded as a regulatory asset or liability and recovered or refunded, respectively, in subsequent periods. Also included is the recovery of non-market based costs or fees charged to certain of the Utilities by various regulatory bodies including FERC and RTOs, which can include PJM charges and credits for service including, but not limited to, procuring transmission services and transmission enhancement.
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Deferred generation costs - Primarily relates to regulatory assets associated with the securitized recovery of certain fuel and purchased power regulatory assets at the Ohio Companies (amortized through 2034) as well as the ENEC at MP and PE. MP and PE recover net power supply costs, including fuel costs, purchased power costs and related expenses, net of related market sales revenue through the ENEC. The ENEC rate is updated annually.
Deferred distribution costs - Primarily relates to the Ohio Companies’ deferral of certain expenses resulting from distribution and reliability related expenditures, including interest (amortized through 2036) and remaining refunds owed to customers associated with the PUCO-approved Ohio Stipulation.
Storm-related costs - Relates to the deferral of storm costs, which vary by jurisdiction. Approximately $187 million and $148 million are currently being recovered through rates as of September 30, 2022 and December 31, 2021, respectively.
Uncollectible and COVID-19 related costs - Includes the deferral of costs arising from COVID-19, including uncollectible expenses under new and existing orders prior to the pandemic.
Energy efficiency program costs - Relates to the recovery of costs in excess of revenues associated with energy efficiency programs including New Jersey energy efficiency and renewable energy programs, the Pennsylvania Companies’ EE&C programs, the Ohio Companies’ Demand Side Management and Energy Efficiency Rider, and PE’s EmPOWER Maryland Surcharge. Investments in certain of these energy efficiency programs earn a long-term return.
New Jersey societal benefit costs - Primarily relates to regulatory assets associated with MGP remediation, universal service and lifeline funds, and consumer education in New Jersey.
Vegetation management costs - Relates to regulatory assets in New Jersey and West Virginia associated with the recovery of certain distribution vegetation management costs as well as MAIT vegetation management costs (amortized through 2024).
The following table provides information about the composition of net regulatory assets that do not earn a current return as of September 30, 2022 and December 31, 2021, of which approximately $399 million and $228 million, respectively, are currently being recovered through rates over varying periods, through 2068, depending on the nature of the deferral and the jurisdiction.
| Regulatory Assets by Source Not Earning a Current Return | September 30, 2022 | December 31, 2021 | Change | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Deferred transmission costs | $ | 8 | $ | 13 | $ | (5) | ||||||||||||||
| Deferred generation costs | 176 | 63 | 113 | |||||||||||||||||
| Deferred distribution costs | 19 | 2 | 17 | |||||||||||||||||
| Storm-related costs | 571 | 549 | 22 | |||||||||||||||||
| COVID-19 related costs | 74 | 65 | 9 | |||||||||||||||||
| Vegetation management costs | 47 | 31 | 16 | |||||||||||||||||
| Other | 10 | 9 | 1 | |||||||||||||||||
| Regulatory Assets Not Earning a Current Return | $ | 905 | $ | 732 | $ | 173 | ||||||||||||||
CAPITAL RESOURCES AND LIQUIDITY
FirstEnergy’s business is capital intensive, requiring significant resources to fund operating expenses, construction and other investment expenditures, scheduled debt maturities and interest payments, dividend payments, and potential contributions to its pension plan.
FE and its distribution and transmission subsidiaries expect their existing sources of liquidity to remain sufficient to meet their respective anticipated obligations. In addition to internal sources to fund liquidity and capital requirements for the remainder of 2022 and beyond, FE and its distribution and transmission subsidiaries expect to rely on external sources of funds. Short-term cash requirements not met by cash provided from operations are generally satisfied through short-term borrowings. Long-term cash needs may be met through the issuance of long-term debt by FE and certain of its distribution and transmission subsidiaries to, among other things, fund capital expenditures and other capital-like investments, and refinance short-term and maturing long-term debt, subject to market conditions and other factors.
In alignment with FirstEnergy’s strategy to invest in its Regulated Distribution and Regulated Transmission segments as a fully regulated company, FirstEnergy is focused on maintaining balance sheet strength and flexibility. Specifically, at the regulated
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businesses, regulatory authority has been obtained for various regulated distribution and transmission subsidiaries to issue and/or refinance debt.
Any financing plans by FE or any of its consolidated subsidiaries, including the issuance of equity and debt, and the refinancing of short-term and maturing long-term debt are subject to market conditions and other factors. No assurance can be given that any such issuances, financing or refinancing, as the case may be, will be completed as anticipated or at all. Any delay in the completion of financing plans could require FE or any of its consolidated subsidiaries to utilize short-term borrowing capacity, which could impact available liquidity. In addition, FE and its consolidated subsidiaries expect to continually evaluate any planned financings, which may result in changes from time to time.
On November 6, 2021, FirstEnergy, along with FET, entered into the FET P&SA with Brookfield and the Brookfield Guarantors, pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction closed on May 31, 2022.
On December 13, 2021, FE privately issued to BIP Securities II-B L.P., an affiliate of Blackstone Infrastructure Partners L.P., 25,588,535 shares of FE’s common stock, par value $0.10 per share, at a price of $39.08 per share, representing an investment of $1.0 billion. On April 21, 2022, FERC approved the Blackstone representative’s ability to participate as a voting member of the FE Board. Sean T. Klimczak, the Blackstone Infrastructure Partners-selected representative, was elected to the FE Board at the 2022 annual shareholders’ meeting.
On October 18, 2021, FE, FET, the Utilities, and the Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses.
Together, these transactions enhance FirstEnergy’s credit profile, provide funding for the strategic investments discussed above, and address all of FirstEnergy’s equity plans, with the exception of annual issuances of up to $100 million under regular dividend reinvestment plans and employee benefit stock investment plans, through at least 2025. Also, as with the recently completed FET transaction, premium valuations of our distribution and transmission businesses, together with growth in cash flow from operations resulting from the investment opportunities described above, could provide FirstEnergy future optionality to accelerate further strengthening of the balance sheet and enhance shareholder value. As such, we are pursuing a sale of a minority stake in one of our transmission or distribution businesses.
As of September 30, 2022, FirstEnergy’s net deficit in working capital (current assets less current liabilities) was primarily due to accounts payable, current portions of long-term debt, and accrued interest, taxes, and compensation and benefits. FirstEnergy believes its cash from operations and available liquidity will be sufficient to meet its current working capital needs.
Short-Term Borrowings / Revolving Credit Facilities
On October 18, 2021, FE, FET, the Utilities, and the Transmission Companies entered into the 2021 Credit Facilities, which were six separate senior unsecured five-year syndicated revolving credit facilities with JPMorgan Chase Bank, N.A., Mizuho Bank, Ltd. and PNC Bank, National Association that replace the FE Revolving Facility and the FET Revolving Facility, and provide for aggregate commitments of $4.5 billion. The 2021 Credit Facilities are available until October 18, 2026, as follows:
•FE and FET, $1.0 billion revolving credit facility;
•Ohio Companies, $800 million revolving credit facility;
•Pennsylvania Companies, $950 million revolving credit facility;
•JCP&L, $500 million revolving credit facility;
•MP and PE, $400 million revolving credit facility; and
•Transmission Companies, $850 million credit facility.
Under the 2021 Credit Facilities, an aggregate amount of $4.5 billion is available to be borrowed, repaid and reborrowed, subject to each borrower’s respective sublimit under the respective facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses.
Borrowings under the 2021 Credit Facilities may be used for working capital and other general corporate purposes. Generally, borrowings under each of the credit facilities are available to each borrower separately and mature on the earlier of 364 days from the date of borrowing or the commitment termination date, as the same may be extended. Each of the 2021 Credit Facilities contain financial covenants requiring each borrower, with the exception of FE, to maintain a consolidated debt-to-total-capitalization ratio (as defined under each of the 2021 Credit Facilities) of no more than 65%, and 75% for FET, measured at the end of each fiscal quarter. FE is required under its 2021 Credit Facility to maintain a consolidated interest coverage ratio of not less than 2.50 times, measured at the end of each fiscal quarter for the last four fiscal quarters beginning with the quarter ending December 31, 2021.
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FirstEnergy’s 2021 Credit Facilities bear interest at fluctuating interest rates, primarily based on LIBOR. LIBOR tends to fluctuate based on general interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions. FirstEnergy has not hedged its interest rate exposure with respect to its floating rate debt. Accordingly, FirstEnergy’s interest expense for any particular period will fluctuate based on LIBOR and other variable interest rates. On July 27, 2017, the FCA (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. Subsequently, on March 5, 2021, IBA (the entity that calculates and publishes LIBOR) and FCA made public statements regarding the future cessation of LIBOR. IBA permanently ceased publication for 1-week and 2-month LIBOR settings and all settings for non-U.S. dollar LIBOR on December 31, 2021. According to the FCA, IBA will permanently cease to publish overnight, 1-month, 3-month, 6-month and 12-month LIBOR settings on June 30, 2023. IBA did not identify any successor administrator in its announcement. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after such end dates, and there is considerable uncertainty regarding the publication or representativeness of LIBOR beyond such end dates. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is seeking to replace U.S. dollar LIBOR with a newly created index, SOFR, calculated based on repurchase agreements backed by treasury securities. FirstEnergy’s 2021 Credit Facilities provide a mechanism to automatically transition to a SOFR-based benchmark when all U.S. dollar LIBOR settings are no longer provided or are no longer representative. In addition, FirstEnergy’s 2021 Credit Facilities provide an option for the applicable borrower and lender to jointly elect to transition early to a SOFR-based benchmark, or in certain circumstances, an alternative benchmark replacement. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere. To the extent these interest rates increase, interest expense will increase. If sources of capital for us are reduced, capital costs could increase materially. Restricted access to capital markets and/or increased borrowing costs could have an adverse effect on FirstEnergy’s results of operations, cash flows, financial condition and liquidity.
FirstEnergy had no outstanding short-term borrowings as of September 30, 2022 and December 31, 2021. FirstEnergy’s available liquidity from external sources as of October 24, 2022, was as follows:
| Revolving Credit Facility | Maturity | Commitment | Available Liquidity | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| FE and FET | October 2026 | $ | 1,000 | $ | 997 | |||||||||||||||
| Ohio Companies | October 2026 | 800 | 800 | |||||||||||||||||
| Pennsylvania Companies | October 2026 | 950 | 950 | |||||||||||||||||
| JCP&L | October 2026 | 500 | 499 | |||||||||||||||||
| MP and PE | October 2026 | 400 | 400 | |||||||||||||||||
| Transmission Companies | October 2026 | 850 | 850 | |||||||||||||||||
| Subtotal | $ | 4,500 | $ | 4,496 | ||||||||||||||||
| Cash and cash equivalents | — | 207 | ||||||||||||||||||
| Total | $ | 4,500 | $ | 4,703 | ||||||||||||||||
The following table summarizes the limitations on short-term indebtedness applicable to each borrower under current regulatory approvals and applicable statutory and/or charter limitations as of September 30, 2022:
| Individual Borrower | Regulatory and Other Short-Term Debt Limitations | |||||||||||||
| (In millions) | ||||||||||||||
| FE and FET | N/A | |||||||||||||
| OE, CEI, JCP&L, ME, MP, and ATSI | $ | 500 | (1) | |||||||||||
| TE, PN, and WP | 300 | (1) | ||||||||||||
| PE and Penn | 150 | (1) | ||||||||||||
| TrAIL and MAIT | 400 | (1) | ||||||||||||
(1) Includes amounts which may be borrowed under the regulated companies’ money pool. | ||||||||||||||
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Subject to each borrower’s sublimit, the amounts noted below are available for the issuance of LOCs (subject to borrowings drawn under the 2021 Credit Facilities) expiring up to one year from the date of issuance. The stated amount of outstanding LOCs will count against total commitments available under each of the 2021 Credit Facilities and against the applicable borrower’s borrowing sublimit. As of September 30, 2022, FirstEnergy had $4 million in outstanding LOCs.
| Revolving Credit Facility | LOC Availability | |||||||
| (In millions) | ||||||||
| FE and FET | $ | 100 | ||||||
| Ohio Companies | 150 | |||||||
| Pennsylvania Companies | 200 | |||||||
| JCP&L | 100 | |||||||
| MP and PE | 100 | |||||||
| Transmission Companies | 200 | |||||||
The 2021 Credit Facilities do not contain provisions that restrict the ability to borrow or accelerate payment of outstanding advances in the event of any change in credit ratings of the borrowers. Pricing is defined in “pricing grids,” whereby the cost of funds borrowed under the 2021 Credit Facilities are related to the credit ratings of the company borrowing the funds. Additionally, borrowings under each of the 2021 Credit Facilities are subject to the usual and customary provisions for acceleration upon the occurrence of events of default, including a cross-default for other indebtedness in excess of $100 million.
As of September 30, 2022, the borrowers were in compliance with the applicable interest coverage and debt-to-total-capitalization ratio covenants in each case as defined under the 2021 Credit Facilities.
FirstEnergy Money Pools
FirstEnergy’s utility operating subsidiary companies also have the ability to borrow from each other and FE to meet their short-term working capital requirements. Similar but separate arrangements exist among FirstEnergy’s unregulated companies with AE Supply, FE, FET, FEV and certain other unregulated subsidiaries. FESC administers these money pools and tracks surplus funds of FE and the respective regulated and unregulated subsidiaries, as the case may be, as well as proceeds available from bank borrowings. Companies receiving a loan under the money pool agreements must repay the principal amount of the loan, together with accrued interest, within 364 days of borrowing the funds. The rate of interest is the same for each company receiving a loan from their respective pool and is based on the average cost of funds available through the pool. The average interest rate for borrowings through the third quarter of 2022 was 1.59% per annum for the regulated companies’ money pool and 1.52% per annum for the unregulated companies’ money pool.
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Long-Term Debt Capacity
FE’s and its subsidiaries’ access to capital markets and costs of financing are influenced by the credit ratings of their securities. The following table displays FE’s and its subsidiaries’ credit ratings as of October 24, 2022:
| Corporate Credit Rating | Senior Secured | Senior Unsecured | Outlook/CreditWatch (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuer | S&P | Moody’s | Fitch | S&P | Moody’s | Fitch | S&P | Moody’s | Fitch | S&P | Moody’s | Fitch | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FE | BBB- | Ba1 | BBB- | — | — | — | BB+ | Ba1 | BBB- | S | P | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AGC | BB+ | Baa2 | BBB | — | — | — | — | — | — | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ATSI | BBB | A3 | BBB | — | — | — | BBB | A3 | BBB+ | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CEI | BBB | Baa3 | BBB | A- | Baa1 | A- | BBB | Baa3 | BBB+ | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FET | BBB- | Baa2 | BBB- | — | — | — | BB+ | Baa2 | BBB- | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| JCP&L | BBB | A3 | BBB | — | — | — | BBB | A3 | BBB+ | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ME | BBB | A3 | BBB | — | — | — | BBB | A3 | BBB+ | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| MAIT | BBB | A3 | BBB | — | — | — | BBB | A3 | BBB+ | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| MP | BBB | Baa2 | BBB | A- | A3 | A- | BBB | Baa2 | — | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OE | BBB | A3 | BBB | A- | A1 | A- | BBB | A3 | BBB+ | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PN | BBB | Baa1 | BBB | — | — | — | BBB | Baa1 | BBB+ | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Penn | BBB | A3 | BBB | A- | A1 | — | — | — | — | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PE | BBB | Baa2 | BBB | A- | A3 | A- | — | — | — | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TE | BBB | Baa2 | BBB | A- | A3 | A- | — | — | — | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TrAIL | BBB | A3 | BBB | — | — | — | BBB | A3 | BBB+ | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| WP | BBB | A3 | BBB | A- | A1 | A- | — | — | — | S | S | S | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) S = Stable, P = Positive
On September 13, 2022, Moody’s issued a one notch downgrade to all applicable ratings for CEI and TE and revised their outlooks to stable.
The applicable undrawn and drawn margin on the 2021 Credit Facilities are subject to ratings based pricing grids. The applicable fee paid on the undrawn commitments under the 2021 Credit Facilities are based on each borrower’s senior unsecured non-credit enhanced debt ratings as determined by S&P and Moody’s. The fee paid on actual borrowings are determined based on each borrower’s senior unsecured non-credit enhanced debt ratings as determined by S&P and Moody’s.
The interest rates payable on approximately $2.1 billion in FE’s senior unsecured notes are subject to adjustments from time to time if the ratings on the notes from any one or more of S&P, Moody’s and Fitch decreases to a rating set forth in the applicable governing documents. Generally a one-notch downgrade by the applicable rating agency may result in a 25 basis point coupon rate increase beginning at BB, Ba1, and BB+ for S&P, Moody’s and Fitch, respectively, to the extent such rating is applicable to the series of outstanding senior unsecured notes, during the next interest period, subject to an aggregate cap of 2% from issuance interest rate.
Debt capacity is subject to the consolidated interest coverage ratio in the 2021 Credit Facilities. As of September 30, 2022, FirstEnergy could incur approximately $740 million of incremental interest expense or incur a $1.8 billion reduction to the consolidated interest coverage earnings numerator, as defined under the covenant, and FE would remain within the limitations of the financial covenant requirements by the 2021 Credit Facilities.
Cash Requirements and Commitments
FirstEnergy has certain obligations and commitments to make future payments under contracts. For an in-depth discussion of FirstEnergy’s cash requirements and commitments, see “Capital Resources and Liquidity - Cash Requirements and Commitments" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" within FirstEnergy’s Form 10-K for the year ended December 31, 2021 (filed on February 16, 2022).
Changes in Cash Position
As of September 30, 2022, FirstEnergy had $251 million of cash and cash equivalents and $26 million of restricted cash compared to approximately $1.5 billion of cash and cash equivalents and $49 million of restricted cash as of December 31, 2021, on the Consolidated Balance Sheets.
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Cash Flows From Operating Activities
FirstEnergy’s most significant sources of cash are derived from electric service provided by its distribution and transmission operating subsidiaries. The most significant use of cash from operating activities is buying electricity to serve non-shopping customers and paying fuel suppliers, employees, tax authorities, lenders and others for a wide range of materials and services.
Cash provided from operating activities was $1,837 million compared to $2,104 million in the first nine months of 2022 and 2021, respectively. The decrease is primarily due to:
•Rate refunds and rate credits provided to Ohio customers during the first nine months of 2022 under the PUCO-approved Ohio Stipulation,
•Higher operating expenses from lower capitalization of certain vegetation management and corporate support costs,
•The absence of accounts receivable working capital improvements in the first nine months of 2021, when collection activity improved since the start of the pandemic. Accounts receivable working capital was also impacted by higher generation prices charged to customers and higher customer usage and demands, partially offset by,
•Higher cash flow generated from regulated capital investments made since the second quarter of 2021,
•Higher cash collateral receipts primarily from certain generation suppliers that serve shopping customers due to the rise in power prices,
•Higher cash dividend distributions received by FEV from its equity investment in Global Holding, and
•Improvements in accounts payable working capital from the implementation of certain FE Forward initiatives.
Cash Flows From Financing Activities
In the first nine months of 2022 and 2021, cash used for financing activities was $1,068 million and $1,410 million, respectively. The following table summarizes financing activities for the first nine months of 2022 and 2021:
| For the Nine Months Ended September 30, | ||||||||||||||
| Financing Activities | 2022 | 2021 | ||||||||||||
| (In millions) | ||||||||||||||
| New Issues: | ||||||||||||||
| Unsecured notes | $ | 300 | $ | 1,150 | ||||||||||
| Senior secured notes | — | 150 | ||||||||||||
| FMBs | — | 200 | ||||||||||||
| $ | 300 | $ | 1,500 | |||||||||||
| Redemptions / Repayments: | ||||||||||||||
| Unsecured notes | $ | (2,636) | $ | — | ||||||||||
| FMBs | (200) | — | ||||||||||||
| Senior secured notes | (67) | (58) | ||||||||||||
| $ | (2,903) | $ | (58) | |||||||||||
| Proceeds from FET minority interest sale, net of transaction costs | $ | 2,348 | $ | — | ||||||||||
| Distributions to FET minority interest | $ | (15) | $ | — | ||||||||||
| Capital Call from FET minority interest | $ | 9 | $ | — | ||||||||||
| Discounts (premiums) on debt issuances and redemptions, net | $ | (137) | $ | 29 | ||||||||||
| Short-term borrowings redemptions, net | $ | — | $ | (2,200) | ||||||||||
| Common stock dividend payments | $ | (667) | $ | (636) | ||||||||||
| Other | $ | (3) | $ | (45) | ||||||||||
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FirstEnergy had the following redemptions and issuances during the nine months ended September 30, 2022:
| Company | Type | Redemption / Issuance Date | Interest Rate | Maturity | Amount (in Millions) | Description | ||||||||||||||
| Redemptions | ||||||||||||||||||||
| FE | Unsecured Notes | January, 2022 | 4.25% | 2023 | $850 | In December 2021, FE provided notice of redemption with a make-whole premium of approximately $38 million ($30 million after-tax). | ||||||||||||||
| TE | Senior Secured Notes | February, 2022 | 2.65% | 2028 | $25 | On January 27, 2022, TE instructed its indenture trustee to provide notice of partial redemption. | ||||||||||||||
| CEI | Senior Notes, Series A | March, 2022 | 2.77% | 2034 | $150 | On February 11, 2022, CEI instructed its indenture trustee to provide notice of full redemption. | ||||||||||||||
| WP | FMBs | April, 2022 | 3.34% | 2022 | $100 | WP redeemed FMBs that became due. | ||||||||||||||
| FE | Unsecured Notes | June, 2022 | 2.85% | 2022 | $500 | On May 23, 2022 FE provided notice of redemption. | ||||||||||||||
| FE | Unsecured Notes | June, 2022 | 7.375% | 2031 | $715 | On May 25, 2022, FE commenced an offer to purchase for cash a portion of its 2031 Notes and 2047 Notes, which had $1.5 billion and $1 billion principal amounts outstanding, respectively. A portion of these notes were redeemed for approximately $1.1 billion, including a tender premium of approximately $101 million ($80 million after-tax). In addition, FE recognized approximately $7 million ($5 million after-tax) of deferred cash flow hedge losses and $10 million ($8 million after-tax) in other unamortized debt costs and fees associated with the FE debt redemptions. | ||||||||||||||
| FE | Unsecured Notes | June, 2022 | 4.85% | 2047 | $284 | |||||||||||||||
| Penn | FMBs | June, 2022 | 6.09% | 2022 | $100 | Penn redeemed FMBs that became due. | ||||||||||||||
| FE | Unsecured Notes | August-September 2022 | 7.375% | 2031 | $27 | During the third quarter of 2022, FE repurchased a portion of the principal amount of its 2031 Notes and 2047 Notes through the open market for approximately $134 million including a discount of approximately $3 million ($2 million after tax). In addition, FE recognized approximately $2 million ($1 million after-tax) in other unamortized debt costs related to the FE open market repurchases. | ||||||||||||||
| FE | Unsecured Notes | August-September 2022 | 4.85% | 2047 | $110 | |||||||||||||||
| Issuances | ||||||||||||||||||||
| Penn | FMBs | April, 2022 | 3.79% | 2032 | $150 | Proceeds are expected to be received on November 29, 2022, and used to repay short-term borrowings. | ||||||||||||||
| OE | Senior Unsecured Notes | September, 2022 | 5.50% | 2033 | $300 | Proceeds were used to repay borrowings outstanding under the regulated money pool, to finance capital expenditures, to fund working capital needs and for other general corporate purposes. | ||||||||||||||
FE or its affiliates may, from time to time, seek to retire or purchase outstanding debt through open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as FE or its affiliates may determine, and will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.
Cash Flows From Investing Activities
Cash used for investing activities in the first nine months of 2022 principally represented cash used for property additions. The following table summarizes investing activities for the first nine months of 2022 and 2021:
| For the Nine Months Ended September 30, | Increase | |||||||||||||||||||
| Cash Used for Investing Activities | 2022 | 2021 | (Decrease) | |||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Property Additions: | ||||||||||||||||||||
| Regulated Distribution | $ | 1,063 | $ | 993 | $ | 70 | ||||||||||||||
| Regulated Transmission | 700 | 732 | (32) | |||||||||||||||||
| Corporate / Other | 25 | 43 | (18) | |||||||||||||||||
| Proceeds from sale of Yards Creek | — | (155) | 155 | |||||||||||||||||
| Asset removal costs | 151 | 178 | (27) | |||||||||||||||||
| Other | 64 | 20 | 44 | |||||||||||||||||
| $ | 2,003 | $ | 1,811 | $ | 192 | |||||||||||||||
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Cash used for investing activities for the first nine months of 2022 increased $192 million, compared to the same period of 2021, primarily due to the absence of proceeds from the sale of Yards Creek received in the first quarter of 2021.
GUARANTEES AND OTHER ASSURANCES
FirstEnergy has various financial and performance guarantees and indemnifications, which are issued in the normal course of business. These contracts include performance guarantees, stand-by letters of credit, debt guarantees, surety bonds and indemnifications. FirstEnergy enters into these arrangements to facilitate commercial transactions with third parties by enhancing the value of the transaction to the third party. The maximum potential amount of future payments FirstEnergy and its subsidiaries could be required to make under these guarantees as of September 30, 2022, was approximately $1.1 billion, as summarized below:
| Guarantees and Other Assurances | Maximum Exposure | |||||||
| (In millions) | ||||||||
| FE’s Guarantees on Behalf of its Consolidated Subsidiaries | ||||||||
| Deferred compensation arrangements | $ | 509 | ||||||
| Vehicle leases | 75 | |||||||
| Other | 7 | |||||||
| 591 | ||||||||
| FE’s Guarantees on Other Assurances | ||||||||
| Surety Bonds | 326 | |||||||
| Deferred compensation arrangements | 130 | |||||||
| LOCs | 4 | |||||||
| 460 | ||||||||
| Total Guarantees and Other Assurances | $ | 1,051 | ||||||
Collateral and Contingent-Related Features
In the normal course of business, FE and its subsidiaries may enter into physical or financially settled contracts for the sale and purchase of electric capacity, energy, fuel and emission allowances. Certain agreements contain provisions that require FE or its subsidiaries to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon FE’s or its subsidiaries’ credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty.
As of September 30, 2022, $36 million of collateral has been posted by FE or its subsidiaries and is included in “Prepaid taxes and other current assets” on FirstEnergy’s Consolidated Balance Sheets. FE or its subsidiaries are holding $321 million of cash collateral as of September 30, 2022, from certain generation suppliers, primarily due to the rise in power prices, and such amount is included in “Other current liabilities” on FirstEnergy’s Consolidated Balance Sheets.
These credit-risk-related contingent features stipulate that if the subsidiary were to be downgraded or lose its investment grade credit rating (based on its senior unsecured debt rating), it would be required to provide additional collateral. The following table discloses the potential additional credit rating contingent contractual collateral obligations as of September 30, 2022:
| Potential Collateral Obligations | Utilities and Transmission Companies | FE | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Contractual Obligations for Additional Collateral | |||||||||||||||||||||||
| Upon further downgrade | $ | 64 | $ | — | $ | 64 | |||||||||||||||||
Surety Bonds (collateralized amount)(1) | 61 | 249 | 310 | ||||||||||||||||||||
| Total Exposure from Contractual Obligations | $ | 125 | $ | 249 | $ | 374 | |||||||||||||||||
(1)Surety bonds are not tied to a credit rating. Surety Bonds’ impact assumes maximum contractual obligations, which is ordinarily 100% of the face amount of the surety bond except with respect to $39 million of surety bond obligations for which the collateral obligation is capped at 60% of the face amount, and typical obligations require 30 days to cure.
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MARKET RISK INFORMATION
FirstEnergy uses various market risk sensitive instruments, including derivative contracts, primarily to manage the risk of price and interest rate fluctuations. FirstEnergy’s Enterprise Risk Management Committee, comprised of members of senior management, provides general oversight for risk management activities throughout FirstEnergy.
Commodity Price Risk
FirstEnergy has limited exposure to financial risks resulting from fluctuating commodity prices, such as prices for electricity, coal and energy transmission. FirstEnergy’s Risk Management Department and Enterprise Risk Management Committee are responsible for promoting the effective design and implementation of sound risk management programs and overseeing compliance with corporate risk management policies and established risk management practice.
The valuation of derivative contracts is based on observable market information. As of September 30, 2022, FirstEnergy has a net asset of $15 million in non-hedge derivative contracts that are related to FTRs at certain of the Utilities. FTRs are subject to regulatory accounting and do not impact earnings.
Equity Price Risk
As of September 30, 2022, the FirstEnergy pension plan assets were allocated approximately as follows: 34% in equity securities, 17% in fixed income securities, 13% in alternatives, 14% in real estate, 15% in private debt/equity, 3% in derivatives and 4% in cash and short-term securities. Due to the American Rescue Plan Act of 2021, under current assumptions, including an expected future annual return on assets of 7.5%, FirstEnergy does not currently expect to have a required contribution to the pension plan. However, a decline in the value of pension plan assets could result in additional funding requirements and FirstEnergy may elect to contribute to the pension plan voluntarily. As of September 30, 2022, FirstEnergy’s OPEB plan assets were allocated approximately as follows: 46% in equity securities, 51% in fixed income securities and 3% in cash and short-term securities. See Note 4, “Pension and Other Post-Employment Benefits,” of the Notes to Consolidated Financial Statements for additional details on FirstEnergy’s pension and OPEB plans.
In the nine months ended September 30, 2022, FirstEnergy’s pension and OPEB plan assets have lost approximately 22.0% and 17.2%, respectively, as compared to an annual expected return on plan assets of 7.5%.
Interest Rate Risk
FirstEnergy recognizes net actuarial gains or losses for its pension and OPEB plans in the fourth quarter of each year and whenever a plan is determined to qualify for a remeasurement. A primary factor contributing to these actuarial gains and losses are changes in the discount rates used to value pension and OPEB obligations as of the measurement date and the difference between expected and actual returns on the plans’ assets.
The remaining components of pension and OPEB expense, primarily service costs, interest cost on obligations, expected return on plan assets and amortization of prior service costs, are set at the beginning of the calendar year and are recorded on a monthly basis. Changes in asset performance and discount rates will not impact these pension costs for 2022, however, future years could be impacted by changes in the market.
FirstEnergy utilizes a spot rate approach in the estimation of the components of benefit cost by applying specific spot rates along the full yield curve to the relevant projected cash flows. As of September 30, 2022, the spot rate was 5.48% and 5.42% for pension and OPEB obligations, respectively, as compared to 3.02% and 2.84% as of December 31, 2021, respectively.
Estimating the final discount rate and return or loss on plan assets as of the year-end remeasurement date is difficult to predict based on the currently volatile equity markets and rising interest rate environment. As a result, FirstEnergy is unable to determine or meaningfully project the mark-to-market adjustment, or estimate a reasonable range of adjustment, that will be recorded as of December 31, 2022.
FirstEnergy’s 2021 Credit Facilities bear interest at fluctuating interest rates, primarily based on LIBOR. LIBOR tends to fluctuate based on general interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions. FirstEnergy has not hedged its interest rate exposure with respect to its floating rate debt. Accordingly, FirstEnergy’s interest expense for any particular period will fluctuate based on LIBOR and other variable interest rates.
Economic Conditions
Economic conditions following the COVID-19 pandemic, have increased lead times across numerous material categories, with some as much as doubling from previous times. Some key suppliers have struggled with labor shortages and raw material availability, which along with increasing inflationary pressure, have increased the costs of certain materials, equipment and contractors. FirstEnergy has taken steps to mitigate these risks and does not currently expect service disruptions or any material
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impact on its capital spending plan. However, the situation remains fluid and a prolonged continuation or further increase in supply chain disruptions could have an adverse effect on FirstEnergy’s results of operations, cash flow and financial condition.
CREDIT RISK
Credit risk is the risk that FirstEnergy would incur a loss as a result of nonperformance by counterparties of their contractual obligations. FirstEnergy maintains credit policies and procedures with respect to counterparty credit (including requirement that counterparties maintain specified credit ratings) and require other assurances in the form of credit support or collateral in certain circumstance in order to limit counterparty credit risk. FirstEnergy has concentrations of suppliers and customers among electric utilities, financial institutions and energy marketing and trading companies. These concentrations may impact FirstEnergy’s overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions. In the event an energy supplier of the Ohio Companies, Pennsylvania Companies, JCP&L or PE defaults on its obligation, the affected company would be required to seek replacement power in the market. In general, subject to regulatory review or other processes, it is expected that appropriate incremental costs incurred by these entities would be recoverable from customers through applicable rate mechanisms, thereby mitigating the financial risk for these entities. FirstEnergy’s credit policies to manage credit risk include the use of an established credit approval process, daily credit mitigation provisions, such as margin, prepayment or collateral requirements. FirstEnergy and its subsidiaries may request additional credit assurance, in certain circumstances, in the event that the counterparties’ credit ratings fall below investment grade, their tangible net worth falls below specified percentages or their exposures exceed an established credit limit.
OUTLOOK
INCOME TAXES
On August 16, 2022, President Biden signed into law the IRA of 2022, which, among other things, imposes a new 15% corporate alternative minimum tax based on “adjusted financial statement income”, applicable to corporations with a three-year average adjusted financial statement income over $1 billion. The alternative minimum tax is effective for the 2023 tax year and, if applicable, corporations must pay the greater of the regular corporate income tax or the alternative minimum tax. Although NOL carryforwards created through the regular corporate income tax system cannot be used to reduce the alternative minimum tax, financial statement net operating losses can be used to reduce adjusted financial statement income and the amount of alternative minimum tax owed. Additionally, for alternative minimum taxes paid, corporations will receive a tax credit to be carried forward without limitation and applied against future regular corporate income tax liability. The IRA of 2022 as enacted requires the U.S. Treasury to provide regulations and other guidance necessary to administer the alternative minimum tax, including further defining allowable adjustments to determine adjusted financial statement income, which directly impacts the amount of alternative minimum tax to be paid. Currently, FirstEnergy believes that it is more likely than not that it will be subject to the alternative minimum tax beginning in 2023, however, until such U.S. Treasury guidance is issued, the amount of alternative minimum tax FirstEnergy would pay could be significantly different than current estimates or it may not be a payer at all. Further, due to the existing limitations on NOL carryforward utilization, FirstEnergy already expected to pay some regular corporate income tax so the amount of any potential incremental cash tax it may pay beginning in 2023 is not expected to have a material financial impact based on its current analysis. As of September 30, 2022, FirstEnergy has approximately $7 billion in Federal NOL carryforwards ($1.5 billion, net of tax) a portion of which begin to expire in 2031 and $4.9 billion ($1.0 billion, net of tax) of which has no expiration.
STATE REGULATION
Each of the Utilities' retail rates, conditions of service, issuance of securities and other matters are subject to regulation in the states in which it operates - in Maryland by the MDPSC, in New Jersey by the NJBPU, in Ohio by the PUCO, in Pennsylvania by the PPUC, in West Virginia by the WVPSC and in New York by the NYPSC. The transmission operations of PE in Virginia, ATSI in Ohio, and the Transmission Companies in Pennsylvania are subject to certain regulations of the VSCC, PUCO and PPUC, respectively. In addition, under Ohio law, municipalities may regulate rates of a public utility, subject to appeal to the PUCO if not acceptable to the utility. Further, if any of the FirstEnergy affiliates were to engage in the construction of significant new transmission facilities, depending on the state, they may be required to obtain state regulatory authorization to site, construct and operate the new transmission facility.
MARYLAND
PE operates under MDPSC approved base rates that were effective as of March 23, 2019. PE also provides SOS pursuant to a combination of settlement agreements, MDPSC orders and regulations, and statutory provisions. SOS supply is competitively procured in the form of rolling contracts of varying lengths through periodic auctions that are overseen by the MDPSC and a third-party monitor. Although settlements with respect to SOS supply for PE customers have expired, service continues in the same manner until changed by order of the MDPSC. PE recovers its costs plus a return for providing SOS. PE expects to file a new base rate case in early 2023, consistent with the MDPSC’s order issued on March 22, 2019.
The EmPOWER Maryland program requires each electric utility to file a plan to reduce electric consumption and demand 0.2% per year, up to the ultimate goal of 2% annual savings, for the duration of the 2021-2023 EmPOWER Maryland program cycles to
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the extent the MDPSC determines that cost-effective programs and services are available. PE's approved 2021-2023 EmPOWER Maryland plan continues and expands upon prior years' programs for a projected total investment of approximately $148 million over the three-year period. PE recovers program investments with a return through an annually reconciled surcharge, with most costs subject to recovery over a five-year period with a return on the unamortized balance. On August 16, 2022, the MDPSC ordered each utility to file, by October 28, 2022, a set of plans for paying down all amortization balances by the scheduled expiration of the EmPOWER program on December 31, 2029. PE expects to submit its required plan by October 28, 2022. Maryland law only allows for the utility to recover lost distribution revenue attributable to energy efficiency or demand reduction programs through a base rate case proceeding, and to date, such recovery has not been sought or obtained by PE.
NEW JERSEY
JCP&L operates under NJBPU approved rates that took effect as of January 1, 2021, and were effective for customers as of November 1, 2021. JCP&L provides BGS for retail customers who do not choose a third-party EGS and for customers of third-party EGSs that fail to provide the contracted service. All New Jersey EDCs participate in this competitive BGS procurement process and recover BGS costs directly from customers as a charge separate from base rates.
JCP&L has instituted energy efficiency and peak demand reduction programs in accordance with the New Jersey Clean Energy Act as approved by the NJBPU in April 2021. The NJBPU approved plans include recovery of lost revenues resulting from the programs and a three-year plan including total program costs of $203 million, of which $158 million of investment is recovered over a ten-year amortization period with a return as well as operations and maintenance expenses and financing costs of $45 million recovered on an annual basis.
In December 2017, the NJBPU issued proposed rules to modify its current CTA policy in base rate cases to: (i) calculate savings using a five-year look back from the beginning of the test year; (ii) allocate savings with 75% retained by the company and 25% allocated to customers; and (iii) exclude transmission assets of electric distribution companies in the savings calculation. On January 17, 2019, the NJBPU approved the proposed CTA rules with no changes. On May 17, 2019, the NJ Rate Counsel filed an appeal with the Appellate Division of the Superior Court of New Jersey and on June 7, 2021, the Superior Court issued an order reversing the NJBPU’s CTA rules and remanded the case back to the NJBPU. Specifically, the Court’s ruling requires 100% of the CTA savings to be credited to customers in lieu of the NJBPU’s current policy requiring 25%. On September 19, 2022, the NJBPU issued a notice to re-adopt its rules of practice, including proposed changes to the rules regarding CTA policy in base rate cases consistent with the Superior Court’s June 7, 2021 order. Once the proposed rules of practice are final, they will be applied on a prospective basis in a future base rate case, however, it is not expected to have a material adverse effect on FirstEnergy’s results or financial condition.
On October 28, 2020, the NJBPU approved a stipulated settlement between JCP&L and various parties, resolving JCP&L’s request for distribution base rate increase. The settlement provided for a $94 million annual base distribution revenues increase for JCP&L based on an ROE of 9.6%, which became effective for customers on November 1, 2021. The settlement additionally provided that JCP&L would be subject to a management audit, which began in May 2021 and is currently ongoing. JCP&L anticipates that the management report will be issued by the end of the year.
On September 14, 2021, JCP&L submitted a supplemental filing with the NJBPU to revise a previously filed AMI Program, which proposed the deployment of approximately 1.2 million advanced meters. Under the revised AMI Program, during the first six years of the AMI Program from 2022 through 2027, JCP&L estimates costs of $494 million, consisting of capital investments of approximately $390 million, incremental operations and maintenance expenses of approximately $73 million and cost of removal of $31 million. On February 8, 2022, JCP&L filed with the NJBPU a stipulation entered into with the NJBPU staff, NJ Rate Counsel and others, that, pending NJBPU approval, would affirm the terms of the revised AMI Program. The Stipulation, which was approved by NJBPU order on February 23, 2022, also provides that the revised AMI Program-related capital costs, the legacy meter stranded costs, and the operations and maintenance expense will be deferred and placed in regulatory assets, with such amounts sought to be recovered in the JCP&L’s subsequent base rate cases.
On July 2, 2020, the NJBPU issued an order allowing New Jersey utilities to track and create a regulatory asset for future recovery of all prudently incurred incremental costs arising from the COVID-19 pandemic beginning March 9, 2020 and continuing until the New Jersey Governor issues an order stating that the COVID-19 pandemic is no longer in effect. New Jersey utilities can request recovery of such regulatory asset in a stand-alone COVID-19 regulatory asset filing or future base rate case. On October 28, 2020, the NJBPU issued an order expanding the scope of the proceeding to examine all pandemic issues, including recovery of the COVID-19 regulatory assets, by way of a generic proceeding. Through various executive orders issued by the New Jersey Governor, the moratorium period was extended to December 31, 2021. On December 21, 2021, the moratorium on residential disconnections for certain entities providing utility service was extended until March 15, 2022. The moratorium on residential disconnections was not extended for investor-owned electric utilities such as JCP&L, but does require that investor-owned electric public utilities offer qualifying residential customers deferred payment arrangements meeting certain minimum criteria prior to disconnecting service. Additionally, while the moratorium on residential disconnections for certain entities providing electric service was not extended after March 15, 2022, new legislation was enacted on March 25, 2022, prohibiting utilities from disconnecting electric service to customers that have applied for utility bill assistance before June 15, 2022 until such time as the state agency administering the assistance program makes a decision on the application and further
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requiring that all utilities offer a deferred payment arrangement meeting certain minimum criteria after the state agency’s decision on the application has been made.
Pursuant to an NJBPU order requiring all New Jersey electric distribution companies to file electric vehicle programs, JCP&L filed its program on March 1, 2021. JCP&L’s proposed electric vehicle program consisted of six sub-programs, including a consumer education and outreach initiative that would begin on January 1, 2022, and continue over a four-year period. On May 2, 2022, JCP&L filed with the NJBPU a stipulation entered into with the NJBPU staff, NJ Rate Counsel and others that provided a total budget of approximately $40 million for JCP&L’s electric vehicle program, including investments of approximately $29 million and operations and maintenance expenses of approximately $11 million. Electric vehicle related capital and operations and maintenance costs shall be deferred and placed in separate regulatory assets for recovery in JCP&L’s next base rate case. The stipulation was approved without modification by the NJBPU on June 8, 2022.
OHIO
The Ohio Companies operate under PUCO-approved base distribution rates that became effective in 2009. The Ohio Companies currently operate under ESP IV, effective June 1, 2016 and continuing through May 31, 2024, that continues the supply of power to non-shopping customers at a market-based price set through an auction process. ESP IV also continues the Rider DCR, which supports continued investment related to the distribution system for the benefit of customers, with increased revenue caps of $20 million per year from June 1, 2019 through May 31, 2022; and $15 million per year from June 1, 2022 through May 31, 2024. In addition, ESP IV includes: (1) continuation of a base distribution rate freeze through May 31, 2024; (2) a goal across FirstEnergy to reduce CO2 emissions by 90% below 2005 levels by 2045; and (3) contributions, totaling $51 million to: (a) fund energy conservation programs, economic development and job retention in the Ohio Companies’ service territories; (b) establish a fuel-fund in each of the Ohio Companies’ service territories to assist low-income customers; and (c) establish a Customer Advisory Council to ensure preservation and growth of the competitive market in Ohio.
On May 16, 2022, the Ohio Companies filed their application for determination of the existence of SEET under ESP IV for calendar year 2021, which demonstrated that each of the individual Ohio Companies did not have significantly excessive earnings.
On July 15, 2022, the Ohio Companies filed an application with the PUCO for approval of phase two of their distribution grid modernization plan that would, among other things, provide for the installation of an additional 700,000 smart meters, distribution automation equipment on approximately 240 distribution circuits, voltage regulating equipment on approximately 220 distribution circuits, and other investments and pilot programs in related technologies designed to provide enhanced customer benefits. The Ohio Companies propose that phase two will be implemented over a four-year budget period with estimated capital investments of approximately $626 million and operations and maintenance expenses of approximately $144 million over the deployment period. Under the proposal, costs of phase two of the grid modernization plan would be recovered through the Ohio Companies’ AMI rider, pursuant to the terms and conditions approved in ESP IV.
On November 1, 2021, the Ohio Companies, together with the OCC, PUCO Staff, and several other signatories, entered into an Ohio Stipulation with the intent of resolving the ongoing energy efficiency rider audits, various SEET proceedings, including the Ohio Companies’ 2017 SEET proceeding, and the Ohio Companies’ quadrennial ESP review, each of which was pending before the PUCO. Specifically, the Ohio Stipulation provides that the Ohio Companies’ current ESP IV passes the required statutory test for their prospective SEET review as part of the Quadrennial Review of ESP IV, and except for limited circumstances, the signatory parties have agreed not to challenge the Ohio Companies’ SEET return on equity calculation methodology for their 2021-2024 SEET proceedings. The Ohio Stipulation additionally affirms that: (i) the Ohio Companies’ ESP IV shall continue through its previously authorized term of May 31, 2024; and (ii) the Ohio Companies will file their next base rate case in May 2024, and further, no signatory party will seek to adjust the Ohio Companies’ base distribution rates before that time, except in limited circumstances. The Ohio Companies further agreed to refund $96 million to customers in connection with the 2017-2019 SEET cases, and to provide $210 million in future rate reductions for all customers, including $80 million in 2022, $60 million in 2023, $45 million in 2024, and $25 million in 2025. The PUCO approved the 2017-2019 SEET refunds and 2022 rate reductions on December 1, 2021, and refunds began in December 2021. Current and future rate reductions are recognized as a reduction to regulated distribution segment’s revenue in the Consolidated Statements of Income as they are provided to the Ohio Companies’ customers.
On September 8, 2020, the OCC filed motions in the Ohio Companies’ corporate separation audit and DMR audit dockets, requesting the PUCO to open an investigation and management audit, hire an independent auditor, and require FirstEnergy to show it did not improperly use money collected from consumers or violate any utility regulatory laws, rules or orders in its activities regarding HB 6. On December 30, 2020, in response to the OCC's motion, the PUCO reopened the DMR audit docket, and directed PUCO staff to solicit a third-party auditor and conduct a full review of the DMR to ensure funds collected from customers through the DMR were only used for the purposes established in ESP IV. On June 2, 2021, the PUCO selected an auditor and the auditor filed the final audit report on January 14, 2022, which made certain findings and recommendations. The report found that spending of DMR revenues was not required to be tracked, and that DMR revenues, like all rider revenues, are placed into the regulated money pool as a matter of routine, where the funds lose their identity. Therefore, the report could not suggest that DMR funds were used definitively for direct or indirect support for grid modernization. The report also concluded that there was no documented evidence that ties revenues from the DMR to lobbying for the passage of HB 6, but also could not rule
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out with certainty uses of DMR funds to support the passage of HB 6. The report further recommended that the regulated companies' money pool be audited more frequently and the Ohio Companies adopt formal dividend policies. Final comments and responses were filed by parties during the second quarter of 2022.
On September 15, 2020, the PUCO opened a new proceeding to review the political and charitable spending by the Ohio Companies in support of HB 6 and the subsequent referendum effort, and directing the Ohio Companies to show cause, demonstrating that the costs of any political or charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any rates or charges paid by customers. The Ohio Companies initially filed a response stating that the costs of any political or charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any rates or charges paid by customers, but on August 6, 2021, filed a supplemental response explaining that, in light of the facts set forth in the DPA and the findings of the Rider DCR audit report further discussed below, political or charitable spending in support of HB 6, or the subsequent referendum effort, affected pole attachment rates paid by approximately $15 thousand. On October 26, 2021, the OCC filed a motion requesting the PUCO to order an independent external audit to investigate FE’s political and charitable spending related to HB 6, and to appoint an independent review panel to retain and oversee the auditor. In November and December 2021, parties filed comments and reply comments regarding the Ohio Companies’ original and supplemental responses to the PUCO’s September 15, 2020, show cause directive. On May 4, 2022, the PUCO selected a third-party auditor to determine whether the show cause demonstration submitted by the Ohio Companies is sufficient to ensure that the cost of any political or charitable spending in support of HB 6 or the subsequent referendum effort was not included, directly or indirectly, in any rates or charges paid by ratepayers.
In connection with an ongoing audit of the Ohio Companies’ policies and procedures relating to the code of conduct rules between affiliates, on November 4, 2020, the PUCO initiated an additional corporate separation audit as a result of the FirstEnergy leadership transition announcement made on October 29, 2020, as further discussed below. The additional audit is to ensure compliance by the Ohio Companies and their affiliates with corporate separation laws and the Ohio Companies’ corporate separation plan. The additional audit is for the period from November 2016 through October 2020. The final audit report was filed on September 13, 2021. The audit report makes no findings of major non-compliance with Ohio corporate separation requirements, minor non-compliance with eight requirements, and findings of compliance with 23 requirements. Parties filed comments and reply comments on the audit report.
In connection with an ongoing annual audit of the Ohio Companies’ Rider DCR for 2020, and as a result of disclosures in FirstEnergy’s Form 10-K for the year ended December 31, 2020 (filed on February 18, 2021), the PUCO expanded the scope of the audit on March 10, 2021, to include a review of certain transactions that were either improperly classified, misallocated, or lacked supporting documentation, and to determine whether funds collected from customers were used to pay the vendors, and if so, whether or not the funds associated with those payments should be returned to customers through Rider DCR or through an alternative proceeding. On August 3, 2021, the auditor filed its final report on this phase of the audit, and the parties submitted comments and reply comments on this audit report in October 2021. Additionally, on September 29, 2021, the PUCO expanded the scope of the audit in this proceeding to determine if the costs of the naming rights for FirstEnergy Stadium have been recovered from the Ohio Companies’ customers. On November 19, 2021, the auditor filed its final report, in which the auditor concluded that the FirstEnergy Stadium naming rights expenses were not recovered from Ohio customers. On December 15, 2021, the PUCO further expanded the scope of the audit to include an investigation into an apparent nondisclosure of a side agreement in the Ohio Companies’ ESP IV settlement proceedings, but stayed its expansion of the audit until otherwise ordered by the PUCO.
On August 16, 2022, the U.S. Attorney for the Southern District of Ohio requested that the PUCO stay the above pending HB 6-related matters for a period of six months, which request was granted by the PUCO on August 24, 2022. Unless otherwise ordered by the PUCO, the four cases are stayed in their entirety, including discovery and motions, and all related procedural schedules are vacated.
In the fourth quarter of 2020, motions were filed with the PUCO requesting that the PUCO amend the Ohio Companies’ riders for collecting the OVEC-related charges required by HB 6 to provide for refunds in the event such provisions of HB 6 are repealed. Neither the Ohio Companies nor FE benefit from the OVEC-related charges the Ohio Companies collect. Instead, the Ohio Companies are further required by HB 6 to remit all the OVEC-related charges they collect to non-FE Ohio electric distribution utilities. The Ohio Companies contested the motions, which are pending before the PUCO.
See below for additional details on the government investigations and subsequent litigation surrounding the investigation of HB 6.
PENNSYLVANIA
The Pennsylvania Companies operate under rates approved by the PPUC, effective as of January 27, 2017. On November 18, 2021, the PPUC issued orders to each of the Pennsylvania Companies directing they operate under DSPs for the June 1, 2019 through May 31, 2023 delivery period, which DSPs provide for the competitive procurement of generation supply for customers who do not receive service from an alternative EGS. Under the 2019-2023 DSPs, supply will be provided by wholesale suppliers through a mix of 3, 12 and 24-month energy contracts, as well as two RFPs for 2-year SREC contracts for ME, PN and Penn. On December 14, 2021, the Pennsylvania Companies filed proposed DSPs for provision of generation for the June 1, 2023 through
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May 31, 2027 delivery period, to be sourced through competitive procurements for customers who do not receive service from an alternative EGS. An evidentiary hearing was held on April 13, 2022, and on April 20, 2022, the parties filed a partial settlement with the PPUC resolving certain of the issues in the proceeding and setting aside the remainder of the issues to be resolved through briefing. PPUC approved the partial settlement, without modification, on August 4, 2022. Under the 2023-2027 DSPs, supply is proposed to be provided through a mix of 12 and 24-month energy contracts, as well as long-term solar PPAs.
In March 2018, the PPUC approved adjusted customer rates of the Pennsylvania Companies to reflect the net impact of the Tax Act. As a result, the Pennsylvania Companies established riders that, beginning July 1, 2018, refunded to customers tax savings attributable to the Tax Act as compared to the amounts established in their most recent base rate proceedings on a current and going forward basis. The amounts recorded as savings for the total period of January 1 through June 30, 2018, were tracked and were to be addressed for treatment in a future proceeding. On May 17, 2021, the Pennsylvania Companies filed petitions with the PPUC proposing to refund the net savings for the January through June 2018 period to customers beginning January 1, 2022. On November 18, 2021, the PPUC approved the Pennsylvania Companies' proposed refunds, but also revised a previous methodology for calculating the net tax savings, which resulted in additional tax savings attributable to the Tax Act to be refunded to customers and directed the Pennsylvania Companies to file new petitions to propose the timing and methodology to provide these additional refunds to customers. The Pennsylvania Companies recalculated the net impact for 2018 through 2021 under the revised PPUC methodology in comparison to amounts already refunded to customers under the existing riders, which resulted in an additional $61 million in savings, with interest, to be provided to customers. As a result, FirstEnergy recognized a pre-tax charge of $61 million in the fourth quarter of 2021, associated with the additional refund and based on the November 2021 PPUC order and methodology. The Pennsylvania Companies filed petitions to propose the timing and methodology of the refund of these amounts on February 17, 2022. The Pennsylvania Companies’ petitions and the proposed refunds addressed within were approved by the PPUC on June 16, 2022, without modification, effective July 1, 2022, and are expected to be refunded by the end of the year.
Pursuant to Pennsylvania Act 129 of 2008 and PPUC orders, Pennsylvania EDCs implemented energy efficiency and peak demand reduction programs. On June 18, 2020, the PPUC entered a Final Implementation Order for a Phase IV EE&C Plan, operating from June 2021 through May 2026. The Final Implementation Order set demand reduction targets, relative to 2007 to 2008 peak demands, at 2.9% MW for ME, 3.3% MW for PN, 2.0% MW for Penn, and 2.5% MW for WP; and energy consumption reduction targets, as a percentage of the Pennsylvania Companies’ historic 2009 to 2010 reference load at 3.1% MWH for ME, 3.0% MWH for PN, 2.7% MWH for Penn, and 2.4% MWH for WP. The Pennsylvania Companies’ Phase IV plans were approved by PPUC without modification on March 25, 2021.
Pennsylvania EDCs are permitted to seek PPUC approval of an LTIIP for infrastructure improvements and costs related to highway relocation projects, after which a DSIC may be approved to recover LTIIP costs. On January 16, 2020, the PPUC approved the Pennsylvania Companies’ LTIIPs for the five-year period beginning January 1, 2020 and ending December 31, 2024 for a total capital investment of approximately $572 million for certain infrastructure improvement initiatives. On June 25, 2021, the Pennsylvania OCA filed a complaint against Penn’s quarterly DSIC rate, disputing the recoverability of the Companies’ automated distribution management system investment under the DSIC mechanism. On January 26, 2022, the parties filed a joint petition for settlement that resolves all issues in this matter, which was approved by the PPUC without modification on April 14, 2022.
Following the Pennsylvania Companies’ 2016 base rate proceedings, the PPUC ruled in a separate proceeding related to the DSIC mechanisms that the Pennsylvania Companies were not required to reflect federal and state income tax deductions related to DSIC-eligible property in DSIC rates. The decision was appealed to the Pennsylvania Supreme Court and in July 2021 the court upheld the Pennsylvania Commonwealth Court’s reversal of the PPUC’s decision and remanded the matter back to the PPUC for determination as to how DSIC calculations shall account for ADIT and state taxes. The matter awaits further action by the PPUC. The adverse ruling by the Pennsylvania Supreme Court is not expected to result in a material impact to FirstEnergy.
WEST VIRGINIA
MP and PE provide electric service to all customers through traditional cost-based, regulated utility ratemaking and operate under WVPSC-approved rates that became effective in February 2015. MP and PE recover net power supply costs, including fuel costs, purchased power costs and related expenses, net of related market sales revenue through the ENEC. MP’s and PE’s ENEC rate is updated annually.
On December 30, 2020, MP and PE filed with the WVPSC a determination of the rate impact of the Tax Act with respect to ADIT. The filing proposed an annual revenue reduction of $2.6 million, effective January 1, 2022, with reconciliation and any resulting adjustments incorporated into annual ENEC proceedings. On August 12, 2021, a unanimous settlement was reached with all the parties agreeing to a $7.7 million rate reduction beginning January 1, 2022, with a true-up in the ENEC proceeding each year. On November 30, 2021, the WVPSC approved the settlement on all terms, except for the proposed effective date of the rate reduction, which was held in abeyance until further notice.
On December 29, 2021, the WVPSC issued an order granting MP and PE’s requested $19.6 million increase in ENEC rates, requiring, among other things, that MP and PE refund to its large industrial customers their respective portion of the $7.7 million rate reduction discussed above and also requires MP and PE to negotiate a PPA for its capacity shortfall and a reasonable
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reserve margin if certain conditions are met. By order dated March 2, 2022, the WVPSC reopened the case to determine whether rates should be increased to recover growing ENEC under-recoveries. On May 17, 2022, the WVPSC issued an order approving an interim rate increase of $94 million, effective for customer rates on May 18, 2022, subject to a prudence review during MP and PE’s 2022 ENEC case.
On August 25, 2022, MP and PE filed with the WVPSC their annual ENEC case requesting an increase in ENEC rates of $183.8 million beginning January 1, 2023, which represents a 12.2% increase to the rates currently in effect. The increase is driven by an underrecovery during the review period (July 1, 2021 to June 30, 2022) of $144.9 million due to higher coal, reagent, and allowance expenses. This filing additionally addresses, among other things, the WVPSC’s May 2022 request for a prudence review of current rates. An order is expected by the end of 2022.
On December 3, 2021 and on December 27, 2021, the WVPSC approved settlements granting MP and PE a $16 million increase in rates effective January 1, 2022, and permitting the continuation of the vegetation management program and surcharge for another two years. WVPSC additionally ordered MP and PE to perform equipment inspections within a reasonable time after vegetation management occurs on a circuit.
On November 22, 2021, MP and PE filed with the WVPSC their plan to construct 50 MWs of solar generation at five sites in West Virginia. The plan includes a tariff to offer solar power to West Virginia customers and cost recovery for MP and PE from other customers through a surcharge for any solar investment not fully subscribed by their customers. A hearing was held in mid-March 2022 and on April 21, 2022, the WVPSC issued an order approving, effective May 1, 2022, the requested tariff and requiring MP and PE to subscribe at least 85% of the planned 50 MWs before seeking final tariff approval. MP and PE must seek separate approval from the WVPSC to recover any solar generation costs in excess of the approved tariff. The first solar generation site is expected to be in-service by the end of 2023 and all construction completed at the other sites no later than the end of 2025 at a total investment cost of approximately $100 million.
On December 17, 2021, MP and PE filed with the WVPSC for approval of environmental compliance projects at the Ft. Martin and Harrison Power Stations to comply with the EPA’s ELG and operate these plants beyond 2028. The request includes a surcharge to recover the expected $142 million capital investment and $3 million in annual operation and maintenance expense. MP and PE reached a settlement agreement with WVPSC staff and certain intervenors, recommending: (i) approval of the ELG compliance plan submitted by MP and PE and (ii) recovery of costs through a surcharge. A ruling approving the settlement without modification was issued by the WVPSC on September 12, 2022, and construction is expected to be completed by the end of 2025. See “Outlook - Environmental Matters - Clean Water Act" below, for additional details on the EPA's ELG.
FERC REGULATORY MATTERS
Under the FPA, FERC regulates rates for interstate wholesale sales and transmission of electric power, regulatory accounting and reporting under the Uniform System of Accounts, and other matters, including construction and operation of hydroelectric projects. With respect to their wholesale services and rates, the Utilities, AE Supply and the Transmission Companies are subject to regulation by FERC. FERC regulations require JCP&L, MP, PE, WP and the Transmission Companies to provide open access transmission service at FERC-approved rates, terms and conditions. Transmission facilities of JCP&L, MP, PE, WP and the Transmission Companies are subject to functional control by PJM and transmission service using their transmission facilities is provided by PJM under the PJM Tariff.
FERC regulates the sale of power for resale in interstate commerce in part by granting authority to public utilities to sell wholesale power at market-based rates upon showing that the seller cannot exert market power in generation or transmission or erect barriers to entry into markets. The Utilities and AE Supply each have been authorized by FERC to sell wholesale power in interstate commerce at market-based rates and have a market-based rate tariff on file with FERC, although in the case of the Utilities major wholesale purchases remain subject to review and regulation by the relevant state commissions.
Federally enforceable mandatory reliability standards apply to the bulk electric system and impose certain operating, record-keeping and reporting requirements on the Utilities, AE Supply, and the Transmission Companies. NERC is the ERO designated by FERC to establish and enforce these reliability standards, although NERC has delegated day-to-day implementation and enforcement of these reliability standards to six regional entities, including RFC. All of the facilities that FirstEnergy operates are located within the RFC region. FirstEnergy actively participates in the NERC and RFC stakeholder processes, and otherwise monitors and manages its companies in response to the ongoing development, implementation and enforcement of the reliability standards implemented and enforced by RFC.
FirstEnergy believes that it is in material compliance with all currently effective and enforceable reliability standards. Nevertheless, in the course of operating its extensive electric utility systems and facilities, FirstEnergy occasionally learns of isolated facts or circumstances that could be interpreted as excursions from the reliability standards. If and when such occurrences are found, FirstEnergy develops information about the occurrence and develops a remedial response to the specific circumstances, including in appropriate cases “self-reporting” an occurrence to RFC. Moreover, it is clear that NERC, RFC and FERC will continue to refine existing reliability standards as well as to develop and adopt new reliability standards. Any inability on FirstEnergy’s part to comply with the reliability standards for its bulk electric system could result in the imposition of financial
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penalties, or obligations to upgrade or build transmission facilities, that could have a material adverse effect on its financial condition, results of operations, and cash flows.
FERC Audit
FERC’s Division of Audits and Accounting initiated a nonpublic audit of FESC in February 2019. Among other matters, the audit is evaluating FirstEnergy’s compliance with certain accounting and reporting requirements under various FERC regulations. On February 4, 2022, FERC filed the final audit report for the period of January 1, 2015 through September 30, 2021, which included several findings and recommendations that FirstEnergy has accepted. The audit report included a finding and related recommendation on FirstEnergy’s methodology for allocation of certain corporate support costs to regulatory capital accounts under certain FERC regulations and reporting. Effective in the first quarter of 2022 and in response to the finding, FirstEnergy had implemented a new methodology for the allocation of these corporate support costs to regulatory capital accounts for its regulated distribution and transmission companies on a prospective basis. With the assistance of an independent outside firm, FirstEnergy completed an analysis during the third quarter of 2022 of these costs and how it impacted certain FERC-jurisdictional wholesale transmission customer rates for the audit period of 2015 through 2021. As a result of this analysis, FirstEnergy recorded in the third quarter of 2022 approximately $45 million ($34 million after-tax) in expected customer refunds, plus interest, due to its wholesale transmission customers and reclassified approximately $195 million of certain transmission capital assets to operating expenses for the audit period, of which $90 million ($67 million after-tax) are not expected to be recoverable and impacted FirstEnergy’s earnings since they relate to costs capitalized during stated transmission rate time periods. These reclassifications also resulted in a reduction to the Regulated Transmission segment’s rate base by approximately $160 million, which is not expected to materially impact FirstEnergy or the segment’s future earnings. The expected wholesale transmission customer refunds were recognized as a reduction to revenue, and the amount of reclassified transmission capital assets that are not expected to be recoverable were recognized within “Other operating expenses” at the Regulated Transmission segment and on FirstEnergy’s Consolidated Statements of Income.
ATSI Transmission Formula Rate
On May 1, 2020, ATSI filed amendments to its formula rate to recover regulatory assets for certain costs that ATSI incurred as a result of its 2011 move from MISO to PJM, certain costs allocated to ATSI by FERC for transmission projects that were constructed by other MISO transmission owners, and certain costs for transmission-related vegetation management programs. A portion of these costs would have been charged to the Ohio Companies. Additionally, ATSI proposed certain income tax-related adjustments and certain tariff changes addressing the revenue credit components of the formula rate template. On June 30, 2020, FERC issued an initial order accepting the tariff amendments subject to refund and setting the matter for hearing and settlement proceedings. ATSI and the parties to the FERC proceeding subsequently were able to reach settlement, and on October 14, 2021, filed the settlement with FERC. As a result of the filed settlement, FirstEnergy recognized a $21 million pre-tax charge during the third quarter of 2021, which reflects the difference between amounts originally recorded as regulatory assets and amounts which will ultimately be recovered as a result of the pending settlement. From a segment perspective, during the third quarter of 2021, the Regulated Transmission segment recorded a pre-tax charge of $48 million and the Regulated Distribution segment recognized a $27 million reduction to a reserve previously recorded in 2010. In addition, the settlement provides for partial recovery of future incurred costs allocated to ATSI by MISO for the above-referenced transmission projects that were constructed by other MISO transmission owners, which is not expected to have a material impact on FirstEnergy or ATSI. The uncontested settlement was approved by FERC on March 24, 2022 without modification. ATSI’s compliance filing to implement the terms of the settlement was accepted by FERC without modification on June 23, 2022.
FERC Actions on the Tax Act
On March 15, 2018, FERC initiated proceedings on the question of how to address possible changes to ADIT and bonus depreciation as a result of the Tax Act. Such possible changes could impact FERC-jurisdictional rates, including transmission rates. On November 21, 2019, FERC issued a final rule (Order No. 864). Order No. 864 requires utilities with transmission formula rates to update their formula rate templates to include mechanisms to: (i) deduct any excess ADIT from or add any deficient ADIT to their rate base; (ii) raise or lower their income tax allowances by any amortized excess or deficient ADIT; and (iii) incorporate a new permanent worksheet into their rates that will annually track information related to excess or deficient ADIT. Per FERC directives, ATSI submitted its compliance filing on May 1, 2020. MAIT submitted its compliance filing on June 1, 2020. On November 18, 2021, FERC issued an order that: (i) accepted ATSI’s proposed tariff amendments to its rate base adjustment mechanism, effective January 27, 2020; (ii) directed ATSI to make a further compliance filing by January 17, 2022; and (iii) set the amount of ATSI’s recorded ADIT balances as of December 31, 2017, for hearing and settlement procedures. ATSI submitted the compliance filing, and following settlement negotiations, filed an uncontested settlement agreement with FERC on October 18, 2022. There is no timetable for FERC to rule on the settlement agreement. On December 3, 2021, FERC issued an order that (i) accepted MAIT’s proposed tariff amendments to its rate base adjustment mechanism, effective January 27, 2020; (ii) directed MAIT to make a further compliance filing by February 1, 2022; and (iii) set the amount of MAIT’s recorded ADIT balances as of December 31, 2017 for hearing and settlement procedures. MAIT submitted the compliance filing, and following settlement negotiations, filed an uncontested settlement agreement with FERC on October 18, 2022. There is no timetable for FERC to rule on the settlement agreement. On May 15, 2020, TrAIL submitted its compliance filing and on June 1, 2020, PATH submitted its required compliance filing. On May 4, 2021, FERC staff requested additional information about PATH’s proposed rate base adjustment mechanism, and PATH submitted the requested information on June 3, 2021. On July 12, 2021, FERC staff
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requested additional information about TrAIL’s proposed rate base adjustment mechanism. TrAIL filed its response on August 6, 2021. On March 31, 2022, FERC issued an order, ruling that TrAIL’s compliance filing partially complied with the requirements of Order No. 864 and directing TrAIL to submit a further compliance filing to address certain additional items that according to FERC will further enhance transparency. TrAIL submitted the compliance filing on May 31, 2022, and FERC accepted the compliance filing by letter order dated August 30, 2022. On April 27, 2022, FERC issued an order on PATH’s compliance filing, ruling that it partially complied with the requirements of Order No. 864 and directing PATH to submit a further compliance filing to address certain additional items. PATH submitted the compliance filing on June 27, 2022. MP, WP and PE (as holders of a “stated” transmission rate when Order No. 864 issued) are addressing these requirements in the transmission formula rates amendments that were filed on October 29, 2020, and which have been accepted by FERC effective January 1, 2021, subject to refund, pending further hearing and settlement procedures. MP, WP and PE are engaged in settlement negotiations with the parties to the transmission formula rate amendments proceeding.
ATSI ROE – Ohio Consumers Counsel v. ATSI, et al.
On February 24, 2022, the OCC filed a complaint with FERC against ATSI, AEP’s Ohio affiliates and AEPSC, and Duke Energy Ohio, LLC asserting that FERC should reduce the ROE utilized in the utilities’ transmission formula rates by eliminating the 50 basis point adder associated with RTO membership, effective February 24, 2022. The OCC contends that this result is required because Ohio law mandates that transmission owning utilities join an RTO and that the 50 basis point adder is applicable only where RTO membership is voluntary. ATSI disagrees with the OCC’s characterization and set forth its reasons for such disagreement in a combined motion to dismiss and answer that was filed with FERC on March 31, 2022. On that same date, AEP and Duke filed separate motions to dismiss and answers to the OCC complaint, and several other parties filed comments. ATSI filed a response to certain intervenors’ filings on April 28, 2022. FirstEnergy is unable to predict the outcome of this proceeding, but it is not expected to have a material impact.
Transmission ROE Methodology
On March 20, 2020, FERC initiated a rulemaking proceeding on the transmission rate incentives provisions of Section 219 of the 2005 Energy Policy Act. FirstEnergy submitted comments through EEI and as part of a consortium of PJM Transmission Owners. In a supplemental rulemaking proceeding that was initiated on April 15, 2021, FERC requested comments on, among other things, whether to require utilities that have been members of an RTO for three years or more and that have been collecting an “RTO membership” ROE incentive adder to file tariff updates that would terminate collection of the incentive adder. Initial comments on the proposed rule were filed on June 25, 2021, and reply comments were filed on July 26, 2021. The rulemaking remains pending before FERC. FirstEnergy is a member of PJM and its transmission subsidiaries could be affected by the supplemental proposed rule. FirstEnergy participated in comments on the supplemental rulemaking that were submitted by a group of PJM transmission owners and by various industry trade groups. If there were to be any changes to FirstEnergy transmission incentive ROE, such changes will be applied on a prospective basis.
Allegheny Power Zone Transmission Formula Rate Filings
On October 29, 2020, MP, PE and WP filed tariff amendments with FERC to implement a forward-looking formula transmission rate, to be effective January 1, 2021. In addition, on October 30, 2020, KATCo filed a proposed new tariff to establish a forward-looking formula rate and requested that the new rate become effective January 1, 2021. In its filing, KATCo explained that while it currently owns no transmission assets, it may build new transmission facilities in the Allegheny zone, and that it may seek required state and federal authorizations to acquire transmission assets from PE and WP by January 1, 2022. These transmission rate filings were accepted for filing by FERC on December 31, 2020, effective January 1, 2021, subject to refund, pending further hearing and settlement procedures and were consolidated into a single proceeding. MP, PE and WP, and KATCo are engaged in settlement negotiations with the other parties to the formula rate proceedings.
ENVIRONMENTAL MATTERS
Various federal, state and local authorities regulate FirstEnergy with regard to air and water quality, hazardous and solid waste disposal, and other environmental matters. While FirstEnergy’s environmental policies and procedures are designed to achieve compliance with applicable environmental laws and regulations, such laws and regulations are subject to periodic review and potential revision by the implementing agencies. FirstEnergy cannot predict the timing or ultimate outcome of any of these reviews or how any future actions taken as a result thereof may materially impact its business, results of operations, cash flows and financial condition.
Clean Air Act
FirstEnergy complies with SO2 and NOx emission reduction requirements under the CAA and SIP(s) by burning lower-sulfur fuel, utilizing combustion controls and post-combustion controls and/or using emission allowances.
CSAPR requires reductions of NOx and SO2 emissions in two phases (2015 and 2017), ultimately capping SO2 emissions in affected states to 2.4 million tons annually and NOx emissions to 1.2 million tons annually. CSAPR allows trading of NOx and SO2 emission allowances between power plants located in the same state and interstate trading of NOx and SO2 emission
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allowances with some restrictions. On July 28, 2015, the D.C. Circuit ordered the EPA to reconsider the CSAPR caps on NOx and SO2 emissions from power plants in 13 states, including West Virginia. This followed the 2014 U.S. Supreme Court ruling generally upholding the EPA’s regulatory approach under CSAPR but questioning whether the EPA required upwind states to reduce emissions by more than their contribution to air pollution in downwind states. The EPA issued a CSAPR Update on September 7, 2016, reducing summertime NOx emissions from power plants in 22 states in the eastern U.S., including West Virginia, beginning in 2017. Various states and other stakeholders appealed the CSAPR Update to the D.C. Circuit in November and December 2016. On September 13, 2019, the D.C. Circuit remanded the CSAPR Update to the EPA citing that the rule did not eliminate upwind states’ significant contributions to downwind states’ air quality attainment requirements within applicable attainment deadlines.
Also in March 2018, the State of New York filed a CAA Section 126 petition with the EPA alleging that NOx emissions from nine states (including West Virginia) significantly contribute to New York’s inability to attain the ozone NAAQS. The petition sought suitable emission rate limits for large stationary sources that are allegedly affecting New York’s air quality within the three years allowed by CAA Section 126. On September 20, 2019, the EPA denied New York’s CAA Section 126 petition. On October 29, 2019, the State of New York appealed the denial of its petition to the D.C. Circuit. On July 14, 2020, the D.C. Circuit reversed and remanded the New York petition to the EPA for further consideration. On March 15, 2021, the EPA issued a revised CSAPR Update that addresses, among other things, the remands of the prior CSAPR Update and the New York Section 126 petition. In December 2021, MP purchased NOx emissions allowances to comply with 2021 ozone season requirements. On April 6, 2022, the EPA published proposed rules seeking to impose further significant reductions in EGU NOx emissions in 25 states, including West Virginia. The EPA held a virtual public hearing regarding the proposed rules on April 21, 2022, and MP submitted written comments on June 21, 2022. Depending on the outcome of any appeals and how the EPA and the states ultimately implement the revised CSAPR Update, the future cost of compliance may materially impact FirstEnergy’s operations, cash flows and financial condition.
Climate Change
There are several initiatives to reduce GHG emissions at the state, federal and international level. Certain northeastern states are participating in the RGGI and western states led by California, have implemented programs, primarily cap and trade mechanisms, to control emissions of certain GHGs. Additional policies reducing GHG emissions, such as demand reduction programs, renewable portfolio standards and renewable subsidies have been implemented across the nation.
In September 2016, the U.S. joined in adopting the agreement reached on December 12, 2015, at the United Nations Framework Convention on Climate Change meetings in Paris to reduce GHGs. The Paris Agreement’s non-binding obligations to limit global warming to below two degrees Celsius became effective on November 4, 2016. On June 1, 2017, the Trump Administration announced that the U.S. would cease all participation in the Paris Agreement. On January 20, 2021, President Biden signed an executive order re-adopting the agreement on behalf of the U.S. In November 2020, FirstEnergy published its Climate Story which includes its climate position and strategy, as well as a new comprehensive and ambitious GHG emission goal. FirstEnergy pledged to achieve carbon neutrality by 2050 and set an interim goal for a 30% reduction in GHGs within FirstEnergy’s direct operational control by 2030, based on 2019 levels. Future resource plans to achieve carbon reductions, including any determination of retirement dates of the regulated coal-fired generation, will be developed by working collaboratively with regulators in West Virginia. Determination of the useful life of the regulated coal-fired generation could result in changes in depreciation, and/or continued collection of net plant in rates after retirement, securitization, sale, impairment, or regulatory disallowances. If MP is unable to recover these costs, it could have a material adverse effect on FirstEnergy’s and/or MP’s financial condition, results of operations, and cash flow. Furthermore, FirstEnergy cannot currently estimate the financial impact of climate change policies, although potential legislative or regulatory programs restricting CO2 emissions, or litigation alleging damages from GHG emissions, could require material capital and other expenditures or result in changes to its operations.
In December 2009, the EPA released its final “Endangerment and Cause or Contribute Findings for GHGs under the Clean Air Act,” concluding that concentrations of several key GHGs constitute an “endangerment” and may be regulated as “air pollutants” under the CAA and mandated measurement and reporting of GHG emissions from certain sources, including electric generating plants. Subsequently, the EPA released its final CPP regulations in August 2015 to reduce CO2 emissions from existing fossil fuel-fired EGUs and finalized separate regulations imposing CO2 emission limits for new, modified, and reconstructed fossil fuel-fired EGUs. Numerous states and private parties filed appeals and motions to stay the CPP with the D.C. Circuit in October 2015. On February 9, 2016, the U.S. Supreme Court stayed the rule during the pendency of the challenges to the D.C. Circuit and U.S. Supreme Court. On March 28, 2017, an executive order, entitled “Promoting Energy Independence and Economic Growth,” instructed the EPA to review the CPP and related rules addressing GHG emissions and suspend, revise or rescind the rules if appropriate. On June 19, 2019, the EPA repealed the CPP and replaced it with the ACE rule that established guidelines for states to develop standards of performance to address GHG emissions from existing coal-fired generation. On January 19, 2021, the D.C. Circuit vacated and remanded the ACE rule declaring that the EPA was “arbitrary and capricious” in its rule making and, as such, the ACE rule is no longer in effect and all actions thus far taken by states to implement the federally mandated rule are now null and void. Vacating the ACE Rule had the unintended effect of reinstating the CPP because the repeal of the CPP was a provision within the ACE Rule. The D.C. Circuit decision was appealed by several states and interested parties, including West Virginia, arguing that the EPA did not have the authorization under Section 111(d) of the Clean Air Act to require “generation shifting” as a way to limit GHGs. On June 30, 2022, the U.S. Supreme Court held that the EPA’s regulation of
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GHGs under Section 111(d) of the Clean Air Act was not authorized by Congress and remanded the Rule to the EPA for further reconsideration.
Clean Water Act
Various water quality regulations, the majority of which are the result of the federal CWA and its amendments, apply to FirstEnergy’s facilities. In addition, the states in which FirstEnergy operates have water quality standards applicable to FirstEnergy’s operations.
On September 30, 2015, the EPA finalized new, more stringent effluent limits for the Steam Electric Power Generating category (40 CFR Part 423) for arsenic, mercury, selenium and nitrogen for wastewater from wet scrubber systems and zero discharge of pollutants in ash transport water. The treatment obligations were to phase-in as permits are renewed on a five-year cycle from 2018 to 2023. However, on April 13, 2017, the EPA granted a Petition for Reconsideration and on September 18, 2017, the EPA postponed certain compliance deadlines for two years. On August 31, 2020, the EPA issued a final rule revising the effluent limits for discharges from wet scrubber systems, retaining the zero-discharge standard for ash transport water, (with some limited discharge allowances), and extending the deadline for compliance to December 31, 2025 for both. In addition, the EPA allows for less stringent limits for sub-categories of generating units based on capacity utilization, flow volume from the scrubber system, and unit retirement date. The EPA is reconsidering the ELG rule with a publicly announced target of issuing a proposed revised rule in the Fall of 2022 and a final rule by the Spring of 2023. In the interim, the rule issued on August 31, 2020, remains in effect. Depending on the outcome of appeals and how final rules are ultimately implemented, the compliance with these standards, could require additional capital expenditures or changes in operations at Ft. Martin and Harrison power stations from what was filed with the WVPSC in December 2021 that seeks approval of environmental compliance projects to comply with the EPA’s 2020 ELG Rule.
Regulation of Waste Disposal
Federal and state hazardous waste regulations have been promulgated as a result of the RCRA, as amended, and the Toxic Substances Control Act. Certain CCRs, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA’s evaluation of the need for future regulation.
In April 2015, the EPA finalized regulations for the disposal of CCRs (non-hazardous), establishing national standards for landfill design, structural integrity design and assessment criteria for surface impoundments, groundwater monitoring and protection procedures and other operational and reporting procedures to assure the safe disposal of CCRs from electric generating plants. On September 13, 2017, the EPA announced that it would reconsider certain provisions of the final regulations. On July 29, 2020, the EPA published a final rule again revising the date that certain CCR impoundments must cease accepting waste and initiate closure to April 11, 2021. The final rule also allows for an extension of the closure deadline based on meeting proscribed site-specific criteria. On November 30, 2020, AE Supply submitted a closure deadline extension request to the EPA seeking to extend the closure date of McElroy's Run CCR impoundment facility until 2024, which request is pending technical review by the EPA. AE Supply continues to operate McElroy’s Run as a disposal facility for FG’s Pleasants Power Station.
FE or its subsidiaries have been named as potentially responsible parties at waste disposal sites, which may require cleanup under the CERCLA. Allegations of disposal of hazardous substances at historical sites and the liability involved are often unsubstantiated and subject to dispute; however, federal law provides that all potentially responsible parties for a particular site may be liable on a joint and several basis. Environmental liabilities that are considered probable have been recognized on the Consolidated Balance Sheets as of September 30, 2022, based on estimates of the total costs of cleanup, FirstEnergy’s proportionate responsibility for such costs and the financial ability of other unaffiliated entities to pay. Total liabilities of approximately $103 million have been accrued through September 30, 2022, of which, approximately $65 million are for environmental remediation of former MGP and gas holder facilities in New Jersey, which are being recovered by JCP&L through a non-bypassable SBC. FE or its subsidiaries could be found potentially responsible for additional amounts or additional sites, but the loss or range of losses cannot be determined or reasonably estimated at this time.
OTHER LEGAL PROCEEDINGS
United States v. Larry Householder, et al.
On July 21, 2020, a complaint and supporting affidavit containing federal criminal allegations were unsealed against the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. Also, on July 21, 2020, and in connection with the investigation, FirstEnergy received subpoenas for records from the U.S. Attorney’s Office for the Southern District Ohio. FirstEnergy was not aware of the criminal allegations, affidavit or subpoenas before July 21, 2020.
On July 21, 2021, FE entered into a three-year DPA with the U.S. Attorney’s Office that, subject to court proceedings, resolves this matter. Under the DPA, FE has agreed to the filing of a criminal information charging FE with one count of conspiracy to commit honest services wire fraud. The DPA requires that FirstEnergy, among other obligations: (i) continue to cooperate with the U.S. Attorney’s Office in all matters relating to the conduct described in the DPA and other conduct under investigation by the
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U.S. government; (ii) pay a criminal monetary penalty totaling $230 million within sixty days, which shall consist of (x) $115 million paid by FE to the United States Treasury and (y) $115 million paid by FE to the ODSA to fund certain assistance programs, as determined by the ODSA, for the benefit of low-income Ohio electric utility customers; (iii) publish a list of all payments made in 2021 to either 501(c)(4) entities or to entities known by FirstEnergy to be operating for the benefit of a public official, either directly or indirectly, and update the same on a quarterly basis during the term of the DPA; (iv) issue a public statement, as dictated in the DPA, regarding FE’s use of 501(c)(4) entities; and (v) continue to implement and review its compliance and ethics program, internal controls, policies and procedures designed, implemented and enforced to prevent and detect violations of the U.S. laws throughout its operations, and to take certain related remedial measures. The $230 million payment will neither be recovered in rates or charged to FirstEnergy customers nor will FirstEnergy seek any tax deduction related to such payment. The entire amount of the monetary penalty was recognized as expense in the second quarter of 2021 and paid in the third quarter of 2021. Under the terms of the DPA, the criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA.
Legal Proceedings Relating to United States v. Larry Householder, et al.
On August 10, 2020, the SEC, through its Division of Enforcement, issued an order directing an investigation of possible securities laws violations by FE, and on September 1, 2020, issued subpoenas to FE and certain FE officers. On April 28, 2021, and July 11, 2022, the SEC issued additional subpoenas to FE, with which FE has complied. While no contingency has been reflected in its consolidated financial statements, FE believes that it is probable that it will incur a loss in connection with the resolution of the SEC investigation. Given the ongoing nature and complexity of the review, inquiries and investigations, FE cannot yet reasonably estimate a loss or range of loss that may arise from the resolution of the SEC investigation.
In addition to the subpoenas referenced above under “—United States v. Larry Householder, et. al.” and the SEC investigation, certain FE stockholders and FirstEnergy customers filed several lawsuits against FirstEnergy and certain current and former directors, officers and other employees, and the complaints in each of these suits is related to allegations in the complaint and supporting affidavit relating to HB 6 and the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. The plaintiffs in each of the below cases seek, among other things, to recover an unspecified amount of damages (unless otherwise noted). Unless otherwise indicated, no contingency has been reflected in FirstEnergy’s consolidated financial statements with respect to these lawsuits as a loss is neither probable, nor is a loss or range of a loss reasonably estimable.
•In re FirstEnergy Corp. Securities Litigation (S.D. Ohio); on July 28, 2020 and August 21, 2020, purported stockholders of FE filed putative class action lawsuits alleging violations of the federal securities laws. Those actions have been consolidated and a lead plaintiff, the Los Angeles County Employees Retirement Association, has been appointed by the court. A consolidated complaint was filed on February 26, 2021. The consolidated complaint alleges, on behalf of a proposed class of persons who purchased FE securities between February 21, 2017 and July 21, 2020, that FE and certain current or former FE officers violated Sections 10(b) and 20(a) of the Exchange Act by issuing misrepresentations or omissions concerning FE’s business and results of operations. The consolidated complaint also alleges that FE, certain current or former FE officers and directors, and a group of underwriters violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 as a result of alleged misrepresentations or omissions in connection with offerings of senior notes by FE in February and June 2020. FE believes that it is probable that it will incur a loss in connection with the resolution of this lawsuit. Given the ongoing nature and complexity of such litigation, FE cannot yet reasonably estimate a loss or range of loss.
•MFS Series Trust I, et al. v. FirstEnergy Corp., et al. and Brighthouse Funds II – MFS Value Portfolio, et al. v. FirstEnergy Corp., et al. (S.D. Ohio) on December 17, 2021 and February 21, 2022, purported stockholders of FE filed complaints against FE, certain current and former officers, and certain current and former officers of EH. The complaints allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act by issuing alleged misrepresentations or omissions regarding FE’s business and its results of operations, and seek the same relief as the In re FirstEnergy Corp. Securities Litigation described above. FE believes that it is probable that it will incur losses in connection with the resolution of these lawsuits. Given the ongoing nature and complexity of such litigation, FE cannot yet reasonably estimate a loss or range of loss.
•State of Ohio ex rel. Dave Yost, Ohio Attorney General v. FirstEnergy Corp., et al. and City of Cincinnati and City of Columbus v. FirstEnergy Corp. (Common Pleas Court, Franklin County, OH, all actions have been consolidated); on September 23, 2020 and October 27, 2020, the OAG and the cities of Cincinnati and Columbus, respectively, filed complaints against several parties including FE (the OAG also named FES as a defendant), each alleging civil violations of the Ohio Corrupt Activity Act in connection with the passage of HB 6. On January 13, 2021, the OAG filed a motion for a temporary restraining order and preliminary injunction against FirstEnergy seeking to enjoin FirstEnergy from collecting the Ohio Companies' decoupling rider. On January 31, 2021, FE reached a partial settlement with the OAG and the cities of Cincinnati and Columbus with respect to the temporary restraining order and preliminary injunction request and related issues. In connection with the partial settlement, the Ohio Companies filed an application on February 1, 2021, with the PUCO to set their respective decoupling riders (CSR) to zero. On February 2, 2021, the PUCO approved the application of the Ohio Companies setting the rider to zero and no additional customer bills will include new decoupling rider charges after February 8, 2021. The cases are stayed pending final resolution of the United States v. Larry Householder, et al. criminal proceeding described above, although on August 13, 2021, new defendants were added to the complaint, including two former officers of FirstEnergy. On November 9, 2021, the OAG
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filed a motion to lift the agreed-upon stay, which FE opposed on November 19, 2021; the motion remains pending. On December 2, 2021, the cities and FE entered a stipulated dismissal with prejudice of the cities’ suit.
•Smith v. FirstEnergy Corp. et al., Buldas v. FirstEnergy Corp. et al., and Hudock and Cameo Countertops, Inc. v. FirstEnergy Corp. et al. (S.D. Ohio, all actions have been consolidated); on July 27, 2020, July 31, 2020, and August 5, 2020, respectively, purported customers of FE filed putative class action lawsuits against FE and FESC, as well as certain current and former FE officers, alleging civil Racketeer Influenced and Corrupt Organizations Act violations and related state law claims. FE agreed to a class settlement to resolve these claims on April 11, 2022. In the fourth quarter of 2021, FirstEnergy recognized a pre-tax reserve of $37.5 million in the aggregate with respect to these lawsuits and the Emmons lawsuit below. On June 22, 2022, the court preliminarily approved the class settlement and scheduled the final fairness hearing for November 9, 2022.
•Emmons v. FirstEnergy Corp. et al. (Common Pleas Court, Cuyahoga County, OH); on August 4, 2020, a purported customer of FirstEnergy filed a putative class action lawsuit against FE, FESC, the Ohio Companies, along with FES, alleging several causes of action, including negligence and/or gross negligence, breach of contract, unjust enrichment, and unfair or deceptive consumer acts or practices. FE agreed to a class settlement to resolve these claims on April 11, 2022. In the fourth quarter of 2021, FirstEnergy recognized a pre-tax reserve of $37.5 million in the aggregate with respect to this lawsuit and the lawsuits above consolidated with Smith in the S.D. Ohio alleging, among other things, civil violations of the Racketeer Influenced and Corrupt Organizations Act. On June 22, 2022, the court preliminarily approved the class settlement and scheduled the final fairness hearing for November 9, 2022.
On February 9, 2022, FE, acting through the SLC, agreed to a settlement term sheet to resolve the following shareholder derivative lawsuits relating to HB 6 and the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder that were filed in the S.D. Ohio, the N.D. Ohio, and the Ohio Court of Common Pleas, Summit County:
•Gendrich v. Anderson, et al. and Sloan v. Anderson, et al. (Common Pleas Court, Summit County, OH, all actions have been consolidated); on July 26, 2020 and July 31, 2020, respectively, purported stockholders of FE filed shareholder derivative action lawsuits against certain FE directors and officers, alleging, among other things, breaches of fiduciary duty.
•Miller v. Anderson, et al. (N.D. Ohio); Bloom, et al. v. Anderson, et al.; Employees Retirement System of the City of St. Louis v. Jones, et al.; Electrical Workers Pension Fund, Local 103, I.B.E.W. v. Anderson et al.; Massachusetts Laborers Pension Fund v. Anderson et al.; The City of Philadelphia Board of Pensions and Retirement v. Anderson et al.; Atherton v. Dowling et al.; Behar v. Anderson, et al. (S.D. Ohio, all actions have been consolidated); beginning on August 7, 2020, purported stockholders of FE filed shareholder derivative actions alleging the FE Board and officers breached their fiduciary duties and committed violations of Section 14(a) of the Exchange Act.
On March 11, 2022, the parties executed a stipulation and agreement of settlement, and filed a motion the same day requesting preliminary settlement approval in the S.D. Ohio, which the S.D Ohio granted on May 9, 2022. Subsequently, following a hearing on August 4, 2022, the S.D. Ohio granted final approval of the settlement on August 24, 2022. The settlement agreement is expected to resolve fully these shareholder derivative lawsuits and includes a series of corporate governance enhancements, that have resulted in the following:
•Six members of the FE Board, Messrs. Michael J. Anderson, Donald T. Misheff, Thomas N. Mitchell, Christopher D. Pappas and Luis A. Reyes, and Ms. Julia L. Johnson did not stand for re-election at FE’s 2022 annual shareholder meeting;
•A special FE Board committee of at least three recently appointed independent directors was formed to initiate a review process of the then current senior executive team. The review of the senior executive team by the special FE Board committee and the FE Board was completed in September 2022;
•The FE Board will oversee FE’s lobbying and political activities, including periodically reviewing and approving political and lobbying action plans prepared by management;
•An FE Board committee of recently appointed independent directors will oversee the implementation and third-party audits of the FE Board-approved action plans with respect to political and lobbying activities;
•FE will implement enhanced disclosure to shareholders of political and lobbying activities, including enhanced disclosure in its annual proxy statement; and
•FE will further align financial incentives of senior executives to proactive compliance with legal and ethical obligations.
The settlement also includes a payment to FE of $180 million, to be paid by insurance after the judgment has become final, less $36 million in court-ordered attorney’s fees awarded to plaintiffs. On September 20, 2022, a purported FE stockholder filed a motion for reconsideration of the S.D. Ohio’s final settlement approval. The parties filed oppositions to that motion on October 11, 2022. The N.D. Ohio matter remains pending. On June 2, 2022, the N.D. Ohio entered an order to show cause why the court should not appoint new plaintiffs’ counsel, and thereafter, on June 10, 2022, the parties filed a joint motion to dismiss the matter without prejudice, which the N.D. Ohio denied on July 5, 2022. On August 15, 2022, the N.D. Ohio issued an order stating its intention to appoint one group of applicants as new plaintiffs’ counsel, and on August 22, 2022, the N.D. Ohio ordered that any objections to the appointment be submitted by August 26, 2022. The parties filed their objections by that deadline, and on September 2, 2022, the applicants responded to those objections. In the meantime, on August 25, 2022, a purported FE stockholder represented by the applicants filed a motion to intervene, attaching a proposed complaint-in-intervention purporting
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to assert claims that the FE Board and officers breached their fiduciary duties and committed violations of Section 14(a) of the Exchange Act as well as a claim against a third party for professional negligence and malpractice. The parties filed oppositions to that motion to intervene on September 8, 2022, and the proposed intervenor's reply in support of his motion to intervene was filed on September 22, 2022.
On August 24, 2022, the parties filed a joint motion to dismiss the action pending in the N.D. Ohio based upon and in light of the final approval of the settlement by the S.D. Ohio. On August 30, 2022, the parties filed a joint motion to dismiss the state court action, which the court dismissed with prejudice on September 2, 2022.
In letters dated January 26, and February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the Division is conducting an investigation of FirstEnergy’s lobbying and governmental affairs activities concerning HB 6, and staff directed FirstEnergy to preserve and maintain all documents and information related to the same as such have been developed as part of an ongoing non-public audit being conducted by FERC's Division of Audits and Accounting. FirstEnergy believes that it is probable that it will incur a loss in connection with the resolution of the FERC investigation. As FirstEnergy has entered into settlement discussions with FERC, it currently expects that its loss in connection with the resolution of the FERC investigation would not exceed $5 million.
FE terminated Charles E. Jones as its chief executive officer effective October 29, 2020. As a result of Mr. Jones’ termination, and due to the determination of a committee of independent members of the FE Board that Mr. Jones violated certain FirstEnergy policies and its code of conduct, all grants, awards and compensation under FirstEnergy’s short-term incentive compensation program and long-term incentive compensation program with respect to Mr. Jones that were outstanding on the date of termination were forfeited. In November 2021, after a determination by the Compensation Committee of the FE Board that a demand for recoupment was warranted pursuant to the Recoupment Policy, FE made a recoupment demand to Mr. Jones of compensation previously paid to him totaling approximately $56 million, the maximum amount permissible under the Recoupment Policy. As such, any amounts payable to Mr. Jones under the EDCP will be set off against FE’s recoupment demand. There can be no assurance that the efforts to seek recoupment from Mr. Jones will be successful and no portion of the approximately $56 million recoupment demand has been recognized in FirstEnergy’s financial statements as of September 30, 2022.
The outcome of any of these lawsuits, governmental investigations and audit is uncertain and could have a material adverse effect on FE’s or its subsidiaries’ reputation, business, financial condition, results of operations, liquidity, and cash flows.
Other Legal Matters
There are various lawsuits, claims (including claims for asbestos exposure) and proceedings related to FirstEnergy’s normal business operations pending against FE or its subsidiaries. The loss or range of loss in these matters is not expected to be material to FE or its subsidiaries. The other potentially material items not otherwise discussed above are described under Note 7, “Regulatory Matters.”
FirstEnergy accrues legal liabilities only when it concludes that it is probable that it has an obligation for such costs and can reasonably estimate the amount of such costs. In cases where FirstEnergy determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss if such estimate can be made. If it were ultimately determined that FE or its subsidiaries have legal liability or are otherwise made subject to liability based on any of the matters referenced above, it could have a material adverse effect on FE’s or its subsidiaries’ financial condition, results of operations, and cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, "Organization and Basis of Presentation," for a discussion of new accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “FirstEnergy Corp. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk Information” in Item 2 above.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The management of FirstEnergy, with the participation of the Interim Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of its disclosure controls and procedures, as defined under the Exchange Act, in Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report. Based on that evaluation, the Interim Chief Executive Officer and Chief Financial Officer of FirstEnergy have concluded that its disclosure controls and procedures were effective as of the end of the period covered by this report.
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(b) Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2022, there were no changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, FirstEnergy’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required for Part II, Item 1 is incorporated by reference to the discussions in Note 7, “Regulatory Matters,” and Note 8, “Commitments, Guarantees and Contingencies,” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
ITEM 1A. RISK FACTORS
You should carefully consider the risk factors discussed in "Item 1A. Risk Factors" in FirstEnergy’s Annual Report on Form 10-K for the year ended December 31, 2021, and its Quarterly Reports on Form 10-Q for the quarter ended June 30, 2022, which could materially affect FirstEnergy’s business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit Number | Description | ||||||||||
| (A) | 31.1 | ||||||||||
| (A) | 31.2 | ||||||||||
| (A) | 32 | ||||||||||
| 101 | The following materials from the Quarterly Report on Form 10-Q of FirstEnergy Corp. for the period ended September 30, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) related notes to these financial statements and (vi) document and entity information | ||||||||||
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document contained in Exhibit 101) | ||||||||||
(A) Provided herein in electronic format as an exhibit.
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, FirstEnergy has not filed as an exhibit to this Form 10-Q any instrument with respect to long-term debt if the respective total amount of securities authorized thereunder does not exceed 10% of its respective total assets, but hereby agrees to furnish to the SEC on request any such documents.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
October 25, 2022
| FIRSTENERGY CORP. | |||||
| Registrant | |||||
| /s/ Jason J. Lisowski | |||||
| Jason J. Lisowski | |||||
| Vice President, Controller and Chief Accounting Officer | |||||
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