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, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
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| Commission | | Registrant; State of Incorporation; | | I.R.S. Employer |
| File Number | | Address; and Telephone Number | | Identification No. |
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| 333-21011 | | FIRSTENERGY CORP | | 34-1843785 |
| | | (An | Ohio | Corporation) | | |
| | | 76 South Main Street | | |
| | | Akron | OH | 44308 | | |
| | | Telephone | (800) | 736-3402 | | |
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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| 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.
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).
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.
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| Large Accelerated Filer | ☑ |
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| Accelerated Filer | ☐ |
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| Non-accelerated Filer | ☐ |
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| Smaller Reporting Company | ☐ |
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| 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).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
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| | | OUTSTANDING |
| CLASS | | AS OF SEPTEMBER 30, 20202021 |
| Common Stock, $0.10 par value | | 542,590,202 544,419,619 | |
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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”“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 results of the ongoing internal investigation matterspotential liabilities, increased costs and evaluation of our controls framework and remediation of our material weakness in internal control over financial reporting.
•The extent and duration of COVID-19 and the impacts to our business, operations and financial conditionunanticipated developments resulting from governmental investigations and agreements, including those associated with compliance with or failure to comply with the outbreak of COVID-19 including, but not limited to, disruption of businesses in our territories, volatile capital and credit markets, legislative and regulatory actions,DPA with the effectiveness of our pandemic and business continuity plans,U.S. Attorney’s Office for the precautionary measures we are taking on behalf of our customers, contractors and employees, our customers’ ability to make their utility payment and the potential for supply-chain disruptions.S.D. Ohio.
•The risks and uncertainties associated with government investigations 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 potential of non-compliance with debt covenants in our credit facilities.
•The risks and uncertainties associated with litigation, arbitration, mediation and similar proceedings.
•Legislative and regulatory developments, including, but not limited to, matters related to rates, compliance and enforcement activity.
•Mitigating exposure for remedial activities associated with retired and formerly owned electric generation assets, including, but not limited to, risks associated with the decommissioning of TMI-2.
•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, maintaining financial flexibility, 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 growing earnings and maintaining financial flexibility.through a sale of a minority interest in certain of our transmission assets and/or issuance of additional equity.
•Economic and weather conditions affecting future operating results, such as a recession, significant weather events and other natural disasters, and associated regulatory events or actions in response to such conditions.
•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.
•The extent and duration of COVID-19 and the impacts to our business, operations and financial condition resulting from the outbreak of COVID-19 including, but not limited to, disruption of businesses in our territories and governmental and regulatory responses to the pandemic.
•The effectiveness of our pandemic and business continuity plans, the precautionary measures we are taking on behalf of our customers, contractors and employees, our customers’ ability to make their utility payment and the potential for supply-chain disruptions.
•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 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, the impact of climate change or energy efficiency and peak demand reduction mandates.
•Changes in national and regional economic conditions, including inflationary pressure, affecting us and/or our major industrialcustomers and commercial customers or othersthose vendors with which we do business.
•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.
•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.
•Changing market conditions affecting the measurement of certain liabilities and the value of assets held in our pension trusts, and other trust funds, or causing us to make contributions sooner, or in amounts that are larger, than currently anticipated.
•Labor disruptions by our unionized workforce.
•Changes to significant accounting policies.
•Any changes in tax laws or regulations, or adverse tax audit results or rulings.
•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.
•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 our FE Board of Directors at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
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 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
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| Part I. Financial Information | |
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| Consolidated Statements of Stockholders’ Equity | |
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GLOSSARY OF TERMS
The following abbreviations and acronyms are used in this report to identify FirstEnergy Corp. and its current and former subsidiaries:
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| 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 |
| 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 |
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| CEI | The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary |
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| FE | FirstEnergy Corp., a public utility holding company |
| 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 |
| FENOC | Energy Harbor Nuclear Corp. (formerly known as FirstEnergy Nuclear Operating Company), a subsidiary of EH, which operates NG’s nuclear generating facilities
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| FES | Energy Harbor LLC. (formerly known as FirstEnergy Solutions Corp.), a subsidiary of EH, which provides energy-related products and services |
| FES Debtors | FES, FENOC, FG, NG, FE Aircraft Leasing Corp., Norton Energy Storage LLC, and FGMUC
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| FESC | FirstEnergy Service Company, which provides legal, financial and other corporate support services |
| FET | FirstEnergy Transmission, LLC, the parent company of ATSI, KATCo, MAIT and TrAIL, and has a joint venture in PATH |
| 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 |
| FEV | FirstEnergy Ventures Corp., which invests in certain unregulated enterprises and business ventures |
| FG | Energy Harbor Generation LLC (formerly known as FirstEnergy Generation, LLC), a subsidiary of EH, which owns and operates fossil generating facilities
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| FGMUC | FirstEnergy Generation Mansfield Unit 1 Corp., a subsidiary of FG
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| 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 |
| Global Rail | Global Rail Group, LLC, a subsidiary of Global Holding that owns coal transportation operations near Roundup, Montana |
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| GPUN | GPU Nuclear, Inc., a subsidiary of FE, which operatesformerly operated TMI-2 |
| JCP&L | Jersey Central Power & Light Company, a New Jersey electric utility operating subsidiary |
| KATCo | Keystone Appalachian Transmission Company, a subsidiary of FET |
| 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 |
| NG | Energy Harbor Nuclear Generation LLC (formerly known as FirstEnergy Nuclear Generation, LLC), a subsidiary of EH, which owns nuclear generating facilities
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| 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 |
| 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 |
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| The following abbreviations and acronyms are used to identify frequently used terms in this report: |
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| ACE | Affordable Clean Energy | | EROENEC | Electric Reliability OrganizationExpanded Net Energy Cost |
| ADIT | Accumulated Deferred Income Taxes | | EPA | United States Environmental Protection Agency |
| AEP | American Electric Power Company, Inc. | | EPS | Earnings per Share |
| AFS | Available-for-sale | | ERO | Electric Reliability Organization |
| AFUDC | Allowance for Funds Used During Construction | | ESP IV | Electric Security Plan IV |
AEPAMI | American Electric Power Company, Inc.Advance Metering Infrastructure | | Facebook® | Facebook is a registered trademark of Facebook, Inc. |
AFSAOCI | Available-for-saleAccumulated Other Comprehensive Income (Loss) | | FASB | Financial Accounting Standards Board |
AFUDCARO | Allowance for Funds Used During ConstructionAsset Retirement Obligation | | FE Board | FE Board of Directors |
| ARP | Alternative Revenue Program | | FERC | Federal Energy Regulatory Commission |
AMIASC | Advance Metering InfrastructureAccounting Standard Codification | | FES Bankruptcy | FES Debtors’ voluntary petitions for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code with the Bankruptcy Court |
AMTASU | Alternative Minimum TaxAccounting Standards Update | | Fitch | Fitch Ratings Service |
AOCI | Accumulated Other Comprehensive Income (Loss) | | FPA | Federal Power Act |
ARO | Asset Retirement Obligation | | FTR | Financial Transmission Right |
ARP | Alternative Revenue Program | | GAAP | Accounting Principles Generally Accepted in the United States of America |
ASC | Accounting Standard Codification | | GHG | Greenhouse Gases |
ASU | Accounting Standards Update | | HB 6 | House Bill 6, as passed by Ohio's 133rd General Assembly |
| Bankruptcy Court | U.S. Bankruptcy Court in the Northern District of Ohio in Akron | | IIPFPA | Infrastructure Investment ProgramFederal Power Act |
| BGS | Basic Generation Service | | kWFTR | KilowattFinancial Transmission Right |
| CAA | Clean Air Act | | LIBORGAAP | London Inter-Bank Offered Rate |
CARES Act | Coronavirus Aid, Relief and Economic Security ActAccounting Principles Generally Accepted in the United States of 2020 | | LOC | Letter of CreditAmerica |
| CCR | Coal Combustion Residuals | | LTIIPsGHG | Long-Term Infrastructure Improvement PlansGreenhouse Gases |
| CERCLA | Comprehensive Environmental Response, Compensation, and Liability Act of 1980 | | MDPSCHB 6 | Maryland Public Service CommissionHouse Bill 6, as passed by Ohio's 133rd General Assembly |
| CFR | Code of Federal Regulations | | MGPHB 128 | Manufactured Gas PlantsHouse Bill 128, as passed by Ohio's 134th General Assembly |
CO2 | Carbon Dioxide | | LIBOR | London Inter-Bank Offered Rate |
| Code of Business Conduct | The FirstEnergy Code of Business Conduct and Ethics as approved by the FE Board on July 20, 2021 | | LOC | Letter of Credit |
| COVID-19 | Coronavirus disease | | LTIIPs | Long-Term Infrastructure Improvement Plans |
| CPP | EPA’s Clean Power Plan | | MDPSC | Maryland Public Service Commission |
| CSAPR | Cross-State Air Pollution Rule | | MGP | Manufactured Gas Plants |
| CSR | Conservation Support Rider | | MISO | Midcontinent Independent System Operator, Inc. |
COVID-19CTA | Coronavirus disease 2019 | | mmBTU | One Million British Thermal Units |
CPP | EPA’s Clean Power PlanConsolidated Tax Adjustment | | Moody’s | Moody’s Investors Service, Inc. |
CSAPR | Cross-State Air Pollution Rule | | MW | Megawatt |
CTA | Consolidated Tax Adjustment | | MWH | Megawatt-hour |
| CWA | Clean Water Act | | NAAQSMW | National Ambient Air Quality StandardsMegawatt |
| D.C. Circuit | United States Court of Appeals for the District of Columbia Circuit | | MWH | Megawatt-hour |
| DCR | Delivery Capital Recovery | | NAAQS | National Ambient Air Quality Standards |
| DMR | Distribution Modernization Rider | | NDT | Nuclear Decommissioning Trust |
DCRDOE | Delivery Capital RecoveryUnited States Department of Energy | | NERC | North American Electric Reliability Corporation |
DMRDPA | Distribution Modernization RiderDeferred Prosecution Agreement entered into on July 21, 2021 between FE and S.D. Ohio | | NJBPUNJ Rate Counsel | New Jersey BoardDivision of Public UtilitiesRate Counsel |
| DSIC | Distribution System Improvement Charge | | NOINJBPU | NoticeNew Jersey Board of InquiryPublic Utilities |
| DSP | Default Service Plan | | NOL | Net Operating Loss |
E&PEDC | Earnings and ProfitsElectric Distribution Company | | NOx | Nitrogen Oxide |
EDCEDIS | Electric Distribution CompanyInvestment Surcharge | | NPDES | National Pollutant Discharge Elimination
System |
EDISEE&C | Electric Distribution Investment SurchargeEnergy Efficiency and Conservation | | NRC | Nuclear Regulatory Commission |
EE&CEEI | Energy Efficiency and ConservationEdison Electric Institute | | NUG | Non-Utility Generation |
| EGS | Electric Generation Supplier | | NYPSC | New York State Public Service Commission |
| EGU | Electric Generation Units | | OCAOAG | Office of Consumer AdvocateOhio Attorney General |
| EH | Energy Harbor Corp. | | OCCOCA | Ohio Consumers’ CounselOffice of Consumer Advocate |
| EmPOWER Maryland | EmPOWER Maryland Energy Efficiency Act | | OH AGOCC | Ohio Attorney GeneralConsumers’ Counsel |
ENEC | Expanded Net Energy Cost | | OPEB | Other Post-Employment Benefits |
EPA | United States Environmental Protection Agency | | OPIC | Other Paid-in Capital |
EPS | Earnings per Share | | OVEC | Ohio Valley Electric Corporation |
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PA DEPODSA | Pennsylvania DepartmentOhio Development Service Agency | | RTO | Regional Transmission Organization |
| OPEB | Other Post-Employment Benefits | | S&P | Standard & Poor’s Ratings Service |
| OPIC | Other Paid-in Capital | | S.D. Ohio | Southern District of Environmental ProtectionOhio |
| OVEC | Ohio Valley Electric Corporation | | SBC | Societal Benefits Charge |
PJMPA DEP | PJM Interconnection, LLCPennsylvania Department of Environmental Protection | | SCOH | Supreme Court of Ohio |
PJM TariffPIR | PJM Open Access Transmission Tariff | | SCR | Selective Catalytic Reduction |
POLR | Provider of Last ResortPhase-In Recovery Rider | | SEC | United States Securities and Exchange Commission |
PORPJM | Purchase of ReceivablesPJM Interconnection, LLC | | SEET | Significantly Excessive Earnings Test |
PPAPJM Tariff | Purchase Power AgreementPJM Open Access Transmission Tariff | | SIP | State Implementation Plan(s) Under the Clean Air Act |
| POLR | Provider of Last Resort | | SLC | Special Litigation Committee of the FE Board |
| PPA | Purchase Power Agreement | | SO2 | Sulfur Dioxide |
| PPB | Parts per Billion | | SNCRSOS | Selective Non-Catalytic ReductionStandard Offer Service |
| PPUC | Pennsylvania Public Utility Commission | | SOSREC2
| Sulfur DioxideSolar Renewable Energy Credit |
| PUCO | Public Utilities Commission of Ohio | | SOSSSO | Standard Service Offer Service |
| PURPA | Public Utility Regulatory Policies Act of 1978 | | SREC | Solar Renewable Energy Credit |
RCRA | Resource Conservation and Recovery Act | | SSO | Standard Service Offer |
Regulation FD | Regulation Fair Disclosure promulgated by the SEC | | Tax Act | Tax Cuts and Jobs Act adopted December 22, 2017 |
RFCRCRA | ReliabilityResource Conservation and Recovery Act
| | FirstTMI-1 | CorporationThree Mile Island Unit 1 |
| Regulation FD | Regulation Fair Disclosure promulgated by the SEC | | TMI-2 | Three Mile Island Unit 2 |
RFPRFC | Request for ProposalReliabilityFirst Corporation
| | Twitter® | Twitter is a registered trademark of Twitter, Inc. |
RGGIRFP | Regional Greenhouse Gas Initiative | | UCC | Official committee of unsecured creditors appointed in connection with the FES Bankruptcy |
ROE | Return on EquityRequest for Proposal | | VIE | Variable Interest Entity |
RTORGGI | Regional Transmission OrganizationGreenhouse Gas Initiative | | VSCC | Virginia State Corporation Commission |
S&PROE | Standard & Poor’s Ratings ServiceReturn on Equity | | WVPSC | Public Service Commission of West Virginia |
S.D. Ohio | Southern District of Ohio | | ZEC | Zero Emissions Certificate |
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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, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| (In millions, except per share amounts) | (In millions, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | (In millions, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 |
| | REVENUES: | REVENUES: | | REVENUES: | |
| Distribution services and retail generation | Distribution services and retail generation | | $ | 2,470 | | | $ | 2,411 | | | $ | 6,624 | | | $ | 6,651 | | Distribution services and retail generation | | $ | 2,550 | | | $ | 2,470 | | | $ | 6,882 | | | $ | 6,624 | |
| Transmission | Transmission | | 408 | | | 371 | | | 1,185 | | | 1,090 | | Transmission | | 411 | | | 408 | | | 1,223 | | | 1,185 | |
| Other | Other | | 144 | | | 181 | | | 444 | | | 621 | | Other | | 163 | | | 144 | | | 367 | | | 444 | |
Total revenues(1) | Total revenues(1) | | 3,022 | | | 2,963 | | | 8,253 | | | 8,362 | | Total revenues(1) | | 3,124 | | | 3,022 | | | 8,472 | | | 8,253 | |
| | OPERATING EXPENSES: | OPERATING EXPENSES: | | OPERATING EXPENSES: | |
| Fuel | Fuel | | 101 | | | 122 | | | 276 | | | 382 | | Fuel | | 132 | | | 101 | | | 362 | | | 276 | |
| Purchased power | Purchased power | | 766 | | | 798 | | | 2,073 | | | 2,190 | | Purchased power | | 874 | | | 766 | | | 2,206 | | | 2,073 | |
| Other operating expenses | Other operating expenses | | 937 | | | 758 | | | 2,416 | | | 2,143 | | Other operating expenses | | 856 | | | 937 | | | 2,326 | | | 2,416 | |
| | Provision for depreciation | Provision for depreciation | | 316 | | | 304 | | | 954 | | | 910 | | Provision for depreciation | | 326 | | | 316 | | | 972 | | | 954 | |
| | Amortization (deferral) of regulatory assets, net | Amortization (deferral) of regulatory assets, net | | (91) | | | 43 | | | (26) | | | 85 | | Amortization (deferral) of regulatory assets, net | | 30 | | | (91) | | | 171 | | | (26) | |
| General taxes | General taxes | | 272 | | | 257 | | | 792 | | | 757 | | General taxes | | 275 | | | 272 | | | 812 | | | 792 | |
| | DPA penalty (Note 9) | | DPA penalty (Note 9) | | — | | | — | | | 230 | | | — | |
| Gain on sale of Yards Creek (Note 8) | | Gain on sale of Yards Creek (Note 8) | | — | | | — | | | (109) | | | — | |
| | Total operating expenses | Total operating expenses | | 2,301 | | | 2,282 | | | 6,485 | | | 6,467 | | Total operating expenses | | 2,493 | | | 2,301 | | | 6,970 | | | 6,485 | |
| | OPERATING INCOME | OPERATING INCOME | | 721 | | | 681 | | | 1,768 | | | 1,895 | | OPERATING INCOME | | 631 | | | 721 | | | 1,502 | | | 1,768 | |
| | OTHER INCOME (EXPENSE): | OTHER INCOME (EXPENSE): | | OTHER INCOME (EXPENSE): | |
| | Miscellaneous income, net | Miscellaneous income, net | | 100 | | | 57 | | | 303 | | | 191 | | Miscellaneous income, net | | 136 | | | 100 | | | 379 | | | 303 | |
| | Pension and OPEB mark-to-market adjustment (Note 5) | Pension and OPEB mark-to-market adjustment (Note 5) | | 0 | | | 0 | | | (423) | | | 0 | | Pension and OPEB mark-to-market adjustment (Note 5) | | — | | | — | | | — | | | (423) | |
| Interest expense | Interest expense | | (266) | | | (261) | | | (792) | | | (773) | | Interest expense | | (283) | | | (266) | | | (855) | | | (792) | |
| Capitalized financing costs | Capitalized financing costs | | 21 | | | 19 | | | 57 | | | 53 | | Capitalized financing costs | | 20 | | | 21 | | | 54 | | | 57 | |
| Total other expense | Total other expense | | (145) | | | (185) | | | (855) | | | (529) | | Total other expense | | (127) | | | (145) | | | (422) | | | (855) | |
| | INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 576 | | | 496 | | | 913 | | | 1,366 | | INCOME BEFORE INCOME TAXES | | 504 | | | 576 | | | 1,080 | | | 913 | |
| | INCOME TAXES | INCOME TAXES | | 116 | | | 107 | | | 122 | | | 281 | | INCOME TAXES | | 88 | | | 116 | | | 271 | | | 122 | |
| | INCOME FROM CONTINUING OPERATIONS | INCOME FROM CONTINUING OPERATIONS | | 460 | | | 389 | | | 791 | | | 1,085 | | INCOME FROM CONTINUING OPERATIONS | | 416 | | | 460 | | | 809 | | | 791 | |
| Discontinued operations (Note 3)(2) | Discontinued operations (Note 3)(2) | | (6) | | | 2 | | | 46 | | | (62) | | Discontinued operations (Note 3)(2) | | 47 | | | (6) | | | 47 | | | 46 | |
| | NET INCOME | NET INCOME | | $ | 454 | | | $ | 391 | | | $ | 837 | | | $ | 1,023 | | NET INCOME | | $ | 463 | | | $ | 454 | | | $ | 856 | | | $ | 837 | |
| | | INCOME ALLOCATED TO PREFERRED STOCKHOLDERS (Note 4) | | 0 | | | 0 | | | 0 | | | 7 | | |
| | NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | 454 | | | $ | 391 | | | $ | 837 | | | $ | 1,016 | | |
| | | EARNINGS PER SHARE OF COMMON STOCK (Note 4): | EARNINGS PER SHARE OF COMMON STOCK (Note 4): | | EARNINGS PER SHARE OF COMMON STOCK (Note 4): | |
| Basic - Continuing Operations | Basic - Continuing Operations | | $ | 0.85 | | | $ | 0.72 | | | $ | 1.46 | | | $ | 2.02 | | Basic - Continuing Operations | | $ | 0.76 | | | $ | 0.85 | | | $ | 1.48 | | | $ | 1.46 | |
| Basic - Discontinued Operations | Basic - Discontinued Operations | | (0.01) | | | 0.01 | | | 0.08 | | | (0.12) | | Basic - Discontinued Operations | | 0.09 | | | (0.01) | | | 0.09 | | | 0.08 | |
| Basic - Net Income Attributable to Common Stockholders | | $ | 0.84 | | | $ | 0.73 | | | $ | 1.54 | | | $ | 1.90 | | |
| Basic - Earnings Per Share of Common Stock | | Basic - Earnings Per Share of Common Stock | | $ | 0.85 | | | $ | 0.84 | | | $ | 1.57 | | | $ | 1.54 | |
| | Diluted - Continuing Operations | Diluted - Continuing Operations | | $ | 0.85 | | | $ | 0.72 | | | $ | 1.46 | | | $ | 2.00 | | Diluted - Continuing Operations | | $ | 0.76 | | | $ | 0.85 | | | $ | 1.48 | | | $ | 1.46 | |
| Diluted - Discontinued Operations | Diluted - Discontinued Operations | | (0.01) | | | 0 | | | 0.08 | | | (0.11) | | Diluted - Discontinued Operations | | 0.09 | | | (0.01) | | | 0.09 | | | 0.08 | |
| Diluted - Net Income Attributable to Common Stockholders | | $ | 0.84 | | | $ | 0.72 | | | $ | 1.54 | | | $ | 1.89 | | |
| Diluted - Earnings Per Share of Common Stock | | Diluted - Earnings Per Share of Common Stock | | $ | 0.85 | | | $ | 0.84 | | | $ | 1.57 | | | $ | 1.54 | |
| | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | |
| Basic | Basic | | 542 | | | 538 | | | 542 | | | 533 | | Basic | | 544 | | | 542 | | | 544 | | | 542 | |
| Diluted | Diluted | | 543 | | | 542 | | | 543 | | | 541 | | Diluted | | 545 | | | 543 | | | 545 | | | 543 | |
|
(1) Includes excise and gross receipts tax collections of $103 million and $100 million during each of the three months ended September 30, 2021 and 2020, respectively, and 2019,$283 million and $276 million and $283 million during the nine months ended September 30, 20202021 and 2019,2020, respectively.
(2) Net of income tax expense (benefits) of $6 million and $2$(47) million for the three months ended September 30, 2020 and 2019, respectively, and $(29) million and $46 million for the nine months ended September 30, 20202021, and 2019,$6 million and $(29) million for the three and nine months ended September 30, 2020, respectively.
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
| (In millions) | (In millions) | | 2020 | | 2019 | | 2020 | | 2019 | | (In millions) | | 2021 | | 2020 | | 2021 | | 2020 | |
| | NET INCOME | NET INCOME | | $ | 454 | | | $ | 391 | | | $ | 837 | | | $ | 1,023 | | | NET INCOME | | $ | 463 | | | $ | 454 | | | $ | 856 | | | $ | 837 | | |
| | OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | |
| OTHER COMPREHENSIVE LOSS: | | OTHER COMPREHENSIVE LOSS: | | | | | |
| Pension and OPEB prior service costs | Pension and OPEB prior service costs | | (3) | | | (7) | | | (30) | | | (21) | | | Pension and OPEB prior service costs | | (3) | | | (3) | | | (10) | | | (30) | | |
| Amortized losses on derivative hedges | Amortized losses on derivative hedges | | 0 | | | 0 | | | 1 | | | 1 | | | Amortized losses on derivative hedges | | — | | | — | | | 1 | | | 1 | | |
| | Other comprehensive loss | Other comprehensive loss | | (3) | | | (7) | | | (29) | | | (20) | | | Other comprehensive loss | | (3) | | | (3) | | | (9) | | | (29) | | |
| Income tax benefits on other comprehensive loss | Income tax benefits on other comprehensive loss | | (1) | | | (3) | | | (7) | | | (6) | | | Income tax benefits on other comprehensive loss | | (1) | | | (1) | | | (3) | | | (7) | | |
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | (2) | | | (4) | | | (22) | | | (14) | | | Other comprehensive loss, net of tax | | (2) | | | (2) | | | (6) | | | (22) | | |
| | COMPREHENSIVE INCOME | COMPREHENSIVE INCOME | | $ | 452 | | | $ | 387 | | | $ | 815 | | | $ | 1,009 | | | COMPREHENSIVE INCOME | | $ | 461 | | | $ | 452 | | | $ | 850 | | | $ | 815 | | |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | (In millions, except share amounts) | (In millions, except share amounts) | | | September 30,
2020 | | December 31,
2019 | (In millions, except share amounts) | | | September 30,
2021 | | December 31,
2020 |
| ASSETS | ASSETS | | | | | | ASSETS | | | | | |
| CURRENT ASSETS: | CURRENT ASSETS: | | | | | | CURRENT ASSETS: | | | | | |
| Cash and cash equivalents | Cash and cash equivalents | | | $ | 260 | | | $ | 627 | | Cash and cash equivalents | | | $ | 577 | | | $ | 1,734 | |
| Restricted cash | Restricted cash | | | 36 | | | 52 | | Restricted cash | | | 107 | | | 67 | |
| Receivables- | Receivables- | | | | | Receivables- | | | | |
| Customers | Customers | | | 1,220 | | | 1,137 | | Customers | | | 1,273 | | | 1,367 | |
| Less — Allowance for uncollectible customer receivables | Less — Allowance for uncollectible customer receivables | | | 108 | | | 46 | | Less — Allowance for uncollectible customer receivables | | | 159 | | | 164 | |
| | | 1,112 | | | 1,091 | | | | 1,114 | | | 1,203 | |
| Affiliated companies, net of allowance for uncollectible accounts of $1,063 in 2019 | | | 0 | | | 0 | | |
| Other, net of allowance for uncollectible accounts of $24 in 2020 and $21 in 2019 | | | 228 | | | 203 | | |
| | Other, net of allowance for uncollectible accounts of $12 in 2021 and $26 in 2020 | | Other, net of allowance for uncollectible accounts of $12 in 2021 and $26 in 2020 | | | 250 | | | 236 | |
| Materials and supplies, at average cost | Materials and supplies, at average cost | | | 308 | | | 281 | | Materials and supplies, at average cost | | | 245 | | | 317 | |
| | Prepaid taxes and other | Prepaid taxes and other | | | 218 | | | 157 | | Prepaid taxes and other | | | 239 | | | 157 | |
| Current assets - discontinued operations | | | 0 | | | 33 | | |
| | | | | | 2,162 | | | 2,444 | | | | | 2,532 | | | 3,714 | |
| PROPERTY, PLANT AND EQUIPMENT: | PROPERTY, PLANT AND EQUIPMENT: | | | | | | PROPERTY, PLANT AND EQUIPMENT: | | | | | |
| In service | In service | | | 43,177 | | | 41,767 | | In service | | | 45,032 | | | 43,654 | |
| Less — Accumulated provision for depreciation | Less — Accumulated provision for depreciation | | | 11,971 | | | 11,427 | | Less — Accumulated provision for depreciation | | | 12,460 | | | 11,938 | |
| | | | | 31,206 | | | 30,340 | | | | | 32,572 | | | 31,716 | |
| Construction work in progress | Construction work in progress | | | 1,651 | | | 1,310 | | Construction work in progress | | | 1,733 | | | 1,578 | |
| | | | | 32,857 | | | 31,650 | | | | | 34,305 | | | 33,294 | |
| | PROPERTY, PLANT AND EQUIPMENT, NET - HELD FOR SALE (NOTE 9) | | | 44 | | | 0 | | |
| PROPERTY, PLANT AND EQUIPMENT, NET - HELD FOR SALE (NOTE 8) | | PROPERTY, PLANT AND EQUIPMENT, NET - HELD FOR SALE (NOTE 8) | | | — | | | 45 | |
| | INVESTMENTS: | | | | | | |
| | Nuclear fuel disposal trust | | | 281 | | | 270 | | |
| Other | | | 301 | | | 299 | | |
| Investments - held for sale (Note 10) | | | 881 | | | 882 | | |
| | | | 1,463 | | | 1,451 | | |
| DEFERRED CHARGES AND OTHER ASSETS: | | | | | | |
| INVESTMENTS AND OTHER NONCURRENT ASSETS: | | INVESTMENTS AND OTHER NONCURRENT ASSETS: | | | | | |
| Goodwill | Goodwill | | | 5,618 | | | 5,618 | | Goodwill | | | 5,618 | | | 5,618 | |
| Investments (Note 7) | | Investments (Note 7) | | | 632 | | | 605 | |
| Regulatory assets | Regulatory assets | | | 81 | | | 99 | | Regulatory assets | | | 90 | | | 82 | |
| Other | Other | | | 713 | | | 1,039 | | Other | | | 677 | | | 1,106 | |
| | | | | | 6,412 | | | 6,756 | | | | | 7,017 | | | 7,411 | |
| | | $ | 42,938 | | | $ | 42,301 | | | | $ | 43,854 | | | $ | 44,464 | |
| LIABILITIES AND CAPITALIZATION | LIABILITIES AND CAPITALIZATION | | | | | | LIABILITIES AND CAPITALIZATION | | | | | |
| CURRENT LIABILITIES: | CURRENT LIABILITIES: | | | | | | CURRENT LIABILITIES: | | | | | |
| Currently payable long-term debt | Currently payable long-term debt | | | $ | 77 | | | $ | 380 | | Currently payable long-term debt | | | $ | 1,230 | | | $ | 146 | |
| Short-term borrowings | Short-term borrowings | | | 300 | | | 1,000 | | Short-term borrowings | | | — | | | 2,200 | |
| Accounts payable | Accounts payable | | | 891 | | | 918 | | Accounts payable | | | 876 | | | 827 | |
| Accounts payable - affiliated companies | | | 0 | | | 87 | | |
| | Accrued interest | Accrued interest | | | 283 | | | 249 | | Accrued interest | | | 291 | | | 282 | |
| Accrued taxes | Accrued taxes | | | 601 | | | 545 | | Accrued taxes | | | 641 | | | 640 | |
| Accrued compensation and benefits | Accrued compensation and benefits | | | 339 | | | 258 | | Accrued compensation and benefits | | | 369 | | | 349 | |
| | Other | Other | | | 586 | | | 1,425 | | Other | | | 687 | | | 560 | |
| | | | | | 3,077 | | | 4,862 | | | | | 4,094 | | | 5,004 | |
| CAPITALIZATION: | CAPITALIZATION: | | | | | | CAPITALIZATION: | | | | | |
| Stockholders’ equity- | Stockholders’ equity- | | | | | | Stockholders’ equity- | | | | | |
| Common stock, $0.10 par value, authorized 700,000,000 shares - 542,590,202 and 540,652,222 shares outstanding as of September 30, 2020 and December 31, 2019, respectively | | | 54 | | | 54 | | |
| Common stock, $0.10 par value, authorized 700,000,000 shares - 544,419,619 and 543,117,533 shares outstanding as of September 30, 2021 and December 31, 2020, respectively | | Common stock, $0.10 par value, authorized 700,000,000 shares - 544,419,619 and 543,117,533 shares outstanding as of September 30, 2021 and December 31, 2020, respectively | | | 54 | | | 54 | |
| | Other paid-in capital | Other paid-in capital | | | 10,266 | | | 10,868 | | Other paid-in capital | | | 9,468 | | | 10,076 | |
| Accumulated other comprehensive income (loss) | | | (2) | | | 20 | | |
| Accumulated other comprehensive loss | | Accumulated other comprehensive loss | | | (11) | | | (5) | |
| Accumulated deficit | Accumulated deficit | | | (3,130) | | | (3,967) | | Accumulated deficit | | | (2,032) | | | (2,888) | |
| Total stockholders’ equity | Total stockholders’ equity | | | 7,188 | | | 6,975 | | Total stockholders’ equity | | | 7,479 | | | 7,237 | |
| | Long-term debt and other long-term obligations | Long-term debt and other long-term obligations | | | 22,203 | | | 19,618 | | Long-term debt and other long-term obligations | | | 22,503 | | | 22,131 | |
| | | | | 29,391 | | | 26,593 | | | | | 29,982 | | | 29,368 | |
| NONCURRENT LIABILITIES: | NONCURRENT LIABILITIES: | | | | | | NONCURRENT LIABILITIES: | | | | | |
| Accumulated deferred income taxes | Accumulated deferred income taxes | | | 3,036 | | | 2,849 | | Accumulated deferred income taxes | | | 3,366 | | | 3,095 | |
| Retirement benefits | Retirement benefits | | | 3,342 | | | 3,065 | | Retirement benefits | | | 3,124 | | | 3,345 | |
| Regulatory liabilities | Regulatory liabilities | | | 2,053 | | | 2,360 | | Regulatory liabilities | | | 2,015 | | | 1,826 | |
| Asset retirement obligations | | | 173 | | | 165 | | |
| | Adverse power contract liability | | | 31 | | | 49 | | |
| | Other | Other | | | 1,117 | | | 1,667 | | Other | | | 1,273 | | | 1,826 | |
| Noncurrent liabilities - held for sale (Note 10) | | | 718 | | | 691 | | |
| | | | | 10,470 | | | 10,846 | | |
| COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 10) | | | | | | |
| | | $ | 42,938 | | | $ | 42,301 | | | | | 9,778 | | | 10,092 | |
| COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 9) | | COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 9) | | | 0 | | 0 |
| | | | $ | 43,854 | | | $ | 44,464 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2021 |
| | | Common Stock | | OPIC | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity | | Common Stock | | OPIC | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity |
| (In millions) | (In millions) | | Shares | | Amount | | (In millions) | | Shares | | Amount | |
| Balance, January 1, 2020 | | 541 | | | $ | 54 | | | $ | 10,868 | | | $ | 20 | | | $ | (3,967) | | | $ | 6,975 | | |
| Balance, January 1, 2021 | | Balance, January 1, 2021 | | 543 | | | $ | 54 | | | $ | 10,076 | | | $ | (5) | | | $ | (2,888) | | | $ | 7,237 | |
| Net income | Net income | | 74 | | | 74 | | Net income | | 335 | | | 335 | |
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | (18) | | | (18) | | Other comprehensive loss, net of tax | | (2) | | | (2) | |
| | Stock Investment Plan and share-based benefit plans | | 1 | | | (6) | | | (6) | | |
| Share-based benefit plans | | Share-based benefit plans | | 1 | | | 2 | | | 2 | |
| Cash dividends declared on common stock ($0.39 per share in March) | Cash dividends declared on common stock ($0.39 per share in March) | | (211) | | | (211) | | Cash dividends declared on common stock ($0.39 per share in March) | | (212) | | | (212) | |
| Balance, March 31, 2020 | | 542 | | | $ | 54 | | | $ | 10,651 | | | $ | 2 | | | $ | (3,893) | | | $ | 6,814 | | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | | 544 | | | $ | 54 | | | $ | 9,866 | | | $ | (7) | | | $ | (2,553) | | | $ | 7,360 | |
| Net income | Net income | | | | | | | | | | 309 | | | 309 | | Net income | | | | | | | | | | 58 | | | 58 | |
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | (2) | | | (2) | | Other comprehensive loss, net of tax | | (2) | | | (2) | |
| Share-based benefit plans | | Share-based benefit plans | | 14 | | | 14 | |
| | Stock Investment Plan and share-based benefit plans | | 22 | | | 22 | | |
| Balance, June 30, 2020 | | 542 | | | $ | 54 | | | $ | 10,673 | | | $ | 0 | | | $ | (3,584) | | | $ | 7,143 | | |
| Balance, June 30, 2021 | | Balance, June 30, 2021 | | 544 | | | $ | 54 | | | $ | 9,880 | | | $ | (9) | | | $ | (2,495) | | | $ | 7,430 | |
| Net income | Net income | | | | | | | | | | 454 | | | 454 | | Net income | | | | | | | | | | 463 | | | 463 | |
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | (2) | | | (2) | | Other comprehensive loss, net of tax | | (2) | | | (2) | |
| Stock Investment Plan and share-based benefit plans | | 1 | | | 17 | | | 17 | | |
| Share-based benefit plans | | Share-based benefit plans | | 0 | | 13 | | | 13 | |
| Cash dividends declared on common stock ($0.39 per share in July and September) | Cash dividends declared on common stock ($0.39 per share in July and September) | | (424) | | | (424) | | Cash dividends declared on common stock ($0.39 per share in July and September) | | (425) | | | (425) | |
| Balance, September 30, 2020 | | 543 | | | $ | 54 | | | $ | 10,266 | | | $ | (2) | | | $ | (3,130) | | | $ | 7,188 | | |
| Balance, September 30, 2021 | | Balance, September 30, 2021 | | 544 | | | $ | 54 | | | $ | 9,468 | | | $ | (11) | | | $ | (2,032) | | | $ | 7,479 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | Common Stock | | OPIC | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity |
| (In millions) | | Shares | | Amount | | | |
| Balance, January 1, 2020 | | 541 | | | $ | 54 | | | $ | 10,868 | | | $ | 20 | | | $ | (3,967) | | | $ | 6,975 | |
| Net income | | | | | | | | | | 74 | | | 74 | |
| Other comprehensive loss, net of tax | | | | | | | | (18) | | | | | (18) | |
| Stock Investment Plan and share-based benefit plans | | 1 | | | | | (6) | | | | | | | (6) | |
Cash dividends declared on common stock ($0.39 per share in March) | | | | | | (211) | | | | | | | (211) | |
| Balance, March 31, 2020 | | 542 | | | $ | 54 | | | $ | 10,651 | | | $ | 2 | | | $ | (3,893) | | | $ | 6,814 | |
| Net income | | | | | | | | | | 309 | | | 309 | |
| Other comprehensive loss, net of tax | | | | | | | | (2) | | | | | (2) | |
| | | | | | | | | | | | |
| Stock Investment Plan and share-based benefit plans | | | | | | 22 | | | | | | | 22 | |
| Balance, June 30, 2020 | | 542 | | | $ | 54 | | | $ | 10,673 | | | $ | — | | | $ | (3,584) | | | $ | 7,143 | |
| Net income | | | | | | | | | | 454 | | | 454 | |
| Other comprehensive loss, net of tax | | | | | | | | (2) | | | | | (2) | |
| Stock Investment Plan and share-based benefit plans | | 1 | | | | | 17 | | | | | | | 17 | |
| Cash dividends declared on common stock ($0.39 per share in July and September) | | | | | | (424) | | | | | | | (424) | |
| Balance, September 30, 2020 | | 543 | | | $ | 54 | | | $ | 10,266 | | | $ | (2) | | | $ | (3,130) | | | $ | 7,188 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Series A Convertible Preferred Stock | | Common Stock | | OPIC | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity |
| (In millions) | | Shares | | Amount | | Shares | | Amount | | | |
| Balance, January 1, 2019 | | 0.7 | | | $ | 71 | | | 512 | | | $ | 51 | | | $ | 11,530 | | | $ | 41 | | | $ | (4,879) | | | $ | 6,814 | |
| Net income | | | | | | | | | | | | | | 320 | | | 320 | |
| Other comprehensive loss, net of tax | | | | | | | | | | | | (5) | | | | | (5) | |
| | | | | | | | | | | | | | | | |
| Stock Investment Plan and share-based benefit plans | | | | | | 1 | | | | | 8 | | | | | | | 8 | |
| Cash dividends declared on common stock ($0.38 per share in March) | | | | | | | | | | (202) | | | | | | | (202) | |
| Cash dividends declared on preferred stock ($0.38 per as-converted share in March) | | | | | | | | | | (3) | | | | | | | (3) | |
| Conversion of Series A Convertible Preferred Stock to Common Stock | | (0.5) | | | (50) | | | 18 | | | 2 | | | 48 | | | | | | | 0 | |
| Balance, March 31, 2019 | | 0.2 | | | $ | 21 | | | 531 | | | $ | 53 | | | $ | 11,381 | | | $ | 36 | | | $ | (4,559) | | | $ | 6,932 | |
| Net income | | | | | | | | | | | | | | 312 | | | 312 | |
| Other comprehensive loss, net of tax | | | | | | | | | | | | (5) | | | | | (5) | |
| | | | | | | | | | | | | | | | |
| Stock Investment Plan and share-based benefit plans | | | | | | 1 | | | | | 30 | | | | | | | 30 | |
| Balance, June 30, 2019 | | 0.2 | | | $ | 21 | | | 532 | | | $ | 53 | | | $ | 11,411 | | | $ | 31 | | | $ | (4,247) | | | $ | 7,269 | |
| Net income | | | | | | | | | | | | | | 391 | | | 391 | |
| Other comprehensive loss, net of tax | | | | | | | | | | | | (4) | | | | | (4) | |
| Stock Investment Plan and share-based benefit plans | | | | | | 1 | | | | | 27 | | | | | | | 27 | |
| Cash dividends declared on common stock ($0.38 per share in July and September) | | | | | | | | | | (411) | | | | | | | (411) | |
| Conversion of Series A Convertible Preferred Stock to Common Stock | | (0.2) | | | (21) | | | 7 | | | 1 | | | 20 | | | | | | | 0 | |
| Balance, September 30, 2019 | | 0 | | | $ | 0 | | | 540 | | | $ | 54 | | | $ | 11,047 | | | $ | 27 | | | $ | (3,856) | | | $ | 7,272 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | For the Nine Months Ended September 30, | | For the Nine Months Ended September 30, |
| (In millions) | (In millions) | | 2020 | | 2019 | (In millions) | | 2021 | | 2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
| Net income | Net income | | $ | 837 | | | $ | 1,023 | | Net income | | $ | 856 | | | $ | 837 | |
| Adjustments to reconcile net income to net cash from operating activities- | Adjustments to reconcile net income to net cash from operating activities- | | Adjustments to reconcile net income to net cash from operating activities- | |
| Loss (gain) on disposal, net of tax (Note 3) | | (46) | | | 16 | | |
| Depreciation and amortization | Depreciation and amortization | | 804 | | | 1,069 | | Depreciation and amortization | | 1,162 | | | 804 | |
| | Deferred income taxes and investment tax credits, net | Deferred income taxes and investment tax credits, net | | 124 | | | 251 | | Deferred income taxes and investment tax credits, net | | 255 | | | 124 | |
| | Retirement benefits, net of payments | | Retirement benefits, net of payments | | (310) | | | (218) | |
| | Retirement benefits, net of payments | | (218) | | | (81) | | |
| Pension trust contributions | | 0 | | | (500) | | |
| Pension and OPEB mark-to-market adjustment | Pension and OPEB mark-to-market adjustment | | 423 | | | 0 | | Pension and OPEB mark-to-market adjustment | | — | | | 423 | |
| Settlement agreement and tax sharing payments to the FES Debtors | Settlement agreement and tax sharing payments to the FES Debtors | | (978) | | | 0 | | Settlement agreement and tax sharing payments to the FES Debtors | | — | | | (978) | |
| | Transmission revenue collections, net | | Transmission revenue collections, net | | 120 | | | 1 | |
| Gain on sale of Yards Creek | | Gain on sale of Yards Creek | | (109) | | | — | |
| Gain on disposal, net of tax (Note 3) | | Gain on disposal, net of tax (Note 3) | | (47) | | | (46) | |
| Changes in current assets and liabilities- | Changes in current assets and liabilities- | | Changes in current assets and liabilities- | |
| Receivables | Receivables | | (33) | | | 228 | | Receivables | | 76 | | | (33) | |
| Materials and supplies | Materials and supplies | | (23) | | | (14) | | Materials and supplies | | 73 | | | (23) | |
| Prepaid taxes and other | | (57) | | | (69) | | |
| Prepaid taxes and other current assets | | Prepaid taxes and other current assets | | (34) | | | (57) | |
| Accounts payable | Accounts payable | | (72) | | | (102) | | Accounts payable | | 49 | | | (72) | |
| | Accrued taxes | Accrued taxes | | 4 | | | (105) | | Accrued taxes | | (124) | | | 4 | |
| Accrued interest | Accrued interest | | 34 | | | 27 | | Accrued interest | | 9 | | | 34 | |
| Accrued compensation and benefits | Accrued compensation and benefits | | 65 | | | (68) | | Accrued compensation and benefits | | (2) | | | 65 | |
| Other current liabilities | Other current liabilities | | (16) | | | 2 | | Other current liabilities | | (19) | | | (16) | |
| | Collateral, net | | Collateral, net | | 101 | | | 22 | |
| Other | Other | | 3 | | | 60 | | Other | | 48 | | | (20) | |
| Net cash provided from operating activities | Net cash provided from operating activities | | 851 | | | 1,737 | | Net cash provided from operating activities | | 2,104 | | | 851 | |
| | | CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | CASH FLOWS FROM FINANCING ACTIVITIES: | |
| New financing- | New financing- | | New financing- | |
| Long-term debt | Long-term debt | | 3,425 | | | 2,100 | | Long-term debt | | 1,500 | | | 3,425 | |
| | Redemptions and repayments- | Redemptions and repayments- | | Redemptions and repayments- | |
| Long-term debt | Long-term debt | | (1,110) | | | (784) | | Long-term debt | | (58) | | | (1,110) | |
| Short-term borrowings, net | Short-term borrowings, net | | (700) | | | 0 | | Short-term borrowings, net | | (2,200) | | | (700) | |
| | Preferred stock dividend payments | | 0 | | | (6) | | |
| | Common stock dividend payments | Common stock dividend payments | | (634) | | | (609) | | Common stock dividend payments | | (636) | | | (634) | |
| Other | Other | | (44) | | | (36) | | Other | | (16) | | | (44) | |
| Net cash provided from financing activities | | 937 | | | 665 | | |
| Net cash provided from (used for) financing activities | | Net cash provided from (used for) financing activities | | (1,410) | | | 937 | |
| | | CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | CASH FLOWS FROM INVESTING ACTIVITIES: | |
| Property additions | Property additions | | (1,979) | | | (1,912) | | Property additions | | (1,768) | | | (1,979) | |
| | Proceeds from sale of Yards Creek | | Proceeds from sale of Yards Creek | | 155 | | | — | |
| Sales of investment securities held in trusts | Sales of investment securities held in trusts | | 45 | | | 506 | | Sales of investment securities held in trusts | | 29 | | | 45 | |
| Purchases of investment securities held in trusts | Purchases of investment securities held in trusts | | (63) | | | (536) | | Purchases of investment securities held in trusts | | (37) | | | (63) | |
| | Asset removal costs | Asset removal costs | | (175) | | | (158) | | Asset removal costs | | (178) | | | (175) | |
| Other | Other | | 1 | | | 19 | | Other | | (12) | | | 1 | |
| Net cash used for investing activities | Net cash used for investing activities | | (2,171) | | | (2,081) | | Net cash used for investing activities | | (1,811) | | | (2,171) | |
| | | | Net change in cash, cash equivalents, and restricted cash | Net change in cash, cash equivalents, and restricted cash | | (383) | | | 321 | | Net change in cash, cash equivalents, and restricted cash | | (1,117) | | | (383) | |
| Cash, cash equivalents, and restricted cash at beginning of period | Cash, cash equivalents, and restricted cash at beginning of period | | 679 | | | 429 | | Cash, cash equivalents, and restricted cash at beginning of period | | 1,801 | | | 679 | |
| Cash, cash equivalents, and restricted cash at end of period | Cash, cash equivalents, and restricted cash at end of period | | $ | 296 | | | $ | 750 | | Cash, cash equivalents, and restricted cash at end of period | | $ | 684 | | | $ | 296 | |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
FIRSTENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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, AE Supply, 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: AESC,AE Supply, FirstEnergy Properties, Inc., FEV, FELHC, Inc.,FirstEnergy License Holding Company, GPUN, 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 10 utility operating companies comprise one of the nation’s largest investor-owned electric systems, based on serving over 6 million customers in the Midwest and Mid-Atlantic regions. FirstEnergy’s transmission operations include approximately 24,50024,000 miles of lines and 2 regional transmission operation centers. AGC JCP&L and MP control 3,7903,580 MWs of total capacity, 210 MWscapacity.
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; the completion of such transfer is subject to several closing conditions including regulatory approval, which is related to the Yards Creek generating plant that is being sold pursuant to an asset purchase agreement as further discussed below.are ongoing.
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, 2019.2020.
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 NRC, 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 each of the three months ended September 30, 20202021 and 2019,2020, capitalized financing costs on FirstEnergy’s Consolidated Statements of Income include $13 million and $12 million, respectively, of allowance for equity funds used during construction and $8$7 million and $7$8 million, respectively, of capitalized interest. For each of the nine months ended September 30, 20202021 and 2019,2020, capitalized financing costs on FirstEnergy’s Consolidated Statements of Income include $36$34 million and $34$36 million, respectively, of allowance for equity funds used during construction and $21$20 million and $19$21 million, respectively, of capitalized interest.
COVID-19
The outbreak of COVID-19 is a global pandemic. FirstEnergy is continuously evaluating the global COVID-19 pandemic and taking steps to mitigate known risks. FirstEnergy is actively monitoring the continued impact COVID-19 is having on its customers’ receivable balances, which include increasing arrears balances since the pandemic has begun. FirstEnergy has incurred, and it is expected to incur for the foreseeable future, incremental uncollectible and other COVID-19 pandemic related expenses. COVID-19 related expenses consist of additional costs that FirstEnergy is incurring to protect its employees, contractors and customers, and to support social distancing requirements resulting from the COVID-19 pandemic.requirements. These costs include, but are not limited to, new or added benefits provided to employees, the purchase of additional personal protection equipment and
disinfecting supplies, additional facility cleaning services, initiated programs and communications to customers on utility response, and increased
technology expenses to support remote working, where possible. The full impact on FirstEnergy’s business from the COVID-19 pandemic, including the governmental and regulatory responses, is unknown at this time and difficult to predict. FirstEnergy provides a critical and essential service to its customers and the health and safety of its employees, contractors and customers is its first priority. FirstEnergy is continuously monitoring its supply chain and is working closely with essential vendors to understand the continued impact the COVID-19 pandemic is having on its business,business; however, FirstEnergy does not currently expect disruptions in its ability to deliver service to customers or any material impact on its capital spending plan.
FirstEnergy continues to effectively manage operations during the pandemic in order to provide critical service to customers and believes it is well positioned to manage through the economic slowdown. FirstEnergy Distribution and Transmission revenues benefit from geographic and economic diversity across a five-state service territory, which also allows for flexibility with capital investments and measures to maintain sufficient liquidity over the next twelve months. However, the situation remains fluid and future impacts to FirstEnergy that are presently unknown or unanticipated may occur. Furthermore, the likelihood of an impact to FirstEnergy, and the severity of any impact that does occur, could increase the longer the global pandemic persists.
Customer Receivables
Receivables from customers include distribution services and retail generation sales to residential, commercial and industrial customers of the Utilities. 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.
FirstEnergy reviews its allowance for uncollectible customer receivables utilizing a quantitative and qualitative assessment, which This analysis includes consideration of the outbreak of COVID-19 and the impact on customer receivable balances outstanding and the ability of customers to continue paymentwrite-offs since the pandemic began.
Beginning March 13, 2020, FirstEnergy temporarily suspended customer disconnections for nonpayment and ceased collection activities as a result of the ongoing pandemic and in accordance with state regulatory requirements. The following table summarizes when customertemporary suspension of disconnections for nonpayment and ceasing of collection activities have orextended into the fourth quarter of 2020 but resumed for many customers before the end of 2020, except in New Jersey where the moratorium was extended until the end of 2021. Customers are expected to resume based upon current state guidelines subject to each state's applicable regulations toon winter moratoriums for residential customers, which begin as early as November 1, 2020, and arewere in effect until April 15, 2021. However, see Note 9, “Regulatory Matters,” for further discussion on applicable regulationsDuring 2021, FirstEnergy has experienced a reduction in the amount of receivables that may alter residentialare past due by greater than 30 days since the end of 2020. While total customer disconnection and collection activity,arrears balances continue to decrease in 2021, balances that are over 120 days past due continue to be elevated. Furthermore, FirstEnergy also considered other factors as part of this qualitative assessment, such as winter moratoriums.
| | | | | | | | | | | | | | |
| | Residential | | Non-Residential |
| | | | |
Ohio | | 10/5/2020 | | 10/5/2020 |
Pennsylvania | | 11/9/2020 | | 11/9/2020 |
New Jersey | | 3/15/2021 | | 10/15/2020 |
Maryland | | 11/15/2020 | | 10/1/2020 |
West Virginia | | 11/4/2020 | | 9/15/2020 |
New York | | 11/4/2020 | | 11/4/2020 |
The impactcertain federal stimulus and state funding being made available to assist with past due utility bills. As a result of COVID-19 on customers’ ability to pay for service, along with the actionsthis qualitative analysis, FirstEnergy has taken in response to the pandemic, is expected to result in an increase in customer receivable write-offs as compared to historically incurred losses. In order to estimate the additional losses and impacts expected, FirstEnergy analyzed the likelihood of loss based on increases in customer accounts in arrears since the pandemic began in mid-March 2020 as well as what collection methods are or were suspended, and that have historically been utilized to ensure payment. Based on this assessment, and consideration of other qualitative factors described above, FirstEnergy recognizeddid not recognize any incremental uncollectible expense of $63 million in the first nine months of 2020 ($20 million in the third quarter of 2020), of which approximately $40 million ($13 million in the third quarter of 2020) is not currently being collected through rates and as a result was deferred for future recovery under regulatory mechanisms described below.
The Ohio Companies and JCP&L had existing regulatory mechanisms in place prior to the outbreak of COVID-19, where incremental uncollectible expenses are able to be recovered through riders with no material impact to earnings. Additionally, in response to the COVID-19 pandemic, the MDPSC, NJBPU and WVPSC issued orders allowing PE, JCP&L and MP, respectively, to track and create a regulatory asset for future recovery of incremental costs, including uncollectible expenses and waived late payment charges, incurred as a result of the pandemic. In Pennsylvania, the PPUC has authorized the Pennsylvania Companies to track all prudently incurred incremental costs arising from COVID-19, and to create a regulatory asset for future recovery of incremental uncollectible expenses incurred as a result of COVID-19 above what is included in the Pennsylvania Companies existing rates. On October 13, 2020, the PPUC entered an order that permits the Pennsylvania Companies to create a regulatory asset for incremental expenses associated with lifting the service termination moratorium, as further discussed below.
ended September 30, 2021.
Receivables from customers also include PJM receivables resulting from transmission and wholesale sales. FirstEnergy’s credituncollectible risk on PJM receivables is reducedminimal 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, 20202021 and for the year ended December 31, 20192020 are as follows:
| | | | | | | | |
| | (In millions) |
| | |
Balance, January 1, 2019 | | $ | 50 | |
Charged to income (1)
| | 81 | |
Charged to other accounts (2)
| | 47 | |
Write-offs | | (132) | |
Balance, December 31, 20192020 | | $ | 46 | |
Charged to income (3)(1) | | 112174 | |
Charged to other accounts (2) | | 3546 | |
| Write-offs | | (85)(102) | |
| Balance, December 31, 2020 | | $ | 164 | |
Charged to income (3) | | 30 | |
Charged to other accounts (2) | | 34 | |
| Write-offs | | (69) | |
Balance, September 30, 20202021 | | $ | 108159 | |
(1) $25103 million of which was deferred for future recovery in the twelve months ended December 31, 2019.2020.
(2) Represents recoveries and reinstatements of accounts written off for uncollectible accounts.
(3) $548 million of which was deferred for future recovery in the first nine months of 2020.
Goodwill
FirstEnergy evaluates goodwill for impairment annually on July 31 and more frequently if indicators of impairment arise. For 2020,2021, 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 include: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 valuevalues of these reporting units was,were, more likely than not, greater than their carrying valuevalues and a quantitative analysis was not necessary.
Restricted Cash
Restricted cash primarily relates to cash collected from JCP&L, MP, PE and the Ohio Companies’ customers that is specifically used to service debt of their respective funding companies.
Short-Term Borrowings/ Revolving Credit Facilities
On October 18, 2021, FE, andFET, the Utilities, and FET and certain of its subsidiaries participate in twothe Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities providingwith JPMorgan Chase Bank, N.A., Mizuho Bank, Ltd. and PNC Bank, National Association (collectively, the “2021 Credit Facilities”), which replace the FE Revolving Facility and the FET Revolving Facility, and provide for aggregate commitments of $3.5 billion, which$4.5 billion. The 2021 Credit Facilities are available until December 6, 2022. 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
•Transmission Companies, $850 million credit facility
Under the FE credit facility,2021 Credit Facilities, an aggregate amount of $2.5$4.5 billion is available to be borrowed, repaid and reborrowed, subject to separate borrowing sublimitseach borrower’s respective sublimit for each borrower including FE and its regulated distribution subsidiaries. Under the FET credit facility, an aggregate amount of $1.0 billion is available to be borrowed, repaid and reborrowed under a syndicated credit facility, subject to separate borrowing sublimits for each borrower including FE's transmission subsidiaries. On November 17, 2020, FE and the Utilities and FET and certain of its subsidiaries entered into amendments to the FE credit facility and the FET credit facility, respectively. The amendments provide for modifications and/or waivers of (i) certain representations and warranties and (ii) certain affirmative and negative covenants, contained therein, which allowed FirstEnergy to regain compliance with such provisions. In addition, among other things, the amendment to the FE credit facility reduces the sublimit applicable to FE to $1.5 billion, and the amendments increased certain tiers of pricing applicable to borrowings under the respective facilities. These new credit facilities.
New Accounting Pronouncements
Recently Adopted Pronouncements
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (Issued June 2016 and subsequently updated): ASU 2016-13 removes all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. Prior to adoption, FirstEnergy analyzed its financial instruments within the scope of this guidance, primarily trade receivables and AFS debt securities. The adoption of this standard upon January 1, 2020 did not have a material impact to FirstEnergy’s financial statements and required additional disclosures in these Notes to the Consolidated Financial Statements. Please see above for additional information on FirstEnergy’s allowance for uncollectible customer receivables.
ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" (Issued August 2018): ASU 2018-15 allows implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customers in a software licensing arrangement. FirstEnergy adopted this standard as of January 1, 2020, with no material impact to its financial statements.
ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Issued March 2020): ASU 2020-04 provides temporary optional expedients and exceptions to the current guidance on contract modifications to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. FirstEnergy’s $3.5 billion Revolving Credit Facility bears interest at fluctuating interest rates based on LIBOR and contains provisions (requiring an amendment) in the event that LIBOR can no longer be used. As of September 30, 2020, FirstEnergy has not utilized any of the expedients discussed within this ASU.
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 2019-12, "Simplifying the Accounting for Income Taxes" (Issued in December 2019): ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance, including the elimination of certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. TheFirstEnergy adopted the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020,as of January 1, 2021, with early adoption permitted. FirstEnergy continues to evaluate the new guidance, but currently does not expect ano material impact upon adopting this standard.to the financial statements.
Recently Issued Pronouncements - FirstEnergy has assessed new authoritative accounting guidance issued by the FASB that has not yet been adopted and none are currently expected to have a material impact to the financial statements.
2. REVENUE
FirstEnergy accounts for revenues from contracts with customers under ASC 606, “Revenue from Contracts with Customers.” Revenue from leases, financial instruments, other contractual rights or obligations and other revenues that are not from contracts with customers are outside the scope of the standard and accounted for under other existing GAAP.
FirstEnergy has elected to exclude sales taxes and other similar taxes collected on behalf of third parties from revenue as prescribed in the standard. As a result, tax collections and remittances are excluded from recognition in the income statement and instead recorded through the balance sheet. Excise and gross receipts taxes that are assessed on FirstEnergy are not subject to the election and are included in revenue. FirstEnergy has elected the optional invoice practical expedient for most of its revenues and utilizes the optional short-term contract exemption for transmission revenues due to the annual establishment of revenue requirements, which eliminates the need to provide certain revenue disclosures regarding unsatisfied performance obligations.
FirstEnergy’s revenues are primarily derived from electric service provided by the Utilities and Transmission Companies.
The following tables represent a disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 20202021 and 2019,2020, by type of service from each reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2020 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
Distribution services (2) | | $ | 1,503 | | | $ | 0 | | | $ | (22) | | | $ | 1,481 | |
| Retail generation | | 1,005 | | | 0 | | | (16) | | | 989 | |
| Wholesale sales | | 67 | | | 0 | | | 3 | | | 70 | |
Transmission (2) | | 0 | | | 408 | | | 0 | | | 408 | |
| Other | | 35 | | | 0 | | | 0 | | | 35 | |
| Total revenues from contracts with customers | | $ | 2,610 | | | $ | 408 | | | $ | (35) | | | $ | 2,983 | |
ARP (3) | | 25 | | | 0 | | | 0 | | | 25 | |
| Other non-customer revenue | | 26 | | | 5 | | | (17) | | | 14 | |
| Total revenues | | $ | 2,661 | | | $ | 413 | | | $ | (52) | | | $ | 3,022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2021 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
| Distribution services | | $ | 1,534 | | | $ | — | | | $ | (25) | | | $ | 1,509 | |
| Retail generation | | 1,054 | | | — | | | (13) | | | 1,041 | |
| Wholesale sales | | 117 | | | — | | | 5 | | | 122 | |
| Transmission | | — | | | 411 | | | — | | | 411 | |
| Other | | 30 | | | — | | | — | | | 30 | |
| Total revenues from contracts with customers | | $ | 2,735 | | | $ | 411 | | | $ | (33) | | | $ | 3,113 | |
| ARP | | — | | | — | | | — | | | — | |
| Other non-customer revenue | | 24 | | | 4 | | | (17) | | | 11 | |
| Total revenues | | $ | 2,759 | | | $ | 415 | | | $ | (50) | | | $ | 3,124 | |
(1) Includes eliminations and reconciling adjustments of inter-segment revenues.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2020 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
Distribution services (2) | | $ | 1,503 | | | $ | — | | | $ | (22) | | | $ | 1,481 | |
| Retail generation | | 1,005 | | | — | | | (16) | | | 989 | |
| Wholesale sales | | 67 | | | — | | | 3 | | | 70 | |
Transmission (2) | | — | | | 408 | | | — | | | 408 | |
| Other | | 35 | | | — | | | — | | | 35 | |
| Total revenues from contracts with customers | | $ | 2,610 | | | $ | 408 | | | $ | (35) | | | $ | 2,983 | |
ARP (3) | | 25 | | | — | | | — | | | 25 | |
| Other non-customer revenue | | 26 | | | 5 | | | (17) | | | 14 | |
| Total revenues | | $ | 2,661 | | | $ | 413 | | | $ | (52) | | | $ | 3,022 | |
(1) Includes eliminations and reconciling adjustments of inter-segment revenues.
(2)Includes reductions to revenue related to amounts subject to refund resulting from the Tax Act ($1 million at Regulated Distribution and $3 million at Regulated Transmission).
(3)ARP revenue for the three months ended September 30, 2020, is primarily related to the reconciliation of Ohio decoupling rates that became effective on February 1, 2020. See Note 8, “Regulatory Matters,” for further discussion on Ohio decoupling rates.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2019 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
Distribution services (2) | | $ | 1,457 | | | $ | 0 | | | $ | (21) | | | $ | 1,436 | |
| Retail generation | | 989 | | | 0 | | | (14) | | | 975 | |
| Wholesale sales | | 100 | | | 0 | | | 2 | | | 102 | |
Transmission (2) | | 0 | | | 371 | | | 0 | | | 371 | |
| Other | | 42 | | | 0 | | | 0 | | | 42 | |
| Total revenues from contracts with customers | | $ | 2,588 | | | $ | 371 | | | $ | (33) | | | $ | 2,926 | |
ARP (3) | | 25 | | | 0 | | | 0 | | | 25 | |
| Other non-customer revenue | | 23 | | | 4 | | | (15) | | | 12 | |
| Total revenues | | $ | 2,636 | | | $ | 375 | | | $ | (48) | | | $ | 2,963 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2021 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
| Distribution services | | $ | 4,177 | | | $ | — | | | $ | (77) | | | $ | 4,100 | |
| Retail generation | | 2,820 | | | — | | | (38) | | | 2,782 | |
| Wholesale sales | | 260 | | | — | | | 12 | | | 272 | |
| Transmission | | — | | | 1,223 | | | — | | | 1,223 | |
| Other | | 89 | | | — | | | — | | | 89 | |
| Total revenues from contracts with customers | | $ | 7,346 | | | $ | 1,223 | | | $ | (103) | | | $ | 8,466 | |
ARP (2) | | (27) | | | — | | | — | | | (27) | |
| Other non-customer revenue | | 68 | | | 10 | | | (45) | | | 33 | |
| Total revenues | | $ | 7,387 | | | $ | 1,233 | | | $ | (148) | | | $ | 8,472 | |
(1) Includes eliminations and reconciling adjustments of inter-segment revenues.(2) Includes reductionsReflects amounts the Ohio Companies refunded to revenue related to amounts subject to refund resulting from the Tax Act ($4 million at Regulated Distribution and $4 million at Regulated Transmission) and Rider DMR as discussed in Note 9, “Regulatory Matters” (approximately $31 million at Regulated Distribution).
(3) ARP revenue for the three months ended September 30, 2019, includes DMR revenue, lost distribution and shared savings revenue in Ohio.
Other non-customer revenue includes revenue from late payment charges of $6 million and $9 million for the three months ended September 30, 2020 and 2019, respectively. Starting in mid-March 2020, and continuing through the third quarter, certain late payment charges began to be waived in response to the COVID-19 pandemic, and as a result, FirstEnergy stopped recognizing these revenues.customers that was previously collected under decoupling mechanisms, with interest. See Note 1, “Organization and Basis of Presentation,8, “Regulatory Matters,” for further discussion on the COVID-19 pandemic. Other non-customer revenue also includes revenue from derivatives of $8 million and $2 million for the three months ended September 30, 2020 and 2019, respectively.Ohio decoupling rates.
The following tables represent a disaggregation of revenue from contracts with customers for the nine months ended September 30, 2020 and 2019, by type of service from each reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2020 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
Distribution services (2) | | $ | 4,000 | | | $ | 0 | | | $ | (65) | | | $ | 3,935 | |
| Retail generation | | 2,735 | | | 0 | | | (46) | | | 2,689 | |
| Wholesale sales | | 188 | | | 0 | | | 6 | | | 194 | |
Transmission (2) | | 0 | | | 1,185 | | | 0 | | | 1,185 | |
| Other | | 102 | | | 0 | | | 0 | | | 102 | |
| Total revenues from contracts with customers | | $ | 7,025 | | | $ | 1,185 | | | $ | (105) | | | $ | 8,105 | |
ARP (3) | | 108 | | | 0 | | | 0 | | | 108 | |
| Other non-customer revenue | | 74 | | | 13 | | | (47) | | | 40 | |
| Total revenues | | $ | 7,207 | | | $ | 1,198 | | | $ | (152) | | | $ | 8,253 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2020 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
Distribution services (2) | | $ | 4,000 | | | $ | — | | | $ | (65) | | | $ | 3,935 | |
| Retail generation | | 2,735 | | | — | | | (46) | | | 2,689 | |
| Wholesale sales | | 188 | | | — | | | 6 | | | 194 | |
Transmission (2) | | — | | | 1,185 | | | — | | | 1,185 | |
| Other | | 102 | | | — | | | — | | | 102 | |
| Total revenues from contracts with customers | | $ | 7,025 | | | $ | 1,185 | | | $ | (105) | | | $ | 8,105 | |
ARP (3) | | 108 | | | — | | | — | | | 108 | |
| Other non-customer revenue | | 74 | | | 13 | | | (47) | | | 40 | |
| Total revenues | | $ | 7,207 | | | $ | 1,198 | | | $ | (152) | | | $ | 8,253 | |
(1) Includes eliminations and reconciling adjustments of inter-segment revenues.
(2) Includes reductions to revenue related to amounts subject to refund resulting from the Tax Act ($2 million at Regulated Distribution and $6 million at Regulated Transmission).
(3)ARP revenue for the nine months ended September 30, 2020, is primarily related to the reconciliation of Ohio decoupling rates that became effectiverates. See Note 8, “Regulatory Matters,” for further discussion on February 1, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2019 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
Distribution services (2) | | $ | 3,903 | | | $ | 0 | | | $ | (63) | | | $ | 3,840 | |
| Retail generation | | 2,853 | | | 0 | | | (42) | | | 2,811 | |
| Wholesale sales | | 316 | | | 0 | | | 9 | | | 325 | |
Transmission (2) | | 0 | | | 1,090 | | | 0 | | | 1,090 | |
| Other | | 113 | | | 0 | | | 1 | | | 114 | |
| Total revenues from contracts with customers | | $ | 7,185 | | | $ | 1,090 | | | $ | (95) | | | $ | 8,180 | |
ARP (3) | | 142 | | | 0 | | | 0 | | | 142 | |
| Other non-customer revenue | | 74 | | | 13 | | | (47) | | | 40 | |
| Total revenues | | $ | 7,401 | | | $ | 1,103 | | | $ | (142) | | | $ | 8,362 | |
(1) Includes eliminations and reconciling adjustments of inter-segment revenues.
(2) Includes reductions to revenue related to amounts subject to refund resulting from the Tax Act ($31 million at Regulated Distribution and $11 million at Regulated Transmission) and Rider DMR as discussed in Note 9, “Regulatory Matters” (approximately $31 million at Regulated Distribution).
(3) ARP revenue for the nine months ended September 30, 2019, includes DMR revenue, and lost distribution and shared savings revenue in Ohio.Ohio decoupling rates.
Other non-customer revenue includes revenue from late payment charges of $22$27 million and $29$22 million for the nine months ended September 30, 2021 and 2020, and 2019, respectively, that FirstEnergy expects are collectible.respectively. Other non-customer revenue also includes revenue from derivatives of $14$5 million and $7$14 million for the nine months ended September 30, 20202021 and 2019,2020, respectively.
Regulated Distribution
The Regulated Distribution segment distributes electricity through FirstEnergy’s 10 utility operating companies and also controls 3,7903,580 MWs of regulated electric generation capacity located primarily in West Virginia Virginia and New Jersey, 210 MWs of which are related to the Yards Creek generating plant that is being sold pursuant to an asset purchase agreement as further discussed below.Virginia. Each of the Utilities earns revenue from state-regulated rate tariffs under which it provides distribution services to residential, commercial and industrial customers in its service territory. The Utilities are obligated under the regulated construct to deliver power to customers reliably, as it is needed, which creates an implied monthly contract with the end-use
customer. See Note 9,8, “Regulatory Matters,” for additional information on rate recovery mechanisms. Distribution and electric revenues are recognized over time as electricity is distributed and delivered to the customer and the customers consume the electricity immediately as delivery occurs.
Retail generation sales relate to POLR, SOS, SSO and default service requirements in Ohio, Pennsylvania, New Jersey and Maryland, as well as generation sales in West Virginia that are regulated by the WVPSC. Certain of the Utilities have default service obligations to provide power to non-shopping customers who have elected to continue to receive service under regulated retail tariffs. The volume of these sales varies depending on the level of shopping that occurs. Supply plans vary by state and by service territory. Default service for the Ohio Companies, Pennsylvania Companies, JCP&L and PE’s Maryland jurisdiction are provided through a competitive procurement process approved by each state’s respective commission. Retail generation revenues are recognized over time as electricity is delivered and consumed immediately by the customer.
The following table represents a disaggregation of the Regulated Distribution segment revenue from contracts with distribution service and retail generation customers for the three and nine months ended September 30, 20202021 and 2019,2020, by class:
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| Revenues by Customer Class | Revenues by Customer Class | | 2020 | | 2019 | | 2020 | | 2019 | Revenues by Customer Class | | 2021 | | 2020 | | 2021 | | 2020 |
| | | (In millions) | | | (In millions) |
| Residential | Residential | | $ | 1,621 | | | $ | 1,538 | | | $ | 4,220 | | | $ | 4,145 | | Residential | | $ | 1,666 | | | $ | 1,621 | | | $ | 4,410 | | | $ | 4,220 | |
| Commercial | Commercial | | 589 | | | 600 | | | 1,640 | | | 1,759 | | Commercial | | 619 | | | 589 | | | 1,722 | | | 1,640 | |
| Industrial | Industrial | | 278 | | | 286 | | | 814 | | | 786 | | Industrial | | 284 | | | 278 | | | 810 | | | 814 | |
| Other | Other | | 20 | | | 22 | | | 61 | | | 66 | | Other | | 19 | | | 20 | | | 55 | | | 61 | |
| Total Revenues | Total Revenues | | $ | 2,508 | | | $ | 2,446 | | | $ | 6,735 | | | $ | 6,756 | | Total Revenues | | $ | 2,588 | | | $ | 2,508 | | | $ | 6,997 | | | $ | 6,735 | |
Wholesale sales primarily consist of generation and capacity sales into the PJM market from FirstEnergy’s regulated electric generation capacity and NUGs. Certain of the Utilities may also purchase power in the PJM markets to supply power to their customers. Generally, these power sales from generation and purchases to serve load are netted hourly and reported as either
revenues or purchased power on the Consolidated Statements of Income based on whether the entity was a net seller or buyer each hour. Capacity revenues are recognized ratably over the PJM planning year at prices cleared in the annual PJM Reliability Pricing Model Base Residual Auction and Incremental Auctions. Capacity purchases and sales through PJM capacity auctions are reported within revenues on the Consolidated Statements of Income. Certain capacity income (bonuses) and charges (penalties) related to the availability of units that have cleared in the auctions are unknown and not recorded in revenue until, and unless, they occur.
The Utilities’ distribution customers are metered on a cycle basis. An estimate of unbilled revenues is calculated to recognize electric service provided from the last meter reading through the end of the month. This estimate includes many factors, among which are historical customer usage, load profiles, estimated weather impacts, customer shopping activity and prices in effect for each class of customer. In each accounting period, the Utilities accrue the estimated unbilled amount as revenue and reverse the related prior period estimate. Customer payments vary by state but are generally due within 30 days.
ASC 606 excludes industry-specific accounting guidance for recognizing revenue from ARPs as these programs represent contracts between the utility and its regulators, as opposed to customers. Therefore, revenuerevenues from these programs are not within the scope of ASC 606 and regulated utilities are permitted to continue to recognize such revenues in accordance with existing practice but are presented separately from revenue arising from contracts with customers. FirstEnergy currently hashad ARPs in Ohio primarily under the DMR, lost distribution and shared savings revenue in 2019, andfor decoupling revenue in 2020.2020, and has reflected refunds of decoupling revenue owed to customers as reductions to ARPs in 2021. Please see Note 9,8, “Regulatory Matters,” for further discussion on decoupling revenues in Ohio.
Regulated Transmission
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 at the Transmission Companies, as well as stated transmission rates at MP, PE and WP, although as further discussed inrates. See Note 9,8, “Regulatory Matters,” MP, PE and WP filed with FERC on October 29, 2020, to convert their existing stated transmission rates to forward-looking formula rates, effective January 1, 2021. JCP&L had stated rates in 2019, but moved to forward-looking formula rates, subject to a refund, effective January 1, 2020, as further discussed in Note 9, “Regulatory Matters.”for additional information.
Both the forward-lookingForward-looking formula and stated rates recover costs that the regulatory agencies determine are permitted to be recovered and provide a return on transmission capital investment. 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 costs. Revenue requirements under stated rates are calculated annually by multiplying the highest one-hour peak load
in each respective transmission zone by the approved, stated rate in that zone. Revenues and cash receipts for the stand-ready obligation of providing transmission service are recognized ratably over time.
The following table represents a disaggregation of revenue from contracts with regulated transmission customers for the three and nine months ended September 30, 20202021 and 2019,2020, by transmission owner:
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| Transmission Owner | Transmission Owner | | 2020 | | 2019 | | 2020 | | 2019 | Transmission Owner | | 2021 | | 2020 | | 2021 | | 2020 |
| | | (In millions) | | | (In millions) |
| ATSI | ATSI | | $ | 202 | | | $ | 184 | | | $ | 598 | | | $ | 542 | | ATSI | | $ | 206 | | | $ | 202 | | | $ | 604 | | | $ | 598 | |
| TrAIL | TrAIL | | 61 | | | 55 | | | 182 | | | 172 | | TrAIL | | 59 | | | 61 | | | 176 | | | 182 | |
| MAIT | MAIT | | 68 | | | 58 | | | 183 | | | 157 | | MAIT | | 75 | | | 68 | | | 222 | | | 183 | |
| JCP&L | JCP&L | | 43 | | | 40 | | | 122 | | | 120 | | JCP&L | | 41 | | | 43 | | | 126 | | | 122 | |
| Other | | 34 | | | 34 | | | 100 | | | 99 | | |
| MP, PE and WP | | MP, PE and WP | | 30 | | | 34 | | | 95 | | | 100 | |
| | Total Revenues | Total Revenues | | $ | 408 | | | $ | 371 | | | $ | 1,185 | | | $ | 1,090 | | Total Revenues | | $ | 411 | | | $ | 408 | | | $ | 1,223 | | | $ | 1,185 | |
3. 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. In September 2018, the Bankruptcy Court approved a FES Bankruptcy settlement agreement by and among FirstEnergy, two groups of key FES creditors (collectively, the FES Key Creditor Groups), the FES Debtors and the UCC. The FES Bankruptcy settlement agreement resolved certain claims by FirstEnergy against the FES Debtors, all claims by the FES Debtors and the FES Key Creditor Groups against FirstEnergy, as well as releases from third parties who voted in favor of the FES Debtors' plan of reorganization, in return for among other things, a cash payment of $853 million upon emergence. The FES Bankruptcy settlement was conditioned on the FES Debtors confirming and effectuating a plan of reorganization acceptable to FirstEnergy.
On February 18, 2020, the FES Debtors and FirstEnergy entered into an IT Access Agreement that provided IT support to enable the FES Debtors to emerge from bankruptcy prior to full IT separation by the FES Debtors. As part of the IT Access Agreement, the FES Debtors and FirstEnergy resolved, among other things, the on-going reconciliation of outstanding tax sharing payments for tax years 2018, 2019 and 2020 for a total of $125 million. On February 25, 2020, the Bankruptcy Court approved the IT Access Agreement. On February 27, 2020, the FES Debtors effectuated their plan, emerged from bankruptcy and FirstEnergy tendered the bankruptcy court approved settlement payments totaling $853 million and thea $125 million tax sharing payment to the FES Debtors, with no material impact to net income in 2020.Debtors.
By eliminating a significant portion of its competitive generation fleet with the deconsolidation of the FES Debtors, FirstEnergy has concluded the FES Debtors meet 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.
Services Agreement
Pursuant to the FES Bankruptcy settlement agreement, FirstEnergy entered into an amended and restated shared services agreement with the FES Debtors to extend the availability of shared services until June 30, 2020, subject to reductions in services if requested by the FES Debtors, and extensions of time, subject to FirstEnergy’s approval. Under the amended shared services agreement, and consistent with the prior shared services agreements, costs are directly billed or assigned at no more than cost.13
AsSummarized Results of JuneDiscontinued Operations
Summarized results of discontinued operations for the three and nine months ended September 30, 2021 and 2020, FirstEnergy had substantially ceased providing post-emergence services to FES Debtors underwere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| (In millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
| Revenues | | $ | — | | | $ | — | | | $ | — | | | $ | 7 | |
| Fuel | | — | | | — | | | — | | | (6) | |
| | | | | | | | |
| Other operating expenses | | — | | | — | | | — | | | (6) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other income | | — | | | — | | | — | | | 5 | |
| Income from discontinued operations, before tax | | — | | | — | | | — | | | — | |
| Income tax expense | | — | | | — | | | — | | | — | |
| Income from discontinued operations, net of tax | | — | | | — | | | — | | | — | |
| | | | | | | | |
| Settlement consideration | | — | | | — | | | — | | | (1) | |
| Accelerated net pension and OPEB prior service credits | | — | | | — | | | — | | | 18 | |
| Gain on disposal of FES and FENOC, before tax | | — | | | — | | | — | | | 17 | |
| Income taxes (benefits), including worthless stock deduction | | (47) | | | 6 | | | (47) | | | (29) | |
| Gain on disposal of FES and FENOC, net of tax | | 47 | | | (6) | | | 47 | | | 46 | |
| | | | | | | | |
| Income from discontinued operations | | $ | 47 | | | $ | (6) | | | $ | 47 | | | $ | 46 | |
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 termsnine months ended September 30, 2021 and 2020, cash flows from operating activities includes income from discontinued operations of $47 million and $46 million, respectively. There were no cash flows from investing or financing activities from discontinued operations for the amended and restated shared services agreement. In connection with the FES Debtors emergence from bankruptcy, FirstEnergy entered into an amended separation agreement with the FES Debtors to implement the separation of FES Debtors and their businesses from FirstEnergy.nine months ended September 30, 2021 or 2020.
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. As a result of the FES Debtors’ tax return deconsolidation, FirstEnergy recognized a worthless stock deduction, for the remaining tax basis in the FES Debtors of approximately $4.9 billion, net of unrecognized tax benefits of $316 million.million, for the remaining tax basis in the stock of the FES Debtors. Tax-effected, the worthless stock deduction is approximately $1$1.0 billion, net of valuation allowances recorded against the state tax benefit ($8319 million) and the aforementioned unrecognized tax benefits ($7268 million).
Additionally, In conjunction with filing the Tax Act amended Section 163(j) of the Internal Revenue Code, limiting interest expense deductions for corporations but with exemption for certain regulated utilities. Based on interpretation of subsequently issued proposed regulations, FirstEnergy estimated the amount of deductible interest for its2020 consolidated group in 2018 and 2019, with nondeductible portions being carried forward with an indefinite life and for which deferred tax assets were recorded. However, full valuation allowances were recorded against the deferred tax assets related to the carryforward of nondeductible interest as future utilization of the carryforwards requires taxable income from sources other than regulated utility businesses. Final regulations under Section 163(j) were issued in July 2020 but do not materially change these results. All tax expense related to nondeductible interest in 2018 and 2019 was recorded in discontinued operations as it was entirely attributed to the inclusion of the FES Debtors in FirstEnergy's consolidated tax group. Pursuant to certain safe harbor rules in the final regulations under Section 163(j), and due to the FES Debtors’ emergence from bankruptcy on February 27, 2020, FirstEnergy expects all interest expense for 2020 to be fully deductible. See Note 7, “Income Taxes” for further information
Upon emergence, FirstEnergy paid the FES Debtors $125 million to settle all reconciliations under the Intercompany Tax Allocation Agreement for 2018, 2019 and 2020 tax years, including all issues regarding nondeductible interest. In September 2020, FirstEnergy filed its 2019 federal income tax return with the IRS and recognized a $6 million charge to discontinued operations induring the third quarter of 2020, resulting from2021, FirstEnergy computed a final adjustments to intercompany tax sharing relatedfederal NOL allocation between the FES Debtors and FirstEnergy consolidated that resulted in FirstEnergy recording an increase to the FES Debtors.
Competitive Generation Asset Sales
As contemplated under the FES Bankruptcy settlement agreement, AE Supply entered into an agreement on December 31, 2018, to transfer the 1,300 MW Pleasants Power Station and related assets to FG, while retaining certain specified liabilities. Under the termsconsolidated NOL carryforward of the agreement, FG acquired the economic interests in Pleasants as of January 1, 2019, and AE Supply operated Pleasants until ownership was transferred on January 30, 2020. AE Supply will continue to provide access to the McElroy's Run CCR Impoundment Facility, which was not transferred, and FE will provide guarantees for certain retained environmental liabilities of AE Supply, including the McElroy’s Run CCR Impoundment Facility.During the first quarter of 2020, FG paid AE Supply approximately $65$289 million of cash for related materials and supplies (at book value) and the settlement of FG’s economic interest in Pleasants.
Summarized Results of Discontinued Operations
Summarized results of discontinued operations for the three and nine months ended September 30, 2020 and 2019, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months
Ended September 30, |
| (In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
| Revenues | | $ | 0 | | | $ | 62 | | | $ | 7 | | | $ | 147 | |
| Fuel | | 0 | | | (50) | | | (6) | | | (105) | |
| | | | | | | | |
| Other operating expenses | | 0 | | | (16) | | | (6) | | | (42) | |
| | | | | | | | |
| General taxes | | 0 | | | (2) | | | 0 | | | (11) | |
| | | | | | | | |
| Other income | | 0 | | | 2 | | | 5 | | | 10 | |
| Loss from discontinued operations, before tax | | 0 | | | (4) | | | 0 | | | (1) | |
| Income tax expense | | 0 | | | 17 | | | 0 | | | 45 | |
| Loss from discontinued operations, net of tax | | 0 | | | (21) | | | 0 | | | (46) | |
| | | | | | | | |
| Settlement Consideration | | 0 | | | 8 | | | (1) | | | (15) | |
| Accelerated net pension and OPEB prior service credits | | 0 | | | 0 | | | 18 | | | 0 | |
| Gain (loss) on Disposal of FES and FENOC, before tax | | 0 | | | 8 | | | 17 | | (15) | |
| Income tax expense (benefit) including worthless stock deduction | | 6 | | | (15) | | | (29) | | | 1 | |
| Gain (loss) on disposal of FES and FENOC, net of tax | | (6) | | | 23 | | | 46 | | | (16) | |
| | | | | | | | |
| Income (loss) from discontinued operations | | $ | (6) | | | $ | 2 | | | $ | 46 | | | $ | (62) | |
FirstEnergy’s Consolidated Statement of Cash Flows combines cash flows from discontinued operations with cash flows from continuing operations within each cash flow category. For the nine months ended September 30, 2020 and 2019, cash flows from operating activities includes income (loss) from discontinued operations of$46($61 million and $(62) million, respectively.tax-effected).
4. EARNINGS PER SHARE OF COMMON STOCK
Basic EPS available to common stockholders 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 plus the potential additional common shares that could result if dilutive securities and other agreements to issue common stock were exercised.
During 2019, EPS was computed using the two-class method required for participating securities. The convertible preferred stock issued in January 2018 were considered participating securities since the shares participated in dividends on common stock on an “as-converted” basis. All convertible preferred stock was converted to common stock during 2019.
The two-class method uses an earnings allocation formula that treats participating securities as having rights to earnings that otherwise would have been available only to common stockholders. Under the two-class method, net income attributable to common stockholders is derived by subtracting the following from income from continuing operations:
•preferred stock dividends,
•deemed dividends for the amortization of the beneficial conversion feature recognized at issuance of the preferred stock (if any), and
•an allocation of undistributed earnings between the common stock and the participating securities (convertible preferred stock) based on their respective rights to receive dividends.
Net losses were not allocated to the convertible preferred stock as they did not havea contractual obligation to share in the losses of FirstEnergy. FirstEnergy allocated undistributed earnings based upon income from continuing operations.
Diluted EPS reflects the dilutive effect of potential common shares from share-based awards and convertible shares of preferred stock.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 dilutive effect of the convertible preferred stock was computed using the if-converted method, which assumes conversion of the convertible preferred stock at the beginning of the period, giving income recognition for the add-back of the preferred stock dividends, amortization of beneficial conversion feature, and undistributed earnings allocated to preferred stockholders.
The following table reconciles basic and diluted EPS of common stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| Reconciliation of Basic and Diluted EPS of Common Stock | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | |
| (In millions, except per share amounts) | | | | | | | | |
| EPS of Common Stock | | | | | | | | |
| Income from continuing operations | | $ | 460 | | | $ | 389 | | | $ | 791 | | | $ | 1,085 | |
| Less: Preferred dividends | | 0 | | | 0 | | | 0 | | | (3) | |
| | | | | | | | |
| Less: Undistributed earnings allocated to preferred stockholders | | 0 | | | 0 | | | 0 | | | (4) | |
| Income from continuing operations available to common stockholders | | 460 | | | 389 | | | 791 | | | 1,078 | |
| Discontinued operations, net of tax | | (6) | | | 2 | | | 46 | | | (62) | |
| Less: Undistributed earnings allocated to preferred stockholders | | 0 | | | 0 | | | 0 | | | 0 | |
| Income (loss) from discontinued operations available to common stockholders | | (6) | | | 2 | | | 46 | | | (62) | |
| | | | | | | | |
| Income available to common stockholders, basic | | $ | 454 | | | $ | 391 | | | $ | 837 | | | $ | 1,016 | |
| | | | | | | | |
| Income allocated to preferred shareholders, preferred dilutive | | 0 | | | 0 | | | 0 | | | (7) | |
| | | | | | | | |
| Income available to common stockholders, dilutive | | $ | 454 | | | $ | 391 | | | $ | 837 | | | $ | 1,023 | |
| | | | | | | | |
| Share Count information: | | | | | | | | |
| Weighted average number of basic shares outstanding | | 542 | | | 538 | | | 542 | | | 533 | |
| Assumed exercise of dilutive stock options and awards | | 1 | | | 2 | | | 1 | | | 2 | |
| Assumed conversion of preferred stock | | 0 | | | 2 | | | 0 | | | 6 | |
| Weighted average number of diluted shares outstanding | | 543 | | | 542 | | | 543 | | | 541 | |
| | | | | | | | |
| Income available to common stockholders, per common share: | | | | | | | | |
| Income from continuing operations, basic | | $ | 0.85 | | | $ | 0.72 | | | $ | 1.46 | | | $ | 2.02 | |
| Discontinued operations, basic | | (0.01) | | | 0.01 | | | 0.08 | | | (0.12) | |
| Income available to common stockholders, basic | | $ | 0.84 | | | $ | 0.73 | | | $ | 1.54 | | | $ | 1.90 | |
| | | | | | | | |
| Income from continuing operations, diluted | | $ | 0.85 | | | $ | 0.72 | | | $ | 1.46 | | | $ | 2.00 | |
| Discontinued operations, diluted | | (0.01) | | | 0 | | | 0.08 | | | (0.11) | |
| Income available to common stockholders, diluted | | $ | 0.84 | | | $ | 0.72 | | | $ | 1.54 | | | $ | 1.89 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| Reconciliation of Basic and Diluted EPS | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | |
| (In millions, except per share amounts) | | | | | | | | |
| | | | | | | | |
| Income from continuing operations | | $ | 416 | | | $ | 460 | | | $ | 809 | | | $ | 791 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Discontinued operations, net of tax | | 47 | | | (6) | | | 47 | | | 46 | |
| | | | | | | | |
| | | | | | | | |
| Net Income | | $ | 463 | | | $ | 454 | | | $ | 856 | | | $ | 837 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Share count information: | | | | | | | | |
| Weighted average number of basic shares outstanding | | 544 | | | 542 | | | 544 | | | 542 | |
| Assumed exercise of dilutive stock options and awards | | 1 | | | 1 | | | 1 | | | 1 | |
| | | | | | | | |
| Weighted average number of diluted shares outstanding | | 545 | | | 543 | | | 545 | | | 543 | |
| | | | | | | | |
| Earnings (Loss) Per Share of Common Stock: | | | | | | | | |
| | | | | | | | |
| Income from continuing operations, basic | | $ | 0.76 | | | $ | 0.85 | | | $ | 1.48 | | | $ | 1.46 | |
| Discontinued operations, basic | | 0.09 | | | (0.01) | | | 0.09 | | | 0.08 | |
| Basic earnings per share of common stock | | $ | 0.85 | | | $ | 0.84 | | | $ | 1.57 | | | $ | 1.54 | |
| | | | | | | | |
| Income from continuing operations, diluted | | $ | 0.76 | | | $ | 0.85 | | | $ | 1.48 | | | $ | 1.46 | |
| Discontinued operations, diluted | | 0.09 | | | (0.01) | | | 0.09 | | | 0.08 | |
| Diluted earnings per share of common stock | | $ | 0.85 | | | $ | 0.84 | | | $ | 1.57 | | | $ | 1.54 | |
For the three months ended September 30, 2020, approximately 80 thousand shares from stock options and awards were excluded from the calculation of diluted shares outstanding, as their inclusion would be anti-dilutive. For the three and nine months ended September 30, 2019, 0 shares from stock options and awards were excluded from the calculation of diluted shares outstanding.
5. PENSION AND OTHER POST-EMPLOYMENT BENEFITS
The components of the consolidated net periodic costs (credits) for pension and OPEB were as follows:
| | Components of Net Periodic Benefit Costs (Credits) | Components of Net Periodic Benefit Costs (Credits) | | Pension | OPEB | Components of Net Periodic Benefit Costs (Credits) | | Pension | OPEB |
| For the Three Months Ended September 30, | For the Three Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 | For the Three Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | (In millions) | | | (In millions) |
| Service costs | Service costs | | $ | 47 | | | $ | 48 | | | $ | 1 | | | $ | 1 | | Service costs | | $ | 48 | | | $ | 47 | | | $ | 1 | | | $ | 1 | |
| Interest costs | Interest costs | | 71 | | | 93 | | | 4 | | | 6 | | Interest costs | | 57 | | | 71 | | | 3 | | | 4 | |
| Expected return on plan assets | Expected return on plan assets | | (156) | | | (135) | | | (9) | | | (7) | | Expected return on plan assets | | (163) | | | (156) | | | (10) | | | (9) | |
Amortization of prior service costs (credits) | Amortization of prior service costs (credits) | | 1 | | | 2 | | | (4) | | | (9) | | Amortization of prior service costs (credits) | | 1 | | | 1 | | | (4) | | | (4) | |
| | Net periodic costs (credits), including amounts capitalized | | $ | (37) | | | $ | 8 | | | $ | (8) | | | $ | (9) | | |
| | Net periodic credits, including amounts capitalized | | Net periodic credits, including amounts capitalized | | $ | (57) | | | $ | (37) | | | $ | (10) | | | $ | (8) | |
| Net periodic credits, recognized in earnings | Net periodic credits, recognized in earnings | | $ | (56) | | | $ | (11) | | | $ | (8) | | | $ | (10) | | Net periodic credits, recognized in earnings | | $ | (80) | | | $ | (56) | | | $ | (10) | | | $ | (8) | |
|
(1) The income tax benefits associated with pension and OPEB prior service costs amortized out of AOCI were $1 million for both the three months ended September 30, 2021 and 2020, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Components of Net Periodic Benefit Costs (Credits) | | Pension | OPEB |
| For the Nine Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 |
| | (In millions) |
| Service costs | | $ | 147 | | | $ | 144 | | | $ | 3 | | | $ | 3 | |
| Interest costs | | 216 | | | 279 | | | 12 | | | 16 | |
| Expected return on plan assets | | (464) | | | (405) | | | (25) | | | (21) | |
Special termination costs (1) | | 0 | | | 14 | | | 0 | | — | | 0 | |
Amortization of prior service costs (credits) (2) | | 12 | | | 6 | | | (42) | | | (27) | |
One-time termination benefit (3) | | 8 | | | 0 | | | 0 | | | 0 | |
| Pension and OPEB mark-to-market adjustment | | 386 | | | 0 | | | 37 | | | 0 | |
| Net periodic costs (credits), including amounts capitalized | | $ | 305 | | | $ | 38 | | | $ | (15) | | | $ | (29) | |
| Net periodic costs (credits), recognized in earnings | | $ | 240 | | | $ | (19) | | | $ | (15) | | | $ | (30) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Components of Net Periodic Benefit Costs (Credits) | | Pension | OPEB |
| For the Nine Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| | | (In millions) |
| Service costs | | $ | 145 | | | $ | 147 | | | $ | 3 | | | $ | 3 | |
| Interest costs | | 170 | | | 216 | | | 8 | | | 12 | |
| Expected return on plan assets | | (489) | | | (464) | | | (27) | | | (25) | |
Amortization of prior service costs (credits)(1) (2) | | 3 | | | 12 | | | (13) | | | (42) | |
| | | | | | | | |
One-time termination benefit (3) | | — | | | 8 | | | — | | | — | |
| Pension and OPEB mark-to-market adjustment | | — | | | 386 | | | — | | | 37 | |
| Net periodic costs (credits), including amounts capitalized | | $ | (171) | | | $ | 305 | | | $ | (29) | | | $ | (15) | |
| Net periodic costs (credits), recognized in earnings | | $ | (243) | | | $ | 240 | | | $ | (30) | | | $ | (15) | |
(1)Subject to a cap, FirstEnergy agreed to fund a pension enhancement through its pension plan, for voluntary enhanced retirement packages offered to certain FES employees, as well as offer certain other employee benefits. The costs are a component of discontinued operations in FirstEnergy’s Consolidated Statements of Income.
(2) 2020 includes the acceleration of $18 million in net credits as a result of the FES Debtors’ emergence during the first quarter of 2020 and is a component of discontinued operations in FirstEnergy’s Consolidated Statements of Income.
(2) The income tax benefits associated with pension and OPEB prior service costs amortized out of AOCI were $3 million and $7 million for the nine months ended September 30, 2021 and 2020, respectively.
(3) Costs represent additional benefits provided to FES and FENOC employees under the approved settlement agreement and are a component of discontinued operations in FirstEnergy’s Consolidated Statements of Income.
FirstEnergy recognizes a pension and OPEB mark-to-market adjustment for the change in fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for remeasurement. Under the approved bankruptcy settlement agreement discussed above, upon emergence, FES and FENOC employees ceased earning years of service under the FirstEnergy pension and OPEB plans. The emergence on February 27, 2020, triggered a remeasurement of the affected pension and OPEB plans and as a result, FirstEnergy recognized a non-cash, pre-tax pension and OPEB mark-to-market adjustment of approximately $423 million in the first quarter of 2020. The pension and OPEB mark-to-market adjustment primarily reflects a 38 bps decrease in the discount rate used to measure benefit obligations from December 31, 2019, partially offset by a slightly higher than expected return on assets.
On February 1, 2019,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 madedoes not currently expect to have a $500 million voluntary cashrequired contribution to the qualified pension plan.plan based on various assumptions including annual expected rate of returns for assets of 7.5%. However, FirstEnergy expects no required contributions through 2021.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.
6. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables show the changes in AOCI for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | |
| | Gains & Losses on Cash Flow Hedges (1) | | | | Defined Benefit Pension & OPEB Plans | | Total |
| | (In millions) |
| AOCI Balance, July 1, 2020 | | $ | (8) | | | | | $ | 8 | | | $ | 0 | |
| | | | | | | | |
| | | | | | | | |
| Amounts reclassified from AOCI | | 0 | | | | | (3) | | | (3) | |
| | | | | | | | |
| Other comprehensive loss | | 0 | | | | | (3) | | | (3) | |
| Income tax benefits on other comprehensive loss | | 0 | | | | | (1) | | | (1) | |
| Other comprehensive loss, net of tax | | 0 | | | | | (2) | | | (2) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| AOCI Balance, September 30, 2020 | | $ | (8) | | | | | $ | 6 | | | $ | (2) | |
| | | | | | | | |
| AOCI Balance, July 1, 2019 | | $ | (10) | | | | | $ | 41 | | | $ | 31 | |
| | | | | | | | |
| | | | | | | | |
| Amounts reclassified from AOCI | | 0 | | | | | (7) | | | (7) | |
| | | | | | | | |
| Other comprehensive loss | | 0 | | | | | (7) | | | (7) | |
| Income tax benefits on other comprehensive loss | | 0 | | | | | (3) | | | (3) | |
| Other comprehensive loss, net of tax | | 0 | | | | | (4) | | | (4) | |
| | | | | | | | |
| AOCI Balance, September 30, 2019 | | $ | (10) | | | | | $ | 37 | | | $ | 27 | |
| | | | | | | | |
| | Gains & Losses on Cash Flow Hedges (1) | | | | Defined Benefit Pension & OPEB Plans | | Total |
| | (In millions) |
| AOCI Balance, January 1, 2020 | | $ | (9) | | | | | $ | 29 | | | $ | 20 | |
| | | | | | | | |
| | | | | | | | |
| Amounts reclassified from AOCI | | 1 | | | | | (30) | | | (29) | |
| | | | | | | | |
| Other comprehensive income (loss) | | 1 | | | | | (30) | | | (29) | |
| Income tax benefits on other comprehensive loss | | 0 | | | | | (7) | | | (7) | |
| Other comprehensive income (loss), net of tax | | 1 | | | | | (23) | | | (22) | |
| | | | | | | | |
| AOCI Balance, September 30, 2020 | | $ | (8) | | | | | $ | 6 | | | $ | (2) | |
| | | | | | | | |
| AOCI Balance, January 1, 2019 | | $ | (11) | | | | | $ | 52 | | | $ | 41 | |
| | | | | | | | |
| | | | | | | | |
| Amounts reclassified from AOCI | | 1 | | | | | (21) | | | (20) | |
| | | | | | | | |
| Other comprehensive income (loss) | | 1 | | | | | (21) | | | (20) | |
| Income tax benefits on other comprehensive loss | | 0 | | | | | (6) | | | (6) | |
| Other comprehensive income (loss), net of tax | | 1 | | | | | (15) | | | (14) | |
| | | | | | | | |
| AOCI Balance, September 30, 2019 | | $ | (10) | | | | | $ | 37 | | | $ | 27 | |
| | | | | | | | |
|
|
|
(1) Relates to previous cash flow hedges used to hedge fixed rate long-term debt securities prior to their issuance.
The following amounts were reclassified from AOCI in the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Affected Line Item in Consolidated Statements of Income |
Reclassifications from AOCI(1) | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (In millions) | | |
| Gains & losses on cash flow hedges | | | | | | | | | | |
| | | | | | | | | | |
| Long-term debt | | $ | 0 | | | $ | 0 | | | $ | 1 | | | $ | 1 | | | Interest expense |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | $ | 0 | | | $ | 0 | | | $ | 1 | | | $ | 1 | | | Net of tax |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Defined benefit pension and OPEB plans | | | | | | | | | | |
| Prior-service costs | | $ | (3) | | | $ | (7) | | | $ | (30) | | | $ | (21) | | | (2) |
| | 1 | | | 3 | | | 7 | | | 6 | | | Income taxes |
| | $ | (2) | | | $ | (4) | | | $ | (23) | | | $ | (15) | | | Net of tax |
| | | | | | | | | | |
(1) Amounts in parenthesis represent credits to the Consolidated Statements of Income from AOCI. |
(2) Prior-service costs are reported within Miscellaneous income, net, within Other Income (Expense) on FirstEnergy’s Consolidated Statements of Income. Components are included in the computation of net periodic costs (credits), see Note 5, “Pension and Other Post-Employment Benefits.” |
7. INCOME TAXES
FirstEnergy’s interim effective tax rates reflect the estimated annual effective tax rates for 20202021 and 2019.2020. These tax rates are affected by estimated annual permanent items, such as AFUDC equity and other flow-through items, as well as discrete items that may occur in any given period but are not consistent from period to period.
FirstEnergy’s effective tax rate on continuing operations for the three months ended September 30, 2021 and 2020, was 17.5% and 2019, was 20.1% and 21.6%, respectively. The change in the effective tax rate was primarily due to various state flow-through items such asa $29 million decrease in the reserve for
unrecognized tax treatmentbenefits primarily related to positions on nondeductible interest under Section 163(j) that were effectively settled with the IRS in closing out audits of allowance for equity funds used during construction, as well as the amortization of net excess deferred2018 and 2019 consolidated federal income taxes.tax returns.
FirstEnergy’s effective tax rate on continuing operations for the nine months ended September 30, 2021 and 2020, was 25.1% and 2019, was 13.4% and 20.6%, respectively. TheIn addition to the items mentioned above, the change in effective tax rate was primarily due to:
•The non-deductibility of the DPA penalty and $9 million of tax expense recorded in the second quarter of 2021 related to the remeasurement of West Virginia deferred income taxes resulting from a state tax law change (as discussed further below).
•The absence of a $10 million benefit from accelerated amortization of certain investment tax credits recorded in the second quarter of 2020.
•The absence of a $52 million benefit for reduction in valuation allowances in the first quarter of 2020 from the recognition of deferred gains on prior intercompany generation asset transfers triggered by the FES Debtors’ emergence from bankruptcy and deconsolidation from FirstEnergy’s consolidated federal income tax group in the first quarter of 2020, and a $10 million benefit from accelerated amortization of certain investment tax credits in the second quarter of 2020. group.
See Note 3, “Discontinued Operations,” for other tax matters relating to the FES Bankruptcy that were recognized in discontinued operations.
During the three months ended September 30, 2021, FirstEnergy recorded a net $25 million decrease to the reserve for uncertain tax positions primarily due to the effectively settled positions discussed previously, partially offset by a $4 million increase in the reserve related to certain federal tax credits claimed on FirstEnergy’s 2020 federal income tax return. During the nine months ended September 30, 2020,2021, FirstEnergy remeasuredrecorded a net $21 million decrease in its reserve for uncertain tax positions. The decrease primarily resulted from the effectively settled positions discussed previously and remeasurement for federal and state taxWest Virginia deferred taxes (as discussed further below), partially offset by an increase of $15 million for benefits related to the worthless stock deduction, resulting in a net decrease to the reserve of approximately $28 million, none of which had an impact on the effectivecertain federal tax rate.credits. As of September 30, 2020,2021, it is reasonably possible that within the next twelve months FirstEnergy could record a net decrease of approximately $57$26 million to its reserve for uncertain tax positions due to the expiration of the statute of limitations or resolution with taxing authorities, of which approximately $55$24 million would impact FirstEnergy’s effective tax rate.
On March 27, 2020, the11, 2021, President Biden signed into law the CARESAmerican Rescue Plan Act of 2021. While the Act is primarily an economic stimulus package, in response toit also, among other changes, expanded the COVID-19 pandemic. The CARES Act contains several corporate income tax provisions, including making remaining AMT credits immediately refundable; providing a 5-year carrybackscope of NOLs generated in tax years 2018, 2019, and 2020, and removing the 80% taxable income limitation on utilization of those NOLs if carried back to prior tax years or utilized in tax years beginning before 2021; and temporarily liberalizing the interest deductibility rules under Section 163(j)162(m) of the Tax Act, by raising the adjusted taxable income limitation from 30% to 50% for tax years 2019 and 2020 and giving taxpayers the election of using 2019 adjusted taxable income for purposes of computing 2020 interest deductibility. FirstEnergy has approximately $18 million of refundable AMT creditsInternal Revenue Code that will be fully refundable through the CARES Act, however, does not expect to generate additional income tax refunds from the NOL carryback provision and expects interest to be fully deductible starting in 2020.limits deductions on certain executive officer compensation. FirstEnergy does not currently expect the other provisions of the CARES Actthese changes to have a material effect on current income tax expense or the realizability of deferred income tax assets.impact.
On July 28, 2020,April 9, 2021, West Virginia enacted legislation changing the IRS issued final regulations implementing intereststate’s corporate income tax apportionment rules, including adopting a single sales factor formula and market-based sourcing for sales of services and intangibles, effective for taxable years beginning on or after January 1, 2022. Enactment of this law triggered a remeasurement of state deferred income taxes for entities included in FirstEnergy’s West Virginia combined unitary return, resulting in a net impact of approximately $9 million in additional tax expense deduction limitation rules under section 163(j)in the second quarter of the Internal Revenue Code. The final regulations changed certain rules on the computation of interest expense and limitation amount, as well as rules relevant to status as a regulated utility business and the allocation of consolidated group interest2021.
expense between utilityIn August 2021, the IRS completed its examination of FirstEnergy’s 2018 and non-utility businesses. After reviewing the final regulations, FirstEnergy recorded a true-up to prior years’ reserve estimates during the quarter, which did not have a material impact2019 federal income tax returns and issued Full Acceptance Letters with no adjustments to FirstEnergy’s taxable income statement.in either year. Tax year 2020 is currently under review by the IRS.
8.7. 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.
NUG contracts represent PPAs with third-party non-utility generators that are transacted to satisfy certain obligations under PURPA. NUG contract carrying values are recorded at fair value and adjusted periodically using a mark-to-model methodology, which approximates market. The primary unobservable inputs into the model are regional power prices and generation MWH. Pricing for the NUG contracts is a combination of market prices for the current year and next two years based on observable data and internal models using historical trends and market data for the remaining years under contract. The internal models use forecasted energy purchase prices as an input when prices are not defined by the contract. Forecasted market prices are based on Intercontinental Exchange, Inc. quotes and management assumptions. Generation MWH reflects data provided by contractual arrangements and historical trends. The model calculates the fair value by multiplying the prices by the generation MWH. 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, 2020,2021, from those used as of December 31, 2019.2020. The 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, 2020 | | December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | (In millions) |
| Corporate debt securities | $ | 0 | | | $ | 135 | | | $ | 0 | | | $ | 135 | | | $ | 0 | | | $ | 135 | | | $ | 0 | | | $ | 135 | |
| | | | | | | | | | | | | | | |
Derivative assets FTRs(1) | 0 | | | 0 | | | 7 | | | 7 | | | 0 | | | 0 | | | 4 | | | 4 | |
| | | | | | | | | | | | | | | |
| Equity securities | 2 | | | 0 | | | 0 | | | 2 | | | 2 | | | 0 | | | 0 | | | 2 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| U.S. state debt securities | 0 | | | 274 | | | 0 | | | 274 | | | 0 | | | 271 | | | 0 | | | 271 | |
Other(2) | 260 | | | 781 | | | 0 | | | 1,041 | | | 627 | | | 789 | | | 0 | | | 1,416 | |
| Total assets | $ | 262 | | | $ | 1,190 | | | $ | 7 | | | $ | 1,459 | | | $ | 629 | | | $ | 1,195 | | | $ | 4 | | | $ | 1,828 | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Derivative liabilities FTRs(1) | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (1) | | | $ | (1) | |
Derivative liabilities NUG contracts(1) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (16) | | | (16) | |
| | | | | | | | | | | | | | | |
| Total liabilities | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (17) | | | $ | (17) | |
| | | | | | | | | | | | | | | |
Net assets (liabilities)(3) | $ | 262 | | | $ | 1,190 | | | $ | 7 | | | $ | 1,459 | | | $ | 629 | | | $ | 1,195 | | | $ | (13) | | | $ | 1,811 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | (In millions) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Derivative assets FTRs(1) | $ | — | | | $ | — | | | $ | 10 | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 3 | | | $ | 3 | |
| | | | | | | | | | | | | | | |
| Equity securities | 2 | | | — | | | — | | | 2 | | | 2 | | | — | | | — | | | 2 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| U.S. state debt securities | — | | | 271 | | | — | | | 271 | | | — | | | 276 | | | — | | | 276 | |
Cash, cash equivalents and restricted cash(2) | 684 | | | — | | | — | | | 684 | | | 1,801 | | | — | | | — | | | 1,801 | |
Other(3) | — | | | 43 | | | — | | | 43 | | | — | | | 41 | | | — | | | 41 | |
| Total assets | $ | 686 | | | $ | 314 | | | $ | 10 | | | $ | 1,010 | | | $ | 1,803 | | | $ | 317 | | | $ | 3 | | | $ | 2,123 | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Derivative liabilities FTRs(1) | $ | — | | | $ | — | | | $ | (1) | | | $ | (1) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total liabilities | $ | — | | | $ | — | | | $ | (1) | | | $ | (1) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
Net assets (liabilities)(4) | $ | 686 | | | $ | 314 | | | $ | 9 | | | $ | 1,009 | | | $ | 1,803 | | | $ | 317 | | | $ | 3 | | | $ | 2,123 | |
(1)Contracts are subject to regulatory accounting treatment and changes in market values do not impact earnings.
(2)Primarily consistsRestricted cash of short-term cash investments.
(3)Excludes $2$107 million and $(16)$67 million as of September 30, 20202021 and December 31, 2019,2020 respectively, primarily relates to cash collected from JCP&L, MP, PE and the Ohio Companies’ customers that is specifically used to service debt of their respective funding companies.
(3)Primarily consists of short-term investments.
(4)Excludes $1 million as of December 31, 2020, of net receivables, payables, taxes and accrued income associated with financial instruments reflected within the fair value table.
Rollforward of Level 3 Measurements
The following table provides a reconciliation of changes in the fair value of NUG contracts and FTRs that are classified as Level 3 in the fair value hierarchy for the periods ended September 30, 2020, and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NUG Contracts(1) | | FTRs(1) |
| Derivative Assets | | Derivative Liabilities | | Net | | Derivative Assets | | Derivative Liabilities | | Net |
| (In millions) |
| January 1, 2019 Balance | $ | 0 | | | $ | (44) | | | $ | (44) | | | $ | 10 | | | $ | (1) | | | $ | 9 | |
| | | | | | | | | | | |
| Unrealized loss | 0 | | | (11) | | | (11) | | | (1) | | | 0 | | | (1) | |
| Purchases | 0 | | | 0 | | | 0 | | | 6 | | | (4) | | | 2 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Settlements | 0 | | | 39 | | | 39 | | | (11) | | | 4 | | | (7) | |
| | | | | | | | | | | |
| December 31, 2019 Balance | $ | 0 | | | $ | (16) | | | $ | (16) | | | $ | 4 | | | $ | (1) | | | $ | 3 | |
| | | | | | | | | | | |
| Unrealized loss | 0 | | | (3) | | | (3) | | | 0 | | | 0 | | | 0 | |
| Purchases | 0 | | | 0 | | | 0 | | | 7 | | | (2) | | | 5 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Settlements | 0 | | | 19 | | | 19 | | | (4) | | | 3 | | | (1) | |
| | | | | | | | | | | |
| September 30, 2020 Balance | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 7 | | | $ | 0 | | | $ | 7 | |
(1)Contracts are subject to regulatory accounting treatment and changes in market values do not impact earnings.
Level 3 Quantitative Information
The following table provides quantitative information for the FTRs contracts that are classified as Level 3 in the fair value hierarchy for the period ended September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value, Net (In millions) | | Valuation
Technique | | Significant Input | | Range | | Weighted Average | | Units |
| FTRs | | $ | 7 | | | Model | | RTO auction clearing prices | | $ | 0.10 | | to | $ | 2.40 | | | $1.20 | | Dollars/MWH |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value, Net (In millions) | | Valuation
Technique | | Significant Input | | Range | | Weighted Average | | Units |
| FTRs | | $ | 9 | | | Model | | RTO auction clearing prices | | $ | 0.50 | | to | $ | 3.30 | | | $1.40 | | 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 NDTs andspent nuclear fuel disposal trusts of JCP&L, ME and PN are subject to regulatory accounting with all gains and losses on equity and AFS debt securities offset against regulatory assets.
The investment policy for the NDT funds restricts or limits the trusts’ ability to hold certain types of assets including private or direct placements, warrants, securities of FirstEnergy, investments in companies owning nuclear power plants, financial derivatives, securities convertible into common stock and securities of the trust funds’ custodian or managers and their parents or subsidiaries.
Nuclear Decommissioning andSpent Nuclear Fuel Disposal Trusts
JCP&L ME and PN holdholds debt and equity securities within their respective NDT andthe spent nuclear fuel disposal trusts. The debt securitiestrust, which are classified as AFS securities, recognized at fair market value. As further discussed in Note 10, "Commitments, Guarantees and Contingencies", assets and liabilities heldThe trust is intended for sale on FirstEnergy’s Consolidated Balance Sheetsfunding spent nuclear fuel disposal fees to the DOE associated with the TMI-2 transaction consist of an ARO of $718 million, NDTs of $881 million, as well as property, plantpreviously owned Oyster Creek and equipment with a net book value of zero, which are included in the regulated distribution segment.TMI-1 nuclear power plants.
The following table summarizes the amortized cost basis, unrealized gains, unrealized losses and fair values of investments held in NDT andspent nuclear fuel disposal trusts as of September 30, 2020,2021, and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020(1) | | December 31, 2019(2) |
| | Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value (3) | | Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value (3) |
| | (In millions) |
| | | | | | | | | | | | | | | | |
| Debt securities | | $ | 406 | | | $ | 11 | | | $ | (8) | | | $ | 409 | | | $ | 403 | | | $ | 9 | | | $ | (11) | | | $ | 401 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021(1) | | December 31, 2020(2) |
| | Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | (In millions) |
| | | | | | | | | | | | | | | | |
| Debt securities | | $ | 277 | | | $ | 2 | | | $ | (8) | | | $ | 271 | | | $ | 275 | | | $ | 7 | | | $ | (6) | | | $ | 276 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(1) Excludes short-term cash investments of $753 million, of which $746 million is classified as held for sale.$12 million.
(2) Excludes short-term cash investments of $751 million, of which $747 million is classified as held for sale.
(3) Includes $135 million classified as held for sale as of September 30, 2020 and December 31, 2019.$9 million.
Proceeds from the sale of investments in equity and AFS debt securities, realized gains and losses on those sales and interest and dividend income for the three and nine months ended September 30, 20202021 and 2019,2020, were as follows:
| | | | | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020(1) | | 2021 | | 2020(1) |
| | (In millions) | | | | | | (In millions) | | | | |
| Sale proceeds | Sale proceeds | | $ | 6 | | | $ | 204 | | | $ | 45 | | | $ | 506 | | Sale proceeds | | $ | 16 | | | $ | 6 | | | $ | 29 | | | $ | 45 | |
| Realized gains | Realized gains | | 0 | | | 8 | | | 4 | | | 20 | | Realized gains | | — | | | — | | | — | | | 4 | |
| Realized losses | Realized losses | | 0 | | | (7) | | | (7) | | | (18) | | Realized losses | | (1) | | | — | | | (2) | | | (7) | |
| | Interest and dividend income | Interest and dividend income | | 4 | | | 10 | | | 18 | | | 30 | | Interest and dividend income | | 3 | | | 4 | | | 8 | | | 18 | |
(1) Includes amounts associated with NDTs that were previously held by JCP&L, ME, and PN. See above for additional information.
Other Investments
Other investments include employee benefit trusts, which are primarily invested in corporate-owned life insurance policies and equity method investments. Other investments were $301$349 millionand$299 $322 million as of September 30, 2020,2021, and December 31, 2019,2020, respectively, and are excluded from the amounts reported above.
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, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (In millions) |
Carrying value (1) | $ | 22,389 | | | $ | 20,074 | |
| Fair value | $ | 26,161 | | | $ | 22,928 | |
(1) The carrying value as of September 30, 2020, includes $3,425 million of debt issuances and $1,110 million of redemptions that occurred in 2020. | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| (In millions) |
| Carrying value | $ | 23,819 | | | $ | 22,377 | |
| Fair value | $ | 27,018 | | | $ | 25,465 | |
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, 2020,2021, and December 31, 2019.2020.
During the nine months ended September 30, 2021, the following long-term debt was issued:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company | | Issuance Date | | Interest Rate | | Maturity | | Amount | | Use of proceeds | |
| | | | | | | | | | | |
| FET | | 3/19/2021 | | 2.866% | | 2028 | | $500 million | | Repay short-term borrowings under the former FET Revolving Facility. | |
| MP | | 4/9/2021 | | 3.55% | | 2027 | | $200 million | | Fund MP’s ongoing capital expenditures, for working capital needs and for other general corporate purposes. | |
| TE | | 5/6/2021 | | 2.65% | | 2028 | | $150 million | | Repay short-term borrowings, fund TE’s ongoing capital expenditures and for other general corporate purposes. | |
| MAIT | | 5/24/2021 | | 4.10% | | 2028 | | $150 million | | Repay borrowings outstanding under FirstEnergy’s regulated company money pool, fund MAIT’s ongoing capital expenditures, to fund working capital and for other general corporate purposes. | |
| JCP&L | | 6/10/2021 | | 2.75% | | 2032 | | $500 million | | Repay $450 million of short-term debt under the former FE Revolving Facility, storm recovery and restoration costs and expenses, to fund JCP&L’s ongoing capital expenditures, working capital requirements and for other general corporate purposes. | |
8. REGULATORY MATTERS
STATE REGULATION
Each of the Utilities’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.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.
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 2018-2020 and 2021-2023 EmPOWER Maryland program cycles, to the extent the MDPSC determines that cost-effective programs and services are available. PE’sPE's approved 2018-2020 EmPOWER Maryland plan continues and expands upon prior years’years' programs, and adds new programs, for a projected total costinvestment of $116 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 amortization.period with a return on the unamortized balance. 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. On September 1, 2020, PE filed its proposed plan for the 2021-2023 EmPOWER Maryland program cycle. The new plan largely continues PE’s existing programs and iswith an estimated to costinvestment of approximately $148 million over the three-year period.period with similar recovery. The MDPSC had a hearingapproved the plan on the proposed plan in OctoberDecember 18, 2020.
On January 19, 2018, PE filed a joint petition along with other utility companies, work group stakeholders and the MDPSC electric vehicle work group leader to implement a statewide electric vehicle portfolio in connection with a 2016 MDPSC proceeding to consider an array of issues relating to electric distribution system design, including matters relating to electric vehicles, distributed energy resources, advanced metering infrastructure, energy storage, system planning, rate design, and impacts on low-income customers. PE proposed an electric vehicle charging infrastructure program at a projected total cost of $12 million, to be recovered over a five-year amortization. On January 14, 2019, the MDPSC approved the petition subject to certain reductions in the scope of the program. The MDPSC approved PE’s compliance filing, which implements the pilot program, with minor modifications, on July 3, 2019.
On August 24, 2018, PE filed a base rate case with the MDPSC, which it supplemented on October 22, 2018, to update the partially forecasted test year with a full twelve months of actual data. The rate case requested an annual increase in base distribution rates of $19.7 million, plus creation of an EDIS to fund four enhanced service reliability programs. In responding to discovery, PE revised its request for an annual increase in base rates to $17.6 million. The proposed rate increase reflected $7.3 million in annual savings for customers resulting from the recent federal tax law changes. On March 22, 2019, the MDPSC issued a finalan order thatapproving PE’s 2018 base rate case filing, which among other things, approved aan annual rate increase of $6.2 million, approved three of the four EDIS programs for four years to fund enhanced service reliability programs, directed PE to file a new depreciation study within 18 months, and ordered the filing of a new base rate case in four years to correspond to the ending of the approved EDIS programs. On September 22, 2020, PE filed its depreciation study that indicatedreflecting a slight increase in depreciation,expense and as a result, is seeking that the difference in depreciationto be deferred for future recovery in PE’s next base rate case. TheOn January 29, 2021, the Maryland Office of People's Counsel filed testimony recommending an annual reduction in depreciation expense of $10.8 million, and the staff of the MDPSC has setfiled testimony recommending an annual reduction of $9.6 million. On May 26, 2021, the matter for hearing and delegated itjudge issued a Proposed Order which would reduce PE’s base rates by $2.1 million. PE filed an appeal of the Proposed Order to a public utility law judge. On November 6, 2020, an order was issued scheduling evidentiary hearings in Aprilthe MDPSC on June 25, 2021, which the MDPSC denied on October 26, 2021.
Maryland’s Governor issued an order on March 16, 2020, forbidding utilities from terminating residential service or charging late fees for non-payment for the duration of the COVID-19 pandemic. On April 9, 2020, the MDPSC issued an order allowing utilities to track and create a regulatory asset for future recovery of all prudently incurred incremental costs arising from the COVID-19 pandemic, including incremental uncollectible expense, incurred from the date of the Governor’s order (or earlier if the utility could show that the expenses related to suspension of service terminations). OnIn July 8, 2020, the MDPSC subsequently issued a notice opening a public conference to collect information from utilities and other stakeholders about the impacts of the COVID-19
pandemic on the utilities and their customers. The MDPSC subsequently issued orders allowing Maryland electric and gas utilities to resume residential service terminations for non-payment on November 15, 2020, subject to various restrictions, and clarifying that utilities could resume charging late fees on October 1, 2020. On June 16, 2021, the MDPSC provided PE with approximately $4 million of COVID-19 relief funds that was allocated by the Maryland General Assembly to be used to reduce certain residential customer utility account receivable arrearages.
NEW JERSEY
JCP&L operates under NJBPU approved rates that were effective as of January 1, 2017. 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.
On April 18, 2019, pursuant to the May 2018 New Jersey enacted legislation establishing a ZEC program to provide ratepayer funded subsidies of New Jersey nuclear energy supply, the NJBPU approved the implementation of a non-bypassable, irrevocable ZEC charge for all New Jersey electric utility customers, including JCP&L’s customers. Once collected from customers by JCP&L, these funds will be remitted to eligible nuclear energy generators.
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 ratepayers; and (iii) exclude transmission assets of electric distribution companies in the savings calculation, which were published in the NJ Register in the first quarter of 2018.JCP&L filed comments supporting the proposed rulemaking. 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. JCP&L is contesting this appeal but is unable to predict the outcome of this matter.
Also in December 2017, the NJBPU approved its IIP rulemaking. The IIP creates a financial incentive for utilities to accelerate the level of investment needed to promote the timely rehabilitationJersey and replacement of certain non-revenue producing components that enhance reliability, resiliency, and/or safety. On May 8, 2019, the NJBPU approved a Stipulation of Settlement submitted by JCP&L, Rate Counsel, NJBPU Staff and New Jersey Large Energy Users Coalition to implement JCP&L’s infrastructure plan, JCP&L Reliability Plus. The plan provides that JCP&L will invest up to approximately $97 million in capital investments beginning on June 1, 2019 through December 31, 2020,7, 2021, the court issued an Order reversing the NJBPU’s CTA rules and remanded the case back to enhance the reliability and resiliency of JCP&L’s distribution system and reduceNJBPU. Specifically, the frequency and duration of power outages. JCP&L shall seek recoverycourt’s ruling requires 100% of the capital investment through an accelerated cost recovery mechanism, provided forCTA savings to be credited to customers in lieu of the rules, that includesNJBPU’s current policy requiring 25%. The court’s ruling will be applied on a revenue adjustment calculation and a process for two rate adjustments. The NJBPU approved adjusted rates that took effect on March 1, 2020. As further discussed below, JCP&L will recover the IIP capital investments as part of its distribution base rate case.prospective basis.
On February 18, 2020, JCP&L submitted a filing with the NJBPU requesting a distribution base rate increase of $186.9 million on an annual basis, which represents an overall average increase inincrease. On October 28, 2020, the NJBPU approved a stipulated settlement between JCP&L rates of 7.8%. The filing seeks to recover certain costs associated with providing safe and reliable electric service to JCP&L customers, along with recovery of previously incurred storm costs. JCP&L proposed a rate effective date of March 19, 2020. The NJBPU issued orders suspending JCP&L’s proposed rates until November 19, 2020. JCP&L filed updates to the requested distribution base rate in both June and July 2020, resulting in JCP&L seeking a total annual distribution base rate increase of approximately $185 million. On October 16, 2020, thevarious parties, submitted a stipulation of settlement to the administrative law judge, providing for, among other things, a $94 million annual base distribution revenues increase for JCP&L based on an ROE of 9.6%, which will become effective for customers on November 1, 2021. Until the rates become effective, and starting on January 1, 2021, JCP&L will be permittedbegan to amortize an existing regulatory liability totaling approximately $86 million to offset the base rate increase that otherwise would have occurred in this period. The parties also agreed that the actual net gain from the sale of JCP&L’s interest in the Yards Creek pumped-storage hydro generation facility in New Jersey (210 MWs), as further discussed below, shall be applied to reduce JCP&L’s existing regulatory asset for previously deferred storm costs. On October 22,Lastly, the parties agreed that approximately $95 million of Reliability Plus capital investment for projects through December 31, 2020, is included in rate base effective December 31, 2020, with a final prudence review of only those capital investment projects from July 1, 2020, through December 31, 2020, to occur in January 2021. During the administrative law judge entered an initial decision adoptingfirst quarter of 2021, JCP&L submitted its review of storm costs, filed a written report for its Reliability Plus projects placed in service from July 1, 2020 through December 31, 2020, and submitted the vegetation management report, all required under the stipulation of settlement. On October 28, 2020,March 24, 2021, JCP&L, NJ Rate Counsel and the NJBPU Staff submitted a stipulation of settlement to the NJBPU, which was approved on April 7, 2021, providing that the settlementReliability Plus projects placed into service from July 1, 2020 through December 31, 2020 were reasonable and ordered an upcoming management audit for JCP&L.prudent.
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. Subject to terms and conditions of the agreement, the base purchase price is $155 million. CompletionAs of December 31, 2020, assets held for sale on FirstEnergy’s Consolidated Balance Sheets associated with the transaction consist of property, plant and equipment of $45 million, which is subject to several closing conditions, including approval byincluded in the NJBPU and FERC.regulated distribution segment. On July 31, 2020, FERC approved the transfer of JCP&L’s interest in the hydroelectric operating license. On October 8, 2020, FERC issued an order authorizing the transfer of JCP&L’s ownership interest in the hydroelectric facilities. There can be no assurance that all closing conditions will be satisfied or that the transaction will be consummated. JCP&L currently anticipates closing of the transaction to occur in the next few months. Assets held for sale on FirstEnergy’s Consolidated Balance Sheets associated with the transaction consist of property, plant and equipment of $44 million, which is included in the regulated distribution segment. On October 28, 2020, the NJBPU approved the sale of Yards Creek. 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. As further discussed above, 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 of regulatory assets, net”, line on the Consolidated Statements of Income, resulting in no earnings impact to FirstEnergy or JCP&L.
On August 27, 2020, JCP&L filed an AMI Program with the NJBPU, which proposes the deployment of approximately 1.2 million advanced meters over a three-year period beginning on January 1, 2023, at a total cost of approximately $418 million, including the pre-deployment phase. The 3-year deployment is part of the 20 year20-year AMI Program that is expected to cost a total of approximately $732 million and proposes a cost recovery mechanism through a separate AMI tariff rider. On February 26, 2021, JCP&L filed a letter requesting a suspension of the procedural schedule to allow for settlement discussions, which was granted on March 5, 2021. On September 14, 2021, JCP&L submitted a supplemental filing, which reflects increases in the AMI Program’s costs. Under the revised AMI Program, during the first six years of the AMI Program, JCP&L estimates cost of $494 million, consisting of capital expenditures of approximately $390 million, operations and maintenance expenses of approximately $73 million and cost of removal of $31 million. JCP&L expects a NJBPU order by the end of 2021.
On June 10, 2020, the NJBPU issued an order establishing a framework for the filing of utility-run energy efficiency and peak demand reduction programs in accordance with the New Jersey Clean Energy Act. Under the established framework, JCP&L will recover its program investments with a return over a ten yearten-year amortization period and its operations and maintenance expenses on an annual basis, be eligible to receive lost revenues on energy savings that resulted from its programs and be eligible for incentives or subject to penalties based on its annual program performance, beginning in the fifth year of its program offerings. On September 25, 2020, JCP&L filed its energy efficiency and peak demand reduction program. JCP&L’s program consists of 11 energy efficiency and peak demand reduction programs and subprograms to be run from July 1, 2021, through June 30, 2024. The program also seeksOn April 23, 2021, JCP&L filed a Stipulation of Settlement with the NJBPU for approval of cost recovery totaling approximately $230of 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 lost revenues associated withoperations and maintenance expenses and financing costs of $45 million recovered on an annual basis. On April 27, 2021, the energy savings resulting fromNJBPU issued an Order approving the programs.Stipulation of Settlement.
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 through September 30, 2021, or until the 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 August 21, 2020, the Governor of New Jersey issued a press release announcing that the New Jersey utilities agreed to extend their voluntary moratorium preventing shutoffs to both residential and commercial customers during the COVID-19 pandemic until October 15, 2020. On October 15, 2020, the Governor issued an Executive Order prohibiting utilities from terminating service to any residential gas, electric, public and private water customer, through March 15, 2021, requiring the reconnection of certain customers, and disallowing the charging of late payment charges or reconnection fees during the public health emergency. 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. Comments are dueThrough various Executive Orders issued by November 30, 2020.Governor Murphy, the moratorium period is extended to December 31, 2021.
The recent credit rating actions taken on October 28, 2020, by S&P and Fitch triggered a requirement from various NJBPU orders that JCP&L file a mitigation plan, which was filed on November 5, 2020, to demonstrate that JCP&L has sufficient liquidity to meet its BGS obligations. On November 18,December 11, 2020, the NJBPU scheduledheld a public hearing on the mitigation plan. Written comments on JCP&L’s mitigation plan were submitted on January 8, 2021.
On September 23, 2020, the NJBPU issued an Order requiring all New Jersey electric distribution companies to file electric vehicle programs. JCP&L filed its electric vehicle program on March 1, 2021, which consists 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. The total proposed budget for December 11, 2020.the electric vehicle program is approximately $50 million, of which $16 million is capital expenditures and $34 million is for operations and maintenance expenses. JCP&L is proposing to recover the electric vehicle program costs via a non-bypassable rate clause applicable to all distribution customer rate classes, which would become effective on January 1, 2022. On May 26, 2021, a procedural schedule was set to include evidentiary hearings the week of October 18, 2021. On July 16, 2021, the procedural schedule was extended by thirty days as requested by JCP&L to continue settlement discussions. On August 19, 2021, the presiding commissioner issued an order modifying the procedural schedule by extending the procedural schedule by ninety days as requested by JCP&L to continue settlement discussions.
On October 28, 2020, the NJBPU approved a settlement in JCP&L’s distribution rate, and voted that JCP&L will be subject to an upcoming management audit. The management audit began at the end of May 2021 and is currently ongoing.
OHIO
The Ohio Companies operate under base distribution rates approved by the PUCO effective in 2009. The Ohio Companies’ residential and commercial base distribution revenues are decoupled, through a mechanism that took effect on February 1, 2020, to the base distribution revenue and lost distribution revenue associated with energy efficiency and peak demand reduction programs recovered as of the twelve-month period ending on December 31, 2018.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, rider, 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) the collection of lost distribution revenues associated with energy efficiency and peak demand reduction programs; (3) a goal across FirstEnergy to reduce CO2 emissions by 90% below 2005 levels by 2045; and (4)(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.
ESP IV further provided for the Ohio Companies to collect throughDMR revenues, but the DMR $132.5 million annually for three years beginning in 2017, grossed up for federal income taxes, resulting in an approved amount of approximately $168 million annually in 2018 and 2019. On appeal, the SCOH on June 19, 2019, reversed the PUCO’s determination that thedecision to include DMR is lawful, and remanded the matter to the PUCO with instructions to remove the DMR fromin ESP IV. On August 20, 2019,Subsequently, the SCOH denied the Ohio Companies’ motion for reconsideration. The PUCO entered an order directing the Ohio Companies to cease further collection through the DMR and credit back to customers a refund of the DMR funds collected since July 2, 2019, and remove the DMR from ESP IV.2019. On July 15, 2019, the OCC filed a Notice of Appealan appeal with the SCOH, challenging the PUCO’s exclusion of DMR revenues from the determination of the existence of significantly excessive earnings under ESP IV for OE for calendar year 2017, and claiming a $42 million refund is due to OE customers. On December 1, 2020, the SCOH reversed the PUCO’s exclusion of the DMR revenues from the determination of the existence of significantly excessive earnings under ESP IV for OE for calendar year 2017, and claiming a $42 million refundremanded the case to the PUCO with instructions to conduct new proceedings which include the DMR revenues in the analysis, determine the threshold against which the earned return is due to OE customers. The Ohio Companies are contesting this appeal but aremeasured, and make other necessary determinations. FirstEnergy is unable to predict the outcome of this matter. The SCOH heard the argument on this matter on May 12, 2020.these proceedings but has not deemed a liability probable as of September 30, 2021.
On July 23, 2019, Ohio enacted legislation establishing support for nuclear energy supply in Ohio. In addition to theHB 6, which included provisions supporting nuclear energy, the legislation included a provision implementingauthorizing a decoupling mechanism for Ohio electric utilities and ending current energy efficiency program mandates. Under HB 6 the energy efficiency program mandates would have ended on December 31, 2020, provided that statewide energy efficiency mandates are achieved as determined by the PUCO. On February 26, 2020,24, 2021, the PUCO found that statewide energy efficiency mandates had been achieved, and ordered that a wind-down of statutorily
requiredOhio electric utilities’ energy efficiency programs shall commence on September 30, 2020, and the programs shall terminate on December 31, 2020, and thatpeak demand reduction cost recovery riders terminate. Third-parties have challenged the Ohio Companies’ existing portfolio plans are extended through 2020 without changes.authorization to recover all lost distribution revenue under energy efficiency and peak demand reduction cost recovery riders. On October 18, 2021, the attorney examiner issued a procedural schedule setting hearings for December 22, 2021, on that issue. FirstEnergy is unable to predict the outcome of this proceeding.
On November 21, 2019, the Ohio Companies applied to the PUCO for approval of a decoupling mechanism,March 31, 2021, Governor DeWine signed HB 128, which, would set residential and commercial base distribution related revenues at the levels collected in 2018. As such, those base distribution revenues would no longer be based on electric consumption, which allows continued support of energy efficiency initiatives while also providing revenue certainty to the Ohio Companies. On January 15, 2020, the PUCO approved the Ohio Companies’ decoupling application, and the decoupling mechanism took effect on February 1, 2020. Various Ohio House and Senate Bills were introduced in the third quarter of 2020 to, among other things, repealrepealed parts of HB 6, the legislation that established support for nuclear energy supply in Ohio, provided for a decoupling mechanism for Ohio electric utilities, and provided for the ending of current energy efficiency program mandates. FirstEnergy is unable to predict the outcome of the legislative activity in response to the investigation of HB 6, however, a repeal of the decoupling provision of HB 6 is reasonably possible.128 was effective June 30, 2021. As of September 30, 2020, the uncollected amount recognized as a regulatory asset on FirstEnergy’s Consolidated Balance Sheet from the decoupling mechanism was approximately $100 million. However, absent the decoupling mechanism and other provisions of HB 6, it is expected that the Ohio Companies would have collected lost distribution revenues estimated at approximately $63 million for the nine months ended September 30, 2020, for a pre-tax net impact of approximately $37 million. Furthermore, as FirstEnergy would not have financially benefited from the zeromechanism to provide support to nuclear credit includedenergy in HB 6,Ohio, there is no expected additional impact to FirstEnergy due to the repeal of that provision in HB 6. On November 2, 2020,128.
As further discussed below, in connection with a partial settlement with the OAG and other parties, the Ohio Companies filed their annual updatean application with the PUCO on February 1, 2021, to set the respective decoupling riders (CSR) to zero. On February 2, 2021, the PUCO approved the application. While the partial settlement with the OAG focused specifically on decoupling, the Ohio Companies elected to forego recovery of lost distribution revenue. FirstEnergy is committed to pursuing an open dialogue with stakeholders in an appropriate manner with respect to the numerous regulatory proceedings currently underway as further discussed herein. As a result of the partial settlement, and the decision to not seek lost distribution revenue, FirstEnergy recognized a $108 million pre-tax charge ($84 million after-tax) in the fourth quarter of 2020, and $77 million (pre-tax) of which is associated with forgoing collection of lost distribution revenue. On March 31, 2021, FirstEnergy announced that the Ohio Companies would proactively refund to customers amounts previously collected under decoupling, rider with an estimated annual revenue requirementinterest, which total approximately $27 million. On April 22, 2021, in anticipation of approximately $113 million with a proposedthe effective date of JanuaryHB 128 and in accordance with HB 128’s provisions regarding the prompt refund of decoupling funds, the Ohio Companies filed an application with the PUCO to modify CSR to return such amount over twelve months commencing June 1, 2021. On June 17, 2021, the Ohio Companies agreed to modify their proposal to return such amount in a single lump sum to customers, beginning on July 1, 2021, unless otherwise ordered byor promptly upon obtaining PUCO approval. On July 7, 2021, the PUCO.PUCO issued an order approving the Ohio Companies’ modified application and directed that all funds collected through CSR be refunded to customers over a single billing cycle beginning August 1, 2021.
On July 17, 2019, the PUCO approved, with no material modifications, a settlement agreement that provides for the implementation of the Ohio Companies’ first phase of grid modernization plans, including the investment of $516 million over three years to modernize the Ohio Companies’ electric distribution system, and for all tax savings associated with the Tax Act to flow back to customers. The settlement had broad support, including PUCO Staff,staff, the OCC, representatives of industrial and commercial customers, a low-income advocate, environmental advocates, hospitals, competitive generation suppliers and other parties.
In March 2020, the PUCO issued entries directing utilities to review their service disconnection and restoration policies and suspend, for the duration of the COVID-19 pandemic, otherwise applicable requirements that may impose a service continuity hardship or service restoration hardship on customers. The Ohio Companies are utilizing their existing approved cost recovery mechanisms where applicable to address the financial impacts of these directives. On July 31, 2020, the Ohio Companies filed with the PUCO their transition plan and requests for waivers to allow for the safe resumption of normal business operations, including service disconnections for non-payment, on or after September 15, 2020.non-payment. On September 23, 2020, the PUCO approved the Ohio Companies’ transition plan, including approval of the resumption of service disconnections for non-payment, which the Ohio Companies began on October 5, 2020.
On July 29, 2020, the PUCO consolidated the Ohio Companies’ Applicationsapplications for determination of the existence of significantly excessive earnings, or SEET, under ESP IV for calendar years 2018 and 2019, which had been previously filed on July 15, 2019, and May 15, 2020, respectively, and set a procedural schedule with evidentiary hearings scheduled for October 29, 2020. The calculations included in the Ohio Companies’ SEET filings for calendar years 2018 and 2019 demonstrate that the Ohio Companies did not have significantly excessive earnings, however, FirstEnergy and the Ohio Companies are unable to predict the PUCO’s ultimate determination of the applications. On August 3, 2020, the OCC filed an interlocutory appeal asking the PUCO to stay the SEET proceeding until the SCOH determines whether DMR should be excluded from the SEET, as further discussed above. Furthermore, on July 29, 2020, Ohio House Bill 740 was introduced, which would repeal legislation passed last year that permitted the Ohio Companies to file their SEET results on a consolidated basis instead of on an individual company basis.respectively. On September 4, 2020, the PUCO opened its quadrennial review of ESP IV, consolidated it with the Ohio Companies’ 2018 and 2019 SEET Applications, and set a procedural schedule for the consolidated matters. On October 29, 2020,January 12, 2021, the PUCO issuedconsolidated these matters with the determination of the existence of significantly excessive earnings under ESP IV for calendar year 2017, which the SCOH had remanded to the PUCO. On March 1, 2021, the Ohio Companies filed testimony in the quadrennial review and supplemental testimony in the SEET cases for calendar years 2017 through 2019. The calculations included in the quadrennial review for 2020 through 2024 demonstrate that the prospective effect of ESP IV is not substantially likely to provide the Ohio Companies with significantly excessive earnings during the balance of ESP IV. In addition, the Ohio Companies’ quadrennial review testimony demonstrated that ESP IV continues to be more favorable in the aggregate and during the remaining term of ESP IV as compared to the expected results of a market rate offer. Further, the revised calculations included in the Ohio Companies’ supplemental SEET testimony for calendar years 2017 through 2019 demonstrated that the Ohio Companies did not have significantly excessive earnings, on an entry extending the deadline forindividual company basis or on a consolidated basis. On March 31, 2021, Governor DeWine signed House Bill 128, which repeals legislation passed in 2019 that permitted the Ohio Companies to file their SEET results on a consolidated basis instead of on an individual company basis. HB 128 was effective June 30, 2021. Further, the OCC and another party filed testimony on April 5, 2021, recommending refunds for one or more of the Ohio Companies for calendar years 2017 through 2019. On April 20, 2021, the Ohio Companies filed supplemental testimony in the quadrennial review providing prospective SEET values on an individual company basis, which demonstrate that
the Ohio Companies are not projected to have significantly excessive earnings, on an individual company basis, during the balance of ESP IV testimonyIV. On October 18, 2021, the attorney examiner issued a procedural schedule setting hearings for December 13, 2021, to March 1,allow time for settlement negotiations. As of September 30, 2021, no contingency has been reflected in FirstEnergy’s consolidated financial statements with respect to these matters as a loss is neither probable, nor is a loss or range of a loss reasonably estimable.
On May 17, 2021, the Ohio Companies filed their application for the determination of significantly excessive earnings for calendar year 2020. The calculations included in the application demonstrated that the Ohio Companies, on an individual company basis, did not have significantly excessive earnings.
In connection with the evidentiary hearingsaudit of the Ohio Companies’ Rider DCR for 2017, the PUCO issued an order on June 16, 2021, directing the Ohio Companies to commence no sooner than May 3, 2021.prospectively discontinue capitalizing certain vegetation management costs and reduce the 2017 Rider DCR revenue requirement by $3.7 million associated with these costs.
On September 8, 2020, the OCC filed motions in the Ohio Companies’ Corporate Separation Auditcorporate separation audit and Rider DMR Auditaudit 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. The Ohio Companies’ filed aOn December 30, 2020, in response in opposition to the OCC’s motions on September 23, 2020.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 ratepayers through the DMR were only used for the purposes established in ESP IV. On June 2, 2021, the PUCO selected an auditor, and a final audit report is to be filed by December 16, 2021.
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, 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 ratepayers. The Ohio Companies filed a response on September 30, 2020, stating that any political and charitable spending in support of HB 6 or the subsequent referendum were not included in rates or charges paid for by its customers. Several parties requested that the PUCO broaden the scope of the review of political and charitable spending. On August 6, 2021, the Ohio Companies filed a supplemental response explaining that, in light of the new facts revealed by the DPA between FE and the U.S Attorney’s Office for the S.D. Ohio, and the findings of the Rider DCR audit report, the Ohio Companies concluded that political or charitable spending in support of HB 6, or the subsequent referendum effort, affected pole attachment rates paid by approximately $15 thousand, which will be refunded to those customers. 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 connection with an on-goingongoing 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.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. A PUCO attorney examiner has issued a procedural schedule for the filing of comments and reply comments and testimony, as well as an evidentiary hearing on February 10, 2022.
On November 24, 2020, the Environmental Law and Policy Center filed motions to vacate the PUCO’s orders in proceedings related to the Ohio Companies’ settlement that provides for the implementation of the first phase of grid modernization plans and for all tax savings associated with the Tax Act to flow back to customers, the Ohio Companies’ energy efficiency portfolio plans for the period from 2013 through 2016, and the Ohio Companies’ application for a two-year extension of the DMR, on the grounds that the former Chairman of the PUCO should have recused himself in these matters. On December 30, 2020, the PUCO denied the motions, and reinstated the requirement under ESP IV that the Ohio Companies file a base distribution rate case by May 31, 2024, the end of ESP IV, which the Ohio Companies had indicated they would not oppose.
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, which the Ohio Companies are further required to remit to other Ohio electric distribution utilities or to the State Treasurer, to provide for refunds in the event such provisions of HB 6 are repealed. The Ohio Companies contested the motions, which are pending before the PUCO.
On December 7, 2020, the Citizens’ Utility Board of Ohio filed a complaint with the PUCO against the Ohio Companies. The complaint alleges that the Ohio Companies’ new charges resulting from HB 6, and any increased rates resulting from proceedings over which the former PUCO Chairman presided, are unjust and unreasonable, and that the Ohio Companies violated Ohio corporate separation laws by failing to operate separately from unregulated affiliates. The complaint requests, among other things, that any rates authorized by HB 6 or authorized by the PUCO in a proceeding over which the former Chairman presided be made refundable; that the Ohio Companies be required to file a new distribution rate case at the earliest
possible date; and that the Ohio Companies’ corporate separation plans be modified to introduce institutional controls. The Ohio Companies are contesting the complaint.
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 intendsexpanded the scope of the audit on March 10, 2021, to selectinclude a review of certain transactions that were either improperly classified, misallocated, or lacked supporting documentation, and to determine whether funds collected from ratepayers were used to pay the vendors, and if so, whether or not the funds associated with those payments should be returned to ratepayers through Rider DCR or through an alternative proceeding. The final audit report was filed on August 3, 2021. The audit report recommends that approximately $6.6 million be refunded to customers associated with certain vendor transactions that were either improperly classified, misallocated, or lacked supporting documentation. On September 29, 2021, the PUCO further expanded the scope of the audit, and directed the auditor to determine if the costs of the naming rights for FirstEnergy Stadium have been recovered from ratepayers by December 2, 2020,the Ohio Companies, with a final audit report to be filed by November 19, 2021. On October 4, 2021, the Ohio Companies and other parties filed comments on the August 3, 2021 audit report’s recommendations regarding the transactions disclosed in April 2021.FirstEnergy’s Form 10-K for the year ended December 31, 2020. On October 14, 2021, the Ohio Companies and other parties filed reply comments.
See Note 10,9, "Commitments, Guarantees and Contingencies" for additional details on the government investigationinvestigations 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. These rates were adjusted for the net impact of the Tax Act, effective March 15, 2018. The net impact of the Tax Act for the period January 1, 2018 through March 14, 2018 was separately tracked and its treatment will be addressed in a future rate proceeding. The Pennsylvania Companies operate under DSPs for the June 1, 2019 through May 31, 2023 delivery period, which provide for the competitive procurement of generation supply for customers who do not choose an alternative EGS or for customers of alternative EGSs that fail to provide the contracted service. 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.
Pursuant to Pennsylvania Act 129 of 2008 and PPUC orders, Pennsylvania EDCs implement energy efficiency and peak demand reduction programs. The Pennsylvania Companies’ Phase III EE&C plans for the June 2016 through May 2021 period, which were approved in March 2016, with expected costs up to $390 million, are designed to achieve the targets established in the PPUC’s Phase III Final Implementation Order with full recovery through the reconcilable EE&C riders. 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 must bewere filed by November 30, 2020. A settlement has been reached in this matter, and a joint petition seeking approval of that settlement by the parties was filed on February 16, 2021. On March 25, 2021, the PPUC issued an order approving the settlement without modification.
Pennsylvania EDCs may file with theare permitted to seek PPUC for 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 August 30, 2019,January 16, 2020, the PPUC approved the Pennsylvania Companies filed Petitions for approval of newCompanies’ 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 January 16, 2020,June 25, 2021, the PPUC approved the LTIIPs without modification. The Pennsylvania Companies’ approved DSIC riders for quarterly cost recovery went into effect July 1, 2016. On August 30, 2019, PennOCA filed a Petition seeking approval of a waivercomplaint against Penn’s quarterly DSIC rate, disputing the recoverability of the statutoryCompanies’ automated distribution management system investment under the DSIC cap of 5% of distribution rate revenuemechanism. Penn responded on July 19, 2021, and approval to increase the maximum allowable DSIC to 11.81% of distribution rate revenue for the five-year period ofsubmitted its proposed LTIIP. On March 12, 2020, an order was entered approving a settlement by all parties to that case which provides for a temporary increase in the recoverability cap from 5% to 7.5%, to expiredirect testimony on the earlier of the effective date of new base rates following Penn’s next base rate case or the expiration of its LTIIP II program.October 13, 2021.
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, which decision was appealed by the Pennsylvania OCA to the Pennsylvania Commonwealth Court. The Commonwealth Court reversed the PPUC’s decision and remanded the matter to require the Pennsylvania Companies to revise their tariffs and DSIC calculations to include ADIT and state income taxes. On April 7, 2020, the Pennsylvania Supreme Court issued an order granting Petitions for Allowance of Appeal by both the PPUC and the Pennsylvania Companies of the Commonwealth Court’s Opinion and Order. Briefs and Reply Briefs of the parties were filed, and oral argument before the Supreme Court was held on October 21, 2020. AnOn July 21, 2021, the Pennsylvania Supreme Court issued its ruling, affirming the Commonwealth Court’s Opinion and Order, and remanding 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.
The PPUC issued an order on March 13, 2020, forbidding utilities from terminating service for non-payment for the duration of the COVID-19 pandemic. On May 13, 2020, the PPUC issued a Secretarial letter directing utilities to track all prudently incurred
incremental costs arising from the COVID-19 pandemic, and to create a regulatory asset for future recovery of incremental uncollectibles incurred as a result of the COVID-19 pandemic and termination moratorium. On October 13, 2020, the PPUC entered an order lifting the service termination moratorium effective November 9, 2020, subject to certain additional notification, payment procedures and exceptions, and permits the Pennsylvania Companies to create a regulatory asset for all incremental expenses associated with their compliance with the order. Customers with income levels at 300% of federal poverty income guidelines and below are not subject to termination throughOn March 19, 2021, the PPUC entered an order lifting the moratorium in total effective March 31, 2021, as long as they apply for assistance programssubject to certain additional guidelines regarding the duration of payment arrangements and payment arrangements. Utilities may create a regulatory asset for all incremental expenses associated with their compliance with the order. On October 27, 2020, several stakeholders filed a joint petition for clarification of the order. Answers to the joint petition for clarification were due on November 6, 2020.reporting obligations.
WEST VIRGINIA
MP and PE provide electric service to all customers through traditional cost-based, regulated utility ratemaking and operate under rates approved by the WVPSC effective 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 March 13, 2020, the WVPSC urged all utilities to suspend utility service terminations except where necessary as a matter of safety or where requested by the customer. On May 15, 2020, the WVPSC issued an order to authorize MP and PE to record a deferral of additional, extraordinary costs directly related to complying with the various COVID-19 government shut-down orders and operational precautions, including impacts on uncollectible expense and cash flow related to temporary discontinuance of service terminations for non-payment and any credits to minimum demand charges associated with business customers adversely impacted by shut-downs or temporary closures related to the pandemic. MP and PE resumed disconnection activity for commercial and industrial customers on September 15, 2020, and for residential customers on November 4, 2020.
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 proposes an annual revenue reduction of $2.6 million annually, effective January 1, 2022, with reconciliation and any resulting adjustments incorporated into the annual ENEC proceedings. A unanimous settlement was reached with all the parties agreeing to a $7.7 million reduction beginning January 1, 2022, with a true-up in the ENEC proceeding each year. The settlement was presented to the WVPSC on August 28, 2020,18, 2021, and an order is expected to be issued this year.
On August 27, 2021, MP and PE filed with the WVPSC their annual ENEC case requesting a decreasean increase in ENEC rates of $55$19.6 million beginning January 1, 2021,2022, representing a 4% decrease1.5% increase in rates compared toversus those currently in effect on August 28, 2020. The decrease in the ENEC rates is net of recovering approximately $10.5 million in previously deferred, incremental uncollectible and other related costs resulting from the COVID-19 pandemic. A hearing is set to begin on December 2, 2020, andeffect. Once an order is issued in the ADIT case discussed above, it is expected ina supplement will be filed lowering the request by $7.7 million by taking into account the rate decrease from the case. A procedural schedule has been issued setting a hearing on December 2020.3, 2021.
Also on August 28, 2020, MP and PE filed with the WVPSC for recovery of costs associated with modernization and improvement program for their coal-fired boilers. The proposed annual revenue increase for these environmental compliance projects is $5 million beginning January 1, 2021. A hearing is set to begin on December 2, 2020.
FERC REGULATORY MATTERS
Under the FPA, FERC regulates rates for interstate wholesale sales, transmission of electric power, accounting 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
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. FirstEnergy is unable to predict the final outcome or impact of this audit.
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, certain income tax-related adjustments, including, but not limited to impacts from the Tax Act discussed further below, and certain costs for transmission-related vegetation management programs. The amount on FirstEnergy’s Consolidated Balance Sheet forA portion of these regulatory assets was approximately $76 millioncosts would have been charged to the Ohio Companies. Additionally, ATSI proposed certain income tax-related adjustments and $73 million,
as of September 30, 2020 and December 31, 2019, respectively. Per prior FERC orders, ATSI included a “cost-benefit study” to support recovery of ATSI’s costs to move to PJM, andcertain tariff changes addressing the MISO transmission project costs that were allocated to ATSI. Certain intervenors filed protestsrevenue credit components of the formula rate amendments on May 29, 2020, and ATSI filed a reply on June 15, 2020.template. On June 30, 2020, FERC issued an initial order accepting the tariff amendments subject to refund suspending the effective date for five months to be effective December 1, 2020, 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 was recognized in Other Operating Expenses on the FirstEnergy Consolidated Statements of Income. This $21 million charge 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 engaged innot expected to have a material impact on FirstEnergy or ATSI. The settlement negotiations with the other parties.is pending before FERC for approval.
FERC Actions on 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 toto: (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. Certain intervenors filed protests of the compliance filings, to which ATSI and MAIT responded. On October 28, 2020, FERC Staffstaff requested additional information about ATSI’s proposed rate base adjustment mechanism.mechanism, and ATSI has 30 dayssubmitted the requested information on November 25, 2020. On May 4, 2021, FERC staff requested additional information about MAIT’s proposed rate base adjustment mechanism, and MAIT submitted the requested information on June 3, 2021. On June 24, 2021, an intervenor protested the supplemental information that MAIT submitted, to respond in writing to FERC Staff’s request.which MAIT responded. 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. These compliance filings each remain pending before FERC. MP, WP and PE (as holders of a “stated” transmission rate)rate when Order No. 864 issued) are addressing these requirements in the transmission formula rates amendments that were filed on October 29, 2020.2020, and which have been accepted by FERC effective January 1, 2021, subject to refund, pending further hearing and settlement procedures, addressed further below. JCP&L is addressingaddressed these requirements as part of its pending transmission formula rate case.case, which was resolved by a settlement approved by FERC on April 15, 2021, addressed further below.
Transmission ROE Methodology
FERC’s methodology for calculating electric transmission utility ROE has been in transition as a result of an April 14, 2017 ruling by the D.C. Circuit that vacated FERC’s then-effective methodology. On October 16, 2018, FERC issued an order in which it proposed a revised ROE methodology. FERC proposed that, for complaint proceedings alleging that an existing ROE is not just and reasonable, FERC will rely on three financial models - discounted cash flow, capital-asset pricing, and expected earnings - to establish a composite zone of reasonableness to identify a range of just and reasonable ROEs. FERC then will utilize the transmission utility’s risk relative to other utilities within that zone of reasonableness to assign the transmission utility to one of three quartiles within the zone. FERC would take no further action (i.e., dismiss the complaint) if the existing ROE falls within the identified quartile. However, if the replacement ROE falls outside the quartile, FERC would deem the existing ROE presumptively unjust and unreasonable and would determine the replacement ROE. FERC would add a fourth financial model risk premium to the analysis to calculate a ROE based on the average point of central tendency for each of the four financial models. On March 21, 2019, FERC established NOIs to collect industry and stakeholder comments on the revised ROE methodology that is described in the October 16, 2018 decision, and also whether to make changes to FERC’s existing policies and practices for awarding transmission rates incentives. On November 21, 2019, FERC announcedMay 20, 2021, in a complaint proceedingcase not involving MISO utilities that FERC would rely on the discounted cash flow and capital-asset pricing models as the basis for establishing ROE. Certain parties, including the Utilities, sought rehearing of FERC’s decision in the MISO utilities proceeding and, on May 21, 2020,FirstEnergy, FERC issued Opinion No. 575 in which it reiterated the nationwide ROE methodology set forth in 2020 in Opinion Nos. 569-A that changed FERC’s ROE methodology.and 569-B. Under this methodology, FERC established an ROE that is based onemploys three financial models – discounted cash flow, capital-asset pricing, and risk premium – to calculate a composite zone of reasonableness. As it has done in other recent ROE cases, FERC noted that utilities could, in utility-specific proceedings, ask to haverejected the use of the expected earnings methodology included in calculating the utility’s authorized ROE. FERC also noted that, going forward, it will divide that zone into three equal parts, to be used for high risk, normal risk, and low risk utilities. A given utility will be assigned to one of these three parts of the zone of reasonableness, and its ROE will be set at the median or midpoint of the other utilities that are in the applicable third of the zone. FirstEnergy filed a request for clarification or, alternatively, rehearing of Opinion No. 575 was filed on June 21, 2021, and on September 9, 2021, FERC issued an order clarifying aspects of its prior opinion, but affirming the result. On July 15, 2021, FERC issued another order, addressing ROE for a generation company in New England, which FERC denied on July 22, 2020. FirstEnergy also initiated appellate proceedings ofapplied a standard consistent with Opinion Nos. 569-A and 569-B. FERC’s Opinion Nos. 569569-A and 569-A, as did a number of other parties. These proceedings are pending before569-B, upon which Opinion No. 575 is based, have been appealed to the United States Court of Appeals forD.C. Circuit. FirstEnergy is not participating in the District of Columbia Circuit.appeal. Any changes to FERC’s transmission rate ROE and incentive policies for the Utilities would be applied on a prospective basis.
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 submitted July 1, 2020,filed on June 25, 2021, and reply comments were filed on July 16, 2020.26, 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 through EEI and throughin comments that were submitted by a consortiumgroup of PJM Transmission Owners. This proceeding is pending before FERC.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.
JCP&L Transmission Formula Rate
On October 30, 2019, JCP&L filed tariff amendments with FERC to convert JCP&L’s existing stated transmission rate toimplement a forward-looking formula transmission rate. JCP&L requested that the tariff amendments become effective January 1, 2020. On December 19, 2019, FERC issued its initial order in the case, allowing JCP&L to transition to a forward-looking formula rate as of January 1, 2020 as requested, subject to refund, pending further hearing and settlement proceedings. JCP&L and the parties to the FERC proceeding are engaged insubsequently were able to reach settlement, negotiations.and on February 2, 2021, JCP&L filed an offer of settlement with FERC. On April 15, 2021, FERC approved the settlement agreement as filed, with no changes, effective January 1, 2021.
Allegheny Power Zone Transmission Formula Rate Filings
On October 29, 2020, MP, PE and WP filed tariff amendments with FERC to convert their existing stated transmission rate toimplement a forward-looking formula transmission rate, 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 pending before FERC. FirstEnergy intendsengaged in settlement negotiations with the other parties to includethe formula rate proceedings. KATCo will be included in the Regulated Transmission reportable segment.
10.9. 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, 2020,2021, outstanding guarantees and other assurances aggregated approximately $1.7$1.1 billion, consisting of parental guarantees on behalf of its consolidated subsidiaries ($1.0 billion)586 million), other guarantees ($11468 million) and other assurances ($502469 million).
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.
Certain agreements entered into by FE and its subsidiaries have margining provisions that require posting of collateral. As of September 30, 2020, $12021, $55 million of collateral has been posted by FE or its subsidiaries.subsidiaries, all of which was posted as a result of the credit rating downgrades in the fourth quarter of 2020, and is included in Prepaid taxes and other current assets 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, 2020:2021:
| | Potential Collateral Obligations | Potential Collateral Obligations | | | | | Utilities and FET | | FE | | Total | Potential Collateral Obligations | | | | | Utilities and FET | | FE | | Total |
| | | | | (In millions) | | | | (In millions) |
| Contractual Obligations for Additional Collateral | Contractual Obligations for Additional Collateral | | | | | | Contractual Obligations for Additional Collateral | | | | | |
| Upon Further Downgrade (1) | Upon Further Downgrade (1) | | | | | $ | 40 | | | $ | 0 | | | $ | 40 | | Upon Further Downgrade (1) | | | | | $ | 32 | | | $ | — | | | $ | 32 | |
| Surety Bonds (Collateralized Amount) (2)(1) | Surety Bonds (Collateralized Amount) (2)(1) | | | | | 66 | | | 257 | | | 323 | | Surety Bonds (Collateralized Amount) (2)(1) | | | | | 56 | | | 258 | | | 314 | |
| Total Exposure from Contractual Obligations | Total Exposure from Contractual Obligations | | | | | $ | 106 | | | $ | 257 | | | $ | 363 | | Total Exposure from Contractual Obligations | | | | | $ | 88 | | | $ | 258 | | | $ | 346 | |
(1)As a result of certain credit rating downgrades in October 2020, FirstEnergy may be required to provide $4.5 million in collateral.
(2)Surety Bonds are not tied to a credit rating. Surety Bonds’ impact assumes maximum contractual obligations, (typicalwhich 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).cure.
OTHER COMMITMENTS AND CONTINGENCIES
FE is a guarantor under a $120 million syndicated senior secured term loan facility due November 12, 2024, under which Global Holding’s outstanding principal balance is $114was $68 million as of September 30, 2020. In addition to FE,2021. Signal Peak, Global Rail, Global Mining Group, LLC and Global Coal Sales Group, LLC, each being a direct or indirect subsidiary of Global Holding, and FE continue to provide their joint and several guaranties of the obligations of Global Holding under the facility.
In connection with the facility, 69.99% of Global Holding’s direct and indirect membership interests in Signal Peak, Global Rail and their affiliates along with FEV’s and WMB Marketing Ventures, LLC’s respective 33-1/3% membership interests in Global Holding, are pledged to the lenders under the current facility as collateral.
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. TheOn July 28, 2015, the D.C. Circuit ordered the EPA on July 28, 2015, to reconsider the CSAPR caps on NOx and SO2 emissions from power plants in 13 states, including Ohio, Pennsylvania and West Virginia. This followsfollowed 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 ruleUpdate on September 7, 2016, reducing summertime NOx emissions from power plants in 22 states in the eastern U.S., including Ohio, Pennsylvania and West Virginia, beginning in 2017. Various states and other stakeholders appealed the CSAPR update ruleUpdate to the D.C. Circuit in November and December 2016. On September 13, 2019, the D.C. Circuit remanded the CSAPR update ruleUpdate 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. Depending on the outcome of the appeals, the EPA’s reconsideration of the CSAPR update rule and how the EPA and the states ultimately implement CSAPR, the future cost of compliance may materially impact FirstEnergy’s operations, cash flows and financial condition.
In February 2019, the EPA announced its final decision to retain without changes the NAAQS for SO2, specifically retaining the 2010 primary (health-based) 1-hour standard of 75 PPB. As of September 30, 2020, FirstEnergy has no power plants operatingAlso, during this time, in areas designated as non-attainment by the EPA.
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 seekssought 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. FirstEnergy is unable to predictOn March 15, 2021, the EPA issued a revised CSAPR Update that addresses, among other things, the remands of the CSAPR Update and the New York Section 126 Petition. Depending on the outcome of these matters or estimateany appeals and how the loss or rangeEPA and the states ultimately implement the revised CSAPR Update, the future cost of loss.compliance may materially impact FirstEnergy's operations, cash flows and financial condition.
In February 2019, the EPA announced its final decision to retain without changes the NAAQS for SO2, specifically retaining the 2010 primary (health-based) 1-hour standard of 75 PPB. As of March 31, 2020, FirstEnergy has no power plants operating in areas designated as non-attainment by the EPA.
Climate Change
There are a number ofseveral 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.
At the international level, the United Nations Framework Convention on Climate Change resulted in the Kyoto Protocol requiring participating countries, which does not include the U.S., to reduce GHGs commencing in 2008 and has been extended through 2020. The Obama Administration submitted in March 2015, a formal pledge for the U.S. to reduce its economy-wide GHG emissions by 26 to 28 percent below 2005 levels by 2025. In 2015, FirstEnergy set a goal of reducing company-wide CO2 emissions by at least 90 percent below 2005 levels by 2045. As of December 31, 2018, FirstEnergy has reduced its CO2 emissions by approximately 62 percent. 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.Paris to reduce GHG. 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 GHG 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 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. 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 GHG under the Clean Air Act”Act,” concluding that concentrations of several key GHGs constitutesconstitute an “endangerment”"endangerment" and may be regulated as “air pollutants”"air pollutants" under the CAA and mandated measurement and reporting of GHG emissions from certain sources, including electric generating plants. TheSubsequently, 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 firedfuel-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.Court. On March28, 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 October16, 2017, the EPA issued a proposed rule to repeal the CPP. On June 19, 2019, the EPA repealed the CPP and replaced it with the ACE rule that establishesestablished guidelines for states to develop standards of performance to address GHG emissions from existing coal-fired power plants. 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. The D.C. Circuit decision is subject to legal challenge. Depending on the outcomes of further appeals and how any final rules are ultimately implemented, the future cost of compliance may be material.
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.
The EPA finalized CWA Section 316(b) regulations in May 2014, requiring cooling water intake structures with an intake velocity greater than 0.5 feet per second to reduce fish impingement when aquatic organisms are pinned against screens or other parts of a cooling water intake system to a 12% annual average and requiring cooling water intake structures exceeding 125 million gallons per day to conduct studies to determine site-specific controls, if any, to reduce entrainment, which occurs when aquatic life is drawn into a facility’s cooling water system. Depending on any final action taken by the states with respect to impingement and entrainment, the future capital costs of compliance with these standards may be material.
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, how final rules are ultimately implemented and the compliance options MP elects to take with the new rules, the compliance with these standards, which could include capital expenditures at the Ft. Martin and Harrison power stations, may be substantial and changes to MP’s operations at those power stations may also result.
On September 29, 2016, FirstEnergy received a request from the EPA for information pursuant to CWA Section 308(a) for information concerning boron exceedances of effluent limitations established in the NPDES Permit for the former Mitchell Power Station’s Mingo landfill, owned by WP. On November 1, 2016, WP provided an initial response that contained information related to a similar boron issue at the former Springdale Power Station’s landfill.landfill, also owned by WP. The EPA requested additional information regarding the Springdale landfill and on November 15, 2016, WP provided a comprehensive response for both facilities and intends tohas fully complycomplied with the Section 308(a) information request. On March 3, 2017, WP proposed to the PA DEP a re-route of its wastewater discharge to eliminate potential boron exceedances at the Springdale landfill. Onlandfill and on January 29, 2018, WP submitted an NPDES permit renewal application to PA DEP proposing to re-route its wastewater discharge to eliminate potential boron exceedances at the Mingo landfill. On February 20, 2018, the DOJDepartment of Justice issued a letter and tolling agreement to WP on behalf of the EPA alleging violations of the CWA at the Springdale and Mingo landfill whilelandfills and seeking to enter settlement negotiations in lieu of filing a complaint. The EPA has proposed a penalty of $900,000 toTo settle alleged past boron exceedances at both facilities, WP has agreed to a penalty amount of $610 thousand to be paid over two years. It is expected that WP will sign a Consent Decree memorializing the Mingopipeline construction milestones and Springdale landfills. Negotiations are continuing and WP is unable to predict the outcomecivil penalty payments in the fourth quarter of this matter.2021.
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 17, 2018, the EPA Administrator signed a final rule extending the deadline for certain CCR facilities to cease disposal and commence closure activities, as well as, establishing less stringent groundwater monitoring and protection requirements. On August 21, 2018, the D.C. Circuit remanded sections of the CCR Rule to the EPA to provide for additional safeguards for unlined CCR impoundments that are more protective of human health and the environment. On December 2, 2019, the EPA published a proposed rule accelerating the date that certain CCR impoundments must cease accepting waste and initiate closure to August 31, 2020. The proposed rule allowsallowed for an extension of the closure deadline based on meeting proscribed site-specific criteria.
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. 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 FirstEnergy’sthe Consolidated Balance Sheets as of September 30, 2020,2021, 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 $104101 million have been accrued through September 30, 2020. Included in the total2021, of which, approximately $67 million are accrued liabilities of approximately $68 million 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 S.D. Ohio. FirstEnergy was not aware of the criminal allegations, affidavit or subpoenas before July 21, 2020. No contingency
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 been reflected in FirstEnergy’s consolidated financial statements as a loss is neither probable, nor is a loss or rangeagreed to the filing of a loss reasonably estimable.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.
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, the SEC issued an additional subpoena to FE. 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). 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.
•Owens v. FirstEnergy Corp. et al. and Frand v. FirstEnergy Corp. et al. (Federal District Court, 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 Securities Exchange Act of 1934 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.
•Gendrich v. Anderson, et al. and Sloan v. Anderson, et al. (Common Pleas Court, Summit County, OH); 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. These actions have been consolidated.
•Miller v. Anderson, et al. (Federal District Court, 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. (U.S. District Court, 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 Securities Exchange Act of 1934. The cases in the S.D. Ohio have been consolidated and co-lead plaintiffs have been appointed by the court. On May 11, 2021, the court denied the defendants’ motion to dismiss in the consolidated
derivative proceedings in the S.D. Ohio. As previously disclosed, on June 29, 2021, the FE Board established a SLC, effective July 1, 2021. The SLC has been delegated full authority by the FE Board to take all actions as the SLC deems advisable, appropriate, and in the best interests of FirstEnergy and its shareholders with respect to pending shareholder derivative litigation and demands. On July 20, 2021, the SLC filed motions to stay proceedings in each of the shareholder derivative actions pending in the Northern and Southern Districts of Ohio and in Summit County, Ohio, while the SLC investigates the matters asserted in the lawsuits. On September 17, 2021, the court in the N.D. Ohio issued an order denying the individual defendants’ motions to dismiss and denying the SLC’s motion to stay. On October 20, 2021, the court in the S.D. Ohio also issued an order denying the SLC’s motion to stay. The SLC appealed the court’s decision in the Northern District of Ohio, denying the SLC’s motion to stay, to the United States Court of Appeals for the Sixth Circuit Court.
•Smith v. FirstEnergy Corp. et al., Buldas v. FirstEnergy Corp. et al., and Hudock and Cameo Countertops, Inc. v. FirstEnergy Corp. et al. (Federal District Court, S.D. Ohio); on July 27, 2020, July 31, 2020, and August 5, 2020, respectively, purported customers of FirstEnergy filed putative class action lawsuits against FE and FESC, as well as certain current and former FirstEnergy officers, alleging civil Racketeer Influenced and Corrupt Organizations Act violations and related state law claims. These actions have been consolidated.consolidated, and the court denied FirstEnergy’s motions to dismiss and stay discovery on February 10 and 11, 2021, respectively. The defendants submitted answers to the complaint on March 10, 2021. A motion for leave to amend the complaint and add FES as a defendant was filed on September 27, 2021 and remains pending. Discovery is proceeding.
•OwensState of Ohio ex rel. Dave Yost, Ohio Attorney General v. FirstEnergy Corp., et al. and FrandCity of Cincinnati and City of Columbus v. FirstEnergy Corp. (Common Pleas Court, Franklin County, OH); 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. These actions have been consolidated. The cases are stayed pending final resolution of the United States v. Larry Householder, et al. (Federal District Court, S.D. Ohio);criminal proceeding described above, although on July 28, 2020 and August 21, 2020, purported stockholders13, 2021, new defendants were added to the complaint, including two former officers of FE filed putative class action lawsuits against FE and certain FE officers, purportedly on behalf of all purchasers of FE common stock from February 21, 2017 through July 21, 2020, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, alleging misrepresentations or omissions by FirstEnergy concerning its business and results of operations.FirstEnergy.
•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, OE, TE and CEI, 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. On October 1, 2020, plaintiffs filed a First Amended Complaint, adding as a plaintiff a purported customer of FirstEnergy and alleging a civil violation of the Ohio Corrupt Activity Act and civil conspiracy against FE, FESC and FES. On May 4, 2021, the court granted the defendants’ motion to dismiss plaintiffs’ breach of contract claims and denied the remainder of the motions to dismiss. The defendants submitted answers to the complaint on June 1, 2021. Discovery is proceeding.
•
Miller v. Anderson, et al. (Federal District Court, N.D. Ohio); Bloom, et al. v. Anderson, et al.; Employees Retirement System
In letters dated January 26, and February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the CityDivision is conducting an investigation of St. Louis v. Jones, et al.; Beck v. Anderson 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 CityFirstEnergy’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 Philadelphia Boardan ongoing non-public audit being conducted by FERC's Division of PensionsAudits and Retirement v. Anderson et al.; Atherton v. Dowling et al; Behar v. Anderson, et al. (U.S. District Court, S.D. Ohio); beginning on August 7, 2020, purported stockholders of FE filed shareholder derivative actions alleging the board and officers breached their fiduciary duties and committed violations of Section 14(a) of the Securities Exchange Act of 1934.
•State of Ohio ex rel. Dave Yost, Ohio Attorney General v.Accounting. While no contingency has been reflected in its consolidated financial statements, FirstEnergy Corp., et al. (Common Pleas Court, Franklin County, OH); on September 23, 2020, the OH AG filedbelieves that it is probable that it will incur a complaint against several parties including FE and FESC, alleging, one cause of action, a civil violation of the Ohio Corrupt Activity Actloss in connection with the passage of HB 6. The OH AG sought a preliminary injunction to prevent eachresolution of the defendants, including FEFERC investigation. Given the ongoing nature and FESC, through the end of 2020, from: (i) contributing to any groups whose purpose is to keep or modify HB 6; (ii) making any public statements
for or against any repeal or modification legislation concerning HB 6; (iii) lobbying, consulting, or advising on these matters; or (iv) contributing to any Ohio legislative candidates. The court denied the OH AG’s request for preliminary injunctive relief on October 2, 2020.
•City of Cincinnati and City of Columbus v. FirstEnergy Corp. (Common Pleas Court, Franklin County, OH); on October 27, 2020, the Cities of Cincinnati and Columbus filed a complaint against several parties including FE, alleging a civil violationcomplexity of the Ohio Corrupt Activity Actreview, inquiries and seeking to enjoininvestigations, FirstEnergy cannot yet reasonably estimate a loss or range of loss that may arise from the collectionresolution of the zero nuclear credit included in HB 6.
•Mitchell v. FirstEnergy Corp. et al. (Common Pleas Court, Fairfield County, OH); on October 6, 2020, an unsuccessful candidate for the Ohio legislature filed an amended complaint adding FirstEnergy Corp. to a previously filed Ohio Corrupt Activity Act civil lawsuit against now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. The amended complaint sought an amount in excess of $875,000, plus treble damages and other relief. On November 2, 2020, the plaintiff moved to voluntarily dismiss the claims without prejudice.FERC investigation.
The plaintiffs in each of the above cases, seek, among other things, to recover an unspecified amount of damages (unless otherwise noted). 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. The outcome of any of these lawsuits, governmental investigations and investigationsaudit are 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. No contingency has been reflected in FirstEnergy’s consolidated financial statements as a loss is neither probable, nor is a loss or range of a loss reasonably estimable.
Internal Investigation Relating to United States v. Larry Householder, et al.
As previously disclosed, a committee of independent members of the FE Board of Directors ishas been directing an internal investigation related to ongoing government investigations. In connection with FirstEnergy’s internal investigation, such committee determined on October 29, 2020, to terminate FirstEnergy’s Chief Executive Officer, Charles E. Jones, together with two other executives: Dennis M. Chack, Senior Vice President of Product Development, Marketing, and Branding; and Michael J. Dowling, Senior Vice President of External Affairs. Each of these terminated executives violated certain FirstEnergy policies and its code of conduct. These executives were terminated as of October 29, 2020. Such former members of senior management did not maintain and promote a control environment with an appropriate tone of compliance in certain areas of FirstEnergy’s business, nor sufficiently promote, monitor or enforce adherence to certain FirstEnergy policies and its code of conduct. Furthermore, certain former members of senior management did not reasonably ensure that relevant information was communicated within our organization and not withheld from our independent directors, our Audit Committee, and our independent auditor. Among the matters
considered with respect to the determination by the committee of independent members of the FE Board of Directors that certain former members of senior management violated certain FirstEnergy policies and its code of conduct related to a payment of approximately $4 million made in early 2019 in connection with the termination of a purported consulting agreement, as amended, which had been in place since 2013. The counterparty to such agreement was an entity associated with an individual who subsequently was appointed to a full-time role as an Ohio government official directly involved in regulating the Ohio Companies, including with respect to distribution rates. At this time, it has not been determined if the payments were for the purposes represented within the consulting agreement. Immediately following these terminations, the independent members of its Board appointed Mr. Steven E. Strah to the position of Acting Chief Executive Officer and Mr. Christopher D. Pappas, a current member of the Board, to the temporary position of Executive Director, each effective as of October 29, 2020. Mr. Donald T. Misheff will continue to serve as Non-Executive Chairman of the Board. Additionally, on November 8, 2020, Robert Reffner,the Senior Vice President and Chief Legal Officer, and Ebony Yeboah-Amankwah,the Vice President, General Counsel, and Chief Ethics Officer, were separated from FirstEnergy due to inaction and conduct that the FE Board determined was influenced by the improper tone at the top. The matter is a subjectSubsequently, effective May 26, 2021, the Vice President, Rates and Regulatory Affairs, and Acting Vice President, External Affairs was separated from FirstEnergy related to her inaction regarding an amendment in 2015 of the ongoing internal investigation as it relates to the government investigations.purported consulting agreement discussed above.
Nuclear Plant MattersAdditionally, on February 17, 2021, the FE Board appointed Mr. John W. Somerhalder II to the positions of Vice Chairperson of the FE Board and Executive Director of FE, each effective as of March 1, 2021. Mr. Donald T. Misheff continues to serve as Non-Executive Chairman of the FE Board. Mr. Somerhalder will help lead efforts to enhance FirstEnergy’s reputation. On March 7, 2021, the FE Board appointed Mr. Steven E. Strah to the position of Chief Executive Officer of FirstEnergy, effective as of March 8, 2021. On March 7, 2021, at the recommendation of the FirstEnergy Corporate Governance and Corporate Responsibility Committee, the FE Board also elected Mr. Strah as a Director of FirstEnergy, effective as of March 8, 2021.
Under NRC regulations, JCP&L, ME and PN must ensureAlso, in connection with the internal investigation, FirstEnergy identified certain transactions, which, in some instances, extended back ten years of more, including vendor service, that adequate funds will be availablewere either improperly classified, misallocated to decommission their retired nuclear facility, TMI-2. As of September 30, 2020, JCP&L, ME and PN had in total approximately $881 million invested in external trusts to be used for the decommissioning and environmental remediation of their retired TMI-2 nuclear generating facility. The values of these NDTs also fluctuate based on market conditions. If the valuescertain of the trusts decline by a material amount,Utilities and Transmission Companies, or lacked proper supporting documentation. These transactions resulted in amounts collected from customers that were immaterial to FirstEnergy. The Utilities and Transmission Companies are working with the obligationappropriate regulatory agencies to JCP&L, ME and PN to fund the trusts may increase. Disruptions in the capital markets and their effects on particular businesses and the economy could also affect the values of the NDTs.address these amounts.
On October 15, 2019, JCP&L, ME, PN and GPUN executed an asset purchase and sale agreement with TMI-2 Solutions, LLC, a subsidiary of EnergySolutions, LLC, concerning the transfer and dismantlement of TMI-2. This transfer of TMI-2 to TMI-2 Solutions, LLC will include the transfer of: (i) the ownership and operating NRC licenses for TMI-2; (ii) the external trusts for the decommissioning and environmental remediation of TMI-2; and (iii) related liabilities of approximately $900 million as of September 30, 2020. There can beThe internal investigation has revealed no assurance that the transfer will receive the required regulatory approvals and, even if approved, whether the conditions to the closingnew material issues since FirstEnergy’s Form 10-K was filed on February 18, 2021. The focus of the transfer will be satisfied. On November 12, 2019, JCP&L filedinternal investigation has transitioned from a Petitionproactive investigation to continued cooperation with the NJBPU seeking approval of the transfer and sale of JCP&L’s entire 25% interest in TMI-2 to TMI-2 Solutions, LLC. On October 28, 2020, Rate Counsel submitted comments recommending that the NJBPU only approve the sale of TMI-2 on the condition that any liability for TMI-2 be absorbed by the joint owners and that JCP&L should agree to not seek to recover any
such costs from its utility customers. On November 2, 2020, JCP&L submitted reply comments accepting Rate Counsel’s condition. JCP&L is awaiting a NJBPU order. Also on November 12, 2019, JCP&L, ME, PN, GPUN and TMI-2 Solutions, LLC filed an application with the NRC seeking approval to transfer the NRC license for TMI-2 to TMI-2 Solutions, LLC. On August 10, 2020, JCP&L, ME, PN, GPUN, TMI-2 Solutions, LLC, and the PA DEP reached a settlement agreement regarding the decommissioning of TMI-2. The settlement agreement provides for increased and detailed oversight by the PA DEP over the decommissioning work, expenditures, and environmental impacts of the dismantlement of TMI-2 by TMI-2 Solutions, LLC. In addition, the PA DEP withdrew its objection to the TMI-2 transfer in the NRC proceedings. Both the NRC and NJBPU proceedings are ongoing. Assets and liabilities held for sale on FirstEnergy’s Consolidated Balance Sheet associated with the transaction consist of asset retirement obligations of$718 million, NDTs of $881 million as well as property, plant and equipment with a net book value of zero, which are included in the regulated distribution segment.
FES Bankruptcy
On March 31, 2018, FES, including its consolidated subsidiaries, FG, NG, FE Aircraft Leasing Corp., Norton Energy Storage L.L.C. and FGMUC, and FENOC filed voluntary petitions for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court and emerged on February 27, 2020. See Note 3, “Discontinued Operations,” for additional discussion.ongoing government investigations.
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 9,8, “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.
11.10. 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.
The Regulated Distribution segment distributes electricity through FirstEnergy’s 10 utility operating companies, serving approximately 6000000 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 3,7903,580 MWs of regulated electric generation capacity located primarily in West Virginia Virginia and New Jersey, of which, 210 MWs are related to the Yards Creek generating station that is being sold pursuant to an asset purchase agreement as further discussed below.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. Included within the segment are $881 million and $882is $45 million of assets classified as held for sale as of September 30, 2020 and December 31, 2019 associated with the asset purchase and sale agreements with TMI-2 Solutions to transfer TMI-2 to TMI-2 Solutions, LLC. See Note 10, "Commitments, Guarantees and Contingencies" for additional information. Also included within the segment is $44 million of assets classified as held for sale as of September 30, 2020, associated with the asset purchase agreement with Yards Creek Energy, LLC to transfer JCP&L’s 50% interest in the Yards Creek pumped-storage hydro generation station (210 MWs). SeeCreek; see Note 9, "Regulatory Matters"8, “Regulatory Matters,” for additional information.
TheRegulated 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 at the Transmission Companies as well as stated transmission rates at JCP&L, MP, PE and WP; although as explained in Note 9, “Regulatory Matters”, on October 29, 2020, MP, PE and WP filed with FERC to convert their existing stated rates to forward-looking formula rates, effective January 1, 2021. Effective January 1, 2020, JCP&L's transmission rates became forward-looking formula rates, subject to refund, pending further hearing and settlement proceedings. Both the forward-looking formula and statedrates. Forward-looking rates recover costs that the regulatory agencies determineFERC determines are permitted to be recovered and provide a return on transmission capital investment. 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 costs. The segment’s results also reflect the net transmission expenses related to the delivery of electricity on FirstEnergy’s transmission facilities.
Corporate/Other reflects corporate support and other costs not charged or attributable to FE’s subsidiaries,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 businesses that do not
constitute an operating segment. Reconciling adjustments for the elimination of inter-segment transactions and discontinued operations are shown separately in the following table of Segment Financial Information. As of September 30, 2020,2021, 67 MWs of electric generating capacity, representing AE Supply’s OVEC capacity entitlement, was included in continuing operations of Corporate/Other. As of September 30, 2020,2021, Corporate/Other had approximately $7.85$7.4 billion of FE holding company debt.
Financial information for each of FirstEnergy’s reportable segments is presented in the tables below:
Segment Financial Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | Regulated Distribution | | Regulated Transmission | | Corporate/ Other | | Reconciling Adjustments | | FirstEnergy Consolidated |
| | (In millions) |
| | | | | | | | | | |
| September 30, 2020 | | | | | | | | | | |
| External revenues | | $ | 2,611 | | | $ | 408 | | | $ | 3 | | | $ | 0 | | | $ | 3,022 | |
| Internal revenues | | 50 | | | 5 | | | 0 | | | (55) | | | 0 | |
| Total revenues | | $ | 2,661 | | | $ | 413 | | | $ | 3 | | | $ | (55) | | | $ | 3,022 | |
| Depreciation | | 223 | | | 79 | | | 0 | | | 14 | | | 316 | |
| Amortization of regulatory assets, net | | (91) | | | 0 | | | 0 | | | 0 | | | (91) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Miscellaneous income (expense), net | | 81 | | | 7 | | | 13 | | | (1) | | | 100 | |
| Interest expense | | 124 | | | 55 | | | 88 | | | (1) | | | 266 | |
| Income taxes (benefits) | | 109 | | | 35 | | | (28) | | | 0 | | | 116 | |
| Income (loss) from continuing operations | | 413 | | | 115 | | | (68) | | | 0 | | | 460 | |
| Property additions | | $ | 391 | | | $ | 278 | | | $ | 18 | | | $ | 0 | | | $ | 687 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| September 30, 2019 | | | | | | | | | | |
| External revenues | | $ | 2,590 | | | $ | 371 | | | $ | 2 | | | $ | 0 | | | $ | 2,963 | |
| Internal revenues | | 46 | | | 4 | | | 0 | | | (50) | | | 0 | |
| Total revenues | | $ | 2,636 | | | $ | 375 | | | $ | 2 | | | $ | (50) | | | $ | 2,963 | |
| Depreciation | | 215 | | | 71 | | | 0 | | | 18 | | | 304 | |
| Amortization of regulatory assets, net | | 42 | | | 1 | | | 0 | | | 0 | | | 43 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Miscellaneous income (expense), net | | 36 | | | 4 | | | 24 | | | (7) | | | 57 | |
| Interest expense | | 124 | | | 49 | | | 95 | | | (7) | | | 261 | |
| Income taxes (benefits) | | 103 | | | 26 | | | (22) | | | 0 | | | 107 | |
| Income (loss) from continuing operations | | 370 | | | 113 | | | (94) | | | 0 | | | 389 | |
| Property additions | | $ | 365 | | | $ | 304 | | | $ | 15 | | | $ | 0 | | | $ | 684 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| For the Nine Months Ended | | | | | | | | | | |
| | | | | | | | | | |
| September 30, 2020 | | | | | | | | | | |
| External revenues | | $ | 7,062 | | | $ | 1,185 | | | $ | 6 | | | $ | 0 | | | $ | 8,253 | |
| Internal revenues | | 145 | | | 13 | | | 0 | | | (158) | | | 0 | |
| Total revenues | | $ | 7,207 | | | $ | 1,198 | | | $ | 6 | | | $ | (158) | | | $ | 8,253 | |
| Depreciation | | 672 | | | 233 | | | 2 | | | 47 | | | 954 | |
| Amortization of regulatory assets, net | | (32) | | | 6 | | | 0 | | | 0 | | | (26) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Miscellaneous income (expense), net | | 246 | | | 21 | | | 45 | | | (9) | | | 303 | |
| Interest expense | | 374 | | | 162 | | | 265 | | | (9) | | | 792 | |
| Income taxes (benefits) | | 144 | | | 103 | | | (125) | | | 0 | | | 122 | |
| Income (loss) from continuing operations | | 800 | | | 346 | | | (355) | | | 0 | | | 791 | |
| Property additions | | $ | 1,115 | | | $ | 817 | | | $ | 47 | | | $ | 0 | | | $ | 1,979 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| September 30, 2019 | | | | | | | | | | |
| External revenues | | $ | 7,261 | | | $ | 1,091 | | | $ | 10 | | | $ | 0 | | | $ | 8,362 | |
| Internal revenues | | 140 | | | 12 | | | 0 | | | (152) | | | 0 | |
| Total revenues | | $ | 7,401 | | | $ | 1,103 | | | $ | 10 | | | $ | (152) | | | $ | 8,362 | |
| Depreciation | | 644 | | | 211 | | | 3 | | | 52 | | | 910 | |
| Amortization of regulatory assets, net | | 79 | | | 6 | | | 0 | | | 0 | | | 85 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Miscellaneous income (expense), net | | 128 | | | 12 | | | 73 | | | (22) | | | 191 | |
| Interest expense | | 370 | | | 142 | | | 283 | | | (22) | | | 773 | |
| Income taxes (benefits) | | 259 | | | 87 | | | (65) | | | 0 | | | 281 | |
| Income (loss) from continuing operations | | 957 | | | 333 | | | (205) | | | 0 | | | 1,085 | |
| Property additions | | $ | 1,037 | | | $ | 835 | | | $ | 40 | | | $ | 0 | | | $ | 1,912 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| As of September 30, 2020 | | | | | | | | | | |
| Total assets | | $ | 30,249 | | | $ | 12,078 | | | $ | 611 | | | $ | 0 | | | $ | 42,938 | |
| Total goodwill | | $ | 5,004 | | | $ | 614 | | | $ | 0 | | | $ | 0 | | | $ | 5,618 | |
| | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | | | |
| Total assets | | $ | 29,642 | | | $ | 11,611 | | | $ | 1,015 | | | $ | 33 | | | $ | 42,301 | |
| Total goodwill | | $ | 5,004 | | | $ | 614 | | | $ | 0 | | | $ | 0 | | | $ | 5,618 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | Regulated Distribution | | Regulated Transmission | | Corporate/ Other | | Reconciling Adjustments | | FirstEnergy Consolidated |
| | (In millions) |
| | | | | | | | | | |
| September 30, 2021 | | | | | | | | | | |
| External revenues | | $ | 2,708 | | | $ | 411 | | | $ | 5 | | | $ | — | | | $ | 3,124 | |
| Internal revenues | | 51 | | | 4 | | | — | | | (55) | | | — | |
| Total revenues | | $ | 2,759 | | | $ | 415 | | | $ | 5 | | | $ | (55) | | | $ | 3,124 | |
| Depreciation | | 229 | | | 82 | | | (1) | | | 16 | | | 326 | |
| Amortization of regulatory assets, net | | 29 | | | 1 | | | — | | | — | | | 30 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Miscellaneous income (expense), net | | 102 | | | 12 | | | 23 | | | (1) | | | 136 | |
| | | | | | | | | | |
| Interest expense | | 133 | | | 62 | | | 89 | | | (1) | | | 283 | |
| Income taxes (benefits) | | 108 | | | 23 | | | (43) | | | — | | | 88 | |
| Income (loss) from continuing operations | | 416 | | | 70 | | | (70) | | | — | | | 416 | |
| Property additions | | $ | 326 | | | $ | 202 | | | $ | 14 | | | $ | — | | | $ | 542 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| September 30, 2020 | | | | | | | | | | |
| External revenues | | $ | 2,611 | | | $ | 408 | | | $ | 3 | | | $ | — | | | $ | 3,022 | |
| Internal revenues | | 50 | | | 5 | | | — | | | (55) | | | — | |
| Total revenues | | $ | 2,661 | | | $ | 413 | | | $ | 3 | | | $ | (55) | | | $ | 3,022 | |
| Depreciation | | 223 | | | 79 | | | — | | | 14 | | | 316 | |
| Deferral of regulatory assets, net | | (91) | | | — | | | — | | | — | | | (91) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Miscellaneous income (expense), net | | 81 | | | 7 | | | 13 | | | (1) | | | 100 | |
| Interest expense | | 124 | | | 55 | | | 88 | | | (1) | | | 266 | |
| Income taxes (benefits) | | 109 | | | 35 | | | (28) | | | — | | | 116 | |
| Income (loss) from continuing operations | | 413 | | | 115 | | | (68) | | | — | | | 460 | |
| Property additions | | $ | 391 | | | $ | 278 | | | $ | 18 | | | $ | — | | | $ | 687 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| For the Nine Months Ended | | | | | | | | | | |
| | | | | | | | | | |
| September 30, 2021 | | | | | | | | | | |
| External revenues | | $ | 7,237 | | | $ | 1,223 | | | $ | 12 | | | $ | — | | | $ | 8,472 | |
| Internal revenues | | 150 | | | 10 | | | — | | | (160) | | | — | |
| Total revenues | | $ | 7,387 | | | $ | 1,233 | | | $ | 12 | | | $ | (160) | | | $ | 8,472 | |
| Depreciation | | 684 | | | 240 | | | 1 | | | 47 | | | 972 | |
| Amortization of regulatory assets, net | | 159 | | | 12 | | | — | | | — | | | 171 | |
| DPA penalty | | — | | | — | | | 230 | | | — | | | 230 | |
| | | | | | | | | | |
| Miscellaneous income (expense), net | | 297 | | | 34 | | | 59 | | | (11) | | | 379 | |
| | | | | | | | | | |
| Interest expense | | 392 | | | 186 | | | 288 | | | (11) | | | 855 | |
| Income taxes (benefits) | | 261 | | | 93 | | | (83) | | | — | | | 271 | |
| Income (loss) from continuing operations | | 1,003 | | | 295 | | | (489) | | | — | | | 809 | |
| Property additions | | $ | 993 | | | $ | 732 | | | $ | 43 | | | $ | — | | | $ | 1,768 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| September 30, 2020 | | | | | | | | | | |
| External revenues | | $ | 7,062 | | | $ | 1,185 | | | $ | 6 | | | $ | — | | | $ | 8,253 | |
| Internal revenues | | 145 | | | 13 | | | — | | | (158) | | | — | |
| Total revenues | | $ | 7,207 | | | $ | 1,198 | | | $ | 6 | | | $ | (158) | | | $ | 8,253 | |
| Depreciation | | 672 | | | 233 | | | 2 | | | 47 | | | 954 | |
| Amortization (deferral) of regulatory assets, net | | (32) | | | 6 | | | — | | | — | | | (26) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Miscellaneous income (expense), net | | 246 | | | 21 | | | 45 | | | (9) | | | 303 | |
| Interest expense | | 374 | | | 162 | | | 265 | | | (9) | | | 792 | |
| Income taxes (benefits) | | 144 | | | 103 | | | (125) | | | — | | | 122 | |
| Income (loss) from continuing operations | | 800 | | | 346 | | | (355) | | | — | | | 791 | |
| Property additions | | $ | 1,115 | | | $ | 817 | | | $ | 47 | | | $ | — | | | $ | 1,979 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| As of September 30, 2021 | | | | | | | | | | |
| Total assets | | $ | 30,546 | | | $ | 12,660 | | | $ | 648 | | | $ | — | | | $ | 43,854 | |
| Total goodwill | | $ | 5,004 | | | $ | 614 | | | $ | — | | | $ | — | | | $ | 5,618 | |
| | | | | | | | | | |
| As of December 31, 2020 | | | | | | | | | | |
| Total assets | | $ | 30,855 | | | $ | 12,592 | | | $ | 1,017 | | | $ | — | | | $ | 44,464 | |
| Total goodwill | | $ | 5,004 | | | $ | 614 | | | $ | — | | | $ | — | | | $ | 5,618 | |
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 3,7903,580 MWs of regulated electric generation capacity located primarily in West Virginia Virginia and New Jersey, of which, 210 MWs are related to the Yards Creek generating station that is being sold pursuant to an asset purchase agreement as further discussed below.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.
TheRegulated 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 at the Transmission Companies as well as stated transmission rates at JCP&L, MP, PE and WP; although as explained in Note 9, “Regulatory Matters”, on October 29, 2020, MP, PE and WP filed with FERC to convert their existing stated rates to forward-looking formula rates, effective January 1, 2021. Effective January 1, 2020, JCP&L's transmission rates became forward-looking formula rates, subject to refund, pending further hearing and settlement proceedings. Both the forward-looking formula and statedrates. Forward-looking rates recover costs that the regulatory agencies determineFERC determines are permitted to be recovered and provide a return on transmission capital investment. 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 costs. The segment’s results also reflect the net transmission expenses related to the delivery of electricity on FirstEnergy’s transmission facilities.
Corporate/Other reflects corporate support and other costs not charged or attributable to FE’s subsidiaries,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 businesses that do not constitute an operating segment. Additionally, reconciling adjustments for the elimination of inter-segment transactions and discontinued operations are included in Corporate/Other. As of September 30, 2020,2021, 67 MWs of electric generating capacity, representing AE Supply’s OVEC capacity entitlement, was included in continuing operations of Corporate/Other. As of September 30, 2020,2021, Corporate/Other had approximately $7.85$7.4 billion of FE holding company debt.
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. As a fully regulated electric utility, FirstEnergy is focused on stable and predictable earnings and cash flow from its regulated business units - Regulated Distribution and Regulated Transmission - through deliveringbusiness units that deliver enhanced customer service and reliability that supports FE's dividend.
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 S.D. 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 the U.S. Attorney’s Office investigation into FirstEnergy relating to FirstEnergy’s lobbying and governmental affairs activities concerning HB 6, which, among other things 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 was made during the third quarter of 2021 and will neither be recovered in rates or charged to FirstEnergy customers nor will FirstEnergy seek any tax deduction related to such payment. Under the terms of the DPA, the criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA.
In addition to the subpoenas referenced above, the OH AG,OAG, certain FE shareholders and FirstEnergy 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. 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, the SEC issued an additional subpoena to FE. Further, in a letter dated February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the Division is investigating FirstEnergy’s lobbying and governmental affairs activities concerning HB 6.
As previously disclosed, aA committee of independent members of the FE Board of Directors is directingwas put in place to direct an internal investigation related to the ongoing government investigations. In connectionaddition, the FE Board formed a sub-committee of the Audit Committee to, together with the FE Board, assess FirstEnergy’s internal investigation, such committee determined on October 29, 2020,compliance program and implement potential changes, as appropriate. FirstEnergy has taken the following steps to terminate FirstEnergy’saddress current challenges and improve its compliance culture:
•Certain members of senior management, including the former Chief Executive Officer, Charles E. Jones, together with two other executives: Dennis M. Chack, Senior Vice President of Product Development, Marketing, and Branding; and Michael J. Dowling, Senior Vice President of External Affairs. Each of thesewere terminated executives violatedfor violating certain FirstEnergy policies and its code of conduct. These executives were terminated as of October 29, 2020. Such former members of senior management did not maintain and promote a control environment with an appropriate tone of compliance in certain areas of FirstEnergy’s business, nor sufficiently promote, monitor or enforce adherence to certain FirstEnergy policies and its code of conduct. Furthermore, certain former members of senior management did not reasonably ensure that relevant information was communicated within our organization and not withheld from our independent directors, our Audit Committee, and our independent auditor. Among the matters considered with respect to the determination by the committee of independent members of the Board of Directors that certain former members of senior management violated certain FirstEnergy policies and its code of conduct related to a payment of approximately $4 million made in early 2019 in connection with the termination of a purported consulting agreement, as amended, which had been in place since 2013. The counterparty to such agreement was an entity associated with an individual who subsequently was appointed to a full-time role as an Ohio government official directly involved in regulating the Ohio Companies, including with respect to distribution rates. At this time, it has not been determined if the payments were for the purposes represented within the consulting agreement.
•Immediately following these terminations, the independent members of its FE Board appointed Mr. Steven E. Strah to the position of Acting Chief Executive Officer and Mr. Christopher D. Pappas, a current member of the FE Board, to the temporary position of Executive Director, each effective asDirector. In March 2021, Mr. Strah was elected to the position of October 29, 2020. Mr. Donald T. Misheff will continue to serve as Non-Executive ChairmanChief Executive Officer and a Director of the FE Board. Additionally, on November 8, 2020, Robert Reffner, Senior Vice President and
•FirstEnergy’s Chief Legal Officer and Ebony Yeboah-Amankwah, Vice President, General Counsel, and Chief Ethics Officer were separated from FirstEnergy in November 2020 due to inaction and conduct that the FE Board determined was influenced by the improper tone at the top. The matter is a subject of the ongoing internal investigation as it relates to the government investigations.
•In February 2021, the FE Board appointed Mr. John W. Somerhalder II to the positions of Vice Chairperson of the FE Board and Executive Director, replacing Mr. Pappas, who continues to serve on the FE Board as an independent director. The FE Board also appointed Mr. Hyun Park to the position of Senior Vice President & Chief Legal Officer and Mr. Antonio Fernández, to the position of Vice President and Chief Ethics and Compliance Officer, in January 2021 and March 2021, respectively. These executives help play a critical role in enhancing FirstEnergy’s culture of compliance, ethics, integrity and accountability.
•In March 2021, in connection with an agreement with Icahn Capital, the FE Board appointed Andrew Teno and Jesse Lynn as Directors to the FE Board, increasing the size from 12 directors to 14. However, until such time as all final regulatory approvals are obtained, neither Mr. Teno nor Mr. Lynn will have the right to vote at any meeting of the FE Board or any committee thereof. In May 2021, Melvin D. Williams was elected to the FE Board, filling a vacant seat. In June 2021, the FE Board appointed Lisa Winston Hicks and Paul Kaleta as directors to the FE Board, further increasing the size from 14 directors to 16.
•FirstEnergy is making significant changes in its approach to political and legislative engagement and advocacy, through stopping all contributions to 501(c)(4) organizations, the pause of other political disbursements, including from the FirstEnergy Political Action Committee, limiting participation in the political process, suspending or terminating various political consulting relationships, and adding additional oversight and significantly more robust disclosure around political spending to provide increased transparency.
•In March 2021, the FE Board met with FirstEnergy’s top 140 leaders to discuss expectations regarding compliance and ethics.
•Performed training on up-the-ladder reporting for the Legal Department in March 2021.
•In July 2021, enhanced new employee and third-party on-boarding processes to include expectations of FirstEnergy’s code of conduct.
•In May 2021, FirstEnergy separated its Vice President, Rates and Regulatory Affairs, and Acting Vice President, External Affairs due to this individual’s inaction with respect to a previously disclosed purported consulting agreement.
•On June 29, 2021, the FE Board established a SLC of the FE Board, effective July 1, 2021. The SLC has formedbeen delegated full authority by the FE Board to take all actions as the SLC deems advisable, appropriate, and in the best interests of FirstEnergy and its shareholders with respect to pending shareholder derivative litigation and demands. Each of Ms. Hicks and Messrs. Kaleta, Lynn and Williams were appointed to serve on the SLC.
•On July 20, 2021, the FE Board approved and adopted a new sub-committeeCode of our Audit committeeBusiness Conduct, which:
◦Promotes and emphasizes FirstEnergy’s commitment to togethercompliance and ethics,
◦Establishes a “speak up” culture in which stakeholders are encouraged to report actual or suspected Code of Business Conduct violations without fear of retaliation,
◦Conforms to applicable compliance standards, and
◦Improves readability
•On July 20, 2021, the FE Board approved FE entering into a DPA with the Board, assessU.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.
•During the third quarter of 2021, FirstEnergy appointed new senior leaders committed to supporting integrity, including:
◦Vice President of Internal Audit,
◦Vice President and Chief Risk Officer, and
◦Director of Ethics & Compliance.
•FirstEnergy completed additional steps toward enhancing the overall compliance program, including:
◦Completion of the Office of Ethics & Compliance charter,
◦Delivered a Chief Ethics & Compliance Officer-led Code Awareness training to senior leader and implement potential changes, as appropriate. In addition,individuals with significant roles in his new roleFirstEnergy’s control environment,
◦Conducted leader-led training on the Code of Executive Director, Mr. PappasBusiness Conduct for all leaders,
◦Published an Ethics & Compliance Communication Plan, and
◦Selected and began implementation planning for a Governance, Risk and Compliance tool
Also, in connection with the internal investigation, FirstEnergy identified certain transactions, which, in some instances, extended back ten years or more, including vendor service, that were either improperly classified, misallocated to certain of the Utilities and Transmission Companies, or lacked proper supporting documentation. These transactions resulted in amounts collected from customers that were immaterial to FirstEnergy. The Utilities and Transmission Companies are working with the appropriate regulatory agencies to address these amounts.
FirstEnergy has also taken proactive steps to reduce regulatory uncertainty affecting the Ohio Companies:
•On January 31, 2021, FirstEnergy reached a partial settlement with the OAG and other parties regarding decoupling. While the partial settlement with the OAG focused specifically on decoupling, the Ohio Companies will assistof their own accord, not seek to recover lost distribution revenue from residential and commercial customers.
•On March 31, 2021, FirstEnergy announced that the Ohio Companies will proactively refund to customers amounts previously collected under the decoupling mechanism authorized under Ohio law, which totals approximately $27 million, with interest. On July 7, 2021, the PUCO approved the Ohio Companies’ proposal to return the amount to customers in August 2021.
•Also on March 31, 2021, Governor DeWine signed HB 128, which, among other things, repealed parts of HB 6, the legislation that established support for nuclear energy supply in Ohio, provided for a decoupling mechanism for electric utilities, and provided for the ending of current energy efficiency program mandates.
•FirstEnergy leadership teamis committed to pursuing an open dialogue in an appropriate manner with execution of strategic initiatives, engagethe several regulatory proceedings currently underway, including a state management audit, and multi-year SEET and ESP quadrennial review, among other matters. FirstEnergy believes a holistic transparent discussion with FirstEnergy’s external the PUCO staff, and interested
stakeholders in the regulatory process, is an important step towards removing uncertainties about regulatory concerns in Ohio and support the development of enhanced controlscritical to re-establishing trust in FirstEnergy and governance policies and procedures. restoring its reputation.
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 investigationinvestigations, 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 FE’s or its subsidiaries’FirstEnergy’s financial condition, results of operations and cash flows. As discussed below, FirstEnergy is consideringhas made reductions to its Regulated Distribution and Regulated Transmission capital investment plans and is considering reductions to operating expenses, as well as changes to its planned equity issuances, to allow for flexibility, should a fine be imposed as a resultfor among other things, to address the outcomes of the ongoing government investigation.investigations and related lawsuits and regulatory actions.
The outbreak of COVID-19 is a global pandemic. FirstEnergy is taking steps to mitigate known risks and is continuously evaluatingOn October 18, 2021, FE, FET, the rapidly evolving situation based on guidance from governmental officials and public health experts. The full impact on FirstEnergy’s business from the COVID-19 pandemic, including the governmental and regulatory responses, is unknown at this time and difficult to predict. FirstEnergy provides a critical and essential service to its customersUtilities, and the healthTransmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities with JPMorgan Chase Bank, N.A., Mizuho Bank, Ltd. and safetyPNC Bank, National Association (collectively, the “2021 Credit Facilities”), which replace the FE Revolving Facility and the FET Revolving Facility, and provide for aggregate commitments of FirstEnergy’s employees, contractors and customers is its first priority. FirstEnergy is effectively managing its operations, while still providing flexibility for approximately 7,000 of its 12,000 employees to work from home.$4.5 billion. The 2021 Credit Facilities are available until October 18, 2026, as follows:
Beginning March 13, 2020, FirstEnergy temporarily suspended customer disconnections•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
•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 for nonpaymenteach borrower under the respective facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and ceased collection activities as a resultRegulated Transmission businesses, and each of the ongoing pandemic. Starting September 15, 2020, certain operating companies within the businesses.
FirstEnergy utilitiesis also working to improve how it conducts business and serve its customers. 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 operating and capital efficiencies ramping up through 2024. Called "FE Forward," the initiative will play a critical first step in FirstEnergy’s transformation journey as it looks to optimize processes and procedures through range of opportunities, including:
•Optimizing operations by expanding capabilities in areas such as strategic sourcing, inventory optimization and commercial contract terms, and by standardizing best-in-class work management policies across FirstEnergy;
•accelerating FirstEnergy’s digital transformation by revamping customers’ online experience, automating sourcing data collection and management, and deploying advanced analytics in asset health decisions as well as vegetation management programs; and
•productivity improvements through system integration that puts advanced technology tools, such as mobile dashboards and remote access to asset management information, in the hands of frontline employees.
During the initial phase of FE Forward, FirstEnergy reviewed existing policies and practices, as well as the structure and processes around how decisions are made. In the second phase of FE Forward completed in May 2021, FirstEnergy reviewed further improvement opportunities and developed detailed, executable plans focusing on who, when, how and at what cost opportunities can be realized. In June 2021, phase three began non-residentialand is focused on executing and implementing these findings and opportunities. By 2024, FE Forward is projected to generate approximately $300 million in annualized capital expenditure efficiencies while continuing to hold operating expenses flat by absorbing approximately $100 million in projected increases. In addition, FirstEnergy expects to generate approximately $250 million in working capital improvements by 2022. This program includes an estimated $150 million of costs to achieve through 2023, which are expected to be self-funded through these efficiencies. 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 long-term continues to support a smarter and cleaner electric grid. 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.
disconnections for non-payment, and began the same on October 5, 2020 for residential disconnections. FirstEnergy is actively monitoring the impact COVID-19 is having on customers’ receivable balances, which include increasing arrears balance since the pandemic has begun. Additionally, FirstEnergy has incurred, and it is expected to incur for the foreseeable future, incremental uncollectible and other COVID-19 related expenses. Such incrementally incurred COVID-19 pandemic related expenses consist of additional costs that FirstEnergy is incurring to protect its employees, contractors and customers, and to support social distancing requirements resulting from the COVID-19 pandemic. These costs include, but are not limited to, new or added benefits provided to employees, the purchase of additional personal protection equipment and disinfecting supplies, additional facility cleaning services, initiated programs and communications to customers on utility response, and increased technology expenses to support remote working, where possible. The Ohio Companies and JCP&L had existing regulatory mechanisms in place prior to the outbreak of COVID-19, where incremental uncollectible expenses are able to be recovered through riders with no material impact to earnings. Additionally, in response to the COVID-19 pandemic, the MDPSC, NJBPU and WVPSC issued orders allowing PE, JCP&L and MP to track and create a regulatory asset for future recovery of incremental costs, including uncollectible expenses and waived late payment charges, incurred as a result of the pandemic. In Pennsylvania, the PPUC authorized utilities to track all prudently incurred incremental costs arising from COVID-19, and to create a regulatory asset for future recovery of incremental uncollectible expense incurred as a result of COVID-19 above what is included in the Pennsylvania Companies’ existing rates.
FirstEnergy is continuously monitoring its supply chain and is working closely with essential vendors to understand the continued impact of COVID-19 to its business and does not currently expect disruptions in its ability to deliver service to customers or any material impact to its capital spending plan. FirstEnergy’s Distribution and Transmission revenues benefit from geographic and economic diversity across a five-state service territory. Two-thirds of base distribution revenues come from the residential customer class, along with a decoupled rate structure in Ohio, which accounts for approximately 20% of total retail load. FirstEnergy’s commercial and industrial revenues are primarily fixed and demand-based, rather than volume-based. As a result of this, FirstEnergy’s Distribution and Transmission investments provide stable and predictable earnings. However, due to the actions taken by state governments in our service territories limiting certain commercial and industrial activities, FirstEnergy’s residential load has increased, while commercial and industrial loads have declined, however, the magnitude of future load trends are currently unknown and difficult to predict. Related to FirstEnergy’s pension investments, the asset allocation is conservative, with no required contributions until 2022 and the funded status was at 77% as of September 30, 2020, which is essentially unchanged from the end of 2019 at 79%. FirstEnergy believes it is well positioned to manage the economic slowdown resulting from the COVID-19 pandemic. However, the situation remains fluid and future impacts to FirstEnergy, that are presently unknown or unanticipated, may occur.
FE and the Utilities and FET and certain of its subsidiaries participate in two separate five-year syndicated revolving credit facilities providing for aggregate commitments of $3.5 billion, which are available until December 6, 2022. Under the FE credit facility, an aggregate amount of $2.5 billion is available to be borrowed, repaid and reborrowed, subject to separate borrowing sublimits for each borrower including FE and its regulated distribution subsidiaries. Under the FET credit facility, an aggregate amount of $1.0 billion is available to be borrowed, repaid and reborrowed under a syndicated credit facility, subject to separate borrowing sublimits for each borrower including FE's transmission subsidiaries. On November 17, 2020, FE and the Utilities and FET and certain of its subsidiaries entered into amendments to the FE credit facility and the FET credit facility, respectively. The amendments provide for modifications and/or waivers of (i) certain representations and warranties and (ii) certain affirmative and negative covenants, contained therein, which allowed FirstEnergy to regain compliance with such provisions. In addition, among other things, the amendment to the FE credit facility reduces the sublimit applicable to FE to $1.5 billion, and the amendments increased certain tiers of pricing applicable to borrowings under the credit facilities.
In 2020, FirstEnergy continues to execute its regulated growth plans, through the following achievements and plans:
•Implemented forward-looking rates, subject to refund, at JCP&L effective January 1, 2020,
•OH Decoupling rider went into effect on February 1, 2020,
•In October 2020, the NJBPU approved JCP&L’s distribution base rate case settlement agreement, resulting in, among other things, a $94 million increase in annual base distribution revenues,
•Filed for rider recovery of smart meters in NJ, to be deployed beginning in 2023 with a total program cost estimated at $732 million,
•PAPUC-approved DSIC waiver for Penn, which increased the cap from 5% to 7.5% on March 12, 2020,
•Completed final step of FirstEnergy’s strategy to exit the competitive generation business with FES Debtors’ emergence from bankruptcy on February 27, 2020,
•IRP filing in West Virginia to be made by December 30, 2020,
•Issued Climate Position and Strategy Statement, including a pledge to be carbon neutral by 2050, and
•Filed tariff amendments with FERC to convert the existing stated transmission rates of MP, PE and WP to a forward-looking formula transmission rate, effective January 1, 2021. | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| FE Forward Expected Capital Efficiencies and Working Capital Improvements | | 2021 | | 2022 | | 2023 |
| | (In millions) |
| Gross Capital Expenditure Efficiencies | | $ | 180 | | | $ | 210 | | | $ | 300 | |
| Cost to Achieve (+/- 10%) | | (40) | | | (60) | | | (50) | |
| Net Capital Expenditure Efficiencies | | $ | 140 | | | $ | 150 | | | $ | 250 | |
| Working Capital Improvements | | 100 | | | 150 | | | — | |
| Total Cash Flow Improvements | | $ | 240 | | | $ | 300 | | | $ | 250 | |
With an operating territory of 65,000 square miles, the scale and diversity of the ten Utilities that comprise the Regulated Distribution business uniquely position this business for growth through opportunities for additional investment.investment, with plans to invest up to $6.6 billion in capital from 2020 to 2023. Over the past several years, Regulated Distribution has experienced rate base growth through investments that have improved reliability and added operating flexibility to the distribution infrastructure, which provide benefits to the customers and communities those Utilities serve. Based on its current capital plan, which includes over $10 billion in forecasted capital investments from 2018
through 2023, Regulated Distribution’s rate base compounded annual growth rate is expected to be approximately 4% from 2018 through 2023. Additionally, this business is exploring other opportunities for growth, including investments in electric system improvement and modernization projects to increase reliability and improve service to customers, as well as exploring opportunities in customer engagement that focus on the electrification of customers’ homes and businesses by providing a full range of products and services.
With approximately 24,50024,000 miles of transmission lines in operation, the Regulated Transmission business is the centerpiece of FirstEnergy’s regulated investment strategy with 100% of its capital investments expected to be recovered under forward-looking formula rates at the Transmission Companies subject to approval for WP, MP and PE, who filed to move forward-looking formula rates effective January 1, 2021. Regulated Transmission has also experienced significant growth as part of its Energizing the Future transmission plan with plans to invest over $7up to $5.15 billion in capital from 20182020 to 2023, which is expected to result in Regulated Transmission rate base compounded annual growth rate of approximately 10% from 2018 through 2023.
FirstEnergy believes there are incremental investment opportunities for its existing transmission infrastructure of over $20 billion beyond those identified through 2023, 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 November 2018,While FirstEnergy continues to have customer-focused investment opportunities across its distribution and transmission businesses of up to $3 billion annually, it has discontinued providing a long-term earnings compound annual growth rate until there is further clarity regarding Ohio regulatory matters and the Boardongoing government investigations.
FirstEnergy anticipates the need to raise equity and continues to consider all options to raise equity capital. Currently, FirstEnergy is engaging in a process to sell a minority interest in its transmission holding company, FET. FirstEnergy is committed to improving the balance sheet, targeting metrics that support investment grade credit ratings, and to ensure financial flexibility to fund capital expenditures that support a smarter and cleaner electric grid. Beyond FirstEnergy’s expectation to issue up to $100 million per year in equity for its regular stock investment and employee benefit plans, FirstEnergy continues to consider all options to raise equity and expects to provide additional clarity on those financing plans later during the fourth quarter of Directors approved a dividend policy that includes a targeted payout ratio. Dividend payments2021. The amount and timing of any potential equity issuances or alternatives to raise equity capital, are subject to, declarationamong other matters, the ongoing government investigations, related lawsuits and regulatory actions, market conditions and business operations.
FirstEnergy has established new goals for key areas of its business that support the mission to be a forward-thinking, electric utility centered on integrity, powered by a diverse team of employees, committed to making customers’ lives brighter, the Boardenvironment better and future dividend decisions determined by the Board may be impacted by earnings growth, cash flows, credit metrics and other business conditions.our communities stronger.
In November 2020, weFirstEnergy published ourits Climate Story which includes ourits climate position and strategy, as well as a new comprehensive and ambitious greenhouse gasGHG emission goal. FirstEnergy pledged to achieve carbon neutrality by 2050 and set an interim goal for a 30% reduction in greenhouse gasesGHG within the company’sFirstEnergy’s direct operational control by 2030, based on 2019 levels. In addition, FirstEnergy has also set a fleet electrification goal in which beginning in 2021, FirstEnergy plans for 100% of new purchases for ourits light duty and aerial truck fleet to be electric or hybrid vehicles, creating a path to 30% fleet electrification by 2030. Also, later in 2021, FirstEnergy will seek approval to construct a solar generation source of at least 50 MWs in West Virginia. Future resource plans to achieve carbon reductions, including any determination of retirement dates of ourthe regulated coal-fired generating facilities, will be developed by working collaboratively with regulators in West Virginia. Determination of the useful life of ourthe 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 FE andFirstEnergy’s and/or MP’s financial condition, results of operations, and cash flow.
In January 2021, the updated “Strategic Plan – Powered by our Core Values & Behaviors” was published. This comprehensive update provides a vision of FirstEnergy’s path forward in an evolving electric industry. It also articulates significant new goals that will help achieve our long-term strategic commitments in a transparent, sustainable and responsible manner. The $2.5 billion equity issuance in 2018 strengthened FirstEnergy’s balance sheet and supported the company’s transition to a fully regulated utility company. The shares of preferred stock participated in the dividend paid on common stock on an as-converted basis and were non-voting except in certain limited circumstances. Because of this investment, FirstEnergy does not currently anticipate the need to issue additional equity through 2021 and expects to issue, subject to, among other things, market conditions, pricing terms and business operations, up to $600 million of equity annually in 2022 and 2023, including approximately $100 million in equity for its regular stock investment and employee benefit plans.
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. In September 2018, the Bankruptcy Court approved a FES Bankruptcy settlement agreement by and among FirstEnergy, two groups of key FES creditors (collectively, the FES Key Creditor Groups), the FES Debtors and the UCC. The FES Bankruptcy settlement agreement resolved certain claims by FirstEnergy against the FES Debtors, all claims by the FES Debtors and the FES Key Creditor Groups against FirstEnergy, as well as releases from third parties who voted in favor of the FES Debtors' plan of reorganization, in return for among other things, a cash payment of $853 million upon emergence. The FES Bankruptcy settlement was conditioned on the FES Debtors confirming and effectuating a plan of reorganization acceptable to FirstEnergy.
On February 18, 2020, the FES Debtors and FirstEnergy entered into an IT Access Agreement that provided IT support to enable the FES Debtors to emerge from bankruptcy prior to full IT separation by the FES Debtors. As part of the IT Access Agreement, the FES Debtors and FirstEnergy resolved, among other things, the on-going reconciliation of outstanding tax sharing payments for tax years 2018, 2019 and 2020 for a total of $125 million. On February 25, 2020, the Bankruptcy Court approved the IT Access Agreement. On February 27, 2020, the FES Debtors effectuated their plan, emerged from bankruptcy and FirstEnergy tendered the settlement payments totaling $853 million and the $125 million tax sharing payment to the FES Debtors, with no material impact to net income in 2020.Strategic Plan includes specific targets related to:
As contemplated under•Enhancing a culture of compliance through transparency and accountability;
•Enabling a smarter, more resilient electric system;
•Embracing innovation across the FES Bankruptcy settlement agreement, AE Supply entered into an agreement on December 31, 2018,organization;
•Meeting the challenges of climate change;
•Developing a diverse and inclusive workforce, including 2025 goals to transferincrease the 1,300 MW Pleasants Power Stationnumber of employees and related assetsleaders from underrepresented racial and ethnic groups by 30% each and targeting 20% of supply chain spend to FG, while retaining certain specified liabilities. Under the terms of the agreement, FG acquired the economic interests in Pleasants as of January 1, 2019,be with diverse suppliers;
•Building collaborative relationships, marked by trust and AE Supply operated Pleasants until ownership was transferred on January 30, 2020. AE Supply will continue to provide access to the McElroy's Run CCR Impoundment Facility, which was not transferred,respect, with all stakeholders;
•Strengthening FirstEnergy’s safety-first culture; and FE will provide guarantees for certain retained environmental liabilities of AE Supply, including the McElroy’s Run CCR Impoundment Facility.
As of June 30, 2020, FirstEnergy had substantially ceased providing post-emergence services to FES Debtors under the terms of the amended
•Delivering strong and restated shared services agreement. In connection with the FES Debtors emergence from bankruptcy,predictable financial results.
FirstEnergy entered into an amended separation agreement with the FES Debtors to implement the separation of FES Debtors and their businesses from FirstEnergy.
The emergence of the FES Debtors from bankruptcy represents the final step in FirstEnergy’s previously announced strategy to exit the competitive generation business and become a fully regulated utility company with a stronger balance sheet, solid cash flows and more predictable earnings.
FINANCIAL OVERVIEW AND RESULTS OF OPERATIONS
| | (In millions) | (In millions) | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | (In millions) | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | | | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| | Revenues | Revenues | | $ | 3,022 | | | $ | 2,963 | | | $ | 59 | | | 2 | % | | $ | 8,253 | | | $ | 8,362 | | | $ | (109) | | | (1) | % | Revenues | | $ | 3,124 | | | $ | 3,022 | | | $ | 102 | | | 3 | % | | $ | 8,472 | | | $ | 8,253 | | | $ | 219 | | | 3 | % |
| | | Operating expenses | Operating expenses | | 2,301 | | | 2,282 | | | 19 | | | 1 | % | | 6,485 | | | 6,467 | | | 18 | | | — | % | Operating expenses | | 2,493 | | | 2,301 | | | 192 | | | 8 | % | | 6,970 | | | 6,485 | | | 485 | | | 7 | % |
| | Operating income | Operating income | | 721 | | | 681 | | | 40 | | | 6 | % | | 1,768 | | | 1,895 | | | (127) | | | (7) | % | Operating income | | 631 | | | 721 | | | (90) | | | (12) | % | | 1,502 | | | 1,768 | | | (266) | | | (15) | % |
| | | Other expenses, net | Other expenses, net | | (145) | | | (185) | | | 40 | | | 22 | % | | (855) | | | (529) | | | (326) | | | (62) | % | Other expenses, net | | (127) | | | (145) | | | 18 | | | 12 | % | | (422) | | | (855) | | | 433 | | | 51 | % |
| | Income before income taxes | Income before income taxes | | 576 | | | 496 | | | 80 | | | 16 | % | | 913 | | | 1,366 | | | (453) | | | (33) | % | Income before income taxes | | 504 | | | 576 | | | (72) | | | (13) | % | | 1,080 | | | 913 | | | 167 | | | 18 | % |
| | Income taxes | Income taxes | | 116 | | | 107 | | | 9 | | | 8 | % | | 122 | | | 281 | | | (159) | | | (57) | % | Income taxes | | 88 | | | 116 | | | (28) | | | (24) | % | | 271 | | | 122 | | | 149 | | | NM |
| | Income from continuing operations | Income from continuing operations | | 460 | | | 389 | | | 71 | | | 18 | % | | 791 | | | 1,085 | | | (294) | | | (27) | % | Income from continuing operations | | 416 | | | 460 | | | (44) | | | (10) | % | | 809 | | | 791 | | | 18 | | | 2 | % |
| | Discontinued operations, net of tax | Discontinued operations, net of tax | | (6) | | | 2 | | | (8) | | | NM | | 46 | | | (62) | | | 108 | | | NM | Discontinued operations, net of tax | | 47 | | | (6) | | | 53 | | | NM | | 47 | | | 46 | | | 1 | | | NM |
| | Net income | Net income | | $ | 454 | | | $ | 391 | | | $ | 63 | | | 16 | % | | $ | 837 | | | $ | 1,023 | | | $ | (186) | | | (18) | % | Net income | | $ | 463 | | | $ | 454 | | | $ | 9 | | | 2 | % | | $ | 856 | | | $ | 837 | | | $ | 19 | | | 2 | % |
| |
*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 11,10, “Segment Information,” of the Notes to Consolidated Financial Statements.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Summary of Results of Operations — Third Quarter 20202021 Compared with Third Quarter 20192020
Financial results for FirstEnergy’s business segments in the third quarter of 20202021 and 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) 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 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter 2020 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | (In millions) |
| Revenues: | | | | | | | | |
| Electric | | $ | 2,600 | | | $ | 408 | | | $ | (35) | | | $ | 2,973 | |
| Other | | 61 | | | 5 | | | (17) | | | 49 | |
| | | | | | | | |
| Total Revenues | | 2,661 | | | 413 | | | (52) | | | 3,022 | |
| | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Fuel | | 101 | | | — | | | — | | | 101 | |
| Purchased power | | 762 | | | — | | | 4 | | | 766 | |
| Other operating expenses | | 913 | | | 86 | | | (62) | | | 937 | |
| | | | | | | | |
| Provision for depreciation | | 223 | | | 79 | | | 14 | | | 316 | |
| | | | | | | | |
| Deferral of regulatory assets, net | | (91) | | | — | | | — | | | (91) | |
| General taxes | | 199 | | | 59 | | | 14 | | | 272 | |
| | | | | | | | |
| | | | | | | | |
| Total Operating Expenses | | 2,107 | | | 224 | | | (30) | | | 2,301 | |
| | | | | | | | |
| Operating Income (Loss) | | 554 | | | 189 | | | (22) | | | 721 | |
| | | | | | | | |
| Other Income (Expense): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Miscellaneous income, net | | 81 | | | 7 | | | 12 | | | 100 | |
| | | | | | | | |
| | | | | | | | |
| Interest expense | | (124) | | | (55) | | | (87) | | | (266) | |
| Capitalized financing costs | | 11 | | | 9 | | | 1 | | | 21 | |
| Total Other Expense | | (32) | | | (39) | | | (74) | | | (145) | |
| | | | | | | | |
| Income (Loss) Before Income Taxes (Benefits) | | 522 | | | 150 | | | (96) | | | 576 | |
| Income taxes (benefits) | | 109 | | | 35 | | | (28) | | | 116 | |
| Income (Loss) From Continuing Operations | | 413 | | | 115 | | | (68) | | | 460 | |
| Discontinued operations, net of tax | | — | | | — | | | (6) | | | (6) | |
| Net Income (Loss) | | $ | 413 | | | $ | 115 | | | $ | (74) | | | $ | 454 | |
| | | | | | | | |
| | | | | | | | |
| | Third Quarter 2019 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated | |
| Changes Between Third Quarter 2021 and Third Quarter 2020 Financial Results | | Changes Between Third Quarter 2021 and Third Quarter 2020 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | | (In millions) | | | (In millions) |
| Revenues: | Revenues: | | | | | | | Revenues: | | | | | | |
| Electric | Electric | | $ | 2,571 | | | $ | 371 | | | $ | (33) | | | $ | 2,909 | | Electric | | $ | 105 | | | $ | 3 | | | $ | 2 | | | $ | 110 | |
| Other | Other | | 65 | | | 4 | | | (15) | | | 54 | | Other | | (7) | | | (1) | | | — | | | (8) | |
| | Total Revenues | Total Revenues | | 2,636 | | | 375 | | | (48) | | | 2,963 | | Total Revenues | | 98 | | | 2 | | | 2 | | | 102 | |
| | Operating Expenses: | Operating Expenses: | | | | | | | | | Operating Expenses: | | | | | | | | |
| Fuel | Fuel | | 122 | | | — | | | — | | | 122 | | Fuel | | 31 | | | — | | | — | | | 31 | |
| Purchased power | Purchased power | | 794 | | | — | | | 4 | | | 798 | | Purchased power | | 107 | | | — | | | 1 | | | 108 | |
| Other operating expenses | Other operating expenses | | 715 | | | 75 | | | (32) | | | 758 | | Other operating expenses | | (166) | | | 52 | | | 33 | | | (81) | |
| | Provision for depreciation | Provision for depreciation | | 215 | | | 71 | | | 18 | | | 304 | | Provision for depreciation | | 6 | | | 3 | | | 1 | | | 10 | |
| | Amortization of regulatory assets, net | | 42 | | | 1 | | | — | | | 43 | | |
| Amortization (deferral) of regulatory assets, net | | Amortization (deferral) of regulatory assets, net | | 120 | | | 1 | | | — | | | 121 | |
| General taxes | General taxes | | 197 | | | 53 | | | 7 | | | 257 | | General taxes | | 7 | | | 3 | | | (7) | | | 3 | |
| | | Total Operating Expenses | Total Operating Expenses | | 2,085 | | | 200 | | | (3) | | | 2,282 | | Total Operating Expenses | | 105 | | | 59 | | | 28 | | | 192 | |
| | Operating Income (Loss) | Operating Income (Loss) | | 551 | | | 175 | | | (45) | | | 681 | | Operating Income (Loss) | | (7) | | | (57) | | | (26) | | | (90) | |
| | Other Income (Expense): | Other Income (Expense): | | | | | | | | | Other Income (Expense): | | | | | | | | |
| | Miscellaneous income, net | Miscellaneous income, net | | 36 | | | 4 | | | 17 | | | 57 | | Miscellaneous income, net | | 21 | | | 5 | | | 10 | | | 36 | |
| | | Interest expense | Interest expense | | (124) | | | (49) | | | (88) | | | (261) | | Interest expense | | (9) | | | (7) | | | (1) | | | (17) | |
| Capitalized financing costs | Capitalized financing costs | | 10 | | | 9 | | | — | | | 19 | | Capitalized financing costs | | (3) | | | 2 | | | — | | | (1) | |
| Total Other Expense | Total Other Expense | | (78) | | | (36) | | | (71) | | | (185) | | Total Other Expense | | 9 | | | — | | | 9 | | | 18 | |
| | Income (Loss) Before Income Taxes (Benefits) | Income (Loss) Before Income Taxes (Benefits) | | 473 | | | 139 | | | (116) | | | 496 | | Income (Loss) Before Income Taxes (Benefits) | | 2 | | | (57) | | | (17) | | | (72) | |
| Income taxes (benefits) | Income taxes (benefits) | | 103 | | | 26 | | | (22) | | | 107 | | Income taxes (benefits) | | (1) | | | (12) | | | (15) | | | (28) | |
| Income (Loss) From Continuing Operations | Income (Loss) From Continuing Operations | | 370 | | | 113 | | | (94) | | | 389 | | Income (Loss) From Continuing Operations | | 3 | | | (45) | | | (2) | | | (44) | |
| Discontinued operations, net of tax | Discontinued operations, net of tax | | — | | | — | | | 2 | | | 2 | | Discontinued operations, net of tax | | — | | | — | | | 53 | | | 53 | |
| Net Income (Loss) | Net Income (Loss) | | $ | 370 | | | $ | 113 | | | $ | (92) | | | $ | 391 | | Net Income (Loss) | | $ | 3 | | | $ | (45) | | | $ | 51 | | | $ | 9 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes Between Third Quarter 2020 and Third Quarter 2019 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | (In millions) |
| Revenues: | | | | | | | | |
| Electric | | $ | 29 | | | $ | 37 | | | $ | (2) | | | $ | 64 | |
| Other | | (4) | | | 1 | | | (2) | | | (5) | |
| | | | | | | | |
| Total Revenues | | 25 | | | 38 | | | (4) | | | 59 | |
| | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Fuel | | (21) | | | — | | | — | | | (21) | |
| Purchased power | | (32) | | | — | | | — | | | (32) | |
| Other operating expenses | | 198 | | | 11 | | | (30) | | | 179 | |
| | | | | | | | |
| Provision for depreciation | | 8 | | | 8 | | | (4) | | | 12 | |
| | | | | | | | |
| Amortization (deferral) of regulatory assets, net | | (133) | | | (1) | | | — | | | (134) | |
| General taxes | | 2 | | | 6 | | | 7 | | | 15 | |
| | | | | | | | |
| Total Operating Expenses | | 22 | | | 24 | | | (27) | | | 19 | |
| | | | | | | | |
| Operating Income (Loss) | | 3 | | | 14 | | | 23 | | | 40 | |
| | | | | | | | |
| Other Income (Expense): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Miscellaneous income, net | | 45 | | | 3 | | | (5) | | | 43 | |
| | | | | | | | |
| Interest expense | | — | | | (6) | | | 1 | | | (5) | |
| Capitalized financing costs | | 1 | | | — | | | 1 | | | 2 | |
| Total Other Expense | | 46 | | | (3) | | | (3) | | | 40 | |
| | | | | | | | |
| Income (Loss) Before Income Taxes (Benefits) | | 49 | | | 11 | | | 20 | | | 80 | |
| Income taxes (benefits) | | 6 | | | 9 | | | (6) | | | 9 | |
| Income (Loss) From Continuing Operations | | 43 | | | 2 | | | 26 | | | 71 | |
| Discontinued operations, net of tax | | — | | | — | | | (8) | | | (8) | |
| Net Income (Loss) | | $ | 43 | | | $ | 2 | | | $ | 18 | | | $ | 63 | |
| | | | | | | | |
| | | | | | | | |
Regulated Distribution — Third Quarter 20202021 Compared with Third Quarter 20192020
Regulated Distribution’s net income increased$43 $3 million in the third quarter of 2020,2021, as compared to the same period of 2019,2020, primarily due toresulting from the implementation of the base distribution rate case in New Jersey, lower pension and OPEB non-service expenses increased residential sales dueand a reduction to the continued impact of COVID-19,a reserve previously recorded in 2010, partially offset by the absence of decoupling and lost distribution revenues in Ohio, higher operatinginterest expense, and maintenance expenses, as further discussed below.lower weather-related demand.
Revenues —
The $25$98 million increase in total revenues resulted from the following sources:
| | | For the Three Months Ended September 30, | | For the Three Months Ended September 30, |
| Revenues by Type of Service | Revenues by Type of Service | | 2020 | | 2019 | | Increase (Decrease) | Revenues by Type of Service | | 2021 | | 2020 | | Increase (Decrease) |
| | | (In millions) | | | (In millions) |
Distribution(1) | Distribution(1) | | $ | 1,528 | | | $ | 1,482 | | | $ | 46 | | Distribution(1) | | $ | 1,534 | | | $ | 1,528 | | | $ | 6 | |
| | Generation sales: | Generation sales: | | Generation sales: | |
| Retail | Retail | | 1,005 | | | 989 | | | 16 | | Retail | | 1,054 | | | 1,005 | | | 49 | |
| Wholesale | Wholesale | | 67 | | | 100 | | | (33) | | Wholesale | | 117 | | | 67 | | | 50 | |
| Total generation sales | Total generation sales | | 1,072 | | | 1,089 | | | (17) | | Total generation sales | | 1,171 | | | 1,072 | | | 99 | |
| | | Other | Other | | 61 | | | 65 | | | (4) | | Other | | 54 | | | 61 | | | (7) | |
| Total Revenues | Total Revenues | | $ | 2,661 | | | $ | 2,636 | | | $ | 25 | | Total Revenues | | $ | 2,759 | | | $ | 2,661 | | | $ | 98 | |
(1) Includes $25 million of ARP revenues for the three months ended September 30, 2020, and 2019.respectively.
Distribution revenues increased $46$6 million in the third quarter of 2020,2021, as compared to the same period of 2019,2020, primarily resulting from the higher rates associated with incremental riders in Ohio and Pennsylvania, including the recovery of distribution capital investment programs and transmission expenses, increased residential sales due to the continued impact of COVID-19, and higher weather-related customer usage, partially offset by the absence of decoupling and lost distribution revenues in Ohio, the NJ storm recovery rider, the expirationelimination of a NUG contractenergy efficiency mandates and energy efficiency programs in 2020,Ohio, and lower commercial and industrial sales due to the continued impact of COVID-19.weather-related demand. Distribution services by customer class are summarized in the following table:
| | | For the Three Months Ended September 30, | | | | For the Three Months Ended September 30, | |
| | (In thousands) | | (In thousands) | | Actual | | Weather-Adjusted | |
| Electric Distribution MWH Deliveries | Electric Distribution MWH Deliveries | | 2020 | | 2019 | | Increase (Decrease) | | | Electric Distribution MWH Deliveries | | 2021 | | 2020 | | Increase (Decrease) | | 2021 | | 2020 | | Increase | |
| | | (In thousands) | | | | | |
| Residential | Residential | | 16,091 | | | 15,306 | | | 5.1 | % | | | Residential | | 15,652 | | | 16,091 | | | (2.7) | % | | 15,200 | | | 15,157 | | | 0.3 | % | |
Commercial(1) | Commercial(1) | | 9,589 | | | 10,148 | | | (5.5) | % | | | Commercial(1) | | 9,785 | | | 9,589 | | | 2.0 | % | | 9,672 | | | 9,360 | | | 3.3 | % | |
| Industrial | Industrial | | 13,560 | | | 14,477 | | | (6.3) | % | | | Industrial | | 14,018 | | | 13,560 | | | 3.4 | % | | 14,018 | | | 13,533 | | | 3.6 | % | |
| | Total Electric Distribution MWH Deliveries | Total Electric Distribution MWH Deliveries | | 39,240 | | | 39,931 | | | (1.7) | % | | | Total Electric Distribution MWH Deliveries | | 39,455 | | | 39,240 | | | 0.5 | % | | 38,890 | | | 38,050 | | | 2.2 | % | |
(1) Includes street lighting.
Distribution servicesdeliveries to residential, commercial and industrial customers primarily reflects an increase inreflect the cancellation of the state mandated COVID-19 stay-at-home orders. Residential and commercial deliveries were also impacted by lower weather-related customer load due to the continued impact of COVID-19 and higher weather-related usage. Deliveries to commercial customers were lower due to the continued impact of COVID-19, partially offset by higher weather-related usage. Cooling degree days were relatively flat compared to 2019,6% below 2020 and 21%11% above normal. Deliveries toIncreases in industrial customersdeliveries were also negatively impacted due toprimarily seen in the continued impact of COVID-19 contributing to lower steel mining, and educational services customer usage, partially offset by higher shale customer usage.
The following table summarizes the price and volume factors contributing to the $17$99 million decreaseincrease in generation revenues for the third quarter of 2020,2021, as compared to the same period of 2019:2020:
| | | | | | | | |
| Source of Change in Generation Revenues | | Increase (Decrease) |
| | | (In millions) |
| Retail: | | |
| Change in sales volumes | | $ | 30 (6) | |
| Change in prices | | (14)55 | |
| | | 1649 | |
| Wholesale: | | |
| Change in sales volumes | | (21)3 | |
| Change in prices | | (1)26 | |
| Capacity revenue | | (11)21 | |
| | (33)50 | |
| | |
DecreaseChange in Generation Revenues | | $ | (17)99 | |
The increasedecrease in retail generation sales volumes was primarily due to decreased customer shopping in New Jersey and Pennsylvania, an increase in residential load due to the continued impact of COVID-19 in our service territories, and higherlower weather-related usage. Total generation provided by alternative suppliers as a percentage of total MWH deliveries decreased to 43% from 45% in New Jersey and to 63% from 66% in Pennsylvania. The decreaseincrease in retail generation prices primarily resulted from lowerhigher non-shopping generation auction rates at WPP.in Pennsylvania, partially offset by a lower ENEC rate in West Virginia.
Wholesale generation revenues decreased $33increased $50 million in the third quarter of 2020,2021, as compared to the same period in 2019,of 2020, primarily due to decreased volumes associated with lower economic dispatch of MP’s generating units resulting from lowan increase in spot market energy prices the expiration of a NUG contract, and lower capacity revenues. 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.
Other revenues decreased $7 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to the lower recovery of refinancing costs associated with the Ohio PIR, which are deferred for future recovery resulting in no material impact on earnings.
Operating Expenses —
Total operating expenses increased $22$105 million in the third quarter of 2020,2021, as compared to the same period of 2019,2020, primarily due to the following:
•Fuel expense decreased $21increased $31 million in the third quarter of 2020,2021, as compared to the same period of 2019,2020, primarily due to lowerhigher unit costs, andpartially offset by lower generation output resulting from planned outages. Due to the ENEC, fuel consumption as a result of economic dispatch.expense has no material impact on current period earnings.
•Purchased power costs were $32increased $107 million lower in the third quarter of 2021, as compared to the same period of 2020, primarily due to higher unit costs, volumes and capacity expenses.
| | | | | | | | |
| Source of Change in Purchased Power | | Increase |
|
| | (In millions) |
| Purchases | | |
| Change due to unit costs | | $ | 45 | |
| Change due to volumes | | 17 | |
| | 62 | |
| Capacity expense | | 45 | |
| | |
| Change in Purchased Power Costs | | $ | 107 | |
•Other operating expenses decreased $166 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to the following:
•Lower storm restoration costs of $131 million, which were mostly deferred for future recovery, resulting in no material impact on current period earnings.
•Lower COVID-19 related expenses of $25 million, of which $8 million was deferred for future recovery.
•Lower expense due to a $27 million reduction to a reserve previously recorded in 2010.
•Lower energy efficiency costs of $20 million, which are deferred for future recovery, resulting in no material impact on current period earnings.
•Lower uncollectible expenses of $10 million, which were mostly deferred for future recovery, resulting in no material impact on current period earnings.
•Lower pension and OPEB service costs of $2 million.
•Higher network transmission expenses of $24 million, which were mostly deferred for future recovery, resulting in no material impact on current period earnings.
•Higher other operating and maintenance expenses of $25 million primarily associated with increased labor costs and higher vegetation management expense, partially offset by lower regulated generation planned outage spend.
•Depreciation expense increased $6 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to a higher asset base, partially offset by a reduction in accretion expense as a result of the TMI-2 transfer, which has no impact to earnings.
•Amortization of regulatory assets, netincreased $120 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to lower deferrals of storm restoration, transmission, COVID-19, and energy efficiency related costs, partially offset by the amortization of a regulatory liability as part of the New Jersey base rate case implementation in 2021, higher generation related deferrals, and lower Pennsylvania smart meter amortization.
•General taxes increased $7 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to higher property and payroll taxes.
Other Expenses —
Other expense decreased $9 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to lower pension and OPEB non-service costs, partially offset by higher interest expense from long-term debt issuances since the third quarter of 2020 and lower capitalized interest.
Income Taxes —
Regulated Distribution’s effective tax rate was 20.6% and 20.9% for the three months ended September 30, 2021 and 2020, respectively.
Regulated Transmission — Third Quarter 2021 Compared with Third Quarter 2020
Regulated Transmission’s net income decreased $45 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to a charge resulting from the filed ATSI settlement, higher interest expense associated with new debt issuance at FET, a lower rate base at TrAIL and prior year formula rate true-ups, partially offset by a higher rate base at MAIT and ATSI.
Revenues —
Total revenues increased $2 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to recovery of incremental operating expenses and a higher rate base at MAIT and ATSI, partially offset by a lower rate base at TrAIL.
The following table shows revenues by transmission asset owner:
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | Increase (Decrease) |
| Revenues by Transmission Asset Owner | | 2021 | | | 2020 | | |
| | (In millions) |
| ATSI | | $ | 208 | | | | $ | 203 | | | | $ | 5 | |
| TrAIL | | 61 | | | | 63 | | | | (2) | |
| MAIT | | 75 | | | | 70 | | | | 5 | |
| JCP&L | | 41 | | | | 43 | | | | (2) | |
| MP, PE and WP | | 30 | | | | 34 | | | | (4) | |
| | | | | | | | |
| Total Revenues | | $ | 415 | | | | $ | 413 | | | | $ | 2 | |
Operating Expenses —
Total operating expenses increased $59 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to a charge resulting from the filed ATSI settlement, prior year formula rate true-ups and increased depreciation and property taxes due to a higher asset base.
Income Taxes —
Regulated Transmission’s effective tax rate was 24.7% and 23.3% for the three months ended September 30, 2021 and 2020, respectively.
Corporate / Other — Third Quarter 2021 Compared with Third Quarter 2020
Financial results at Corporate/Other resulted in a $51 million decrease in net loss in the third quarter of 2021, as compared to the same period of 2020, primarily due to a gain from discontinued operations, net of tax, higher returns on certain equity method investments and higher income tax benefits, partially offset by higher investigation and other related costs.
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.
Summary of Results of Operations — First Nine Months of 2021 Compared with First Nine Months of 2020
Financial results for FirstEnergy’s business segments in the first nine months of 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) 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 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| First Nine Months 2020 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | (In millions) |
| Revenues: | | | | | | | | |
| | | | | | | | |
| Electric | | $ | 7,031 | | | $ | 1,185 | | | $ | (105) | | | $ | 8,111 | |
| Other | | 176 | | | 13 | | | (47) | | | 142 | |
| | | | | | | | |
| Total Revenues | | 7,207 | | | 1,198 | | | (152) | | | 8,253 | |
| | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Fuel | | 276 | | | — | | | — | | | 276 | |
| Purchased power | | 2,062 | | | — | | | 11 | | | 2,073 | |
| Other operating expenses | | 2,345 | | | 201 | | | (130) | | | 2,416 | |
| | | | | | | | |
| Provision for depreciation | | 672 | | | 233 | | | 49 | | | 954 | |
| | | | | | | | |
| Amortization (deferral) of regulatory assets, net | | (32) | | | 6 | | | — | | | (26) | |
| General taxes | | 583 | | | 177 | | | 32 | | | 792 | |
| | | | | | | | |
| | | | | | | | |
| Total Operating Expenses | | 5,906 | | | 617 | | | (38) | | | 6,485 | |
| | | | | | | | |
| Operating Income (Loss) | | 1,301 | | | 581 | | | (114) | | | 1,768 | |
| | | | | | | | |
| Other Income (Expense): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Miscellaneous income, net | | 246 | | | 21 | | | 36 | | | 303 | |
| | | | | | | | |
| Pension and OPEB mark-to-market adjustment | | (257) | | | (19) | | | (147) | | | (423) | |
| Interest expense | | (374) | | | (162) | | | (256) | | | (792) | |
| Capitalized financing costs | | 28 | | | 28 | | | 1 | | | 57 | |
| Total Other Expense | | (357) | | | (132) | | | (366) | | | (855) | |
| | | | | | | | |
| Income (Loss) Before Income Taxes (Benefits) | | 944 | | | 449 | | | (480) | | | 913 | |
| Income taxes (benefits) | | 144 | | | 103 | | | (125) | | | 122 | |
| Income (Loss) From Continuing Operations | | 800 | | | 346 | | | (355) | | | 791 | |
| Discontinued operations, net of tax | | — | | | — | | | 46 | | | 46 | |
| Net Income (Loss) | | $ | 800 | | | $ | 346 | | | $ | (309) | | | $ | 837 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes Between First Nine Months 2021 and First Nine Months 2020 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | (In millions) |
| Revenues: | | | | | | | | |
| | | | | | | | |
| Electric | | $ | 199 | | | $ | 38 | | | $ | 2 | | | $ | 239 | |
| Other | | (19) | | | (3) | | | 2 | | | (20) | |
| | | | | | | | |
| Total Revenues | | 180 | | | 35 | | | 4 | | | 219 | |
| | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Fuel | | 86 | | | — | | | — | | | 86 | |
| Purchased power | | 130 | | | — | | | 3 | | | 133 | |
| Other operating expenses | | (174) | | | 77 | | | 7 | | | (90) | |
| | | | | | | | |
| Provision for depreciation | | 12 | | | 7 | | | (1) | | | 18 | |
| | | | | | | | |
| Amortization (deferral) of regulatory assets, net | | 191 | | | 6 | | | — | | | 197 | |
| General taxes | | 16 | | | 9 | | | (5) | | | 20 | |
| DPA penalty | | — | | | — | | | 230 | | | 230 | |
| Gain on sale of Yards Creek | | (109) | | | — | | | — | | | (109) | |
| | | | | | | | |
| Total Operating Expenses | | 152 | | | 99 | | | 234 | | | 485 | |
| | | | | | | | |
| Operating Income (Loss) | | 28 | | | (64) | | | (230) | | | (266) | |
| | | | | | | | |
| Other Income (Expense): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Miscellaneous income, net | | 51 | | | 13 | | | 12 | | | 76 | |
| | | | | | | | |
| Pension and OPEB mark-to-market adjustment | | 257 | | | 19 | | | 147 | | | 423 | |
| Interest expense | | (18) | | | (24) | | | (21) | | | (63) | |
| Capitalized financing costs | | 2 | | | (5) | | | — | | | (3) | |
| Total Other Expense | | 292 | | | 3 | | | 138 | | | 433 | |
| | | | | | | | |
| Income (Loss) Before Income Taxes (Benefits) | | 320 | | | (61) | | | (92) | | | 167 | |
| Income taxes (benefits) | | 117 | | | (10) | | | 42 | | | 149 | |
| Income (Loss) From Continuing Operations | | 203 | | | (51) | | | (134) | | | 18 | |
| Discontinued operations, net of tax | | — | | | — | | | 1 | | | 1 | |
| Net Income (Loss) | | $ | 203 | | | $ | (51) | | | $ | (133) | | | $ | 19 | |
| | | | | | | | |
| | | | | | | | |
Regulated Distribution — First Nine Months of 2021 Compared with First Nine Months of 2020
Regulated Distribution’s net income increased $203 million in the first nine months of 2021, as compared to the same period of 2020, primarily resulting from the absence of the pension and OPEB mark-to-market adjustment in 2020, higher weather-related demand, earnings benefits from investment-related riders and the implementation of the base distribution rate case in New Jersey, lower pension and OPEB expenses and a reduction to a reserve previously recorded in 2010, partially offset by the absence of Ohio decoupling and lost distribution revenues, higher interest expense, and the absence of deferred gain tax benefits recognized in 2020 that were triggered by the FES Debtors’ emergence from bankruptcy.
Revenues —
The $180 million increase in total revenues resulted from the following sources:
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| Revenues by Type of Service | | 2021 | | 2020 | | Increase (Decrease) |
| | (In millions) |
Distribution services(1) | | $ | 4,150 | | | $ | 4,108 | | | $ | 42 | |
| | | | | | |
| Generation sales: | | | | | | |
| Retail | | 2,820 | | | 2,735 | | | 85 | |
| Wholesale | | 260 | | | 188 | | | 72 | |
| Total generation sales | | 3,080 | | | 2,923 | | | 157 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other | | 157 | | | 176 | | | (19) | |
| Total Revenues | | $ | 7,387 | | | $ | 7,207 | | | $ | 180 | |
(1) Includes $(27) million and $108 million of ARP revenues for the nine months ended September 30, 2021 and 2020. Amounts for the nine months ended 2021 reflect amounts the Ohio Companies refunded to customers that was previously collected under decoupling mechanisms, with interest. See “Outlook,” below for further discussion on Ohio decoupling rates.
Distribution services revenues increased $42 million in the first nine months 2021, as compared to the same period of 2020, primarily resulting from higher rates associated with riders in Ohio and Pennsylvania including the recovery of capital investment programs and transmission expenses and higher weather-related demand, partially offset by the absence of decoupling and lost distribution revenues in Ohio, the elimination of energy efficiency mandates and energy efficiency programs in Ohio and Pennsylvania and the expiration of a NUG contract. Distribution services by customer class are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | | | | |
| (In thousands) | | Actual | | Weather-Adjusted and Leap Year-Adjusted | |
| Electric Distribution MWH Deliveries | | 2021 | | 2020 | | Increase | | 2021 | | 2020 | | Increase (Decrease) | | | | | |
| | | | | | | | | | | | |
| Residential | | 42,890 | | | 42,059 | | | 2.0 | % | | 42,458 | | | 42,725 | | | (0.6) | % | | | | | |
Commercial(1) | | 27,004 | | | 26,316 | | | 2.6 | % | | 26,990 | | | 26,582 | | | 1.5 | % | | | | | |
| Industrial | | 40,659 | | | 39,118 | | | 3.9 | % | | 40,659 | | | 39,039 | | | 4.1 | % | | | | | |
| | | | | | | | | | | | | | | | | |
| Total Electric Distribution MWH Deliveries | | 110,553 | | | 107,493 | | | 2.8 | % | | 110,107 | | | 108,346 | | | 1.6 | % | | | | | |
(1) Includes street lighting.
Distribution deliveries to residential, commercial and industrial customers reflects the cancellation of the state mandated COVID-19 stay-at-home orders. Residential and commercial deliveries were also impacted by higher weather-related customer usage. Cooling degree days were 1% above 2020 and 15% above normal and heating degree days were 5% above 2020 and 5% below normal. Increases in industrial deliveries were primarily from the steel, other manufacturing, and educational sectors.
The following table summarizes the price and volume factors contributing to the $157 million increase in generation revenues for the first nine months of 2021, as compared to the same period of 2020:
| | | | | | | | |
| Source of Change in Generation Revenues | | Increase (Decrease) |
| | (In millions) |
| Retail: | | |
| Change in sales volumes | | $ | 124 | |
| Change in prices | | (39) | |
| | 85 | |
| Wholesale: | | |
| Change in sales volumes | | 16 | |
| Change in prices | | 47 | |
| Capacity revenue | | 9 | |
| | 72 | |
| Change in Generation Revenues | | $ | 157 | |
The increase in retail generation sales volumes was primarily due to higher weather-related usage and decreased customer shopping in New Jersey and Pennsylvania. Total generation provided by alternative suppliers as a percentage of total MWH deliveries in the first nine months of 2021, as compared to the same period of 2020, decreased to 45% from 47% in New Jersey and to 63% from 64% in Pennsylvania. The decrease in retail generation prices primarily resulted from a lower ENEC rate in West Virginia, partially offset by higher non-shopping generation auction rates in Pennsylvania and New Jersey.
Wholesale generation revenues increased $72 million in the first nine months of 2021, as compared to the same period in 2019,2020, primarily due to increased sales volumes, an increase in spot market energy prices and higher capacity revenues. 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.
Other revenues decreased $19 million in the first nine months of 2021, as compared to the same period in 2020, primarily due to lower pricespole attachment revenue and the lower recovery of refinancing costs associated with the Ohio PIR. Costs associated with the Ohio PIR are deferred for future recovery resulting in no material impact on earnings.
Operating Expenses —
Total operating expenses increased $152 million, primarily due to the following:
•Fuel costs increased $86 million during the first nine months of 2021, as compared to the same period of 2020, primarily due to higher unit costs and increased generation output. Due to the ENEC, fuel expense has no material impact on current earnings.
•Purchased power costs increased $130 million during the first nine months of 2021, as compared to the same period of 2020, primarily due to increased volumes as described above and increased capacity expenses, partially offset by lower unit costs and fewer purchases resulting from the expiration of a NUG contract, partially offset by increased volumes as described above.contract.
| | | | | | | | |
| Source of Change in Purchased Power | | Increase (Decrease) |
|
| | | (In millions) |
| | |
| | |
| | |
| | |
PurchasesPurchases: | | |
| Change due to unit costs | | $ | (40)(35) | |
| Change due to volumes | | 1397 | |
| | | (27)62 | |
Capacity expense | | (5)68 | |
| | |
DecreaseChange in Purchased Power Costs | | $ | (32)130 | |
•Other operating expenses increased $198decreased $174 million in the third quarterfirst nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to the following:to:
•IncreasedLower storm restoration costs of $136$133 million, primarily related to tropical storm Isaias, which were mostly deferred for future recovery, resulting in no material impact on current period earnings.
•Higher incrementalLower uncollectible and other COVID-19 related expensesexpense of $49$87 million, of which $22$50 million was deferred for future recovery.
•Lower West Virginia vegetation management spend and energy efficiency program costs of $41 million, which are deferred for future recovery, resulting in no material impact on earnings.
•Lower COVID-19 related expenses of $38 million, of which $8 million was deferred for future recovery.
•Lower expense due to a $27 million reduction to a reserve previously recorded in 2010.
•Higher network transmission expenses of $15$93 million. These costs are deferred for future recovery, resulting in no material impact on current period earnings.
•Higher pension and OPEB service costs of $11 million.
•Higher other operating and maintenance expenses of $4$50 million, primarily associated with regulated generation maintenance activities.
•Lower energy efficiency program costsincreased labor corporate support and vegetation management spend of $17 million. These costs are deferred for future recovery, resulting in no material impact on earnings.
•Depreciation expense increased $8 million in the third quarter of 2020, as compared to the same period of 2019, primarily due to a higher asset base.
•Deferral of regulatory assets increased $133 million in the third quarter of 2020, as compared to the same period of 2019, primarily due to higher storm restoration, uncollectible and other COVID-19 related costs, partially offset by lower generation and transmission deferrals, the recovery of distribution investment programs and lower energy efficiency related costs.
Other Expenses —
Other expense decreased $46 million in the third quarter of 2020, as compared to the same period of 2019, primarily due to higher net miscellaneous income resulting from lower pension non-service costs.
Income Taxes —
Regulated Distribution’s effective tax rate was 20.9% and 21.8% for the three months ended September 30, 2020 and 2019, respectively.
Regulated Transmission — Third Quarter 2020 Compared with Third Quarter 2019
Regulated Transmission’s net income increased $2 million in the third quarter of 2020, as compared to the same period of 2019, primarily due to higher rate base at ATSI and MAIT associated with Energizing the Future transmission plan, partially offset by higher interest expense and the absence of tax benefits in the third quarter of 2019.
Revenues —
Total revenues increased $38 million in the third quarter of 2020, as compared to the same period of 2019, primarily due to recovery of incremental operating expenses and a higher rate base at ATSI and MAIT.
The following table shows revenues by transmission asset owner:
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | Increase |
| Revenues by Transmission Asset Owner | | 2020 | | | 2019 | | |
| | (In millions) |
| ATSI | | $ | 203 | | | | $ | 185 | | | | $ | 18 | |
| TrAIL | | 63 | | | | 57 | | | | 6 | |
| MAIT | | 70 | | | | 59 | | | | 11 | |
| JCP&L | | 43 | | | | 40 | | | | 3 | |
| Other | | 34 | | | | 34 | | | | — | |
| Total Revenues | | $ | 413 | | | | $ | 375 | | | | $ | 38 | |
Operating Expenses —
Total operating expenses increased $24 million in the third quarter of 2020, as compared to the same period of 2019, primarily due to higher property taxes and depreciation due to a higher asset base, and higher operating and maintenance expenses. The majority of operating expenses are recovered through formula rates, resulting in no material impact on current period earnings.
Other Expense —
Other expenses increased $3 million due to the impact of higher net financing costs from money pool borrowing and lending activities at FET and debt issuances at ATSI, MAIT and FET, partially offset by lower pension and OPEB non-service costs.
Income Taxes —
Regulated Transmission’s effective tax rate was 23.3% and 18.7% for the three months ended September 30, 2020 and 2019, respectively, primarily due to changes in the amortization of excess deferred income taxes and the absence of tax benefits in 2019.
Corporate / Other — Third Quarter 2020 Compared with Third Quarter 2019
Financial results at Corporate/Other resulted in a $26 million decrease in loss from continuing operations in the third quarter of 2020, as compared to the same period of 2019, primarily due to higher tax benefits and lower other operating expenses, partially offset by lower returns on certain equity method investments.
Forfewer planned outages at the three months ended September 30, 2020, FirstEnergy recorded a loss from discontinued operations, net of tax, of $6 million compared to income, net of tax, of $2 million for the three months ended September 30, 2019.
Summary of Results of Operations — First Nine Months of 2020 Compared with First Nine Months of 2019
Financial results for FirstEnergy’s business segments in the first nine months of 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| First Nine Months 2020 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | (In millions) |
| Revenues: | | | | | | | | |
| Electric | | $ | 7,031 | | | $ | 1,185 | | | $ | (105) | | | $ | 8,111 | |
| Other | | 176 | | | 13 | | | (47) | | | 142 | |
| Total Revenues | | 7,207 | | | 1,198 | | | (152) | | | 8,253 | |
| | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Fuel | | 276 | | | — | | | — | | | 276 | |
| Purchased power | | 2,062 | | | — | | | 11 | | | 2,073 | |
| Other operating expenses | | 2,345 | | | 201 | | | (130) | | | 2,416 | |
| | | | | | | | |
| Provision for depreciation | | 672 | | | 233 | | | 49 | | | 954 | |
| | | | | | | | |
| Amortization (deferral) of regulatory assets, net | | (32) | | | 6 | | | — | | | (26) | |
| General taxes | | 583 | | | 177 | | | 32 | | | 792 | |
| | | | | | | | |
| Total Operating Expenses | | 5,906 | | | 617 | | | (38) | | | 6,485 | |
| | | | | | | | |
| Operating Income (Loss) | | 1,301 | | | 581 | | | (114) | | | 1,768 | |
| | | | | | | | |
| Other Income (Expense): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Miscellaneous income, net | | 246 | | | 21 | | | 36 | | | 303 | |
| Pension and OPEB mark-to-market adjustment | | (257) | | | (19) | | | (147) | | | (423) | |
| Interest expense | | (374) | | | (162) | | | (256) | | | (792) | |
| Capitalized financing costs | | 28 | | | 28 | | | 1 | | | 57 | |
| Total Other Expense | | (357) | | | (132) | | | (366) | | | (855) | |
| | | | | | | | |
| Income (Loss) Before Income Taxes (Benefits) | | 944 | | | 449 | | | (480) | | | 913 | |
| Income taxes (benefits) | | 144 | | | 103 | | | (125) | | | 122 | |
| Income (Loss) From Continuing Operations | | 800 | | | 346 | | | (355) | | | 791 | |
| Discontinued operations, net of tax | | — | | | — | | | 46 | | | 46 | |
| Net Income (Loss) | | $ | 800 | | | $ | 346 | | | $ | (309) | | | $ | 837 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| First Nine Months 2019 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | (In millions) |
| Revenues: | | | | | | | | |
| | | | | | | | |
| Electric | | $ | 7,214 | | | $ | 1,090 | | | $ | (96) | | | $ | 8,208 | |
| Other | | 187 | | | 13 | | | (46) | | | 154 | |
| | | | | | | | |
| Total Revenues | | 7,401 | | | 1,103 | | | (142) | | | 8,362 | |
| | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Fuel | | 382 | | | — | | | — | | | 382 | |
| Purchased power | | 2,177 | | | — | | | 13 | | | 2,190 | |
| Other operating expenses | | 2,116 | | | 205 | | | (178) | | | 2,143 | |
| | | | | | | | |
| Provision for depreciation | | 644 | | | 211 | | | 55 | | | 910 | |
| | | | | | | | |
| Amortization of regulatory assets, net | | 79 | | | 6 | | | — | | | 85 | |
| General taxes | | 572 | | | 156 | | | 29 | | | 757 | |
| | | | | | | | |
| Total Operating Expenses | | 5,970 | | | 578 | | | (81) | | | 6,467 | |
| | | | | | | | |
| Operating Income (Loss) | | 1,431 | | | 525 | | | (61) | | | 1,895 | |
| | | | | | | | |
| Other Income (Expense): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Miscellaneous income, net | | 128 | | | 12 | | | 51 | | | 191 | |
| Pension and OPEB mark-to-market adjustment | | — | | | — | | | — | | | — | |
| Interest expense | | (370) | | | (142) | | | (261) | | | (773) | |
| Capitalized financing costs | | 27 | | | 25 | | | 1 | | | 53 | |
| Total Other Expense | | (215) | | | (105) | | | (209) | | | (529) | |
| | | | | | | | |
| Income (Loss) Before Income Taxes (Benefits) | | 1,216 | | | 420 | | | (270) | | | 1,366 | |
| Income taxes (benefits) | | 259 | | | 87 | | | (65) | | | 281 | |
| Income (Loss) From Continuing Operations | | 957 | | | 333 | | | (205) | | | 1,085 | |
| Discontinued operations, net of tax | | — | | | — | | | (62) | | | (62) | |
| Net Income (Loss) | | $ | 957 | | | $ | 333 | | | $ | (267) | | | $ | 1,023 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Changes Between First Nine Months 2020 and First Nine Months 2019 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | (In millions) |
| Revenues: | | | | | | | | |
| | | | | | | | |
| Electric | | $ | (183) | | | $ | 95 | | | $ | (9) | | | $ | (97) | |
| Other | | (11) | | | — | | | (1) | | | (12) | |
| | | | | | | | |
| Total Revenues | | (194) | | | 95 | | | (10) | | | (109) | |
| | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Fuel | | (106) | | | — | | | — | | | (106) | |
| Purchased power | | (115) | | | — | | | (2) | | | (117) | |
| Other operating expenses | | 229 | | | (4) | | | 48 | | | 273 | |
| | | | | | | | |
| Provision for depreciation | | 28 | | | 22 | | | (6) | | | 44 | |
| | | | | | | | |
| Amortization (deferral) of regulatory assets, net | | (111) | | | — | | | — | | | (111) | |
| General taxes | | 11 | | | 21 | | | 3 | | | 35 | |
| | | | | | | | |
| Total Operating Expenses | | (64) | | | 39 | | | 43 | | | 18 | |
| | | | | | | | |
| Operating Income (Loss) | | (130) | | | 56 | | | (53) | | | (127) | |
| | | | | | | | |
| Other Income (Expense): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Miscellaneous income (expense), net | | 118 | | | 9 | | | (15) | | | 112 | |
| Pension and OPEB mark-to-market adjustment | | (257) | | | (19) | | | (147) | | | (423) | |
| Interest expense | | (4) | | | (20) | | | 5 | | | (19) | |
| Capitalized financing costs | | 1 | | | 3 | | | — | | | 4 | |
| Total Other Expense | | (142) | | | (27) | | | (157) | | | (326) | |
| | | | | | | | |
| Income (Loss) Before Income Taxes (Benefits) | | (272) | | | 29 | | | (210) | | | (453) | |
| Income taxes (benefits) | | (115) | | | 16 | | | (60) | | | (159) | |
| Income (Loss) From Continuing Operations | | (157) | | | 13 | | | (150) | | | (294) | |
| Discontinued operations, net of tax | | — | | | — | | | 108 | | | 108 | |
| Net Income (Loss) | | $ | (157) | | | $ | 13 | | | $ | (42) | | | $ | (186) | |
| | | | | | | | |
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Regulated Distribution — First Nine Months of 2020 Compared with First Nine Months of 2019
Regulated Distribution’s net income decreased $157 million in the first nine months of 2020, as compared to the same period of 2019, primarily resulting from the pension and OPEB mark-to-market adjustment in 2020, lower weather-related customer usage, the absence of the DMR revenues that ended in July 2019, partially offset by lower pension and OPEB non-service costs, higher revenues from incremental riders in Ohio and Pennsylvania and increased residential sales due to the continued impact of COVID-19.
Revenues —
The $194 million decrease in total revenues resulted from the following sources:
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| | For the Nine Months Ended September 30, |
| Revenues by Type of Service | | 2020 | | 2019 | | Increase (Decrease) |
| | (In millions) |
Distribution services(1) | | $ | 4,108 | | | $ | 4,045 | | | $ | 63 | |
| | | | | | |
| Generation sales: | | | | | | |
| Retail | | 2,735 | | | 2,853 | | | (118) | |
| Wholesale | | 188 | | | 316 | | | (128) | |
| Total generation sales | | 2,923 | | | 3,169 | | | (246) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other | | 176 | | | 187 | | | (11) | |
| Total Revenues | | $ | 7,207 | | | $ | 7,401 | | | $ | (194) | |
(1) Includes $108 million and $142 million of ARP revenues for the nine months ended September 30, 2020 and 2019, respectively.
Distribution services revenues increased $63 million in the first nine months of 2020, as compared to the same period of 2019, primarily resulting from the implementation of Ohio decoupling rates in 2020, higher rates associated with incremental riders in Ohio and Pennsylvania, including the recovery of distribution capital investment programs and transmission expenses, increased residential sales due to the continued impact of COVID-19 and the implementation of the New Jersey Zero Emission Program in June 2019, partially offset by the absence of the NJ storm recovery rider and DMR revenues that ended in 2019, lower weather-related customer usage, the expiration of a NUG contract and lower commercial and industrial sales due to the continued impact of COVID-19. Distribution services by customer class are summarized in the following table:
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| | For the Nine Months Ended September 30, | | | | | | |
| | | | |
| Electric Distribution MWH Deliveries | | 2020 | | 2019 | | Increase (Decrease) | | | | | | |
| | (In thousands) | | | | | | | | |
| Residential | | 42,059 | | | 41,311 | | | 1.8 | % | | | | | | |
Commercial(1) | | 26,316 | | | 28,909 | | | (9.0) | % | | | | | | |
| Industrial | | 39,118 | | | 42,032 | | | (6.9) | % | | | | | | |
| | | | | | | | | | | | |
| Total Electric Distribution MWH Deliveries | | 107,493 | | | 112,252 | | | (4.2) | % | | | | | | |
(1) Includes street lighting.
Distribution services to residential customers primarily reflects an increase in customer load due to the continued impact of COVID-19, partially offset by lower weather related usage. Deliveries to commercial customers reflects lower weather-related usage and the continued impact of COVID-19. Heating degree days were 5% below 2019, and 10% below normal. Cooling degree days were 1% above 2019, and 16% above normal. Deliveries to industrial customers were also negatively impacted due to the continued impact of COVID-19 contributing to lower steel, mining, educational services and automotive customer usage, partially offset by higher shale customer usage.
The following table summarizes the price and volume factors contributing to the $246 million decrease inregulated generation revenues for the first nine months of 2020, as compared to the same period of 2019:
| | | | | | | | |
Source of Change in Generation Revenues | | Decrease |
| | (In millions) |
Retail: | | |
Change in sales volumes | | $ | (46) | |
Change in prices | | (72) | |
| | (118) | |
Wholesale: | | |
Change in sales volumes | | (69) | |
Change in prices | | (5) | |
Capacity revenue | | (54) | |
| | (128) | |
Decrease in Generation Revenues | | $ | (246) | |
The decrease in retail generation sales volumes was primarily due to lower weather-related usage, partially offset by an increase in residential load due to the continued impact of COVID-19. The decrease in retail generation prices primarily resulted from lower non-shopping generation auction rates in New Jersey and Pennsylvania.
Wholesale generation revenues decreased $128 million in the first nine months of 2020, as compared to the same period in 2019, primarily due to decreased volumes associated with lower economic dispatch of MP’s generating units resulting from low spot market energy prices, the expiration of a NUG contract and lower capacity revenues. 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 decreased $64 million, primarily due to the following:
•Fuel costs were $106 million lower during the first nine months of 2020, as compared to the same period of 2019, primarily due to lower unit costs and lower fuel consumption as a result of economic dispatch.
•Purchased power costs decreased $115 million during the first nine months of 2020, as compared to the same period of 2019, primarily due to lower prices and capacity expenses and decreased purchases resulting from the expiration of a NUG contract, partially offset by the implementation of the NJ Zero Emission Program in June 2019.
| | | | | | | | |
Source of Change in Purchased Power | | Decrease |
|
| | (In millions) |
| | |
| | |
| | |
| | |
Purchases: | | |
Change due to unit costs | | $ | (39) | |
Change due to volumes | | (19) | |
| | (58) | |
Capacity | | (57) | |
| | |
Decrease in Purchased Power Costs | | $ | (115) | |
•Other operating expenses increased $229 million in the first nine months of 2020, as compared to the same period of 2019, primarily due to:
•Higher incremental uncollectible and other COVID-19 related expenses of $117 million, of which $53 million was deferred for future recovery.
•Increased storm restoration costs of $59 million, which were mostly deferred for future recovery, resulting in no material impact on current period earnings.
•Higher network transmission expenses of $36 million. These costs are deferred for future recovery, resulting in no material impact on current period earnings.facilities.
•Higher employee benefit costs of approximately $20$9 million.
•Higher pension and OPEB service costs of $24 million.
•Higher other operating and maintenance expense of $9 million, primarily associated with regulated generation maintenance activities.
•Lower vegetation management spend and energy efficiency program costs of $36 million, which are deferred for future recovery, resulting in no material impact on earnings.
•Depreciation expense increased $28$12 million in the first nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to a higher asset base.base, partially offset by a reduction in accretion expense as a result of the TMI-2 transfer, which has no impact to earnings.
•DeferralAmortization of regulatory assets, net increased $111$191 million in the first nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to higherthe reduction of the New Jersey deferred storm cost regulatory asset as a result of the Yards Creek sale, lower deferrals of storm restoration, transmission, uncollectible and other COVID-19 related costs, and a decrease in deferral of accretion expense as a result of the TMI-2 transfer, partially offset by lowerthe amortization of a regulatory liability as part of the New Jersey base rate case implementation in 2021, higher generation and transmissionrelated deferrals the recovery of distribution investment programs and lower energy efficiency related costs.Pennsylvania smart meter amortization.
•General taxes increased $11$16 million in the first nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to higher Ohio property taxes and payroll taxes associated with employee benefits.taxes.
•Gain on sale of the Yards Creek Generating Facility of $109 million was netted against the New Jersey storm deferral, as described above, resulting in no impact to earnings.
Other Expense —
Other expense increased $142decreased $292 million in the first nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to a $257 million pension and OPEB mark-to-market adjustment in the first quarter of 2020 and higher interest expense from debt issuances primarily at WP and MP, partially offset by higher net miscellaneous income primarily resulting from lower pension and OPEB non-service costs.costs, partially offset by higher interest expense from increased short-term borrowings under the former FE Revolving Facility and long-term debt issuances since the third quarter of 2020.
Income Taxes —
Regulated Distribution’s effective tax rate was 15.3%20.6% and 21.3%15.3% for the nine months ended September 30, 20202021 and 2019,2020, respectively. The change in the effective tax rate was primarily due to the recognition of $52 million in deferred gains relating to prior intercompany transfers of generation assets that were triggered by the deconsolidation of the FES Debtors from FirstEnergy’s consolidated federal income tax group as a result of their emergence from bankruptcy in the first quarter of 2020.
Regulated Transmission — First Nine Months of 20202021 Compared with First Nine Months of 20192020
Regulated Transmission’s net income increased $13decreased $51 million in the first nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to a charge resulting from the filed ATSI settlement, higher interest expense associated with new debt issuances at FET and increased borrowings under the former FET Revolving Facility, lower rate base at TrAIL and prior year formula rate true-ups, partially offset by the impact of a higher rate base at ATSI and MAIT, partially offset by higher interest expense and a true-up of the forward-looking formula rate at ATSI and MAIT.
Revenues —
Total revenues increased $95$35 million, primarily due to the recovery of incremental operating expenses and a higher rate base at ATSI and MAIT, partially offset by the impact of a true-up of the forward-looking rate.lower rate base at TrAIL.
The following table shows revenues by transmission asset owner:
| | | For the Nine Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| Revenues by Transmission Asset Owner | Revenues by Transmission Asset Owner | | 2020 | | | 2019 | | | Increase (Decrease) | Revenues by Transmission Asset Owner | | 2021 | | | 2020 | | | Increase (Decrease) |
| | | (In millions) | | | (In millions) |
| ATSI | ATSI | | $ | 601 | | | | $ | 545 | | | | $ | 56 | | ATSI | | $ | 607 | | | | $ | 601 | | | | $ | 6 | |
| TrAIL | TrAIL | | 188 | | | | 178 | | | | 10 | | TrAIL | | 182 | | | | 188 | | | | (6) | |
| MAIT | MAIT | | 187 | | | | 160 | | | | 27 | | MAIT | | 222 | | | | 187 | | | | 35 | |
| JCP&L | JCP&L | | 122 | | | | 120 | | | | 2 | | JCP&L | | 126 | | | | 122 | | | | 4 | |
| MP, PE and WP | | MP, PE and WP | | 96 | | | | 100 | | | | (4) | |
| | Other | | 100 | | | | 100 | | | | — | | |
| Total Revenues | Total Revenues | | $ | 1,198 | | | | $ | 1,103 | | | | $ | 95 | | Total Revenues | | $ | 1,233 | | | | $ | 1,198 | | | | $ | 35 | |
Operating Expenses —
Total operating expenses increased $39$99 million in the first nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to a charge resulting from the filed ATSI settlement, higher operation and maintenance costs and increased property taxes and depreciation due to a higher asset base. The majority ofNearly all operating expenses are recovered through formula rates, resulting in no material impact on current period earnings.
Other Expense —
Total other expense increased $27decreased $3 million in the first nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to a $19 million pension and OPEB mark-to-market adjustment in the first quarter of 2020, andpartially offset by higher net financing costs from money pool borrowing and lending activity andinterest expense associated with new debt issuances at ATSI, MAITFET and increased borrowings under the former FET partially offset by lower pensionRevolving Facility and OPEB non-service costs.prior year formula rate true-ups.
Income Taxes —
Regulated Transmission’s effective tax rate was24.0% and 22.9% and 20.7% for the nine months ended September 30, 2021 and 2020, and 2019, respectively due to changes in the amortization of excess deferred income taxes and the absence of tax benefits in 2019.respectively.
Corporate / Other — First Nine Months of 20202021 Compared with First Nine Months of 20192020
Financial results at Corporate/Other resulted in a $150$133 million increasedincrease in net loss from continuing operations in the first nine months of 2020,2021, as compared to the same period of 2019,2020, primarily due to the $147$230 million pensionDPA monetary penalty, higher interest expense due to increased long-term debt, higher investigation and OPEB mark-to-market adjustmentother related costs, lower tax benefits from the remeasurement of West Virginia deferred income taxes resulting from a state tax law change passed in 2021 and the first quarterabsence of 2020, higher other operating expenses and lower returns on certain equity method investments, partially offset by $10 million in tax benefits from accelerated amortization of certain investment tax credits and lower other Pensionrecognized in 2020, partially offset by the absence of a pension and OPEB non-service costs.mark-to-market adjustment in 2020 and higher returns on certain equity method investments.
For the nine months ended September 30, 2020,2021, FirstEnergy recorded incomea gain from discontinued operations, net of tax, of $46 million compared to a loss, net of tax, of $62 million for the nine months ended September 30, 2019.$47 million. The change in discontinued operations, net of tax,gain was primarily due to lower settlement-related expenses withincome tax benefits from the FES Debtors, including adjustmentsfinal true-up to the estimated worthless stock deduction and Intercompany Tax Allocation Agreement, as well asa final federal NOL allocation between the accelerationFES Debtors and FirstEnergy resulting from the filing of net pension and OPEB prior service credits inthe 2020 andFirstEnergy federal income tax return during the absencethird quarter of tax expense in 2019 associated with non-deductible interest.2021.
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 at each balance sheet date and whenever new events occur. Factors that may affect probability include changes in the regulatory environment, issuance of a regulatory commission order or passage of new legislation. Management applies judgment in evaluating the evidence available to assess the probability of recovery of regulatory assets from customers, including, but not limited to evaluating evidence related to precedent for similar items at FirstEnergy and information on comparable companies within similar jurisdictions, as well as assessing progress of communications between FirstEnergy and regulators. Certain of these regulatory assets, totaling approximately $115$104 million and $111$117 million as of September 30, 20202021 and December 31, 2019,2020, respectively, are recorded based on prior precedent or anticipated recovery based on rate making premises without a specific order, of which, $78 million and $73$64 million as of September 30, 2020 and December 31, 2019, respectively,2021, are being sought for recoveryincluded in a formula rate amendment filing at ATSI that issettlement pending beforewith FERC. See Note 9,8, "Regulatory Matters" for additional information.
The following table provides information about the composition of net regulatory assets and liabilities as of September 30, 2020,2021, and December 31, 2019,2020, and the changes during the nine months ended September 30, 2020:2021:
| | Net Regulatory Assets (Liabilities) by Source | Net Regulatory Assets (Liabilities) by Source | | September 30,
2020 | | December 31,
2019 | | Change | Net Regulatory Assets (Liabilities) by Source | | September 30,
2021 | | December 31,
2020 | | Change |
| | | | (In millions) | | | (In millions) |
| | Customer payables for future income taxes | Customer payables for future income taxes | | $ | (2,456) | | | $ | (2,605) | | | $ | 149 | | Customer payables for future income taxes | | $ | (2,289) | | | $ | (2,369) | | | $ | 80 | |
| Nuclear decommissioning and spent fuel disposal costs | | (185) | | | (197) | | | 12 | | |
| Spent nuclear fuel disposal costs | | Spent nuclear fuel disposal costs | | (100) | | | (102) | | | 2 | |
| Asset removal costs | Asset removal costs | | (730) | | | (756) | | | 26 | | Asset removal costs | | (646) | | | (721) | | | 75 | |
| Deferred transmission costs | Deferred transmission costs | | 280 | | | 298 | | | (18) | | Deferred transmission costs | | 92 | | | 319 | | | (227) | |
| Deferred generation costs | Deferred generation costs | | 122 | | | 214 | | | (92) | | Deferred generation costs | | 61 | | | 17 | | | 44 | |
| Deferred distribution costs | Deferred distribution costs | | 232 | | | 155 | | | 77 | | Deferred distribution costs | | 81 | | | 79 | | | 2 | |
| Contract valuations | Contract valuations | | 37 | | | 51 | | | (14) | | Contract valuations | | 16 | | | 41 | | | (25) | |
| Storm-related costs | Storm-related costs | | 721 | | | 551 | | | 170 | | Storm-related costs | | 670 | | | 748 | | | (78) | |
| Uncollectible and COVID-19 related costs | Uncollectible and COVID-19 related costs | | 62 | | | 3 | | | 59 | | Uncollectible and COVID-19 related costs | | 59 | | | 97 | | | (38) | |
| Energy efficiency program costs | | Energy efficiency program costs | | 46 | | | 42 | | | 4 | |
| New Jersey societal benefit costs | | New Jersey societal benefit costs | | 103 | | | 112 | | | (9) | |
| Regulatory transition costs | | Regulatory transition costs | | (24) | | | (20) | | | (4) | |
| Vegetation management | | Vegetation management | | 22 | | | 22 | | | — | |
| Other | Other | | (55) | | | 25 | | | (80) | | Other | | (16) | | | (9) | | | (7) | |
| Net Regulatory Liabilities included on the Consolidated Balance Sheets | Net Regulatory Liabilities included on the Consolidated Balance Sheets | | $ | (1,972) | | | $ | (2,261) | | | $ | 289 | | Net Regulatory Liabilities included on the Consolidated Balance Sheets | | $ | (1,925) | | | $ | (1,744) | | | $ | (181) | |
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 tax rate changes such as tax reform. 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.
Nuclear decommissioning and spentSpent nuclear fuel disposal costs - Reflects a regulatory liability representing amounts collected from customers, and placed in external trusts includingthe investment income, losses and changes in fair value thereon (as well as accretion of the trusts for spent nuclear fuel disposal costs related ARO) primarily forto the future decommissioning of TMI-2.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 - Primarily represents differences between revenues earned based on actual costs for the formula-rate Transmission Companies and the amounts billed. Amounts are recorded as a regulatory asset or liability and recovered or refunded, respectively, in subsequent periods.
Deferred generation costs - Primarily relates to regulatory assets associated with the securitized recovery of certain electric customer heating discounts, 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), as well as the Ohio Companies’ deferrals related to the decoupling mechanism which are recorded as a regulatory asset or liability and recovered or refunded, respectively, in subsequent periods.
Contract valuations - Includes the amortization of purchase accounting adjustments at PE which were recorded in connection with the AEAllegheny Energy, Inc. merger representing the fair value of NUG purchased power contracts (amortized over the life of the contracts through 2030).
Storm-related costs - Relates to the recoverydeferral of storm costs, net of recovery, which vary by jurisdiction. Approximately $162$158 million and $193$167 million are currently being recovered through rates as of September 30, 20202021 and December 31, 2019,2020, respectively.
Uncollectible and COVID-19 related costs - Includes the deferral of prudently incurred incremental costs and certain waived late payment charges arising from COVID-19, including uncollectible expenses under new and existing riders 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.
New Jersey societal benefit costs - Primarily relates to regulatory assets associated with manufactured gas plant remediation, universal service and lifeline funds, and consumer education in New Jersey.
Regulatory transition costs - Includes the recovery of PN above-market NUG costs; and JCP&L costs associated with BGS, capacity and ancillary services, net of revenues from the sale of the committed supply in the wholesale market.
Vegetation management - Relates to regulatory assets in New Jersey and West Virginia associated with the recovery of 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, 20202021 and December 31, 2019,2020, of which approximately $193$192 million and $228$195 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,
2020 | | December 31,
2019 | | Change | | |
| | (In millions) | | |
| | | | | | | | |
| Deferred transmission costs | | $ | 31 | | | $ | 27 | | | $ | 4 | | | |
| Deferred generation costs | | 6 | | | 15 | | | (9) | | | |
| Storm-related costs | | 645 | | | 471 | | | 174 | | | |
| COVID-19 related costs | | 29 | | | — | | | 29 | | | |
| Other | | 31 | | | 32 | | | (1) | | | |
| Regulatory Assets Not Earning a Current Return | | $ | 742 | | | $ | 545 | | | $ | 197 | | | |
61 | | | | | | | | | | | | | | | | | | | | | | |
| Regulatory Assets by Source Not Earning a Current Return | | September 30,
2021 | | December 31,
2020 | | Change | | |
| | (In millions) | | |
| | | | | | | | |
| Deferred transmission costs | | $ | 14 | | | $ | 17 | | | $ | (3) | | | |
| Deferred generation costs | | 10 | | | 5 | | | 5 | | | |
| | | | | | | | |
| Storm-related costs | | 561 | | | 654 | | | (93) | | | |
| COVID-19 related costs | | 66 | | | 66 | | | — | | | |
| | | | | | | | |
| Regulatory transition costs | | 13 | | | 16 | | | (3) | | | |
| Vegetation management | | 20 | | | 22 | | | (2) | | | |
| Other | | 12 | | | 9 | | | 3 | | | |
| Regulatory Assets Not Earning a Current Return | | $ | 696 | | | $ | 789 | | | $ | (93) | | | |
CAPITAL RESOURCES AND LIQUIDITY
FirstEnergy’s business is capital intensive, requiring significant resources to fund operating expenses, construction expenditures, scheduled debt maturities and interest payments, dividend payments, and potential contributions to its pension plan.
The $2.5 billion equity issuance in 2018 strengthened FirstEnergy’s balance sheet and supported the company’s transition to a fully regulated utility company. The shares of preferred stock participated in the dividend paid on common stock on an as-converted basis and were non-voting except in certain limited circumstances. Because of this investment, FirstEnergy does not currently anticipateanticipates the need to issue additionalraise equity through 2021 and expectscontinues to consider all options to raise equity capital. Currently, FirstEnergy is engaging in a process to sell a minority interest in its transmission holding company, FET. FirstEnergy is committed to improving the balance sheet, targeting metrics that support investment grade credit ratings, and to ensure financial flexibility to fund capital expenditures that support a smarter and cleaner electric grid. Beyond FirstEnergy’s expectation to issue subject to, among other things, market conditions, pricing terms and business operations, up to $600$100 million of equity annually in 2022 and 2023, including approximately $100 millionper year in equity for its regular stock investment and employee benefit plans.plans, FirstEnergy continues to consider all options to raise equity and expects to provide additional clarity on those financing plans later during the fourth quarter of 2021. The amount and timing of any potential equity issuances or alternatives to raise equity capital, are subject to, among other matters, the ongoing government investigations, related lawsuits and regulatory actions, market conditions and business operations.
In addition to this equity investment, 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 2020the remainder of 2021 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 refinance short-term and maturing long-term debt, subject to market conditions and other factors.
On February 1, 2019, FirstEnergy made a $500 million voluntary cash contribution to the qualified pension plan. FirstEnergy expects no required contributions through 2021.
With an operating territory of 65,000 square miles, the scale and diversity of the ten Utilities that comprise the Regulated Distribution business uniquely position this business for growth through opportunities for additional investment.investment, with plans to invest up to $6.6 billion in capital from 2020 to 2023. Over the past several years, Regulated Distribution has experienced rate base growth through investments that have improved reliability and added operating flexibility to the distribution infrastructure, which provide benefits to the customers and communities those Utilities serve. Based on its current capital plan, which includes over $10 billion in forecasted capital investments from 2018 through 2023, Regulated Distribution’s rate base compounded annual growth rate is expected to be approximately 4% from 2018 through 2023. Additionally, this business is exploring other opportunities for growth, including investments in electric system improvement and modernization projects to increase reliability and improve service to customers, as well as exploring opportunities in customer engagement that focus on the electrification of customers’ homes and businesses by providing a full range of products and services.
FirstEnergy believes there are incremental investment opportunities for its existing transmission infrastructure of over $20 billion beyond those identified through 2023, 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 alignment with FirstEnergy’s strategy to invest in its Regulated Transmission and Regulated Distribution segments as a fully regulated company, FirstEnergy is focused on maintaining balance sheet strength and flexibility. Specifically, at the regulated 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 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. In September 2018, the Bankruptcy Court approved a FES Bankruptcy settlement agreement by and among FirstEnergy, two groups of key FES creditors (collectively, the FES Key Creditor Groups), the FES Debtors and the UCC. The FES Bankruptcy settlement agreement resolved certain claims by FirstEnergy against the FES Debtors, all claims by the FES Debtors and the FES Key Creditor Groups against FirstEnergy, as well as releases from third parties who voted in favor of the FES Debtors' plan of reorganization, in return for among other things, a cash payment of $853 million upon emergence. The FES Bankruptcy settlement was conditioned on the FES Debtors confirming and effectuating a plan of reorganization acceptable to FirstEnergy.
On February 18, 2020, the FES Debtors and FirstEnergy entered into an IT Access Agreement that provided IT support to enable the FES Debtors to emerge from bankruptcy prior to full IT separation by the FES Debtors. As part of the IT Access Agreement, the FES Debtors and FirstEnergy resolved, among other things, the on-going reconciliation of outstanding tax sharing payments for tax years 2018, 2019 and 2020 for a total of $125 million. On February 25, 2020, the Bankruptcy Court approved the IT Access Agreement. On February 27, 2020, the FES Debtors effectuated their plan, emerged from bankruptcy and FirstEnergy tendered the bankruptcy court approved settlement payments totaling $853 million and thea $125 million tax sharing payment to the FES Debtors, with no material impact to net income in 2020.
The outbreak of COVID-19 is a global pandemic. FirstEnergy is continuously evaluating the global COVID-19 pandemic and taking steps to mitigate known risks. FirstEnergy is actively monitoring the continued impact COVID-19 is having on its customers’ receivable balances, which include increasing arrears balances since the pandemic has begun. FirstEnergy has incurred, and it is expected to incur for the foreseeable future, incremental uncollectible and other COVID-19 pandemic related expenses. COVID-19 related expenses consist of additional costs that FirstEnergy is incurring to protect its employees, contractors and customers, and to support social distancing requirements resulting from the COVID-19 pandemic.requirements. These costs include, but are not limited to, new or added benefits provided to employees, the purchase of additional personal protection equipment and disinfecting supplies, additional facility cleaning services, initiated programs and communications to customers on utility response, and increased technology expenses to support remote working, where possible. The full impact on FirstEnergy’s business from the COVID-19 pandemic, including the governmental and regulatory responses, is unknown at this time and difficult to predict. FirstEnergy provides a critical and essential service to its customers and the health and safety of its employees, contractors and customers is its first priority. FirstEnergy is continuously monitoring its supply chain and is working closely with essential vendors to understand the continued impact the COVID-19 pandemic is having on its business,business; however,
FirstEnergy does not currently expect disruptions in its ability to deliver service to customers or any material impact on its capital spending plan.
FirstEnergy continues to effectively manage operations during the pandemic in order to provide critical service to customers and believes it is well positioned to manage through the economic slowdown. FirstEnergy Distribution and Transmission revenues benefit from geographic and economic diversity across a five-state service territory, which also allows for flexibility with capital investments and measures to maintain sufficient liquidity over the next twelve months. However, the situation remains fluid and future impacts to FirstEnergy that are presently unknown or unanticipated may occur. Furthermore, the likelihood of an impact to FirstEnergy, and the severity of any impact that does occur, could increase the longer the global pandemic persists.
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 S.D. 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 the U.S. Attorney’s Office investigation into FirstEnergy relating to FirstEnergy’s lobbying and governmental affairs activities concerning HB 6, which, among other things 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 was made during the third quarter of 2021 and will neither be recovered in rates or charged to FirstEnergy customers nor will FirstEnergy seek any tax deduction related to such payment. Under the terms of the DPA, the criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA.
In addition to the subpoenas referenced above, the OH AG,OAG, certain FE shareholders and FirstEnergy 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. 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, the SEC issued an additional subpoena to FE. Further, in a letter dated February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the Division is investigating FirstEnergy’s lobbying and governmental affairs activities concerning HB 6.
The Board has formed a new sub-committee of our Audit committee to, together with the Board, assess FirstEnergy’s compliance program and implement potential changes, as appropriate. In addition, in his new role of Executive Director, Mr. Pappas will assist the FirstEnergy leadership team with execution of strategic initiatives, engage with FirstEnergy’s external stakeholders, and support the development of enhanced controls and governance policies and procedures. 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 investigationinvestigations, 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 FE’s or its subsidiaries’FirstEnergy’s financial condition, results of operations and cash flows. As discussed below, FirstEnergy is consideringhas made reductions to its Regulated Distribution and Regulated Transmission capital investment plans and is considering reductions to operating expenses, as well as changes to its planned equity issuances, to allow for flexibility, should a fine be imposed as a resultfor among other things, to address the outcomes of the ongoing government investigation.
FirstEnergy is unable to predict the outcome of the legislative activity in response to the investigation of HB 6, however, a repeal of the decoupling provision of HB 6 is reasonably possible. As of September 30, 2020, the uncollected amount recognized as ainvestigations and related lawsuits and regulatory asset on FirstEnergy’s Consolidated Balance Sheet from the decoupling mechanism was approximately $100 million. However, absent the decoupling mechanism and other provisions of HB 6, it is expected that the Ohio Companies would have collected lost distribution revenues estimated at approximately $63 million for the nine months ended September 30, 2020, for a pre-tax net impact of approximately $37 million. Furthermore, as FirstEnergy would not have financially benefited from the zero nuclear credit included in HB 6, there is no expected impact to FirstEnergy due to the repeal of that provision in HB 6. On November 2, 2020, the Ohio Companies filed their annual update to the Ohio decoupling rider with an estimated annual revenue requirement of approximately $113 million with a proposed effective date of January 1, 2021, unless otherwise ordered by the PUCO.actions.
As of September 30, 2020,2021, FirstEnergy’s net deficit in working capital (current assets less current liabilities) was primarily due to accounts payable, short-term borrowings,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, andFET, the Utilities, and FET and certain of its subsidiaries participate in twothe Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities providingwith JPMorgan Chase Bank, N.A., Mizuho Bank, Ltd. and PNC Bank, National Association (collectively, the “2021 Credit Facilities”), which replace the FE Revolving Facility and the FET Revolving Facility, and provide for aggregate commitments of $3.5 billion, which$4.5 billion. The 2021 Credit Facilities are available until December 6, 2022. 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
•Transmission Companies, $850 million credit facility
Under the FE credit facility,2021 Credit Facilities, an aggregate amount of $2.5$4.5 billion is available to be borrowed, repaid and reborrowed, subject to separate borrowing sublimitseach borrower’s respective sublimit for each borrower including FEunder the respective facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and its regulated distribution subsidiaries. UnderRegulated Transmission businesses, and each of the FET credit facility, an aggregate amount of $1.0 billion is available to be borrowed, repaid and reborrowed under a syndicated credit facility, subject to separate borrowing sublimits for each borrower including FE's transmission subsidiaries.operating companies within the businesses.
Borrowings under the credit facilities2021 Credit Facilities may be used for working capital and other general corporate purposes, including intercompany loans and advances by a borrower to any of its subsidiaries.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 credit facilities containsCredit 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 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.
FirstEnergy’s revolving credit facilities2021 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 Financial Conduct Authority (the authority that regulates LIBOR), or FCA, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. Subsequently, on March 5, 2021, ICE Benchmark Administration Limited (the entity that calculates and publishes LIBOR), or IBA, and FCA made public statements regarding the future cessation of LIBOR. According to the FCA, IBA will permanently cease to publish each of the LIBOR settings on either December 31, 2021 or June 30, 2023. IBA did not identify any successor administrator in its announcement. The announced final publication date for 1-week and 2-month LIBOR settings and all settings for non-USD LIBOR is December 31, 2021. The announced final publication date for overnight, 1-month, 3-month, 6-month and 12-month LIBOR settings is June 30, 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021.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 considering replacingseeking to replace U.S. dollar LIBOR with a newly created index (the secured overnight financing rate or SOFR), calculated based on repurchase agreements backed by treasury securities. 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 FirstEnergyus are reduced, capital costs could increase materially. Restricted access to capital markets and/or increased borrowing costs could have an adverse effect on ourFirstEnergy’s results of operations, cash flows, financial condition and liquidity.
On November 23, 2020, JCP&L, ME, Penn, TE and WP, borrowed $950 million in the aggregate under the former FE Revolving Facility, bringing the outstanding principal balance to $1.2 billion, with $1.3 billion of remaining availability. On November 23, 2020, FET and ATSI, borrowed $1 billion in the aggregate under the former FET Revolving Facility, bringing the outstanding principal balance to $1 billion, with no remaining availability. FE, FET and certain of their respective subsidiaries increased their borrowings under the former Revolving Facilities as a proactive measure to increase their respective cash positions and preserve financial flexibility. These borrowings were repaid in full during 2021.
FirstEnergy had $300 million$2.2 billion of short-term borrowings as of December 31, 2020, and $1,000 million ofno outstanding short-term borrowings as of September 30, 2020 and December 31, 2019, respectively.2021. FirstEnergy’s available liquidity from external sources as of November 19, 2020,October 25, 2021, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Borrower(s) | | Type | | Maturity | | Commitment | | Available Liquidity | |
| | | | | | | (In millions) | |
FirstEnergy(1) | | Revolving | | December 2022 | | $ | 2,500 | | | $ | 2,246 | | |
| | | | | | | | | |
FET(2) | | Revolving | | December 2022 | | 1,000 | | | 1,000 | | |
| | | | | Subtotal | | $ | 3,500 | | | $ | 3,246 | | |
| | | Cash and cash equivalents(3) | | — | | | 286 | | |
| | | | | Total | | $ | 3,500 | | | $ | 3,532 | | |
(1)FE and the Utilities. Available liquidity includes impact of $4 million of LOCs issued under various terms.
(2)Includes FET and the Transmission Companies.
(3)As of November 18, 2020.
| | | | | | | | | | | | | | | | | | | | | |
| 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 | | — | | | 557 | | |
| | Total | | $ | 4,500 | | | $ | 5,053 | | |
The following table summarizes the borrowing sublimits for each borrower under the facilities, 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, 2020:October 25, 2021:
| | Borrower | Borrower | | FirstEnergy Revolving
Credit Facility
Sublimit | | | FET Revolving
Credit Facility
Sublimit | | Regulatory and
Other Short-Term Debt Limitations | | | Borrower | | | Regulatory and
Other Short-Term Debt Limitations | | |
| | | | (In millions) | | | | | | | (In millions) | | | |
| FE | FE | | $ | 2,500 | | | | | $ | — | | | $ | — | | (1) | | | FE | | | | $ | — | | (1) | | |
| | FET | FET | | — | | | | | 1,000 | | | — | | (1) | | | FET | | | | — | | (1) | | |
| OE | OE | | 500 | | | | | — | | | 500 | | (2) | | | OE | | | | 500 | | (2) | | |
| CEI | CEI | | 500 | | | | | — | | | 500 | | (2) | | | CEI | | | | 500 | | (2) | | |
| TE | TE | | 300 | | | | | — | | | 300 | | (2) | | | TE | | | | 300 | | (2) | | |
| JCP&L | JCP&L | | 500 | | | | | — | | | 500 | | (2) | | | JCP&L | | | | 500 | | (2) | | |
| ME | ME | | 500 | | | | | — | | | 500 | | (2) | | | ME | | | | 500 | | (2) | | |
| PN | PN | | 300 | | | | | — | | | 300 | | (2) | | | PN | | | | 300 | | (2) | | |
| WP | WP | | 200 | | | | | — | | | 200 | | (2) | | | WP | | | | 200 | | (2) | | |
| MP | MP | | 500 | | | | | — | | | 500 | | (2) | | | MP | | | | 500 | | (2) | | |
| PE | PE | | 150 | | | | | — | | | 150 | | (2) | | | PE | | | | 150 | | (2) | | |
| ATSI | ATSI | | — | | | | | 500 | | | 500 | | (2) | | | ATSI | | | | 500 | | (2) | | |
| Penn | Penn | | 100 | | | | | — | | | 100 | | (2) | | | Penn | | | | 100 | | (2) | | |
| TrAIL | TrAIL | | — | | | | | 400 | | | 400 | | (2) | | | TrAIL | | | | 400 | | (2) | | |
| MAIT | MAIT | | — | | | | | 400 | | | 400 | | (2) | | | MAIT | | | | 400 | | (2) | | |
|
(1)No limitations.
(2)Includes amounts which may be borrowed under the regulated companies’ money pool.
Subject to each borrower’s sublimit, $250 million of the FE credit facility and $100 million of the FET credit facility, isamounts 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.
| | | | | | | | |
| 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 | | 2,500 | |
The former credit facilities and 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 former credit facilities and 2021 Credit Facilities isare related to the credit ratings of the company borrowing the funds. Additionally, borrowings under each of the former credit facilities and 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, 2020,2021, the borrowers were in compliance with the applicable debt-to-total-capitalization ratio covenants in each case as defined under the respective Facilities.
On November 17, 2020, FE and the Utilities and FET and certain of its subsidiaries entered into amendments to the FE credit facility and the FET credit facility, respectively. The amendments provide for modifications and/or waivers of (i) certain representations and warranties and (ii) certain affirmative and negative covenants, contained therein, which allowed FirstEnergy to regain compliance with such provisions. In addition, among other things, the amendment to the FE credit facility reduces the sublimit applicable to FE to $1.5 billion, and the amendments increased certain tiers of pricing applicable to borrowings under theformer revolving 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 inthrough the first nine monthsthird quarter of 20202021 was 0.87%1.26% per annum for the regulated companies’ money pool and 1.21%0.74% per annum for the unregulated companies’ money pool.
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 November 17, 2020:October 25, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Corporate Credit Rating | | Senior Secured | | Senior Unsecured | | Outlook/Watch (1) |
| Issuer | | S&P | | Moody’s | | Fitch | | S&P | | Moody’s | | Fitch | | S&P | | Moody’s | | Fitch | | S&P | | Moody’s | | Fitch |
| FE | | BB+BB | | Baa3Ba1 | | BBB-BB+ | | — | | — | | — | | BB | | Ba1 | | BB+ | | Baa3CW-P | | BBB-S | | CW-N | | N | | NS |
| AGC | | BB | | Baa2 | | BBBBBB- | | — | | — | | — | | — | | — | | — | | CW-NCW-P | | S | | NS |
| ATSI | | BB+ | | A3 | | BBBBBB- | | — | | — | | — | | BBB- | | A3 | | BBB+BBB | | CW-NCW-P | | S | | NS |
| CEI | | BB+ | | Baa2 | | BBBBBB- | | BBB+ | | A3 | | A-BBB+ | | BBB- | | Baa2 | | BBB+BBB | | CW-NCW-P | | N | | S | | N |
| FET | | BB+BB | | Baa2 | | BBB-BB+ | | — | | — | | — | | BB+BB | | Baa2 | | BBB-BB+ | | CW-NCW-P | | S | | NS |
| JCP&L | | BB+ | | A3 | | BBBBBB- | | — | | — | | — | | BBB- | | A3 | | BBB+BBB | | CW-NCW-P | | S | | NS |
| ME | | BB+ | | A3 | | BBBBBB- | | — | | — | | — | | BBB- | | A3 | | BBB+BBB | | CW-NCW-P | | S | | NS |
| MAIT | | BB+ | | A3 | | BBBBBB- | | — | | — | | — | | BBB- | | A3 | | BBB+BBB | | CW-NCW-P | | S | | NS |
| MP | | BB+ | | Baa2 | | BBBBBB- | | BBB+ | | A3 | | A-BBB+ | | BBB- | | Baa2 | | — | | CW-NCW-P | | S | | NS |
| OE | | BB+ | | A3 | | BBBBBB- | | BBB+ | | A1 | | A-BBB+ | | BBB- | | A3 | | BBB+BBB | | CW-NCW-P | | N | | S | | N |
| PN | | BB+ | | Baa1 | | BBBBBB- | | — | | — | | — | | BBB- | | Baa1 | | BBB+BBB | | CW-NCW-P | | S | | NS |
| Penn | | BB+ | | A3 | | BBBBBB- | | —BBB+ | | A1 | | A-BBB+ | | — | | — | | — | | CW-NCW-P | | S | | NS |
| PE | | BB+ | | Baa2 | | BBBBBB- | | —BBB+ | | —A3 | | A-BBB+ | | — | | — | | — | | CW-NCW-P | | S | | NS |
| TE | | BB+ | | Baa1 | | BBBBBB- | | BBB+ | | A2 | | A-BBB+ | | — | | — | | — | | CW-NCW-P | | N | | S | | N |
| TrAIL | | BB+ | | A3 | | BBBBBB- | | — | | — | | — | | BBB- | | A3 | | BBB+BBB | | CW-NCW-P | | S | | NS |
| WP | | BB+ | | A3 | | BBBBBB- | | —BBB+ | | —A1 | | A-BBB+ | | — | | — | | — | | CW-NCW-P | | S | | NS |
(1) S = Stable, P = Positive, N = Negative, CW-NCW-P = CreditWatch with Negative implicationsPositive Implications
On October 30, 2020, Fitch Ratings downgraded FE and FET’s issuer defaultJuly 23, 2021, S&P revised the CreditWatch implications to positive from negative on the ratings and senior unsecured ratings one notch to BBB- from BBB. Fitch also downgraded FE’s subsidiaries issuer default ratings one notch to BBB from BBB+, except for PE, MP, and AGC, whose ratings were affirmed at BBB. Senior unsecured issue ratings for the subsidiaries were downgraded one notch, where applicable, to BBB+ from A-. Senior secured issue ratings for the subsidiaries were downgraded one notch, where applicable, to A- from A. The rating outlook is negative forof FE and its subsidiaries.
On October 30, 2020, S&P downgradedJuly 27, 2021, Moody’s revised the outlook for FE and FET to stable from negative.
On August 25, 2021, Fitch revised the outlook of FE and its subsidiaries issuer creditto stable from negative.
On October 19, 2021, S&P issued a one-notch upgrade to all applicable ratings two notches to BB+ from BBB, except for AGC which was lowered to BB from BBB-.the following subsidiaries: ATSI, CEI, JCP&L, ME, MAIT, MP, OE, PN, Penn, PE, TE, TrAIL, and WP. The senior unsecured issueCreditWatch Positive designation on FE and all subsidiaries is unchanged. The ratings of FE and FET were changed one notch to BB+ from BBB-. The senior unsecured issue ratings of the subsidiaries, where applicable, were lowered one notch to BBB- from BBB. Additionally, the senior secured issue ratings of the subsidiaries, where applicable, were lowered one notch to BBB+ from A-. The ratings on FE and its subsidiaries remain on CreditWatch with negative implications.affirmed.
The applicable undrawn and drawn margin on the FE and FET credit facilities2021 Credit Facilities are subject to ratings based pricing grids. The applicable fee paid on the undrawn commitments under the FE and FET credit facilities2021 Credit Facilities are based on FE and FET’seach 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 rate payable on approximately $3.85 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 documents. Generally a one-notch downgrade by the applicable rating agency may result in a 25 bpsbasis points 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 debt-to-total-capitalization limits in the former credit facilities and 2021 Credit Facilities previously discussed. As of September 30, 2020,2021, FE and its subsidiaries could issuehave issued additional debt of approximately $6.6$6.0 billion, or incurincurred a $3.5$3.2 billion reduction to equity, and remain within the limitations of the financial covenants required by the former FE credit facility.Revolving Facility.
Changes in Cash Position
As of September 30, 2020,2021, FirstEnergy had $260approximately $577 million of cash and cash equivalents and approximately $36$107 million of restricted cash compared to $627 millionapproximately $1.7 billion of cash and cash equivalents and approximately $52$67 million of restricted cash as of December 31, 2019,2020, on the Consolidated Balance Sheets.
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. Beyond the cash settlement and tax sharing payments to the FES Debtors in the first quarter of 2020 and pension contributionthe DPA penalty in 2019,the third quarter of 2021, 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.
FirstEnergy’s Consolidated StatementStatements of Cash Flows combinescombine cash flows from discontinued operations with cash flows from continuing operations within each cash flow category. For the nine months ended September 30, 20202021 and 2019,2020, cash flows from operating activities includes income (loss) from discontinued operations of $46$47 million and $(62)$46 million, respectively.
In the first nine months of 2020,2021, cash provided from operating activities was $851 millionapproximately $2.1 billion compared to $1,737$851 million in the same period of 2019.2020. The decreaseincrease in cash provided from operating activities is primarily due to the absence of a $978 million cash settlement and tax sharing paymentspayment made to the FES Debtors upon their emergence in February 2020, an increase to accounts receivable customer balances due to thehigher distribution deliveries, impact of COVID-19,the distribution rider and higher storm restoration costs,transmission investment recovery, and increased collections of customer account receivable balances, partially offset by the absenceDPA penalty paid in the third quarter of a $500 million cash contribution to the qualified pension plan in February 2019.2021.
Cash Flows From Financing Activities
In the first nine months of 2020,2021, cash provided from (used for) financing activities was $(1.4) billion compared to $937 million compared to $665 million induring the same period of 2019.2020. The following table summarizes new debt financing, redemptions, repayments, short-term borrowings and dividends:
| | | For the Nine Months Ended September 30, | | For the Nine Months Ended September 30, |
| Securities Issued or Redeemed / Repaid | Securities Issued or Redeemed / Repaid | | 2020 | | 2019 | Securities Issued or Redeemed / Repaid | | 2021 | | 2020 |
| | | | (In millions) | | | (In millions) |
| | New Issues | New Issues | | | | | New Issues | | | | |
| Unsecured notes | Unsecured notes | | $ | 3,250 | | | $ | 1,850 | | Unsecured notes | | $ | 1,150 | | | $ | 3,250 | |
| | Senior secured notes | | Senior secured notes | | 150 | | | — | |
| FMBs | FMBs | | 175 | | | 250 | | FMBs | | 200 | | | 175 | |
| | | $ | 3,425 | | | $ | 2,100 | | | $ | 1,500 | | | $ | 3,425 | |
| | | Redemptions / Repayments | Redemptions / Repayments | | | | | Redemptions / Repayments | | | | |
| Term loan | Term loan | | $ | (750) | | | $ | — | | Term loan | | $ | — | | | $ | (750) | |
| Unsecured notes | Unsecured notes | | (250) | | | (725) | | Unsecured notes | | — | | | (250) | |
| | FMBs | FMBs | | (50) | | | — | | FMBs | | — | | | (50) | |
| | Senior secured notes | Senior secured notes | | (60) | | | (59) | | Senior secured notes | | (58) | | | (60) | |
| | | | $ | (1,110) | | | $ | (784) | | | | $ | (58) | | | $ | (1,110) | |
| | | Short-term borrowings redemptions, net | | Short-term borrowings redemptions, net | | $ | (2,200) | | | $ | (700) | |
| | Short-term borrowings, net | | $ | (700) | | | $ | — | | |
| | Preferred stock dividend payments | | $ | — | | | $ | (6) | | |
| | Common stock dividend payments | Common stock dividend payments | | $ | (634) | | | $ | (609) | | Common stock dividend payments | | $ | (636) | | | $ | (634) | |
On February 20, 2020, FE issued $1.75 billion in senior unsecured notes in three separate series: (i) $300 million aggregate principal amount of 2.050% Notes, Series A, due 2025, (ii) $600 million aggregate principal amount of 2.650% Notes, Series B, due 2030 and (iii) $850 million aggregate principal amount of 3.400% Notes, Series C, due 2050. Proceeds from the issuance of the notes, together with cash on hand, were used: (i) to repay the entire $750 million two-year term loan due September 2021, (ii) to make the $853 million in bankruptcy settlement payments and $125 million tax sharing agreement payment with the FES Debtors as discussed above, (iii) to repay $250 million of the $1 billion outstanding 364-day term loan due September 2020, and (iv) for working capital needs and general corporate purposes.
On March 31, 2020, MAIT issued $125 million of 3.60% senior unsecured notes due 2032 and $125 million of 3.70% senior unsecured notes due 2035. Proceeds from the issuance of the notes were used: (i) to refinance existing debt, (ii) for capital expenditures, and (iii) for general corporate purposes.
On April 20, 2020, PN issued $125 million of 3.61% senior unsecured notes due 2032 and $125 million of 3.71% senior unsecured notes due 2035. Proceeds of the issuance of the notes were used: (i) to refinance indebtedness, including short-term borrowings incurred under the FirstEnergy regulated money pool to repay a portion of the $250 million aggregate principle amount of PN’s 5.20% Senior Notes due April 1, 2020, (ii) to fund capital expenditures, (iii) to fund general corporate purposes, or (iv) for any combination of the above.
67
On June 8, 2020, FE issued $750 million in senior unsecured notes in two separate series: (i) $300 million aggregate principal amounts of 1.600% Notes, Series A, due 2026 and (ii) $450 million aggregate principal amount of 2.250% Notes, Series B, due 2030. Proceeds fromDuring the issuance ofnine months ended September 30, 2021, the notes were used to repay all amounts outstanding under the 364-day term loan due September 2020.following long-term debt was issued:
On June 29, 2020, PE issued $75 million of 2.67% FMBs due 2032 and $100 million of 3.43% FMBs due 2051. Proceeds of the issuance of the FMBs were used to repay short-term borrowings under the FirstEnergy regulated money pool, to fund capital expenditures, and for general corporate purposes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company | | Issuance Date | | Interest Rate | | Maturity | | Amount | | Use of Proceeds |
| | | | | | | | | | |
| FET | | 3/19/2021 | | 2.866% | | 2028 | | $500 million | | Repay short-term borrowings under the former FET Revolving Facility. |
| MP | | 4/9/2021 | | 3.55% | | 2027 | | $200 million | | Fund MP’s ongoing capital expenditures, for working capital needs and for other general corporate purposes. |
| TE | | 5/6/2021 | | 2.65% | | 2028 | | $150 million | | Repay short-term borrowings, fund TE’s ongoing capital expenditures and for other general corporate purposes. |
| MAIT | | 5/24/2021 | | 4.10% | | 2028 | | $150 million | | Repay borrowings outstanding under FirstEnergy’s regulated company money pool, fund MAIT’s ongoing capital expenditures, to fund working capital and for other general corporate purposes. |
| JCP&L | | 6/10/2021 | | 2.75% | | 2032 | | $500 million | | Repay $450 million of short-term debt under the former FE Revolving Facility, storm recovery and restoration costs and expenses, to fund JCP&L’s ongoing capital expenditures, working capital requirements and for other general corporate purposes. |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
On July 20, 2020, CEI issued $150 million of 2.77% senior unsecured notes due 2034 and $100 million of 3.23% senior unsecured notes due 2040. Proceeds from the issuance of the notes were used to refinance existing short-term borrowings, to fund capital expenditures, and for general corporate purposes.
Cash Flows From Investing Activities
Cash used for investing activities in the first nine months of 20202021 principally represented cash used for property additions. The following table summarizes investing activities for the first nine months of 20202021 and 2019:2020:
| | | For the Nine Months Ended September 30, | | Increase | | For the Nine Months Ended September 30, | | Increase |
| Cash Used for Investing Activities | Cash Used for Investing Activities | | 2020 | | 2019 | | (Decrease) | Cash Used for Investing Activities | | 2021 | | 2020 | | (Decrease) |
| | | (In millions) | | | (In millions) |
| Property Additions: | Property Additions: | | Property Additions: | |
| Regulated Distribution | Regulated Distribution | | $ | 1,115 | | | $ | 1,037 | | | $ | 78 | | Regulated Distribution | | $ | 993 | | | $ | 1,115 | | | $ | (122) | |
| Regulated Transmission | Regulated Transmission | | 817 | | | 835 | | | (18) | | Regulated Transmission | | 732 | | | 817 | | | (85) | |
| Corporate / Other | Corporate / Other | | 47 | | | 40 | | | 7 | | Corporate / Other | | 43 | | | 47 | | | (4) | |
| | Proceeds from sale of Yards Creek | | Proceeds from sale of Yards Creek | | (155) | | | — | | | (155) | |
| Investments | Investments | | 18 | | | 30 | | | (12) | | Investments | | 29 | | | 18 | | | 11 | |
| | Asset removal costs | Asset removal costs | | 175 | | | 158 | | | 17 | | Asset removal costs | | 178 | | | 175 | | | 3 | |
| Other | Other | | (1) | | | (19) | | | 18 | | Other | | (9) | | | (1) | | | (8) | |
| | $ | 2,171 | | | $ | 2,081 | | | $ | 90 | | | $ | 1,811 | | | $ | 2,171 | | | $ | (360) | |
|
Cash used for investing activities for the first nine monthsthird quarter of 2020 increased $902021 decreased $360 million, compared to the same period of 2019,2020, primarily due to higher property additions. The increase in property additions was due to an increasethe proceeds from the sale of $78 million at Regulated Distribution for investments to improveYards Creek and modernize the electric system.lower capital expenditures.
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, 2020,2021, was approximately $1.7$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 | | $ | 488 | |
| Vehicle leases | | 75 | |
AE Supply asset sales(1) | | $ | 57015 | |
Deferred compensation arrangementsOther | | 4678 | |
| | |
Fuel related contracts and other | | 4 | |
| | 1,041586 | |
| | |
| FE’s Guarantees on Other Assurances | | |
| Surety Bonds | | 330 | |
| Global holding facility | | 11468 | |
| Deferred compensation arrangements | | 147 | |
Surety Bonds | | 339130 | |
| LOCs and other | | 169 | |
| | 616537 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Total Guarantees and Other Assurances | | $ | 1,6571,123 | |
(1)As a condition to closing AE Supply’s sale of four natural gas generating plants in December 2017, FE provided the purchaser two limited three-year guarantees totaling $555 million of certain obligations of AE Supply and AGC. In addition, as a condition to closing AE Supply’s transfer of Pleasants Power Station and as contemplated under the FES Bankruptcy settlement agreement, FE has provided two guarantees for certain retained liabilities of AE Supply, the first totaling up to $15 million for certain retained environmental liabilities of AE Supply, includingassociated with Pleasants Power Station, and the second being limited solely to environmental liabilities for the McElroy’s Run CCR Impoundment Facility.Facility, for which an ARO of $47 million is reflected on FirstEnergy’s Consolidated Balance Sheets, and which is not reflected on the table above.
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.
Certain agreements entered into by FE and its subsidiaries have margining provisions that require posting of collateral. As of September 30, 2020, $12021, $55 million of collateral has been posted by FE or its subsidiaries.subsidiaries, all of which was posted as a result of the credit rating downgrades in the fourth quarter of 2020, and is included in Prepaid taxes and other current assets 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, 2020:2021:
| | Potential Collateral Obligations | Potential Collateral Obligations | | | | | Utilities and FET | | FE | | Total | Potential Collateral Obligations | | | | | Utilities and FET | | FE | | Total |
| | | | (In millions) | | | | (In millions) |
| Contractual Obligations for Additional Collateral | Contractual Obligations for Additional Collateral | | | | | | Contractual Obligations for Additional Collateral | | | | | |
| Upon further downgrade (1) | Upon further downgrade (1) | | | | | $ | 40 | | | $ | — | | | $ | 40 | | Upon further downgrade (1) | | | | | $ | 32 | | | $ | — | | | $ | 32 | |
| Surety Bonds (collateralized amount)(2)(1) | Surety Bonds (collateralized amount)(2)(1) | | | | | 66 | | | 257 | | | 323 | | Surety Bonds (collateralized amount)(2)(1) | | | | | 56 | | | 258 | | | 314 | |
| Total Exposure from Contractual Obligations | Total Exposure from Contractual Obligations | | | | | $ | 106 | | | $ | 257 | | | $ | 363 | | Total Exposure from Contractual Obligations | | | | | $ | 88 | | | $ | 258 | | | $ | 346 | |
(1)As a result of the credit rating downgrades in October 2020, as further discussed above, FirstEnergy may be required to provide $4.5 million in collateral.
(2)Surety Bondsbonds are not tied to a credit rating. Surety Bonds’ impact assumes maximum contractual obligations, (typicalwhich 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).cure.
Other Commitments and Contingencies
FE is a guarantor under a $120 million syndicated senior secured term loan facility due November 12, 2024, under which Global Holding’s outstanding principal balance is $114was $68 million as of September 30, 2020. In addition to FE,2021. Signal Peak, Global Rail,
Global Mining Group, LLC and Global Coal Sales Group, LLC, each being a direct or indirect subsidiary of Global Holding, and FE continue to provide their joint and several guaranties of the obligations of Global Holding under the facility.
In connection with the facility, 69.99% of Global Holding’s direct and indirect membership interests in Signal Peak, Global Rail and their affiliates along with FEV’s and WMB Marketing Ventures, LLC’s respective 33-1/3% membership interests in Global Holding, are pledged to the lenders under the current facility as collateral.
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 Risk Policy Committee, comprised of members of senior management, provides general oversight for risk management activities throughout the company.FirstEnergy.
Commodity Price Risk
FirstEnergy has limited exposure to financial risks resulting from fluctuating commodity prices, includingsuch as prices for electricity, natural gas, coal and energy transmission. FirstEnergy’s Risk Management and Risk Policy Committees are responsible for promoting the effective design and implementation of sound risk management programs and oversees compliance with corporate risk management policies and established risk management practice.
The valuation of derivative contracts is based on observable market information. As of September 30, 2020,2021, FirstEnergy has a net asset of $7$9 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, 2020,2021, the FirstEnergy pension plan assets were allocated approximately as follows: 21%35% in equity securities, 37%32% in fixed income securities, 7%8% in absolute return strategies, 9%10% in real estate, 5%8% in private equity, 4%2% in derivatives and 17%5% in cash and short-term securities. AAs further discussed below, due to the American Rescue Plan Act of 2021, under current assumptions, including an expected 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. FirstEnergy’s funding policy is based on actuarial computations using the projected unit credit method. On February 1, 2019,requirements and FirstEnergy made a $500 million voluntary cash contributionmay elect to contribute to the qualified pension plan. As a result of this contribution and pension investment performance returns to date, FirstEnergy expects no required contributions through 2021.plan voluntarily. As of September 30, 2020,2021, FirstEnergy’s OPEB plan assets were allocated approximately 55%as follows: 48% in equity securities, 42%51% in fixed income securities and 3%1% in cash and short-term securities. See Note 5, “Pension and Other Post-Employment Benefits,” of the Notes to Consolidated Financial Statements for additional details on FirstEnergy’s pension and OPEB plans.
ThroughIn the nine months ended September 30, 2020,2021, FirstEnergy’s pension and OPEB plan assets have gained approximately 9.2%3.4% and 5.7%8.5%, respectively, as compared to an annual expected return on plan assets of 7.5%. On February 27, 2020, FirstEnergy remeasured its plan assets, and from that date through September 30, 2020, FirstEnergy’s pension and OPEB plan assets have gained approximately 6.1% and 5.0%, respectively.
NDT funds have been established to satisfy JCP&L, ME and PN’s nuclear decommissioning obligations associated with TMI-2. As of September 30, 2020, approximately 15% of the funds were invested in fixed income securities and 85% were invested in short-term investments, with limitations related to concentration and investment grade ratings. The investments are carried at their market values of approximately $135 million and $744 million for fixed income securities and short-term investments, respectively, as of September 30, 2020, excluding $2 million of net receivables, payables and accrued income. A decline in the value of JCP&L, ME and PN’s NDTs or a significant escalation in estimated decommissioning costs could result in additional funding requirements. During the nine months ended September 30, 2020, JCP&L, ME and PN made no contributions to the NDTs.
Interest Rate Risk
FirstEnergy recognizes net actuarial gains or losses for its pension and OPEB plans in the fourth quarter of each fiscal 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.
UnderEstimating the approved bankruptcy settlement agreement discussed above, upon emergence, FES and FENOC employees ceased earning years of service under the FirstEnergy pension and OPEB plans. The emergence on February 27, 2020, triggered a remeasurementfinal discount rate as of the affected pension and OPEB plans andyear-end remeasurement date is difficult to predict based on current market conditions. However, if FirstEnergy were to recognize the remeasurement as a result, FirstEnergy recognized a non-cash, pre-tax pension and OPEB mark-to-market adjustment of approximately$423 million in the firstend of the third quarter of 2020. The pension and OPEB mark-to-market adjustment primarily reflects a 38 bps decrease in2021, the discount rate used to measure benefit obligations from December 31, 2019, partially offset by a slightly higher than expected return on assets.
FirstEnergy would anticipate an after-taxpre-tax mark-to-market gain (loss) inwould have been approximately $90 million based on the fourth quarter of 2020 to be in the range of approximately $(330) million to $40 million assuming a discount rate of approximately 2.7% to 3.0% as of September 30, 2021, and a return on the pension and OPEB plans’ assets based on actual investment performance sincethrough the last remeasurement date on February 27, 2020 through September 30, 2020.
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. In addition, in response to the COVID-19 pandemic, FirstEnergy has increased reviews of counterparties, customers and industries that have been negatively impacted, which could affect meeting
contractual obligations with FirstEnergy. 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, and surveys to determine negative impacts to essential vendors as a result of the COVID-19 pandemic. FirstEnergyFE 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
CARESAMERICAN RESCUE PLAN ACT OF 2021
On March 27, 2020, the11, 2021, President Biden signed into law the CARESAmerican Rescue Plan Act of 2021. While the Act is primarily an economic stimulus package, in response toit also, among other changes, expanded the COVID-19 pandemic. The CARES Act contains several corporate income tax provisions, including making remaining AMT credits immediately refundable; providing a 5-year carrybackscope of NOLs generated in tax years 2018, 2019, and 2020, and removing the 80% taxable income limitation on utilization of those NOLs if carried back to prior tax years or utilized in tax years beginning before 2021; and temporarily liberalizing the interest deductibility rules under Section 163(j)162(m) of the Tax Act, by raising the adjusted taxable income limitation from 30% to 50% for tax years 2019 and 2020 and giving taxpayers the election of using 2019 adjusted taxable income for purposes of computing 2020 interest deductibility. FirstEnergy has approximately $18 million of refundable AMT creditsInternal Revenue Code that will be fully refundable through the CARES Act, however, does not expect to generate additional income tax refunds from the NOL carryback provision and expects interest to be fully deductible starting in 2020.limits deductions on certain executive officer compensation. FirstEnergy does not currently expect the other provisions of the CARES Actthese changes to have a material effect on current income tax expense or the realizability of deferred income tax assets.
On July 28, 2020, the IRS issued final regulations implementing interest expense deduction limitation rules under section 163(j) of the Internal Revenue Code. The final regulations changed certain rules on the computation of interest expense and limitation amount, as well as rules relevant to status as a regulated utility business and the allocation of consolidated group interest expense between utility and non-utility businesses. After reviewing the final regulations, FirstEnergy recorded a true-up to prior years’ reserve estimates during the quarter, which did not have a material impact to FirstEnergy’s income statement.impact.
STATE REGULATION
Each of the Utilities’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.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.
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 2018-2020 and 2021-2023 EmPOWER Maryland program cycles, to the extent the MDPSC determines that cost-effective programs and services are available. PE’sPE's approved 2018-2020 EmPOWER Maryland plan continues and expands upon prior years’years' programs, and adds new programs, for a projected total costinvestment of $116 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 amortization.period with a return on the unamortized balance. 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. On September 1, 2020, PE filed its proposed plan for the 2021-2023 EmPOWER Maryland program cycle. The new plan largely continues PE’s existing programs and iswith an estimated to costinvestment of approximately $148 million over the three-year period.period with similar recovery. The MDPSC had a hearingapproved the plan on the proposed plan in OctoberDecember 18, 2020.
On January 19,March 22, 2019, MDPSC issued an order approving PE’s 2018 PE filed a joint petition along with other utility companies, work group stakeholders and the MDPSC electric vehicle work group leader to implement a statewide electric vehicle portfolio in connection with a 2016 MDPSC proceeding to consider an array of issues relating to electric distribution system design, including matters relating to electric vehicles, distributed energy resources, advanced metering infrastructure, energy storage, system planning, rate design, and impacts on low-income customers. PE proposed an electric vehicle charging infrastructure program at a projected total cost of $12 million, to be recovered over a five-year amortization. On January 14, 2019, the MDPSC approved the petition subject to certain reductions in the scope of the program. The MDPSC approved PE’s compliance filing, which implements the pilot program, with minor modifications, on July 3, 2019.
On August 24, 2018, PE filed a base rate case with the MDPSC,filing, which it supplemented on October 22, 2018, to update the partially forecasted test year with a full twelve months of actual data. The rate case requestedamong other things, approved an annual increase in base distribution rates of $19.7 million, plus creation of an EDIS to fund four enhanced service reliability programs. In responding to discovery, PE revised its request for an annual increase in base rates to $17.6 million. The proposed rate increase reflected $7.3 million in annual savings for customers resulting from the recent federal tax law changes. On March 22, 2019, the MDPSC issued a final order that approved a rate increase of $6.2 million, approved three of the four EDIS programs for four years to fund enhanced service reliability programs, directed PE to file a new depreciation study within 18 months, and ordered the filing of a new base rate case in four years to correspond to the ending of the approved EDIS programs. On September 22, 2020, PE filed its depreciation study that indicatedreflecting a slight increase in depreciation,expense and as a result, is seeking that the difference in depreciationto be deferred for future recovery in PE’s next base rate case. TheOn January 29, 2021, the Maryland Office of People's Counsel filed testimony recommending an annual reduction in depreciation expense of $10.8 million, and the staff of the MDPSC has setfiled testimony recommending an annual reduction of $9.6 million. On May 26, 2021, the matter for hearing and delegated itjudge issued a Proposed Order which would reduce PE’s base rates by $2.1 million. PE filed an appeal of the Proposed Order to a public utility law judge. On November 6, 2020, an order was issued scheduling evidentiary hearings in Aprilthe MDPSC on June 25, 2021, which the MDPSC denied on October 26, 2021.
Maryland’s Governor issued an order on March 16, 2020, forbidding utilities from terminating residential service or charging late fees for non-payment for the duration of the COVID-19 pandemic. On April 9, 2020, the MDPSC issued an order allowing utilities
to track and create a regulatory asset for future recovery of all prudently incurred incremental costs arising from the COVID-19 pandemic, including incremental uncollectible expense, incurred from the date of the Governor’s order (or earlier if the utility could show that the expenses related to suspension of service terminations). OnIn July 8, 2020, the MDPSC issued a notice opening a public conference to collect information from utilities and other stakeholders about the impacts of the COVID-19 pandemic on the utilities and their customers. The MDPSC subsequently issued orders allowing Maryland electric and gas utilities to resume residential service terminations for non-payment on November 15, 2020, subject to various restrictions, and clarifying that utilities could resume charging late fees on October 1, 2020. On June 16, 2021, the MDPSC provided PE with approximately $4 million of COVID-19 relief funds that was allocated by the Maryland General Assembly to be used to reduce certain residential customer utility account receivable arrearages.
NEW JERSEY
JCP&L operates under NJBPU approved rates that were effective as of January 1, 2017. 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.
On April 18, 2019, pursuant to the May 2018 New Jersey enacted legislation establishing a ZEC program to provide ratepayer funded subsidies of New Jersey nuclear energy supply, the NJBPU approved the implementation of a non-bypassable, irrevocable ZEC charge for all New Jersey electric utility customers, including JCP&L’s customers. Once collected from customers by JCP&L, these funds will be remitted to eligible nuclear energy generators.
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 ratepayers; and (iii) exclude transmission assets of electric distribution companies in the savings calculation, which
were published in the NJ Register in the first quarter of 2018.JCP&L filed comments supporting the proposed rulemaking. 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. JCP&L is contesting this appeal but is unable to predict the outcome of this matter.
Also in December 2017, the NJBPU approved its IIP rulemaking. The IIP creates a financial incentive for utilities to accelerate the level of investment needed to promote the timely rehabilitationJersey and replacement of certain non-revenue producing components that enhance reliability, resiliency, and/or safety. On May 8, 2019, the NJBPU approved a Stipulation of Settlement submitted by JCP&L, Rate Counsel, NJBPU Staff and New Jersey Large Energy Users Coalition to implement JCP&L’s infrastructure plan, JCP&L Reliability Plus. The plan provides that JCP&L will invest up to approximately $97 million in capital investments beginning on June 1, 2019 through December 31, 2020,7, 2021, the court issued an Order reversing the NJBPU’s CTA rules and remanded the case back to enhance the reliability and resiliency of JCP&L’s distribution system and reduceNJBPU. Specifically, the frequency and duration of power outages. JCP&L shall seek recoverycourt’s ruling requires 100% of the capital investment through an accelerated cost recovery mechanism, provided forCTA savings to be credited to customers in lieu of the rules, that includesNJBPU’s current policy requiring 25%. The court’s ruling will be applied on a revenue adjustment calculation and a process for two rate adjustments. The NJBPU approved adjusted rates that took effect on March 1, 2020. As further discussed below, JCP&L will recover the IIP capital investments as part of its distribution base rate case.prospective basis.
On February 18, 2020, JCP&L submitted a filing with the NJBPU requesting a distribution base rate increase of $186.9 million on an annual basis, which represents an overall average increase inincrease. On October 28, 2020, the NJBPU approved a stipulated settlement between JCP&L rates of 7.8%. The filing seeks to recover certain costs associated with providing safe and reliable electric service to JCP&L customers, along with recovery of previously incurred storm costs. JCP&L proposed a rate effective date of March 19, 2020. The NJBPU issued orders suspending JCP&L’s proposed rates until November 19, 2020. JCP&L filed updates to the requested distribution base rate in both June and July 2020, resulting in JCP&L seeking a total annual distribution base rate increase of approximately $185 million. On October 16, 2020, thevarious parties, submitted a stipulation of settlement to the administrative law judge, providing for, among other things, a $94 million annual base distribution revenues increase for JCP&L based on an ROE of 9.6%, which will become effective for customers on November 1, 2021. Until the rates become effective, and starting on January 1, 2021, JCP&L will be permittedbegan to amortize an existing regulatory liability totaling approximately $86 million to offset the base rate increase that otherwise would have occurred in this period. The parties also agreed that the actual net gain from the sale of JCP&L’s interest in the Yards Creek pumped-storage hydro generation facility in New Jersey (210 MWs), as further discussed below, shall be applied to reduce JCP&L’s existing regulatory asset for previously deferred storm costs. On October 22,Lastly, the parties agreed that approximately $95 million of Reliability Plus capital investment for projects through December 31, 2020, is included in rate base effective December 31, 2020, with a final prudence review of only those capital investment projects from July 1, 2020, through December 31, 2020, to occur in January 2021. During the administrative law judge entered an initial decision adoptingfirst quarter of 2021, JCP&L submitted its review of storm costs, filed a written report for its Reliability Plus projects placed in service from July 1, 2020 through December 31, 2020, and submitted the vegetation management report, all required under the stipulation of settlement. On October 28, 2020,March 24, 2021, JCP&L, NJ Rate Counsel and the NJBPU Staff submitted a stipulation of settlement to the NJBPU, which was approved on April 7, 2021, providing that the settlementReliability Plus projects placed into service from July 1, 2020 through December 31, 2020 were reasonable and ordered an upcoming management audit for JCP&L.prudent.
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. Subject to terms and conditions of the agreement, the base purchase price is $155 million. CompletionAs of December 31, 2020, assets held for sale on FirstEnergy’s Consolidated Balance Sheets associated with the transaction consist of property, plant and equipment of $45 million, which is subject to several closing conditions, including approval byincluded in the NJBPU and FERC.regulated distribution segment. On July 31, 2020, FERC approved the transfer of JCP&L’s interest in the hydroelectric operating license. On October 8, 2020, FERC issued an order authorizing the transfer of JCP&L’s ownership interest in the hydroelectric facilities. There can be no assurance that all closing conditions will be satisfied or that the transaction will be consummated. JCP&L currently anticipates closing of the transaction to occur in the next few months. Assets held for sale on FirstEnergy’s Consolidated Balance Sheets associated with the transaction consist of property, plant and equipment of $44 million, which is included in the regulated distribution segment. On October 28, 2020, the NJBPU approved the sale of Yards Creek. 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. As further discussed above, 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 of regulatory assets, net”, line on the Consolidated Statements of Income, resulting in no earnings impact to FirstEnergy or JCP&L.
On August 27, 2020, JCP&L filed an AMI Program with the NJBPU, which proposes the deployment of approximately 1.2 million advanced meters over a three-year period beginning on January 1, 2023, at a total cost of approximately $418 million, including the pre-deployment phase. The 3-year deployment is part of the 20 year20-year AMI Program that is expected to cost a total of approximately $732 million and proposes a cost recovery mechanism through a separate AMI tariff rider. On February 26, 2021, JCP&L filed a letter requesting a suspension of the procedural schedule to allow for settlement discussions, which was granted on March 5, 2021. On September 14, 2021, JCP&L submitted a supplemental filing, which reflects increases in the AMI Program’s costs. Under the revised AMI Program, during the first six years of the AMI Program, JCP&L estimates cost of $494 million, consisting of capital expenditures of approximately $390 million, operations and maintenance expenses of approximately $73 million and cost of removal of $31 million. JCP&L expects a NJBPU order by the end of 2021.
On June 10, 2020, the NJBPU issued an order establishing a framework for the filing of utility-run energy efficiency and peak demand reduction programs in accordance with the New Jersey Clean Energy Act. Under the established framework, JCP&L will
recover its program investments with a return over a ten yearten-year amortization period and its operations and maintenance expenses on an annual basis, be eligible to receive lost revenues on energy savings that resulted from its programs and be eligible for incentives or subject to penalties based on its annual program performance, beginning in the fifth year of its program offerings. On September 25, 2020, JCP&L filed its energy efficiency and peak demand reduction program. JCP&L’s program consists of 11 energy efficiency and peak demand reduction programs and subprograms to be run from July 1, 2021, through June 30, 2024. The program also seeksOn April 23, 2021, JCP&L filed a Stipulation of Settlement with the NJBPU for approval of cost recovery totaling approximately $230of 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 lost revenues associated withoperations and maintenance expenses and financing costs of $45 million recovered on an annual basis. On April 27, 2021, the energy savings resulting fromNJBPU issued an Order approving the programs.Stipulation of Settlement.
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 through September 30, 2021, or until the 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 August 21, 2020, the Governor of New Jersey issued a press release announcing that the New Jersey utilities agreed to extend their voluntary moratorium preventing shutoffs to both residential and commercial customers during the COVID-19 pandemic until October 15, 2020. On October 15, 2020, the Governor issued an Executive Order prohibiting utilities from terminating service to any residential gas, electric, public and private water customer, through March 15, 2021, requiring the
reconnection of certain customers, and disallowing the charging of late payment charges or reconnection fees during the public health emergency. 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. Comments are dueThrough various Executive Orders issued by November 30, 2020.Governor Murphy, the moratorium period is extended to December 31, 2021.
The recent credit rating actions taken on October 28, 2020, by S&P and Fitch triggered a requirement from various NJBPU orders that JCP&L file a mitigation plan, which was filed on November 5, 2020, to demonstrate that JCP&L has sufficient liquidity to meet its BGS obligations. On November 18,December 11, 2020, the NJBPU scheduledheld a public hearing on the mitigation plan. Written comments on JCP&L’s mitigation plan were submitted on January 8, 2021.
On September 23, 2020, the NJBPU issued an Order requiring all New Jersey electric distribution companies to file electric vehicle programs. JCP&L filed its electric vehicle program on March 1, 2021, which consists 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. The total proposed budget for December 11, 2020.the electric vehicle program is approximately $50 million, of which $16 million is capital expenditures and $34 million is for operations and maintenance expenses. JCP&L is proposing to recover the electric vehicle program costs via a non-bypassable rate clause applicable to all distribution customer rate classes, which would become effective on January 1, 2022. On May 26, 2021, a procedural schedule was set to include evidentiary hearings the week of October 18, 2021. On July 16, 2021, the procedural schedule was extended by thirty days as requested by JCP&L to continue settlement discussions. On August 19, 2021, the presiding commissioner issued an order modifying the procedural schedule by extending the procedural schedule by ninety days as requested by JCP&L to continue settlement discussions.
On October 28, 2020, the NJBPU approved a settlement in JCP&L’s distribution rate, and voted that JCP&L will be subject to an upcoming management audit. The management audit began at the end of May 2021 and is currently ongoing.
OHIO
The Ohio Companies operate under base distribution rates approved by the PUCO effective in 2009. The Ohio Companies’ residential and commercial base distribution revenues are decoupled, through a mechanism that took effect on February 1, 2020, to the base distribution revenue and lost distribution revenue associated with energy efficiency and peak demand reduction programs recovered as of the twelve-month period ending on December 31, 2018.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, rider, 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) the collection of lost distribution revenues associated with energy efficiency and peak demand reduction programs; (3) a goal across FirstEnergy to reduce CO2 emissions by 90% below 2005 levels by 2045; and (4)(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.
ESP IV further provided for the Ohio Companies to collect throughDMR revenues, but the DMR $132.5 million annually for three years beginning in 2017, grossed up for federal income taxes, resulting in an approved amount of approximately $168 million annually in 2018 and 2019. On appeal, the SCOH on June 19, 2019, reversed the PUCO’s determination that thedecision to include DMR is lawful, and remanded the matter to the PUCO with instructions to remove the DMR fromin ESP IV. On August 20, 2019,Subsequently, the SCOH denied the Ohio Companies’ motion for reconsideration. The PUCO entered an order directing the Ohio Companies to cease further collection through the DMR and credit back to customers a refund of the DMR funds collected since July 2, 2019, and remove the DMR from ESP IV.2019. On July 15, 2019, the OCC filed a Notice of Appealan appeal with the SCOH, challenging the PUCO’s exclusion of DMR revenues from the determination of the existence of significantly excessive earnings under ESP IV for OE for calendar year 2017, and claiming a $42 million refund is due to OE customers. On December 1, 2020, the SCOH reversed the PUCO’s exclusion of the DMR revenues from the determination of the existence of significantly excessive earnings under ESP IV for OE for calendar year 2017, and claiming a $42 million refundremanded the case to the PUCO with instructions to conduct new proceedings which include the DMR revenues in the analysis, determine the threshold against which the earned return is due to OE customers. The Ohio Companies are contesting this appeal but aremeasured, and make other necessary determinations. FirstEnergy is unable to predict the outcome of this matter. The SCOH heard the argument on this matter on May 12, 2020.these proceedings but has not deemed a liability probable as of September 30, 2021.
On July 23, 2019, Ohio enacted legislation establishing support for nuclear energy supply in Ohio. In addition to theHB 6, which included provisions supporting nuclear energy, the legislation included a provision implementingauthorizing a decoupling mechanism for Ohio electric utilities and ending current energy efficiency program mandates. Under HB 6 the energy efficiency program mandates would have ended on December 31, 2020, provided that statewide energy efficiency mandates are achieved as determined by the PUCO. On February 26, 2020,24, 2021, the PUCO found that statewide energy efficiency mandates had been achieved, and ordered that a wind-down of statutorily requiredOhio electric utilities’ energy efficiency programs shall commence on September 30, 2020, and the programs shall terminate on December 31, 2020, and thatpeak demand reduction cost recovery riders terminate. Third-parties have challenged the Ohio Companies’ existing portfolio plans are extended through 2020 without changes.authorization to recover all lost distribution revenue under energy efficiency and peak demand reduction cost recovery riders. On October 18, 2021, the attorney examiner issued a procedural schedule setting hearings for December 22, 2021, on that issue. FirstEnergy is unable to predict the outcome of this proceeding.
On November 21, 2019, the Ohio Companies applied to the PUCO for approval of a decoupling mechanism,March 31, 2021, Governor DeWine signed HB 128, which, would set residential and commercial base distribution related revenues at the levels collected in 2018. As such, those base distribution revenues would no longer be based on electric consumption, which allows continued support of energy efficiency initiatives while also providing revenue certainty to the Ohio Companies. On January 15, 2020, the PUCO approved the Ohio Companies’ decoupling application, and the decoupling mechanism took effect on February 1, 2020. Various Ohio House and Senate Bills were introduced in the third quarter of 2020 to, among other things, repealrepealed parts of HB 6, the legislation that established support for nuclear energy supply in Ohio, provided for a decoupling mechanism for Ohio electric utilities, and provided for the ending of current energy efficiency program mandates. FirstEnergy is unable to predict the outcome of the legislative activity in response to the investigation of HB 6, however, a repeal of the decoupling provision of HB 6 is reasonably possible.128 was effective June 30, 2021. As of September 30, 2020, the uncollected amount recognized as a regulatory asset on FirstEnergy’s Consolidated Balance Sheet from the decoupling mechanism was approximately $100 million. However, absent the decoupling mechanism and other provisions of HB 6, it is expected that the Ohio Companies would have collected lost distribution revenues estimated at approximately $63 million for the nine months ended September 30, 2020, for a pre-tax net impact of approximately $37 million. Furthermore, as FirstEnergy would not have financially benefited from the zeromechanism to provide support to nuclear credit includedenergy in HB 6,Ohio, there is no expected additional impact to FirstEnergy due to the repeal of that provision in HB 6. On November 2, 2020,128.
As further discussed below, in connection with a partial settlement with the OAG and other parties, the Ohio Companies filed their annual updatean application with the PUCO on February 1, 2021, to set the respective decoupling riders (CSR) to zero. On February 2, 2021, the PUCO approved the application. While the partial settlement with the OAG focused specifically on decoupling, the Ohio Companies elected to forego recovery of lost distribution revenue. FirstEnergy is committed to pursuing an open dialogue with stakeholders in an appropriate manner with respect to the numerous regulatory proceedings currently underway as further discussed herein. As a result of the partial settlement, and the decision to not seek lost distribution revenue, FirstEnergy recognized a $108 million pre-tax charge ($84 million after-tax) in the fourth quarter of 2020, and $77 million (pre-tax) of which is associated with forgoing collection of lost distribution revenue. On March 31, 2021, FirstEnergy announced that the Ohio Companies would proactively refund to customers amounts previously collected under decoupling, rider with an estimated annual revenue requirementinterest, which total approximately $27 million. On April 22, 2021, in anticipation of approximately $113 million with a proposedthe effective date of JanuaryHB 128 and in accordance with HB 128’s provisions regarding the prompt refund of decoupling funds, the Ohio Companies filed an application with the PUCO to modify CSR to return such amount over twelve months commencing June 1, 2021. On June 17, 2021, the Ohio Companies agreed to modify their proposal to return such amount in a single lump sum to customers, beginning on July 1, 2021, unless otherwise ordered byor promptly upon obtaining PUCO approval. On July 7, 2021, the PUCO.PUCO issued an order approving the Ohio Companies’ modified application and directed that all funds collected through CSR be refunded to customers over a single billing cycle beginning August 1, 2021.
On July 17, 2019, the PUCO approved, with no material modifications, a settlement agreement that provides for the implementation of the Ohio Companies’ first phase of grid modernization plans, including the investment of $516 million over three years to modernize the Ohio Companies’ electric distribution system, and for all tax savings associated with the Tax Act to
flow back to customers. The settlement had broad support, including PUCO Staff,staff, the OCC, representatives of industrial and commercial customers, a low-income advocate, environmental advocates, hospitals, competitive generation suppliers and other parties.
In March 2020, the PUCO issued entries directing utilities to review their service disconnection and restoration policies and suspend, for the duration of the COVID-19 pandemic, otherwise applicable requirements that may impose a service continuity hardship or service restoration hardship on customers. The Ohio Companies are utilizing their existing approved cost recovery mechanisms where applicable to address the financial impacts of these directives. On July 31, 2020, the Ohio Companies filed with the PUCO their transition plan and requests for waivers to allow for the safe resumption of normal business operations, including service disconnections for non-payment, on or after September 15, 2020.non-payment. On September 23, 2020, the PUCO approved the Ohio Companies’ transition plan, including approval of the resumption of service disconnections for non-payment, which the Ohio Companies began on October 5, 2020.
On July 29, 2020, the PUCO consolidated the Ohio Companies’ Applicationsapplications for determination of the existence of significantly excessive earnings, or SEET, under ESP IV for calendar years 2018 and 2019, which had been previously filed on July 15, 2019, and May 15, 2020, respectively, and set a procedural schedule with evidentiary hearings scheduled for October 29, 2020. The calculations included in the Ohio Companies’ SEET filings for calendar years 2018 and 2019 demonstrate that the Ohio Companies did not have significantly excessive earnings, however, FirstEnergy and the Ohio Companies are unable to predict the PUCO’s ultimate determination of the applications. On August 3, 2020, the OCC filed an interlocutory appeal asking the PUCO to stay the SEET proceeding until the SCOH determines whether DMR should be excluded from the SEET, as further discussed above. Furthermore, on July 29, 2020, Ohio House Bill 740 was introduced, which would repeal legislation passed last year that permitted the Ohio Companies to file their SEET results on a consolidated basis instead of on an individual company basis.respectively. On September 4, 2020, the PUCO opened its quadrennial review of ESP IV, consolidated it with the Ohio Companies’ 2018 and 2019 SEET Applications, and set a procedural schedule for the consolidated matters. On October 29, 2020,January 12, 2021, the PUCO issuedconsolidated these matters with the determination of the existence of significantly excessive earnings under ESP IV for calendar year 2017, which the SCOH had remanded to the PUCO. On March 1, 2021, the Ohio Companies filed testimony in the quadrennial review and supplemental testimony in the SEET cases for calendar years 2017 through 2019. The calculations included in the quadrennial review for 2020 through 2024 demonstrate that the prospective effect of ESP IV is not substantially likely to provide the Ohio Companies with significantly excessive earnings during the balance of ESP IV. In addition, the Ohio Companies’ quadrennial review testimony demonstrated that ESP IV continues to be more favorable in the aggregate and during the remaining term of ESP IV as compared to the expected results of a market rate offer. Further, the revised calculations included in the Ohio Companies’ supplemental SEET testimony for calendar years 2017 through 2019 demonstrated that the Ohio Companies did not have significantly excessive earnings, on an entry extending the deadline forindividual company basis or on a consolidated basis. On March 31, 2021, Governor DeWine signed House Bill 128, which repeals legislation passed in 2019 that permitted the Ohio Companies to file their SEET results on a consolidated basis instead of on an individual company basis. HB 128 was effective June 30, 2021. Further, the OCC and another party filed testimony on April 5, 2021, recommending refunds for one or more of the Ohio Companies for calendar years 2017 through 2019. On April 20, 2021, the Ohio Companies filed supplemental testimony in the quadrennial review providing prospective SEET values on an individual company basis, which demonstrate that
the Ohio Companies are not projected to have significantly excessive earnings, on an individual company basis, during the balance of ESP IV testimonyIV. On October 18, 2021, the attorney examiner issued a procedural schedule setting hearings for December 13, 2021, to March 1,allow time for settlement negotiations. As of September 30, 2021, no contingency has been reflected in FirstEnergy’s consolidated financial statements with respect to these matters as a loss is neither probable, nor is a loss or range of a loss reasonably estimable.
On May 17, 2021, the Ohio Companies filed their application for the determination of significantly excessive earnings for calendar year 2020. The calculations included in the application demonstrated that the Ohio Companies, on an individual company basis, did not have significantly excessive earnings.
In connection with the evidentiary hearingsaudit of the Ohio Companies’ Rider DCR for 2017, the PUCO issued an order on June 16, 2021, directing the Ohio Companies to commence no sooner than May 3, 2021.prospectively discontinue capitalizing certain vegetation management costs and reduce the 2017 Rider DCR revenue requirement by $3.7 million associated with these costs.
On September 8, 2020, the OCC filed motions in the Ohio Companies’ Corporate Separation Auditcorporate separation audit and Rider DMR Auditaudit 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. The Ohio Companies’ filed aOn December 30, 2020, in response in opposition to the OCC’s motions on September 23, 2020.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 ratepayers through the DMR were only used for the purposes established in ESP IV. On June 2, 2021, the PUCO selected an auditor, and a final audit report is to be filed by December 16, 2021.
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, 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 ratepayers. The Ohio Companies filed a response on September 30, 2020, stating that any political and charitable spending in support of HB 6 or the subsequent referendum were not included in rates or charges paid for by its customers. Several parties requested that the PUCO broaden the scope of the review of political and charitable spending. On August 6, 2021, the Ohio Companies filed a supplemental response explaining that, in light of the new facts revealed by the DPA between FE and the U.S Attorney’s Office for the S.D. Ohio, and the findings of the Rider DCR audit report, the Ohio Companies concluded that political or charitable spending in support of HB 6, or the subsequent referendum effort, affected pole attachment rates paid by approximately $15 thousand, which will be refunded to those customers. 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 connection with an on-goingongoing 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.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. A PUCO attorney examiner has issued a procedural schedule for the filing of comments and reply comments and testimony, as well as an evidentiary hearing on February 10, 2022.
On November 24, 2020, the Environmental Law and Policy Center filed motions to vacate the PUCO’s orders in proceedings related to the Ohio Companies’ settlement that provides for the implementation of the first phase of grid modernization plans and for all tax savings associated with the Tax Act to flow back to customers, the Ohio Companies’ energy efficiency portfolio plans for the period from 2013 through 2016, and the Ohio Companies’ application for a two-year extension of the DMR, on the grounds that the former Chairman of the PUCO should have recused himself in these matters. On December 30, 2020, the PUCO denied the motions, and reinstated the requirement under ESP IV that the Ohio Companies file a base distribution rate case by May 31, 2024, the end of ESP IV, which the Ohio Companies had indicated they would not oppose.
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, which the Ohio Companies are further required to remit to other Ohio electric distribution utilities or to the State Treasurer, to provide for refunds in the event such provisions of HB 6 are repealed. The Ohio Companies contested the motions, which are pending before the PUCO.
On December 7, 2020, the Citizens’ Utility Board of Ohio filed a complaint with the PUCO against the Ohio Companies. The complaint alleges that the Ohio Companies’ new charges resulting from HB 6, and any increased rates resulting from proceedings over which the former PUCO Chairman presided, are unjust and unreasonable, and that the Ohio Companies violated Ohio corporate separation laws by failing to operate separately from unregulated affiliates. The complaint requests, among other things, that any rates authorized by HB 6 or authorized by the PUCO in a proceeding over which the former
Chairman presided be made refundable; that the Ohio Companies be required to file a new distribution rate case at the earliest possible date; and that the Ohio Companies’ corporate separation plans be modified to introduce institutional controls. The Ohio Companies are contesting the complaint.
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 intendsexpanded the scope of the audit on March 10, 2021, to selectinclude a review of certain transactions that were either improperly classified, misallocated, or lacked supporting documentation, and to determine whether funds collected from ratepayers were used to pay the vendors, and if so, whether or not the funds associated with those payments should be returned to ratepayers through Rider DCR or through an alternative proceeding. The final audit report was filed on August 3, 2021. The audit report recommends that approximately $6.6 million be refunded to customers associated with certain vendor transactions that were either improperly classified, misallocated, or lacked supporting documentation. On September 29, 2021, the PUCO further expanded the scope of the audit, and directed the auditor to determine if the costs of the naming rights for FirstEnergy Stadium have been recovered from ratepayers by December 2, 2020,the Ohio Companies, with a final audit report to be filed by November 19, 2021. On October 4, 2021, the Ohio Companies and other parties filed comments on the August 3, 2021 audit report’s recommendations regarding the transactions disclosed in April 2021.FirstEnergy’s Form 10-K for the year ended December 31, 2020. On October 14, 2021, the Ohio Companies and other parties filed reply comments.
See “Outlook - Other Legal Proceedings” below for additional details on the government investigationinvestigations 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. These rates were adjusted for the net impact of the Tax Act, effective March 15, 2018. The net impact of the Tax Act for the period January 1, 2018 through March 14, 2018 was separately tracked and its treatment will be addressed in a future rate proceeding. The Pennsylvania Companies operate under DSPs for the June 1, 2019 through May 31, 2023 delivery period, which provide for the competitive procurement of generation supply for customers who do not choose an alternative EGS or for customers of alternative EGSs that fail to provide the contracted service. 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.
Pursuant to Pennsylvania Act 129 of 2008 and PPUC orders, Pennsylvania EDCs implement energy efficiency and peak demand reduction programs. The Pennsylvania Companies’ Phase III EE&C plans for the June 2016 through May 2021 period, which were approved in March 2016, with expected costs up to $390 million, are designed to achieve the targets established in the
PPUC’s Phase III Final Implementation Order with full recovery through the reconcilable EE&C riders. 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 must bewere filed by November 30, 2020. A settlement has been reached in this matter, and a joint petition seeking approval of that settlement by the parties was filed on February 16, 2021. On March 25, 2021, the PPUC issued an order approving the settlement without modification.
Pennsylvania EDCs may file with theare permitted to seek PPUC for 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 August 30, 2019,January 16, 2020, the PPUC approved the Pennsylvania Companies filed Petitions for approval of newCompanies’ 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 January 16, 2020,June 25, 2021, the PPUC approved the LTIIPs without modification. The Pennsylvania Companies’ approved DSIC riders for quarterly cost recovery went into effect July 1, 2016. On August 30, 2019, PennOCA filed a Petition seeking approval of a waivercomplaint against Penn’s quarterly DSIC rate, disputing the recoverability of the statutoryCompanies’ automated distribution management system investment under the DSIC cap of 5% of distribution rate revenuemechanism. Penn responded on July 19, 2021, and approval to increase the maximum allowable DSIC to 11.81% of distribution rate revenue for the five-year period ofsubmitted its proposed LTIIP. On March 12, 2020, an order was entered approving a settlement by all parties to that case which provides for a temporary increase in the recoverability cap from 5% to 7.5%, to expiredirect testimony on the earlier of the effective date of new base rates following Penn’s next base rate case or the expiration of its LTIIP II program.October 13, 2021.
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, which decision was appealed by the Pennsylvania OCA to the Pennsylvania Commonwealth Court. The Commonwealth Court reversed the PPUC’s decision and remanded the matter to require the Pennsylvania Companies to revise their tariffs and DSIC calculations to include ADIT and state income taxes. On April 7, 2020, the Pennsylvania Supreme Court issued an order granting Petitions for Allowance of Appeal by both the PPUC and the Pennsylvania Companies of the Commonwealth Court’s Opinion and Order. Briefs and Reply Briefs of the parties were filed, and oral argument before the Supreme Court was held on October 21, 2020. AnOn July 21, 2021, the Pennsylvania Supreme Court issued its ruling, affirming the Commonwealth Court’s Opinion and Order, and remanding 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.
The PPUC issued an order on March 13, 2020, forbidding utilities from terminating service for non-payment for the duration of the COVID-19 pandemic. On May 13, 2020, the PPUC issued a Secretarial letter directing utilities to track all prudently incurred incremental costs arising from the COVID-19 pandemic, and to create a regulatory asset for future recovery of incremental uncollectibles incurred as a result of the COVID-19 pandemic and termination moratorium. On October 13, 2020, the PPUC entered an order lifting the service termination moratorium effective November 9, 2020, subject to certain additional notification, payment procedures and exceptions, and permits the Pennsylvania Companies to create a regulatory asset for all incremental expenses associated with their compliance with the order. Customers with income levels at 300% of federal poverty income guidelines and below are not subject to termination throughOn March 19, 2021, the PPUC entered an order lifting the moratorium in total effective March 31, 2021, as long as they apply for assistance programssubject to certain additional guidelines regarding the duration of payment arrangements and payment arrangements. Utilities may create a regulatory asset for all incremental expenses associated with their compliance with the order. On October 27, 2020, several stakeholders filed a joint petition for clarification of the order. Answers to the joint petition for clarification were due on November 6, 2020.reporting obligations.
WEST VIRGINIA
MP and PE provide electric service to all customers through traditional cost-based, regulated utility ratemaking and operate under rates approved by the WVPSC effective 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 March 13, 2020, the WVPSC urged all utilities to suspend utility service terminations except where necessary as a matter of safety or where requested by the customer. On May 15, 2020, the WVPSC issued an order to authorize MP and PE to record a deferral of additional, extraordinary costs directly related to complying with the various COVID-19 government shut-down orders and operational precautions, including impacts on uncollectible expense and cash flow related to temporary discontinuance of service terminations for non-payment and any credits to minimum demand charges associated with business customers adversely impacted by shut-downs or temporary closures related to the pandemic. MP and PE resumed disconnection activity for commercial and industrial customers on September 15, 2020, and for residential customers on November 4, 2020.
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 proposes an annual revenue reduction of $2.6 million annually, effective January 1, 2022, with reconciliation and any resulting adjustments incorporated into the annual ENEC proceedings. A unanimous settlement was reached with all the parties agreeing to a $7.7 million reduction beginning January 1, 2022, with a true-up in the ENEC proceeding each year. The settlement was presented to the WVPSC on August 18, 2021, and an order is expected to be issued this year.
On August 28, 2020,27, 2021, MP and PE filed with the WVPSC their annual ENEC case requesting a decreasean increase in ENEC rates of $55$19.6 million beginning January 1, 2021,2022, representing a 4% decrease1.5% increase in rates compared toversus those currently in effect on August 28, 2020. The decrease in the ENEC rates is net of recovering approximately $10.5 million in previously deferred, incremental uncollectible and other related costs resulting from the COVID-19 pandemic. A hearing is set to begin on December 2, 2020, andeffect. Once an order is issued in the ADIT case discussed above, it is expected ina supplement will be filed lowering the request by $7.7 million by taking into account the rate decrease from the case. A procedural schedule has been issued setting a hearing on December 2020.3, 2021.
Also on August 28, 2020, MP and PE filed with the WVPSC for recovery of costs associated with modernization and improvement program for their coal-fired boilers. The proposed annual revenue increase for these environmental compliance projects is $5 million beginning January 1, 2021. A hearing is set to begin on December 2, 2020.
FERC REGULATORY MATTERS
Under the FPA, FERC regulates rates for interstate wholesale sales, transmission of electric power, accounting 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 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. FirstEnergy is unable to predict the final outcome or impact of this audit.
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, certain income tax-related adjustments, including, but not limited to impacts from the Tax Act discussed further below, and certain costs for transmission-related vegetation management programs. The amount on FirstEnergy’s Consolidated Balance Sheet forA portion of these regulatory assets was approximately $76 millioncosts would have been charged to the Ohio Companies. Additionally, ATSI proposed certain income tax-related adjustments and $73 million, as of September 30, 2020 and December 31, 2019, respectively. Per prior FERC orders, ATSI included a “cost-benefit study” to support recovery of ATSI’s costs to move to PJM, andcertain tariff changes addressing the MISO transmission project costs that were allocated to ATSI. Certain intervenors filed protestsrevenue credit components of the formula rate amendments on May 29, 2020, and ATSI filed a reply on June 15, 2020.template. On June 30, 2020, FERC issued an initial order accepting the tariff amendments subject to refund suspending the effective date for five months to be effective December 1, 2020, 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 was recognized in Other Operating Expenses on the FirstEnergy Consolidated Statements of Income. This $21 million charge 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 engaged innot expected to have a material impact on FirstEnergy or ATSI. The settlement negotiations with the other parties.is pending before FERC for approval.
FERC Actions on 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 toto: (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. Certain intervenors filed protests of the compliance filings, to which ATSI and MAIT responded. On October 28, 2020, FERC Staffstaff requested additional information about ATSI’s proposed rate base adjustment mechanism.mechanism, and ATSI has 30 dayssubmitted the requested information on November 25, 2020. On May 4, 2021, FERC staff requested additional information about MAIT’s proposed rate base adjustment mechanism, and MAIT submitted the requested information on June 3, 2021. On June 24, 2021, an intervenor protested the supplemental information that MAIT submitted, to respond in writing to FERC Staff’s request.which MAIT responded. 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. These compliance filings each remain pending before FERC. MP, WP and PE (as holders of a “stated” transmission rate)rate when Order No. 864 issued) are addressing these requirements in the transmission formula rates amendments that were filed on October 29, 2020.2020, and which have been accepted by FERC effective January 1, 2021, subject to refund, pending further hearing and settlement procedures, addressed further below. JCP&L is addressingaddressed these requirements as part of its pending transmission formula rate case.case, which was resolved by a settlement approved by FERC on April 15, 2021, addressed further below.
Transmission ROE Methodology
FERC’s methodology for calculating electric transmission utility ROE has been in transition as a result of an April 14, 2017 ruling by the D.C. Circuit that vacated FERC’s then-effective methodology. On October 16, 2018, FERC issued an order in which it proposed a revised ROE methodology. FERC proposed that, for complaint proceedings alleging that an existing ROE is not just and reasonable, FERC will rely on three financial models - discounted cash flow, capital-asset pricing, and expected earnings - to establish a composite zone of reasonableness to identify a range of just and reasonable ROEs. FERC then will utilize the transmission utility’s risk relative to other utilities within that zone of reasonableness to assign the transmission utility to one of three quartiles within the zone. FERC would take no further action (i.e., dismiss the complaint) if the existing ROE falls within the identified quartile. However, if the replacement ROE falls outside the quartile, FERC would deem the existing ROE presumptively unjust and unreasonable and would determine the replacement ROE. FERC would add a fourth financial model risk premium to the analysis to calculate a ROE based on the average point of central tendency for each of the four financial models. On March 21, 2019, FERC established NOIs to collect industry and stakeholder comments on the revised ROE methodology that is described in the October 16, 2018 decision, and also whether to make changes to FERC’s existing policies and practices for awarding transmission rates incentives. On November 21, 2019, FERC announcedMay 20, 2021, in a complaint proceedingcase not involving MISO utilities that FERC would rely on the discounted cash flow and capital-asset pricing models as the basis for establishing ROE. Certain parties, including the Utilities, sought rehearing of FERC’s decision in the MISO utilities proceeding and, on May 21, 2020,FirstEnergy, FERC issued Opinion No. 575 in which it reiterated the nationwide ROE methodology set forth in 2020 in Opinion Nos. 569-A that changed FERC’s ROE methodology.and 569-B. Under this methodology, FERC established an ROE that is based onemploys three financial models – discounted cash flow, capital-asset pricing, and risk premium – to calculate a composite zone of reasonableness. As it has done in other recent ROE cases, FERC noted that utilities could, in utility-specific proceedings, ask to haverejected the use of the expected earnings methodology included in calculating the utility’s authorized ROE. FERC also noted that, going forward, it will divide that zone into three equal parts, to be used for high risk, normal risk, and low risk utilities. A given utility will be assigned to one of these three parts of the zone of reasonableness, and its ROE will be set at the median or midpoint of the other utilities that are in the applicable third of the zone. FirstEnergy filed a request for clarification or, alternatively, rehearing of Opinion No. 575 was filed on June 21, 2021, and on September 9, 2021, FERC issued an order clarifying aspects of its prior opinion, but affirming the result. On July 15, 2021, FERC issued another order, addressing ROE for a generation company in New England, which FERC denied on July 22, 2020. FirstEnergy also initiated appellate proceedings ofapplied a standard consistent with Opinion Nos. 569-A and 569-B. FERC’s Opinion Nos. 569569-A and 569-A, as did a number of other parties. These proceedings are pending before569-B, upon which Opinion No. 575 is based, have been appealed to the United States Court of Appeals forD.C. Circuit. FirstEnergy is not participating in the District of Columbia Circuit.appeal. Any changes to FERC’s transmission rate ROE and incentive policies for the Utilities would be applied on a prospective basis.
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 submitted July 1, 2020,filed on June 25, 2021, and reply comments were filed on July 16, 2020.26, 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 through EEI and throughin comments that were submitted by a consortiumgroup of PJM Transmission Owners. This proceeding is pending before FERC.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.
JCP&L Transmission Formula Rate
On October 30, 2019, JCP&L filed tariff amendments with FERC to convert JCP&L’s existing stated transmission rate toimplement a forward-looking formula transmission rate. JCP&L requested that the tariff amendments become effective January 1, 2020. On December 19, 2019, FERC issued its initial order in the case, allowing JCP&L to transition to a forward-looking formula rate as of January 1, 2020 as requested, subject to refund, pending further hearing and settlement proceedings. JCP&L and the parties to the FERC proceeding are engaged insubsequently were able to reach settlement, negotiations.and on February 2, 2021, JCP&L filed an offer of settlement with FERC. On April 15, 2021, FERC approved the settlement agreement as filed, with no changes, effective January 1, 2021.
Allegheny Power Zone Transmission Formula Rate Filings
On October 29, 2020, MP, PE and WP filed tariff amendments with FERC to convert their existing stated transmission rate toimplement a forward-looking formula transmission rate, 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 pending before FERC. FirstEnergy intendsengaged in settlement negotiations with the other parties to includethe formula rate proceedings. KATCo will be included in the Regulated Transmission reportable segment.
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. TheOn July 28, 2015, the D.C. Circuit ordered the EPA on July 28, 2015, to reconsider the CSAPR caps on NOx and SO2 emissions from power plants in 13 states, including Ohio, Pennsylvania and West Virginia. This followsfollowed 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 ruleUpdate on September 7, 2016, reducing summertime NOx emissions from power plants in 22 states in the eastern U.S., including Ohio, Pennsylvania and West Virginia, beginning in 2017. Various states and other stakeholders appealed the CSAPR update ruleUpdate to the D.C. Circuit in November and December 2016. On September 13, 2019, the D.C. Circuit remanded the CSAPR update ruleUpdate 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. Depending on the outcome of the appeals, the EPA’s reconsideration of the CSAPR update rule and how the EPA and the states ultimately implement CSAPR, the future cost of compliance may materially impact FirstEnergy’s operations, cash flows and financial condition.
In February 2019, the EPA announced its final decision to retain without changes the NAAQS for SO2, specifically retaining the 2010 primary (health-based) 1-hour standard of 75 PPB. As of September 30, 2020, FirstEnergy has no power plants operatingAlso, during this time, in areas designated as non-attainment by the EPA.
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 seekssought 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. FirstEnergy is unable to predictOn March 15, 2021, the EPA issued a revised CSAPR Update that addresses, among other things, the remands of the CSAPR Update and the New York Section 126 Petition. Depending on the outcome of these matters or estimateany appeals and how the loss or rangeEPA and the states ultimately implement the revised CSAPR Update, the future cost of loss.compliance may materially impact FirstEnergy's operations, cash flows and financial condition.
In February 2019, the EPA announced its final decision to retain without changes the NAAQS for SO2, specifically retaining the 2010 primary (health-based) 1-hour standard of 75 PPB. As of March 31, 2020, FirstEnergy has no power plants operating in areas designated as non-attainment by the EPA.
Climate Change
There are a number ofseveral 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.
At the international level, the United Nations Framework Convention on Climate Change resulted in the Kyoto Protocol requiring participating countries, which does not include the U.S., to reduce GHGs commencing in 2008 and has been extended through 2020. The Obama Administration submitted in March 2015, a formal pledge for the U.S. to reduce its economy-wide GHG emissions by 26 to 28 percent below 2005 levels by 2025. In 2015, FirstEnergy set a goal of reducing company-wide CO2 emissions by at least 90 percent below 2005 levels by 2045. As of December 31, 2018, FirstEnergy has reduced its CO2 emissions by approximately 62 percent. 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.Paris to reduce GHG. 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 GHG 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 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. 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 GHG under the Clean Air Act”Act,” concluding that concentrations of several key GHGs constitutesconstitute an “endangerment”"endangerment" and may be regulated as “air pollutants”"air pollutants" under the CAA and mandated measurement and reporting of GHG emissions from certain sources, including electric generating plants. TheSubsequently, 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 firedfuel-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.Court. On March28, 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 October16, 2017, the EPA issued a proposed rule to repeal the CPP. On June 19, 2019, the EPA repealed the CPP and replaced it with the ACE rule that establishesestablished guidelines for states to develop standards of performance to address GHG emissions from existing coal-fired power plants. 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. The D.C. Circuit decision is subject to legal challenge. Depending on the outcomes of further appeals and how any final rules are ultimately implemented, the future cost of compliance may be material.
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.
The EPA finalized CWA Section 316(b) regulations in May 2014, requiring cooling water intake structures with an intake velocity greater than 0.5 feet per second to reduce fish impingement when aquatic organisms are pinned against screens or other parts of a cooling water intake system to a 12% annual average and requiring cooling water intake structures exceeding 125 million gallons per day to conduct studies to determine site-specific controls, if any, to reduce entrainment, which occurs when aquatic life is drawn into a facility’s cooling water system. Depending on any final action taken by the states with respect to impingement and entrainment, the future capital costs of compliance with these standards may be material.
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, how final rules are ultimately implemented and the compliance options MP elects to take with the new rules, the compliance with these standards, which could include capital expenditures at the Ft. Martin and Harrison power stations, may be substantial and changes to MP’s operations at those power stations may also result.
On September 29, 2016, FirstEnergy received a request from the EPA for information pursuant to CWA Section 308(a) for information concerning boron exceedances of effluent limitations established in the NPDES Permit for the former Mitchell Power Station’s Mingo landfill, owned by WP. On November 1, 2016, WP provided an initial response that contained information related to a similar boron issue at the former Springdale Power Station’s landfill.landfill, also owned by WP. The EPA requested additional information regarding the Springdale landfill and on November 15, 2016, WP provided a comprehensive response for both facilities and intends tohas fully complycomplied with the Section 308(a) information request. On March 3, 2017, WP proposed to the PA DEP a re-route of its wastewater discharge to eliminate potential boron exceedances at the Springdale landfill. Onlandfill and on January 29, 2018, WP submitted an NPDES permit renewal application to PA DEP proposing to re-route its wastewater discharge to eliminate potential boron exceedances at the Mingo landfill. On February 20, 2018, the DOJDepartment of Justice issued a letter and tolling agreement to WP on behalf of the EPA alleging violations of the CWA at the Springdale and Mingo landfill whilelandfills and seeking to enter settlement negotiations in lieu of filing a complaint. The EPA has proposed a penalty of $900,000 toTo settle alleged past boron exceedances at both facilities, WP has agreed to a penalty amount of $610 thousand to be paid over two years. It is expected that WP will sign a Consent Decree memorializing the Mingopipeline construction milestones and Springdale landfills. Negotiations are continuing and WP is unable to predict the outcomecivil penalty payments in the fourth quarter of this matter.2021.
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 17, 2018, the EPA Administrator signed a final rule extending the deadline for certain CCR facilities to cease disposal and commence closure activities, as well as, establishing less stringent groundwater monitoring and protection requirements. On August 21, 2018, the D.C. Circuit remanded sections of the CCR Rule to the EPA to provide for additional safeguards for unlined CCR impoundments that are more protective of human health and the environment. On December 2, 2019, the EPA published a proposed rule accelerating the date that certain CCR impoundments must cease accepting waste and initiate closure to August 31, 2020. The proposed rule allowsallowed for an extension of the closure deadline based on meeting proscribed site-specific criteria. 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. 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 FirstEnergy’sthe Consolidated Balance Sheets as of September 30, 2020,2021, 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 $104101 million have been accrued through September 30, 2020. Included in the total2021, of which, approximately $67 million are accrued liabilities of approximately $68 million 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 S.D. Ohio. FirstEnergy was not aware of the criminal allegations, affidavit or subpoenas before July 21, 2020. No contingency
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 been reflected in FirstEnergy’s consolidated financial statements as a loss is neither probable, nor is a loss or rangeagreed to the filing of a loss reasonably estimable.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.
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, the SEC issued an additional subpoena to FE. 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). 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.
•Owens v. FirstEnergy Corp. et al. and Frand v. FirstEnergy Corp. et al. (Federal District Court, 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 Securities Exchange Act of 1934 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.
•Gendrich v. Anderson, et al. and Sloan v. Anderson, et al. (Common Pleas Court, Summit County, OH); 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. These actions have been consolidated.
•Miller v. Anderson, et al. (Federal District Court, 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. (U.S. District Court, 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 Securities Exchange Act of 1934. The cases in the S.D. Ohio have been consolidated and co-lead plaintiffs have been appointed by the court. On May 11, 2021, the court denied the defendants’ motion to dismiss in the consolidated derivative proceedings in the S.D. Ohio. As previously disclosed, on June 29, 2021, the FE Board established a SLC, effective July 1, 2021. The SLC has been delegated full authority by the FE Board to take all actions as the SLC deems advisable, appropriate, and in the best interests of FirstEnergy and its shareholders with respect to pending shareholder derivative litigation and demands. On July 20, 2021, the SLC filed motions to stay proceedings in each of the shareholder derivative actions pending in the Northern and Southern Districts of Ohio and in Summit County, Ohio, while the SLC investigates the matters asserted in the lawsuits. On September 17, 2021, the court in the N.D. Ohio issued an order denying the individual defendants’ motions to dismiss and denying the SLC’s motion to stay. On October 20, 2021, the court in the S.D. Ohio also issued an order denying the SLC’s motion to stay. The SLC appealed the court’s decision in the Northern District of Ohio, denying the SLC’s motion to stay, to the United States Court of Appeals for the Sixth Circuit Court.
•Smith v. FirstEnergy Corp. et al., Buldas v. FirstEnergy Corp. et al., and Hudock and Cameo Countertops, Inc. v. FirstEnergy Corp. et al. (Federal District Court, S.D. Ohio); on July 27, 2020, July 31, 2020, and August 5, 2020, respectively, purported customers of FirstEnergy filed putative class action lawsuits against FE and FESC, as well as certain current and former FirstEnergy officers, alleging civil Racketeer Influenced and Corrupt Organizations Act
violations and related state law claims. These actions have been consolidated.consolidated, and the court denied FirstEnergy’s motions to dismiss and stay discovery on February 10 and 11, 2021, respectively. The defendants submitted answers to the complaint on March 10, 2021. A motion for leave to amend the complaint and add FES as a defendant was filed on September 27, 2021 and remains pending. Discovery is proceeding.
•OwensState of Ohio ex rel. Dave Yost, Ohio Attorney General v. FirstEnergy Corp., et al. and FrandCity of Cincinnati and City of Columbus v. FirstEnergy Corp. (Common Pleas Court, Franklin County, OH); 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. These actions have been consolidated. The cases are stayed pending final resolution of the United States v. Larry Householder, et al. (Federal District Court, S.D. Ohio);criminal proceeding described above, although on July 28, 2020 and August 21, 2020, purported stockholders13, 2021, new defendants were added to the complaint, including two former officers of FE filed putative class action lawsuits against FE and certain FE officers, purportedly on behalf of all purchasers of FE common stock from February 21, 2017 through July 21, 2020, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, alleging misrepresentations or omissions by FirstEnergy concerning its business and results of operations.FirstEnergy.
•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, OE, TE and CEI, 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. On October 1, 2020, plaintiffs filed a First Amended Complaint, adding as a plaintiff a purported customer of FirstEnergy and alleging a civil violation of the Ohio Corrupt Activity Act and civil conspiracy against FE, FESC and FES. On May 4, 2021, the court granted the defendants’ motion to dismiss plaintiffs’ breach of contract claims and denied the remainder of the motions to dismiss. The defendants submitted answers to the complaint on June 1, 2021. Discovery is proceeding.
•
Miller v. Anderson, et al. (Federal District Court, N.D. Ohio); Bloom, et al. v. Anderson, et al.; Employees Retirement System
In letters dated January 26, and February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the CityDivision is conducting an investigation of St. Louis v. Jones, et al.; Beck v. Anderson 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 CityFirstEnergy’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 Philadelphia Boardan ongoing non-public audit being conducted by FERC's Division of PensionsAudits and Retirement v. Anderson et al.; Atherton v. Dowling et al; Behar v. Anderson, et al. (U.S. District Court, S.D. Ohio); beginning on August 7, 2020, purported stockholders of FE filed shareholder derivative actions alleging the board and officers breached their fiduciary duties and committed violations of Section 14(a) of the Securities Exchange Act of 1934.
•State of Ohio ex rel. Dave Yost, Ohio Attorney General v.Accounting. While no contingency has been reflected in its consolidated financial statements, FirstEnergy Corp., et al. (Common Pleas Court, Franklin County, OH); on September 23, 2020, the OH AG filedbelieves that it is probable that it will incur a complaint against several parties including FE and FESC, alleging, one cause of action, a civil violation of the Ohio Corrupt Activity Actloss in connection with the passage of HB 6. The OH AG sought a preliminary injunction to prevent eachresolution of the defendants, including FEFERC investigation. Given the ongoing nature and FESC, through the end of 2020, from: (i) contributing to any groups whose purpose is to keep or modify HB 6; (ii) making any public statements for or against any repeal or modification legislation concerning HB 6; (iii) lobbying, consulting, or advising on these matters; or (iv) contributing to any Ohio legislative candidates. The court denied the OH AG’s request for preliminary injunctive relief on October 2, 2020.
•City of Cincinnati and City of Columbus v. FirstEnergy Corp. (Common Pleas Court, Franklin County, OH); on October 27, 2020, the Cities of Cincinnati and Columbus filed a complaint against several parties including FE, alleging a civil violationcomplexity of the Ohio Corrupt Activity Actreview, inquiries and seeking to enjoininvestigations, FirstEnergy cannot yet reasonably estimate a loss or range of loss that may arise from the collectionresolution of the zero nuclear credit included in HB 6.
•Mitchell v. FirstEnergy Corp. et al. (Common Pleas Court, Fairfield County, OH); on October 6, 2020, an unsuccessful candidate for the Ohio legislature filed an amended complaint adding FirstEnergy Corp. to a previously filed Ohio Corrupt Activity Act civil lawsuit against now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. The amended complaint sought an amount in excess of $875,000, plus
treble damages and other relief. On November 2, 2020, the plaintiff moved to voluntarily dismiss the claims without prejudice.FERC investigation.
The plaintiffs in each of the above cases, seek, among other things, to recover an unspecified amount of damages (unless otherwise noted). 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. The outcome of any of these lawsuits, governmental investigations and investigationsaudit are 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. No contingency has been reflected in FirstEnergy’s consolidated financial statements as a loss is neither probable, nor is a loss or range of a loss reasonably estimable.
Internal Investigation Relating to United States v. Larry Householder, et al.
As previously disclosed, a committee of independent members of the FE Board of Directors ishas been directing an internal investigation related to ongoing government investigations. In connection with FirstEnergy’s internal investigation, such committee determined on October 29, 2020, to terminate FirstEnergy’s Chief Executive Officer, Charles E. Jones, together with two other executives: Dennis M. Chack, Senior Vice President of Product Development, Marketing, and Branding; and Michael J. Dowling, Senior Vice President of External Affairs. Each of these terminated executives violated certain FirstEnergy policies and its code of conduct. These executives were terminated as of October 29, 2020. Such former members of senior management did not maintain and promote a control environment with an appropriate tone of compliance in certain areas of FirstEnergy’s business, nor sufficiently promote, monitor or enforce adherence to certain FirstEnergy policies and its code of conduct. Furthermore, certain former members of senior management did not reasonably ensure that relevant information was communicated within our organization and not withheld from our independent directors, our Audit Committee, and our independent auditor. Among the matters considered with respect to the determination by the committee of independent members of the FE Board of Directors that certain former members of senior management violated certain FirstEnergy policies and its code of conduct related to a payment of approximately $4 million made in early 2019 in connection with the termination of a purported consulting agreement, as amended, which had been in place since 2013. The counterparty to such agreement was an entity associated with an individual who subsequently was appointed to a full-time role as an Ohio government official directly involved in regulating the Ohio Companies, including with respect to distribution rates. At this time, it has not been determined if the payments were for the purposes represented within the consulting agreement. Immediately following these terminations, the independent members of its Board appointed Mr. Steven E. Strah to the position of Acting Chief Executive Officer and Mr. Christopher D. Pappas, a current member of the Board, to the temporary position of Executive Director, each effective as of October 29, 2020. Mr. Donald T. Misheff will continue to serve as Non-Executive Chairman of the Board. Additionally, on November 8, 2020, Robert Reffner,the Senior Vice President and Chief Legal Officer, and Ebony Yeboah-Amankwah,the Vice President, General Counsel, and Chief Ethics Officer, were separated from FirstEnergy due to inaction and conduct that the FE Board determined was influenced by the improper tone at the top. The matter is a subjectSubsequently, effective May 26, 2021, the Vice President, Rates and Regulatory Affairs, and Acting Vice President, External Affairs was separated from FirstEnergy related to her inaction regarding an amendment in 2015 of the ongoing internal investigation as it relates to the government investigations.purported consulting agreement discussed above.
Nuclear Plant Matters
Under NRC regulations, JCP&L, ME and PN must ensure that adequate funds will be availableAdditionally, on February 17, 2021, the FE Board appointed Mr. John W. Somerhalder II to decommission their retired nuclear facility, TMI-2. Asthe positions of September 30, 2020, JCP&L, ME and PN had in total approximately $881 million invested in external trusts to be used for the decommissioning and environmental remediation of their retired TMI-2 nuclear generating facility. The values of these NDTs also fluctuate based on market conditions. If the valuesVice Chairperson of the trusts decline by a material amount, the obligationFE Board and Executive Director of FE, each effective as of March 1, 2021. Mr. Donald T. Misheff continues to JCP&L, ME and PN to fund the trusts may increase. Disruptions in the capital markets and their effects on particular businesses and the economy could also affect the valuesserve as Non-Executive Chairman of the NDTs.
FE Board. Mr. Somerhalder will help lead efforts to enhance FirstEnergy’s reputation. On October 15, 2019, JCP&L, ME, PN and GPUN executed an asset purchase and sale agreement with TMI-2 Solutions, LLC, a subsidiary of EnergySolutions, LLC, concerning the transfer and dismantlement of TMI-2. This transfer of TMI-2 to TMI-2 Solutions, LLC will include the transfer of: (i) the ownership and operating NRC licenses for TMI-2; (ii) the external trusts for the decommissioning and environmental remediation of TMI-2; and (iii) related liabilities of approximately $900 million as of September 30, 2020. There can be no assurance that the transfer will receive the required regulatory approvals and, even if approved, whether the conditions to the closing of the transfer will be satisfied. On November 12, 2019, JCP&L filed a Petition with the NJBPU seeking approval of the transfer and sale of JCP&L’s entire 25% interest in TMI-2 to TMI-2 Solutions, LLC. On October 28, 2020, Rate Counsel submitted comments recommending that the NJBPU only approve the sale of TMI-2 on the condition that any liability for TMI-2 be absorbed by the joint owners and that JCP&L should agree to not seek to recover any such costs from its utility customers. On November 2, 2020, JCP&L submitted reply comments accepting Rate Counsel’s condition. JCP&L is awaiting a NJBPU order. Also on November 12, 2019, JCP&L, ME, PN, GPUN and TMI-2 Solutions, LLC filed an application with the NRC seeking approval to transfer the NRC license for TMI-2 to TMI-2 Solutions, LLC. On August 10, 2020, JCP&L, ME, PN, GPUN, TMI-2 Solutions, LLC, and the PA DEP reached a settlement agreement regarding the decommissioning of TMI-2. The settlement agreement provides for increased and detailed oversight by the PA DEP over the decommissioning work, expenditures, and environmental impacts of the dismantlement of TMI-2 by TMI-2 Solutions, LLC. In addition, the PA DEP withdrew its objection to the TMI-2 transfer in the NRC proceedings. Both the NRC and NJBPU proceedings are ongoing. Assets and liabilities held for sale on FirstEnergy’s Consolidated Balance Sheet associated with the transaction consist of asset retirement obligations of$718 million, NDTs of $881 million as well as property, plant and equipment with a net book value of zero, which are included in the regulated distribution segment.March 7,
FES Bankruptcy2021, the FE Board appointed Mr. Steven E. Strah to the position of Chief Executive Officer of FirstEnergy, effective as of March 8, 2021. On March 7, 2021, at the recommendation of the FirstEnergy Corporate Governance and Corporate Responsibility Committee, the FE Board also elected Mr. Strah as a Director of FirstEnergy, effective as of March 8, 2021.
On March 31, 2018, FES,Also, in connection with the internal investigation, FirstEnergy identified certain transactions, which, in some instances, extended back ten years of more, including its consolidated subsidiaries, FG, NG, FE Aircraft Leasing Corp., Norton Energy Storage L.L.C. and FGMUC, and FENOC filed voluntary petitions for bankruptcy protection under Chapter 11vendor service, that were either improperly classified, misallocated to certain of the United States Bankruptcy CodeUtilities and Transmission Companies, or lacked proper supporting documentation. These transactions resulted in amounts collected from customers that were immaterial to FirstEnergy. The Utilities and Transmission Companies are working with the Bankruptcy Court and emergedappropriate regulatory agencies to address these amounts.
The internal investigation has revealed no new material issues since FirstEnergy’s Form 10-K was filed on February 27, 2020. See Note 3, “Discontinued Operations,” for additional discussion.18, 2021. The focus of the internal investigation has transitioned from a proactive investigation to continued cooperation with the ongoing government investigations.
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 9,8, “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
Recently Adopted Pronouncements
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): MeasurementSee Note 1, "Organization and Basis of Credit Losses on Financial Instruments” (Issued June 2016 and subsequently updated): ASU 2016-13 removes all recognition thresholds and will require companies to recognize an allowancePresentation," for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. Prior to adoption, FirstEnergy analyzed its financial instruments within the scope of this guidance, primarily trade receivables and AFS debt securities. The adoption of this standard upon January 1, 2020 did not have a material impact to FirstEnergy’s financial statements and required additional disclosures in these Notes to the Consolidated Financial Statements. Please see above for additional information on FirstEnergy’s allowance for uncollectible customer receivables.
ASU 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" (Issued August 2018): ASU 2018-15 allows implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customers in a software licensing arrangement. FirstEnergy adopted this standard as of January 1, 2020, with no material impact to its financial statements.
ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Issued March 2020): ASU 2020-04 provides temporary optional expedients and exceptions to the current guidance on contract modifications to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. FirstEnergy’s $3.5 billion Revolving Credit Facility bears interest at fluctuating interest rates based on LIBOR and contains provisions (requiring an amendment) in the event that LIBOR can no longer be used. As of September 30, 2020, FirstEnergy has not utilized any of the expedients discussed within this ASU.
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 issuancesdiscussion of new standards not described below based upon the current expectation that such new standards will not significantly impact FirstEnergy's financial reporting.
ASU 2019-12, "Simplifying the Accounting for Income Taxes" (Issued in December 2019): ASU 2019-12enhances and simplifies various aspects of the income tax accounting guidance including the elimination of certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. FirstEnergy continues to evaluate the new guidance, but currently does not expect a material impact upon adopting this standard.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
Background and Investigation
As previously disclosed, a committee of independent members of the Board of Directors (“Board”) is directing an internal investigation related to ongoing government investigations. In connection with FirstEnergy’s internal investigation, such committee determined that certain former members of senior management, including FirstEnergy’s former chief executive officer, violated certain FirstEnergy policies and its code of conduct. Such former members of senior management did not maintain and promote a control environment with an appropriate tone of compliance in certain areas of FirstEnergy’s business, nor sufficiently promote, monitor or enforce adherence to certain FirstEnergy policies and its code of conduct. Furthermore, certain former members of senior management did not reasonably ensure that relevant information was communicated within our organization and not withheld from our independent directors, our Audit Committee, and our independent auditor. Among the matters considered with respect to the determination by the committee of independent members of the Board of Directors that certain former members of senior management violated certain FirstEnergy policies and its code of conduct related to a payment of approximately $4 million made in early 2019 in connection with the termination of a purported consulting agreement, as amended, which had been in place since 2013. The counterparty to such agreement was an entity associated with an individual who subsequently was appointed to a full-time role as an Ohio government official directly involved in regulating the Ohio Companies, including with respect to distribution rates. At this time, it has not been determined if the payments were for the purposes represented within the consulting agreement. The matter is a subject of the ongoing internal investigation related to the government investigations.
(a) Evaluation of Disclosure Controls and Procedures
The management of FirstEnergy, with the participation of the acting chief executive officer and chief financial officer, have reviewed and evaluated the effectiveness of its disclosure controls and procedures as(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in Rules 13a-15(e) and 15d-15(e)1934), as of September 30, 2020.2021. Based on that evaluation, the acting chief executive officer and chief financial officer of FirstEnergy have concluded that its disclosure controls and procedures were not effective as ofSeptember 30, 2020, solely as a result of the material weakness in FirstEnergy’s internal control over financial reporting described below.2021.
FirstEnergy’s disclosure controls and procedures have been designed to ensure that information required to be disclosed by FirstEnergy in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by FirstEnergy in the reports it files or submits under the Exchange Act is accumulated and communicated to FirstEnergy’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosures. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those internal control systems determined to be effective can provide only a levelRemediation of reasonable assurance with respect to financial statement preparation and presentation.
Previous Material Weakness in Internal Control Over Financial Reporting Existing as of September 30, 2020
Management previously identified and disclosed a material weakness in the FirstEnergy’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of FirstEnergy’s annual or interim financial statements will not be prevented or detected on a timely basis.
WeFirstEnergy did not maintain an effective control environment as our senior management failed to set an appropriate tone at the top. Specifically, certain members of senior management failed to reinforce the need for compliance with the Company’sFirstEnergy’s policies and its code of conduct, which resulted in inappropriate conduct that was inconsistent with the Company’sFirstEnergy’s policies and its code of conduct.
This control deficiencymaterial weakness did not result in a material misstatement of ourFirstEnergy’s annual or interim consolidated financial statements. However, this control deficiencymaterial weakness could have resulted in material misstatements to the annual or interim consolidated financial statements that would not have been prevented or detected. Accordingly, our management has concluded that this control deficiency constitutes a material weakness.
Remediation Plans
Management and the FE Board of Directors take FirstEnergy’s internal control over financial reporting and the integrity of its financial statements seriously. FirstEnergy has completed the documentation and testing of the remedial actions described below and as of September 30, 2021, management has concluded that as a result of the corrective activities implemented, the previously disclosed material weakness has been remediated. Management, the FE Board, of Directors, along with the Audit Committee, and its newly formed subcommittee, are currently working to remediateremediated the material weakness identified above. While we expect to take otherby focusing on people, training, and communication as detailed in the following remedial actions, actions taken to date include:
•the appointment of a new acting chief executive officer and executive directorChief Executive Officer to improve the tone at the top;
•the termination of certain members of senior management, including FirstEnergy’s former chief executive officer,Chief Executive Officer, for violations of certain CompanyFirstEnergy policies and its code of conduct;
•the separation of two senior members of the legal department, due to inaction and conduct that the FE Board determined was influenced by the improper tone at the top; and
•the establishment of the newa subcommittee of FirstEnergy’s Audit Committee, who, with the FE Board, assessed the compliance program, provided recommendations, and has overseen and will continue to oversee the assessment and implementation of potential changes (as appropriate) in FirstEnergy’s compliance program.program;
•the appointment of a new Chief Legal Officer;
•the appointment of a new Vice Chairperson of the FE Board and Executive Director to help lead efforts to enhance FirstEnergy’s reputation with external stakeholders;
•the appointment of new independent directors to the FE Board;
•the appointment of a new Chief Ethics & Compliance Officer who is overseeing the ethics and compliance program and implementation of enhancements to the existing compliance structure and role;
•the FE Board’s reinforcement of and executive team’s recommitment to the importance of setting appropriate tone at the top and the expectation to demonstrate FirstEnergy’s core values and behaviors which support an ethical and compliant culture, as well as adherence to internal control over financial reporting; and
•increased communication and training of employees with respect to:
•FirstEnergy’s commitment to ethical standards and integrity of our business procedures,
•compliance requirements,
•FirstEnergy’s Code of Business Conduct and other FirstEnergy policies, and
•availability of and the process for reporting suspected violations of law or Code of Business Conduct.
Management currently does not have an expected timetable for the execution and completion of a remediation plan. Management and the FE Board of Directors are committed to maintaining a strong internal control environment and will make every effort to ensure thatbelieve the above efforts, which have been tested and are operating effectively, have effectively remediated the material weakness described above will be promptly remediated, however, the material weakness cannot be considered remediated until the applicable remedial control is implemented and operates for a sufficient period of time to allow management to conclude, through testing, that this remediation plan is implemented and the control is operating effectively.weakness.
(b) Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2020,2021, there were no changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) 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 9,8, “Regulatory Matters,” and Note 10,9, “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, 2019,2020, and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 20202021, and June 30, 2020,2021, which could materially affect FirstEnergy’s business, financial condition or future results. The information set forth in this report, including without limitation, the risk factors presented below, updates and should be read in conjunction with, the risk factors and information disclosed in FirstEnergy’s Annual Report on Form 10-K for the year ended December 31, 2019, and its Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
We Have Received Requests for Information Related to Government Investigations. The Investigations and Related Litigation, as well as any Related Potential Adverse Impacts on Federal or State Regulatory Matters, Could Have a Material Adverse Effect on our Reputation, Business, Financial Condition, Results of Operations, Liquidity or Cash Flows.
On July 21, 2020, we received subpoenas for records from the U.S. Attorney’s Office for the S.D. Ohio requesting the production of information concerning an investigation surrounding HB 6 involving the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. Following the announcement of the investigation surrounding HB 6, certain of our stockholders and customers filed several lawsuits against us and certain current and former directors, officers and other employees. 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 FirstEnergy, and on September 1, 2020, issued subpoenas to FirstEnergy and certain of its officers. We are cooperating with the U.S. Attorney’s Office and the SEC in their investigations. See Note 10, “Commitments, Guarantees and Contingencies,” of the Notes to Consolidated Financial Statements, for additional details on the government investigation and subsequent litigation surrounding the investigation of HB 6.
The investigations and related litigation could divert management’s focus and result in substantial investigation expenses, or otherwise require the commitment of substantial corporate resources. Furthermore, the investigations have had, and are likely to continue to have, an adverse impact on the trading prices of our securities. The outcome of the government investigations and related litigation is inherently uncertain. If one or more legal matters were resolved against us, our reputation, business, financial condition, results of operations, liquidity or cash flows may be adversely affected. Further, such an outcome could result in significant compensatory or punitive monetary damages, remedial corporate measures or other relief against us that could adversely impact our operations.
Additionally, we are subject to comprehensive regulation by various federal, state and local regulatory agencies that significantly influence our operating environment. As previously disclosed, a committee of independent members of the Board of Directors is directing an internal investigation related to ongoing government investigations. In connection with FirstEnergy’s internal
investigation, such committee determined that certain former members of senior management, including FirstEnergy’s former chief executive officer, violated certain FirstEnergy policies and its code of conduct. Such former members of senior management did not maintain and promote a control environment with an appropriate tone of compliance in certain areas of FirstEnergy’s business, nor sufficiently promote, monitor or enforce adherence to certain FirstEnergy policies and its code of conduct. Furthermore, certain former members of senior management did not reasonably ensure that relevant information was communicated within our organization and not withheld from our independent directors, our Audit Committee, and our independent auditor. Among the matters considered with respect to the determination by the committee of independent members of the Board of Directors that certain former members of senior management violated certain FirstEnergy policies and its code of conduct related to a payment of approximately $4 million made in early 2019 in connection with the termination of a purported consulting agreement, as amended, which had been in place since 2013. The counterparty to such agreement was an entity associated with an individual who subsequently was appointed to a full-time role as an Ohio government official directly involved in regulating the Ohio Companies, including with respect to distribution rates. At this time, it has not been determined if the payments were for the purposes represented within the consulting agreement. The matter is a subject of the ongoing internal investigation related to the government investigations.
Any appearance of non-compliance with anti-corruption and anti-bribery laws, as well as any alleged failures to comply with anti-corruption and anti-bribery laws, could have an adverse impact on our reputation or relationships with regulatory authorities, and result in a material inquiry or investigation by such federal, state and local regulatory agencies, and result in adverse rulings against us, which could have a material adverse impact on our financial condition, operating results and operations Specifically, the rates our Utilities and transmission operating companies are allowed to charge may be decreased as a result of actions taken by FERC or by a state regulatory commission in which our Utility operates, whether as a result of the investigations by the U.S. Attorney’s Office and the SEC, the appearance of non-compliance with anti-corruption and anti-bribery laws, or otherwise.
We are unable to predict the outcome, duration, scope, result or related costs of the investigations and related litigation, or adverse impacts on federal or state regulatory matters, including with respect to rates, and, therefore, any of these risks could impact us significantly beyond expectations. Moreover, we are unable to predict the potential for any additional investigations, litigation or regulatory actions, any of which could exacerbate these risks or expose us to potential criminal or civil liabilities, sanctions or other remedial measures, including adverse outcomes in pending or future rate cases, and could have a material adverse effect on our reputation, business, financial condition, results of operations, liquidity or cash flows.
We Have Identified a Material Weakness in our Internal Control over Financial Reporting. If We Fail to Remediate such Material Weakness or Otherwise Fail to Develop, Implement and Maintain Effective Internal Controls in Future Periods, Our Ability to Report Our Financial Condition and Results of Operations Accurately and on a Timely Basis Could Be Adversely Affected.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
As previously disclosed, a committee of independent members of our Board of Directors is directing an internal investigation related to ongoing government investigations. In connection with our internal investigation, such committee determined that certain former members of senior management, including our former chief executive officer, violated certain FirstEnergy policies and our code of conduct. Such former members of senior management did not maintain and promote a control environment with an appropriate tone of compliance in certain areas of FirstEnergy’s business, nor sufficiently promote, monitor or enforce adherence to certain FirstEnergy policies and its code of conduct. Furthermore, certain former members of senior management did not reasonably ensure that relevant information was communicated within our organization and not withheld from our independent directors, our Audit Committee, and our independent auditor. Among the matters considered with respect to the determination by the committee of independent members of the Board of Directors that certain former members of senior management violated certain FirstEnergy policies and its code of conduct related to a payment of approximately $4 million made in early 2019 in connection with the termination of a purported consulting agreement, as amended, which had been in place since 2013. The counterparty to such agreement was an entity associated with an individual who subsequently was appointed to a full-time role as an Ohio government official directly involved in regulating the Ohio Companies, including with respect to distribution rates. At this time, it has not been determined if the payments were for the purposes represented within the consulting agreement. The matter is a subject of the ongoing internal investigation related to the government investigations.
During the preparation of FirstEnergy’s financial statements as of and for the quarter ended September 30, 2020, FirstEnergy identified a material weakness in that these certain former members of senior management did not set an appropriate tone at the top as discussed above, which are inconsistent with the standards to which FirstEnergy’s Board of Directors and senior management are committed.
This control deficiency did not result in a material misstatement of our annual or interim consolidated financial statements. However, this control deficiency could have resulted in material misstatements to the annual or interim consolidated financial statements that would not have been prevented or detected. Accordingly, our management has concluded that this control deficiency constitutes a material weakness.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We are in the process of remediating the identified material weakness in our internal control over financial reporting, but our management currently does not have an expected timetable for the execution and completion of a remediation plan. We cannot assure you that we will adequately remediate the material weakness or that additional material weaknesses in our internal controls will not be identified in the future. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those internal control systems determined to be effective can provide only a level of reasonable assurance with respect to financial statement preparation and presentation. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in the implementation, could result in additional material weaknesses, or could result in material misstatements in our financial statements. These misstatements could result in restatements of our financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information. Further, if we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may violate applicable stock exchange listing rules or suffer other adverse regulatory consequences and may breach the covenants under our credit facilities. There could also be a negative reaction in the price of our common stock due to a loss of investor confidence in us and the reliability of our financial statements. See “Item 4. Controls and Procedures” included elsewhere in this Quarterly Report on Form 10-Q for a discussion of the material weakness and our remediation plans.
Failure to Comply with Debt Covenants in our Credit Agreements or Conditions Could Adversely Affect our Ability to Execute Future Borrowings and/or Require Early Repayment.
Our debt and credit agreements contain various financial and other covenants including a consolidated debt to total capitalization ratio of no more than 65% measured at the end of each fiscal quarter.
Our credit agreements contain certain negative and affirmative covenants. Our ability to comply with the covenants and restrictions contained in our FE credit facility and FET credit facility may be affected by events related to the ongoing government investigations or otherwise.
On November 17, 2020, we and certain of our subsidiaries entered into amendments to the FE credit facility and the FET credit facility, respectively. The amendments provide for modifications and/or waivers of (i) certain representations and warranties and (ii) certain affirmative and negative covenants, contained therein, which allowed FirstEnergy to regain compliance with such provisions. Among other things, the amendment to the FE credit facility reduces the sublimit applicable to FE to $1.5 billion, and the amendments increased certain tiers of pricing applicable to borrowings under the credit facilities. In addition, we may be required to seek additional covenant waivers in future periods, and there can be no assurance that we will be able to obtain such waivers on favorable terms, or at all.
A breach of any of the covenants contained in our credit agreements, including any breach related to alleged failures to comply with anti-corruption and anti-bribery laws, could result in an event of default under such agreements, and we would not be able to access our credit facilities for additional borrowings and letters of credit while any default exists. Upon the occurrence of such an event of default, all amounts outstanding under our credit facilities could be declared to be immediately due and payable and all applicable commitments to extend further credit could be terminated. If indebtedness under our credit facilities is accelerated, there can be no assurance that we will have sufficient assets to repay the indebtedness. The operating and financial restrictions and covenants in our credit facilities and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
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
On November 17, 2020, FirstEnergy Corp. (FE) and certain of its subsidiaries entered into amendments (the Amendments) to (x) the Credit Agreement, dated as of December 6, 2016 (the FE Revolving Facility), among FE, The Cleveland Electric Illuminating Company, Metropolitan Edison Company, Ohio Edison Company, Pennsylvania Power Company, The Toledo Edison Company, Jersey Central Power & Light Company, Monongahela Power Company, Pennsylvania Electric Company, The Potomac EdisonNone.
87
Company and West Penn Power Company, as borrowers, Mizuho Bank, Ltd., as administrative agent, and the lending banks party thereto from time to time, and (y) the Credit Agreement, dated as of December 6, 2016 (the FET Revolving Facility and, together with the FE Revolving Facility, the Revolving Facilities), among FirstEnergy Transmission, LLC, American Transmission Systems, Incorporated, Mid-Atlantic Interstate Transmission, LLC and Trans-Allegheny Interstate Line Company, as borrowers, and PNC Bank, National Association, as administrative agent and the banks party thereto. The Amendments to the Revolving Facilities provide for modifications and/or waivers of (i) certain representations and warranties and (ii) certain affirmative and negative covenants, contained therein, which allowed FirstEnergy to regain compliance with such provisions. In addition, among other things, the Amendment to the FE Revolving Facility reduces the sublimit applicable to FE to $1.5 billion, and the Amendments increased certain tiers of pricing applicable to borrowings under the Revolving Facilities.
The foregoing descriptions of the various agreements referenced above do not purport to be complete and are qualified in their entirety by reference to the agreements themselves. The Amendments are filed as Exhibits 10.1 and 10.2, respectively, to this Form 10-Q, and are incorporated herein by reference.
ITEM 6. EXHIBITS
| | | | | | | | | | | |
| Exhibit Number | Description |
| | | |
(A) | 10.1 | | Credit Agreement, dated as of October 18, 2021, by and among FirstEnergy Corp., FirstEnergy Transmission, LLC, the banks and other financial institutions party thereto on the date hereof, as lenders, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to FirstEnergy’s Form 8-K filed October 18, 2021, Exhibit 10.1, File No. 333-21011) |
| 10.2 | | Credit Agreement, dated as of October 18, 2021, by and among The Cleveland Electric Illuminating Company, Ohio Edison Company, The Toledo Edison Company, the banks and other financial institutions party thereto on the date hereof, as lenders, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to FirstEnergy’s Form 8-K filed October 18, 2021, Exhibit 10.2, File No. 333-21011) |
| 10.3 | | Credit Agreement, dated as of October 18, 2021, by and among Metropolitan Edison Company, Pennsylvania Power Company, Pennsylvania Electric Company, West Penn Power Company, the banks and other financial institutions party thereto on the date hereof, as lenders, and Mizuho Bank, Ltd., as administrative agent (incorporated by reference to FirstEnergy’s Form 8-K filed October 18, 2021, Exhibit 10.3, File No. 333-21011) |
| 10.4 | | Credit Agreement, dated as of October 18, 2021, by and among Jersey Central Power & Light Company, the banks and other financial institutions party thereto on the date hereof, as lenders, and Mizuho Bank, Ltd., as administrative agent (incorporated by reference to FirstEnergy’s Form 8-K filed October 18, 2021, Exhibit 10.4, File No. 333-21011) |
| 10.5 | | Credit Agreement, dated as of October 18, 2021, by and among American Transmission Systems, Incorporated, Mid-Atlantic Interstate Transmission, LLC, and Trans-Allegheny Interstate Line Company, the banks and other financial institutions party thereto on the date hereof, as lenders, and PNC Bank, National Association, as administrative agent (incorporated by reference to FirstEnergy’s Form 8-K filed October 18, 2021, Exhibit 10.5, File No. 333-21011) |
| 10.6 | | Credit Agreement, dated as of October 18, 2021, by and among Monongahela Power Company, The Potomac Edison Company, the banks and other financial institutions party thereto on the date hereof, as lenders, and Mizuho Bank, Ltd, as administrative agent (incorporated by reference to FirstEnergy’s Form 8-K filed October 18, 2021, Exhibit 10.6, File No. 333-21011) |
| 10.7 | | |
| 10.8 | | Waiver and Amendment No. 24 to Credit Agreement, dated as of November 17, 2020,July 21, 2021, among FE,FirstEnergy, The Cleveland Electric Illuminating Company, Metropolitan Edison Company, Ohio Edison Company, Pennsylvania Power Company, The Toledo Edison Company, Jersey Central Power & Light Company, Monongahela Power Company, Pennsylvania Electric Company, The Potomac Edison Company and West Penn Power Company, as borrowers, Mizuho Bank, Ltd., as administrative agent, and the lenders identified therein.therein (incorporated by reference to FirstEnergy’s Form 8-K filed July 22, 2021, Exhibit 10.2, File No. 333-21011) |
(A) | 10.210.9 | | Waiver and Amendment No. 24 to Credit Agreement, dated as of November 17, 2020,July 21, 2021, to Credit Agreement, among FirstEnergy Transmission, LLC, American Transmission Systems, Incorporated, Mid-Atlantic Interstate Transmission, LLC and Trans-Allegheny Interstate Line Company, as borrowers, and PNC Bank, National Association, as administrative agent, and the lenders identified therein.therein (incorporated by reference to FirstEnergy’s Form 8-K filed July 22, 2021, Exhibit 10.3, File No. 333-21011) |
| (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, 2020,2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Income, and(ii) Consolidated Statements of Comprehensive Income, (ii)(iii) Consolidated Balance Sheets, (iii)(iv) Consolidated Statements of Cash Flows, (iv)(v) related notes to these financial statements and (v)(vi) document and entity information.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.
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.
November 19, 2020October 28, 2021
| | | | | |
| FIRSTENERGY CORP. |
| Registrant |
| |
| /s/ Jason J. Lisowski |
| Jason J. Lisowski |
| Vice President, Controller
and Chief Accounting Officer |
