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, 2021March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
| | | | | | | | | | | | | | | | | | | | | | | |
| Commission | | Registrant; State of Incorporation; | | I.R.S. Employer |
| File Number | | Address; and Telephone Number | | Identification No. |
| | | | | | | | |
| 333-21011 | | FIRSTENERGY CORPCORP. | | 34-1843785 |
| | | (An | Ohio | Corporation) | | |
| | | 76 South Main Street | | |
| | | Akron | OH | 44308 | | |
| | | Telephone | (800) | 736-3402 | | |
| | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| | | | | | | | | | | | | | |
| Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
| Common Stock, $0.10 par value | | FE | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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.
| | | | | |
| Large Accelerated Filer | ☑ |
| |
| Accelerated Filer | ☐ |
| |
| Non-accelerated Filer | ☐ |
| |
| Smaller Reporting Company | ☐ |
| |
| Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| | | | | | | | |
| | | OUTSTANDING |
| CLASS | | AS OF SEPTEMBER 30, 2021MARCH 31, 2022 |
| Common Stock, $0.10 par value | | 544,419,619570,932,260 |
| | |
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’smanagement's intents, beliefs and current expectations. These statements typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” “forecast,” “target,” “will,” “intend,”"forecast," "target," "will," "intend," “believe,” “project,”"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 potential liabilities, increased costs and unanticipated developments resulting from governmentalgovernment investigations and agreements, including those associated with compliance with or failure to comply with the DPA with the U.S. Attorney’s Office for the S.D. Ohio.DPA.
•The risks and uncertainties associated with government investigations and audits regarding HB 6 and related matters, including potential adverse impacts on federal or state regulatory matters, including, but not limited to, matters relating to rates.
•The potential of non-compliance with debt covenants in our credit facilities.
•The risks and uncertainties associated with litigation, arbitration, mediation, and similar proceedings.proceedings, particularly regarding HB 6 related matters, including risks associated with obtaining court approval of the definitive settlement agreement in the derivative shareholder lawsuits.
•Weather conditions, such as temperature variations and severe weather conditions, or other natural disasters affecting future operating results and associated regulatory actions or outcomes in response to such conditions.
•Legislative and regulatory developments, including, but not limited to, matters related to rates, compliance and enforcement activity.activity, cybersecurity, and climate change.
•The ability to accomplish or realize anticipated benefits from our FE Forward initiative and our other strategic and financial goals, including, but not limited to, 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, through aand satisfying the conditions necessary to close the sale of athe minority interest in certain of our transmission assets and/or issuance of additional equity.FET.
•Economic and weather conditions affecting future operating results, such as a recession, significant weather eventsThe risks associated with cyber-attacks and other natural disasters,disruptions to our, or our vendors’, information technology system, which may compromise our operations, and associated regulatory eventsdata security breaches of sensitive data, intellectual property and proprietary or actions in response to such conditions.personally identifiable information.
•Mitigating exposure for remedial activities associated with retired and formerly owned electric generation assets.
•The ability to access the public securities and other capital and credit markets in accordance with our financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us, including the increasing number of financial institutions evaluating the impact of climate change on their investment decisions.
•The extent and duration of the COVID-19 pandemic and the related 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, supply chain disruptions, additional costs, workforce impacts and governmental and regulatory responses to the pandemic.
•The effectiveness of our pandemic, such as moratoriums on utility disconnections 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.workforce vaccination mandates.
•Actions that may be taken by credit rating agencies that could negatively affect either our access to or terms of financing or our financial condition and liquidity.
•Changes in assumptions regarding factors such as economic conditions within our territories, the reliability of our transmission and distribution system, or the availability of capital or other resources supporting identified transmission and distribution investment opportunities.
•Changes in customers’ demand for power, including, but not limited to, economic conditions, the impact of climate change, or energy efficiency and peak demand reduction mandates.
•Changes in national and regional economic conditions, including recession and inflationary pressure, affecting us and/or our customers and those vendors with which we do business.
•The risks associatedpotential of non-compliance with cyber-attacks and other disruptions todebt covenants in 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.credit facilities.
•The ability to comply with applicable reliability standards and energy efficiency and peak demand reduction mandates.
•Changes to environmental laws and regulations, including, but not limited to, those related to climate change.
•Changing market conditions affecting the measurement of certain liabilities and the value of assets held in our pension trusts, 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 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 ourthe FE Board at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
These forward-looking statements are also qualified by, and should be read together with, the risk factors included in FirstEnergy’s filings with the SEC, including, but not limited to, the most recent Annual Report on Form 10-K and any subsequent
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The foregoing review of factors also should not be construed
as exhaustive. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor assess the impact of any such factor on FirstEnergy’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. FirstEnergy expressly disclaims any obligation to update or revise, except as required by law, any forward-looking statements contained herein or in the information incorporated by reference as a result of new information, future events or otherwise.
TABLE OF CONTENTS
| | | | | |
| | Page |
| |
| Part I. Financial Information | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Consolidated Statements of Stockholders’ Equity | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
GLOSSARY OF TERMS
The following abbreviations and acronyms are used in this report to identify FirstEnergy Corp. and its current and former subsidiaries:
| | | | | |
| |
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 |
| |
| CEI | The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary |
| |
| 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 |
| 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 |
| 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 |
| FGMUC | FirstEnergy Generation Mansfield Unit 1 Corp., a subsidiary of FG |
| 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 |
| GPU | GPU, Inc., former parent of JCP&L, ME and PN, that merged with FE on November 7, 2001 |
| GPUN | GPU Nuclear, Inc., a subsidiary of FE, which formerly 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 |
| OE | Ohio Edison Company, an Ohio electric utility operating subsidiary |
| Ohio Companies | CEI, OE and TE |
| PATH | Potomac-Appalachian Transmission Highline, LLC, a joint venture between FE and a subsidiary of AEP |
| PATH-Allegheny | PATH Allegheny Transmission Company, LLC |
| PATH-WV | PATH West Virginia Transmission Company, LLC |
| PE | The Potomac Edison Company, a Maryland and West Virginia electric utility operating subsidiary |
| Penn | Pennsylvania Power Company, a Pennsylvania electric utility operating subsidiary of OE |
| Pennsylvania Companies | ME, PN, Penn and WP |
| PN | Pennsylvania Electric Company, a Pennsylvania electric utility operating subsidiary |
| Signal Peak | Signal Peak Energy, LLC, an indirect subsidiary of Global Holding that owns mining operations near Roundup, Montana |
| TE | The Toledo Edison Company, an Ohio electric utility operating subsidiary |
| TrAIL | Trans-Allegheny Interstate Line Company, a subsidiary of FET, which owns and operates transmission facilities |
| Transmission Companies | ATSI, MAIT and TrAIL |
| Utilities | OE, CEI, TE, Penn, JCP&L, ME, PN, MP, PE, and WP |
| WP | West Penn Power Company, a Pennsylvania electric utility operating subsidiary |
| | | | | | | | | | | | | | |
The following abbreviations and acronyms aremay be used to identify frequently used terms in this report: |
| | | | |
| 2021 Credit Facilities | Collectively, the six separate senior unsecured five-year syndicated revolving credit facilities entered into by FE, FET, the Utilities, and the Transmission Companies, on October 18, 2021 | | D.C. Circuit | United States Court of Appeals for the District of Columbia Circuit |
| ACE | Affordable Clean Energy | | ENECDMR | Expanded Net Energy CostDistribution Modernization Rider |
| ADIT | Accumulated Deferred Income Taxes | | EPADOE | United States Environmental Protection AgencyDepartment of Energy |
| AEP | American Electric Power Company, Inc. | | EPSDPA | Earnings per ShareDeferred Prosecution Agreement entered into on July 21, 2021 between FE and S.D. Ohio |
| AEPSC | American Electric Power Service Corporation | | DPL | Dayton Power & Light |
| AFS | Available-for-sale | | ERODSIC | Electric Reliability OrganizationDistribution System Improvement Charge |
| AFUDC | Allowance for Funds Used During Construction | | ESP IVDSP | Electric SecurityDefault Service Plan IV |
| AMI | Advance Metering Infrastructure | | Facebook®DTA | Facebook is a registered trademark of Facebook, Inc.Deferred Tax Asset |
| AMT | Alternative Minimum Tax | | EDC | Electric Distribution Company |
| AOCI | Accumulated Other Comprehensive Income (Loss) | | FASBEE&C | Financial Accounting Standards BoardEnergy Efficiency and Conservation |
| ARO | Asset Retirement Obligation | | FE BoardEEI | FE Board of DirectorsEdison Electric Institute |
| ARP | Alternative Revenue Program | | FERCEGS | Federal Energy Regulatory CommissionElectric Generation Supplier |
| ASC | Accounting Standard Codification | | FES BankruptcyEGU | FES Debtors’ voluntary petitions for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code with the Bankruptcy CourtElectric Generation Units |
| ASU | Accounting Standards Update | | FitchEH | Fitch Ratings ServiceEnergy Harbor Corp. |
| Bankruptcy Court | U.S. Bankruptcy Court in the Northern District of Ohio in Akron | | FPAEmPOWER Maryland | Federal PowerEmPOWER Maryland Energy Efficiency Act |
| BGS | Basic Generation Service | | FTRENEC | FinancialExpanded Net Energy Cost |
| Brookfield | North American Transmission RightCompany II LLC, a controlled investment vehicle entity of Brookfield Infrastructure Partners | | EPA | United States Environmental Protection Agency |
| Brookfield Guarantors | Brookfield Super-Core Infrastructure Partners L.P., Brookfield Super-Core Infrastructure Partners (NUS) L.P., and Brookfield Super-Core Infrastructure Partners (ER) SCSp | | EPS | Earnings per Share |
| CAA | Clean Air Act | | GAAPERO | Accounting Principles Generally Accepted in the United States of AmericaElectric Reliability Organization |
| CCR | Coal Combustion Residuals | | GHGESG | Greenhouse GasesEnvironmental, Social, Corporate Governance |
| CERCLA | Comprehensive Environmental Response, Compensation, and Liability Act of 1980 | | HB 6ESP IV | House Bill 6,Electric Security Plan IV |
| CFIUS | Committee on Foreign Investments in the United States | | Exchange Act | Securities and Exchange Act of 1934, as passed by Ohio's 133rd General Assemblyamended |
| CFR | Code of Federal Regulations | | HB 128Facebook® | House Bill 128, as passed by Ohio's 134th General AssemblyFacebook is a registered trademark of Facebook, Inc. |
CO2 | Carbon Dioxide | | LIBORFASB | London Inter-Bank Offered RateFinancial Accounting Standards Board |
| Code of Business Conduct | The FirstEnergy Code of Business Conduct and Ethics as approved by the FE Board on July 20, 2021 | | LOCFCA | Letter of CreditFinancial Conduct Authority |
| COVID-19 | Coronavirus disease | | LTIIPsFE Board | Long-Term Infrastructure Improvement PlansFE Board of Directors |
| CPP | EPA’sEPA's Clean Power Plan | | MDPSCFE Revolving Facility | Maryland Public Service CommissionFE and the Utilities’ former five-year syndicated revolving credit facility, as amended, and replaced by the 2021 Credit Facilities on October 18, 2021 |
| CSAPR | Cross-State Air Pollution Rule | | MGPFERC | Manufactured Gas PlantsFederal Energy Regulatory Committee |
| CSR | Conservation Support Rider | | MISOFES Bankruptcy | Midcontinent Independent System Operator, Inc.FES Debtors' voluntary petitions for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code with the Bankruptcy Court |
| CTA | Consolidated Tax Adjustment | | Moody’sFET Board | Moody’s Investors Service, Inc.The Board of Directors of FET |
| CWA | Clean Water Act | | MWFET LLC Agreement | Megawatt |
D.C. Circuit | United States CourtThird Amended and Restated Limited Liability Company Operating Agreement of Appeals for the District of Columbia Circuit | | MWH | Megawatt-hourFET |
| DCR | Delivery Capital Recovery | | NAAQSFET P&SA | National Ambient Air Quality Standards |
DMR | Distribution Modernization Rider | | NDT | Nuclear Decommissioning Trust |
DOE | United States Department of Energy | | NERC | North American Electric Reliability Corporation |
DPA | Deferred ProsecutionPurchase and Sale Agreement entered into on July 21,November 6, 2021, by and between FE, FET, Brookfield and S.D. Ohio | | NJ Rate Counsel | New Jersey Division of Rate Counsel |
DSIC | Distribution System Improvement Charge | | NJBPU | New Jersey Board of Public Utilities |
DSP | Default Service Plan | | NOL | Net Operating Loss |
EDC | Electric Distribution Company | | NOx | Nitrogen Oxide |
EDIS | Electric Distribution Investment Surcharge | | NPDES | National Pollutant Discharge Elimination
System |
EE&C | Energy Efficiency and Conservation | | NRC | Nuclear Regulatory Commission |
EEI | Edison Electric Institute | | NUG | Non-Utility Generation |
EGS | Electric Generation Supplier | | NYPSC | New York State Public Service Commission |
EGU | Electric Generation Units | | OAG | Ohio Attorney General |
EH | Energy Harbor Corp. | | OCA | Office of Consumer Advocate |
EmPOWER Maryland | EmPOWER Maryland Energy Efficiency Act | | OCC | Ohio Consumers’ CounselBrookfield Guarantors |
| | | | | | | | | | | | | | |
| 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 | | NSR | New Source Review |
| Fitch | Fitch Ratings Service | | NYPSC | New York State Public Service Commission |
| FMB | First Mortgage Bond | | NUG | Non-Utility Generation |
| FPA | Federal Power Act | | OAG | Ohio Attorney General |
| FTR | Financial Transmission Right | | OCA | Office of Consumer Advocate |
| GAAP | Accounting Principles Generally Accepted in the United States of America | | OCC | Ohio Consumers' Counsel |
| GHG | Greenhouse Gases | | ODSA | Ohio Development Service Agency |
| HB 6 | House Bill 6, as passed by Ohio's 133rd General Assembly | | Ohio Stipulation | Stipulation and Recommendation, dated November 1, 2021, entered into by and among
the Ohio Companies, the OCC, PUCO Staff, and
several other signatories |
| HB 128 | House Bill 128, as passed by Ohio's 134th General Assembly | | OPEB | Other Post-Employment Benefits |
| IBA | ICE Benchmark Administration Limited | | OPEIU | Office and Professional Employees International Union |
| IBEW | International Brotherhood of Electrical Workers | | OPIC | Other Paid-in Capital |
| ICP 2007 | FirstEnergy Corp. 2007 Incentive Compensation Plan | | OSHA | Occupational Safety and Health Administration |
| ICP 2015 | FirstEnergy Corp. 2015 Incentive Compensation Plan | | OVEC | Ohio Valley Electric Corporation |
| ICP 2020 | FirstEnergy Corp. 2020 Incentive Compensation Plan | | PA DEP | Pennsylvania Department of Environmental Protection |
| IRS | Internal Revenue Service | | PCRB | Pollution Control Revenue Bond |
| ISO | Independent System Operator | | PIR | Phase-In Recovery Rider |
| ITC | Investment Tax Credit | | PJM | PJM Interconnection, LLC |
| kV | Kilovolt | | PJM Tariff | PJM Open Access Transmission Tariff |
| KWH | Kilowatt-hour | | POLR | Provider of Last Resort |
| LED | Light Emitting Diode | | PPA | Purchase Power Agreement |
| LIBOR | London Inter-Bank Offered Rate | | PPB | Parts per Billion |
| LOC | Letter of Credit | | PPUC | Pennsylvania Public Utility Commission |
| LSE | Load Serving Entity | | PUCO | Public Utilities Commission of Ohio |
| LTIIPs | Long-Term Infrastructure Improvement Plans | | PURPA | Public Utility Regulatory Policies Act of 1978 |
| MDPSC | Maryland Public Service Commission | | RCRA | Resource Conservation and Recovery Act |
| MGP | Manufactured Gas Plants | | REC | Renewable Energy Credit |
| MISO | Midcontinent Independent System Operator, Inc. | | Regulation FD | Regulation Fair Disclosure promulgated by the SEC |
| Moody’s | Moody’s Investors Service, Inc. | | RFC | ReliabilityFirst Corporation |
| MW | Megawatt | | RFP | Request for Proposal |
| MWH | Megawatt-hour | | RGGI | Regional Greenhouse Gas Initiative |
| NAAQS | National Ambient Air Quality Standards | | ROE | Return on Equity |
| NAV | Net Asset Value | | RSS | Rich Site Summary |
| N.D. Ohio | Northern District of Ohio | | RTEP | Regional Transmission Expansion Plan |
| NDT | Nuclear Decommissioning Trust | | RTO | Regional Transmission Organization |
OPEBNERC | Other Post-Employment BenefitsNorth American Electric Reliability Corporation | | S&PSBC | Standard & Poor’s Ratings ServiceSocietal Benefits Charge |
OPICNJBPU | Other Paid-in CapitalNew Jersey Board of Public Utilities | | SCOH | Supreme Court of Ohio |
| NJ Rate Counsel | New Jersey Division of Rate Counsel | | S.D. Ohio | Southern District of Ohio |
OVECNOL | Ohio Valley Electric Corporation | | SBC | Societal Benefits Charge |
PA DEP | Pennsylvania Department of Environmental Protection | | SCOH | Supreme Court of Ohio |
PIR | Phase-In Recovery RiderNet Operating Loss | | SEC | United States Securities and Exchange Commission |
PJMNOx | PJM Interconnection, LLCNitrogen Oxide | | SEET | Significantly Excessive Earnings Test |
PJM TariffNPDES | PJM Open Access Transmission TariffNational Pollutant Discharge Elimination System | | SF6 | Sulfur hexafluoride |
| NRC | Nuclear Regulatory Commission | | SIP | State Implementation Plan(s) Under the Clean Air Act |
| | | | | | | | | | | | | | |
| | | | |
POLRSO2 | Provider of Last ResortSulfur Dioxide | | Twitter® | Twitter is a registered trademark of Twitter, Inc. |
| SLC | Special Litigation Committee of the FE Board |
PPA | Purchase Power Agreement | | SO2
| Sulfur Dioxide |
PPB | Parts per Billion | | SOS | Standard Offer Service |
PPUC | Pennsylvania Public Utility Commission | | SREC | Solar Renewable Energy Credit |
PUCO | Public Utilities Commission of Ohio | | SSO | Standard Service Offer |
PURPA | Public Utility Regulatory Policies Act of 1978 | | Tax Act | Tax Cuts and Jobs Act adopted December 22, 2017 |
RCRASOFR | Resource Conservation and Recovery ActSecured Overnight Financing Rate | | TMI-1 | Three Mile Island Unit 1 |
Regulation FDSOS | Regulation Fair Disclosure promulgated by the SECStandard Offer Service | | TMI-2UWUA | Three Mile Island Unit 2Utility Workers Union of America |
RFCSREC | ReliabilitySolar Renewable Energy CreditFirst Corporation
| | Twitter®VEPCO | Twitter is a registered trademark of Twitter, Inc.Virginia Electric and Power Company |
RFPS&P | Request for ProposalStandard & Poor’s Ratings Service | | VIE | Variable Interest Entity |
RGGISSO | Regional Greenhouse Gas InitiativeStandard Service Offer | | VSCC | Virginia State Corporation Commission |
ROETMI-2 | Return on EquityThree Mile Island Unit 2 | | WVPSC | Public Service Commission of West Virginia |
| TO | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Transmission Owner | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
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 March 31, | |
| (In millions, except per share amounts) | (In millions, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 | (In millions, except per share amounts) | | 2022 | | 2021 | |
| | REVENUES: | REVENUES: | | REVENUES: | | |
| Distribution services and retail generation | Distribution services and retail generation | | $ | 2,550 | | | $ | 2,470 | | | $ | 6,882 | | | $ | 6,624 | | Distribution services and retail generation | | $ | 2,397 | | | $ | 2,236 | | |
| Transmission | Transmission | | 411 | | | 408 | | | 1,223 | | | 1,185 | | Transmission | | 451 | | | 401 | | |
| Other | Other | | 163 | | | 144 | | | 367 | | | 444 | | Other | | 141 | | | 89 | | |
Total revenues(1) | Total revenues(1) | | 3,124 | | | 3,022 | | | 8,472 | | | 8,253 | | Total revenues(1) | | 2,989 | | | 2,726 | | |
| | OPERATING EXPENSES: | OPERATING EXPENSES: | | OPERATING EXPENSES: | | |
| Fuel | Fuel | | 132 | | | 101 | | | 362 | | | 276 | | Fuel | | 140 | | | 118 | | |
| Purchased power | Purchased power | | 874 | | | 766 | | | 2,206 | | | 2,073 | | Purchased power | | 875 | | | 718 | | |
| Other operating expenses | Other operating expenses | | 856 | | | 937 | | | 2,326 | | | 2,416 | | Other operating expenses | | 820 | | | 752 | | |
| | Provision for depreciation | Provision for depreciation | | 326 | | | 316 | | | 972 | | | 954 | | Provision for depreciation | | 340 | | | 323 | | |
| | Amortization (deferral) of regulatory assets, net | Amortization (deferral) of regulatory assets, net | | 30 | | | (91) | | | 171 | | | (26) | | Amortization (deferral) of regulatory assets, net | | (37) | | | 92 | | |
| General taxes | General taxes | | 275 | | | 272 | | | 812 | | | 792 | | General taxes | | 292 | | | 273 | | |
| DPA penalty (Note 9) | | — | | | — | | | 230 | | | — | | |
| Gain on sale of Yards Creek (Note 8) | | — | | | — | | | (109) | | | — | | |
| | Gain on sale of Yards Creek (Note 9) | | Gain on sale of Yards Creek (Note 9) | | — | | | (109) | | |
| | Total operating expenses | Total operating expenses | | 2,493 | | | 2,301 | | | 6,970 | | | 6,485 | | Total operating expenses | | 2,430 | | | 2,167 | | |
| | OPERATING INCOME | OPERATING INCOME | | 631 | | | 721 | | | 1,502 | | | 1,768 | | OPERATING INCOME | | 559 | | | 559 | | |
| | OTHER INCOME (EXPENSE): | OTHER INCOME (EXPENSE): | | OTHER INCOME (EXPENSE): | | |
| | Miscellaneous income, net | Miscellaneous income, net | | 136 | | | 100 | | | 379 | | | 303 | | Miscellaneous income, net | | 106 | | | 135 | | |
| | Pension and OPEB mark-to-market adjustment (Note 5) | | — | | | — | | | — | | | (423) | | |
| | Interest expense | Interest expense | | (283) | | | (266) | | | (855) | | | (792) | | Interest expense | | (313) | | | (285) | | |
| Capitalized financing costs | Capitalized financing costs | | 20 | | | 21 | | | 54 | | | 57 | | Capitalized financing costs | | 19 | | | 13 | | |
| Total other expense | Total other expense | | (127) | | | (145) | | | (422) | | | (855) | | Total other expense | | (188) | | | (137) | | |
| | INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | | 504 | | | 576 | | | 1,080 | | | 913 | | INCOME BEFORE INCOME TAXES | | 371 | | | 422 | | |
| | INCOME TAXES | INCOME TAXES | | 88 | | | 116 | | | 271 | | | 122 | | INCOME TAXES | | 83 | | | 87 | | |
| | INCOME FROM CONTINUING OPERATIONS | | 416 | | | 460 | | | 809 | | | 791 | | |
| Discontinued operations (Note 3)(2) | | 47 | | | (6) | | | 47 | | | 46 | | |
| | | NET INCOME | NET INCOME | | $ | 463 | | | $ | 454 | | | $ | 856 | | | $ | 837 | | NET INCOME | | $ | 288 | | | $ | 335 | | |
| | | EARNINGS PER SHARE OF COMMON STOCK (Note 4): | | |
| Basic - Continuing Operations | | $ | 0.76 | | | $ | 0.85 | | | $ | 1.48 | | | $ | 1.46 | | |
| Basic - Discontinued Operations | | 0.09 | | | (0.01) | | | 0.09 | | | 0.08 | | |
| EARNINGS PER SHARE OF COMMON STOCK (Note 3): | | EARNINGS PER SHARE OF COMMON STOCK (Note 3): | | |
| | Basic - Earnings Per Share of Common Stock | Basic - Earnings Per Share of Common Stock | | $ | 0.85 | | | $ | 0.84 | | | $ | 1.57 | | | $ | 1.54 | | Basic - Earnings Per Share of Common Stock | | $ | 0.51 | | | $ | 0.62 | | |
| | Diluted - Continuing Operations | | $ | 0.76 | | | $ | 0.85 | | | $ | 1.48 | | | $ | 1.46 | | |
| Diluted - Discontinued Operations | | 0.09 | | | (0.01) | | | 0.09 | | | 0.08 | | |
| | Diluted - Earnings Per Share of Common Stock | Diluted - Earnings Per Share of Common Stock | | $ | 0.85 | | | $ | 0.84 | | | $ | 1.57 | | | $ | 1.54 | | Diluted - Earnings Per Share of Common Stock | | $ | 0.50 | | | $ | 0.62 | | |
| | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | | WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | | |
| Basic | Basic | | 544 | | | 542 | | | 544 | | | 542 | | Basic | | 570 | | | 543 | | |
| Diluted | Diluted | | 545 | | | 543 | | | 545 | | | 543 | | Diluted | | 571 | | | 544 | | |
|
(1) Includes excise and gross receipts tax collections of $103 million and $100$95 million during the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, and $283 million and $276 million during the nine months ended September 30, 2021 and 2020, respectively.
(2) Net of income tax expense (benefits) of $(47) million for the three and nine months ended September 30, 2021, and $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 March 31, | | |
| (In millions) | (In millions) | | 2021 | | 2020 | | 2021 | | 2020 | | (In millions) | | 2022 | | 2021 | | |
| | NET INCOME | NET INCOME | | $ | 463 | | | $ | 454 | | | $ | 856 | | | $ | 837 | | | NET INCOME | | $ | 288 | | | $ | 335 | | | |
| | OTHER COMPREHENSIVE LOSS: | OTHER COMPREHENSIVE LOSS: | | | | | | OTHER COMPREHENSIVE LOSS: | | | | | | |
| Pension and OPEB prior service costs | Pension and OPEB prior service costs | | (3) | | | (3) | | | (10) | | | (30) | | | Pension and OPEB prior service costs | | (2) | | | (3) | | | |
| Amortized losses on derivative hedges | | — | | | — | | | 1 | | | 1 | | | |
| | | Other comprehensive loss | Other comprehensive loss | | (3) | | | (3) | | | (9) | | | (29) | | | Other comprehensive loss | | (2) | | | (3) | | | |
| Income tax benefits on other comprehensive loss | Income tax benefits on other comprehensive loss | | (1) | | | (1) | | | (3) | | | (7) | | | Income tax benefits on other comprehensive loss | | (1) | | | (1) | | | |
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | (2) | | | (2) | | | (6) | | | (22) | | | Other comprehensive loss, net of tax | | (1) | | | (2) | | | |
| | COMPREHENSIVE INCOME | COMPREHENSIVE INCOME | | $ | 461 | | | $ | 452 | | | $ | 850 | | | $ | 815 | | | COMPREHENSIVE INCOME | | $ | 287 | | | $ | 333 | | | |
|
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,
2021 | | December 31,
2020 | (In millions, except share amounts) | | | March 31,
2022 | | December 31,
2021 |
| ASSETS | ASSETS | | | | | | ASSETS | | | | | |
| CURRENT ASSETS: | CURRENT ASSETS: | | | | | | CURRENT ASSETS: | | | | | |
| Cash and cash equivalents | Cash and cash equivalents | | | $ | 577 | | | $ | 1,734 | | Cash and cash equivalents | | | $ | 283 | | | $ | 1,462 | |
| Restricted cash | Restricted cash | | | 107 | | | 67 | | Restricted cash | | | 27 | | | 49 | |
| Receivables- | Receivables- | | | | | Receivables- | | | | |
| Customers | Customers | | | 1,273 | | | 1,367 | | Customers | | | 1,258 | | | 1,192 | |
| Less — Allowance for uncollectible customer receivables | Less — Allowance for uncollectible customer receivables | | | 159 | | | 164 | | Less — Allowance for uncollectible customer receivables | | | 132 | | | 159 | |
| | | 1,114 | | | 1,203 | | | | 1,126 | | | 1,033 | |
| | Other, net of allowance for uncollectible accounts of $12 in 2021 and $26 in 2020 | | | 250 | | | 236 | | |
| Other, net of allowance for uncollectible accounts of $10 in 2022 and 2021 | | Other, net of allowance for uncollectible accounts of $10 in 2022 and 2021 | | | 246 | | | 246 | |
| Materials and supplies, at average cost | Materials and supplies, at average cost | | | 245 | | | 317 | | Materials and supplies, at average cost | | | 273 | | | 260 | |
| | Prepaid taxes and other | Prepaid taxes and other | | | 239 | | | 157 | | Prepaid taxes and other | | | 295 | | | 187 | |
| | | | | | 2,532 | | | 3,714 | | | | | 2,250 | | | 3,237 | |
| PROPERTY, PLANT AND EQUIPMENT: | PROPERTY, PLANT AND EQUIPMENT: | | | | | | PROPERTY, PLANT AND EQUIPMENT: | | | | | |
| In service | In service | | | 45,032 | | | 43,654 | | In service | | | 46,349 | | | 46,002 | |
| Less — Accumulated provision for depreciation | Less — Accumulated provision for depreciation | | | 12,460 | | | 11,938 | | Less — Accumulated provision for depreciation | | | 12,834 | | | 12,672 | |
| | | | | 32,572 | | | 31,716 | | | | | 33,515 | | | 33,330 | |
| Construction work in progress | Construction work in progress | | | 1,733 | | | 1,578 | | Construction work in progress | | | 1,481 | | | 1,414 | |
| | | | | 34,305 | | | 33,294 | | | | | 34,996 | | | 34,744 | |
| | PROPERTY, PLANT AND EQUIPMENT, NET - HELD FOR SALE (NOTE 8) | | | — | | | 45 | | |
| | | INVESTMENTS AND OTHER NONCURRENT 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) | | | 632 | | | 605 | | |
| Investments (Note 6) | | Investments (Note 6) | | | 646 | | | 655 | |
| Regulatory assets | Regulatory assets | | | 90 | | | 82 | | Regulatory assets | | | 70 | | | 71 | |
| Other | Other | | | 677 | | | 1,106 | | Other | | | 1,037 | | | 1,107 | |
| | | | | | 7,017 | | | 7,411 | | | | | 7,371 | | | 7,451 | |
| | | $ | 43,854 | | | $ | 44,464 | | | | $ | 44,617 | | | $ | 45,432 | |
| 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 | | | $ | 1,230 | | | $ | 146 | | Currently payable long-term debt | | | $ | 1,055 | | | $ | 1,606 | |
| Short-term borrowings | Short-term borrowings | | | — | | | 2,200 | | Short-term borrowings | | | 350 | | | — | |
| Accounts payable | Accounts payable | | | 876 | | | 827 | | Accounts payable | | | 1,090 | | | 943 | |
| | Accrued interest | Accrued interest | | | 291 | | | 282 | | Accrued interest | | | 289 | | | 283 | |
| Accrued taxes | Accrued taxes | | | 641 | | | 640 | | Accrued taxes | | | 650 | | | 647 | |
| Accrued compensation and benefits | Accrued compensation and benefits | | | 369 | | | 349 | | Accrued compensation and benefits | | | 276 | | | 313 | |
| | Dividends Payable | | Dividends Payable | | | 223 | | | 222 | |
| Other | Other | | | 687 | | | 560 | | Other | | | 427 | | | 402 | |
| | | | | | 4,094 | | | 5,004 | | | | | 4,360 | | | 4,416 | |
| CAPITALIZATION: | CAPITALIZATION: | | | | | | CAPITALIZATION: | | | | | |
| Stockholders’ equity- | Stockholders’ equity- | | | | | | Stockholders’ equity- | | | | | |
| 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 | | |
| Common stock, $0.10 par value, authorized 700,000,000 shares - 570,932,260 and 570,261,104 shares outstanding as of March 31, 2022 and December 31, 2021, respectively | | Common stock, $0.10 par value, authorized 700,000,000 shares - 570,932,260 and 570,261,104 shares outstanding as of March 31, 2022 and December 31, 2021, respectively | | | 57 | | | 57 | |
| | Other paid-in capital | Other paid-in capital | | | 9,468 | | | 10,076 | | Other paid-in capital | | | 10,031 | | | 10,238 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | | | (11) | | | (5) | | Accumulated other comprehensive loss | | | (16) | | | (15) | |
| Accumulated deficit | Accumulated deficit | | | (2,032) | | | (2,888) | | Accumulated deficit | | | (1,317) | | | (1,605) | |
| Total stockholders’ equity | Total stockholders’ equity | | | 7,479 | | | 7,237 | | Total stockholders’ equity | | | 8,755 | | | 8,675 | |
| | Long-term debt and other long-term obligations | Long-term debt and other long-term obligations | | | 22,503 | | | 22,131 | | Long-term debt and other long-term obligations | | | 21,754 | | | 22,248 | |
| | | | | 29,982 | | | 29,368 | | | | | 30,509 | | | 30,923 | |
| NONCURRENT LIABILITIES: | NONCURRENT LIABILITIES: | | | | | | NONCURRENT LIABILITIES: | | | | | |
| Accumulated deferred income taxes | Accumulated deferred income taxes | | | 3,366 | | | 3,095 | | Accumulated deferred income taxes | | | 3,544 | | | 3,437 | |
| Retirement benefits | Retirement benefits | | | 3,124 | | | 3,345 | | Retirement benefits | | | 2,620 | | | 2,669 | |
| Regulatory liabilities | Regulatory liabilities | | | 2,015 | | | 1,826 | | Regulatory liabilities | | | 2,025 | | | 2,124 | |
| | Other | Other | | | 1,273 | | | 1,826 | | Other | | | 1,559 | | | 1,863 | |
| | | | | | 9,778 | | | 10,092 | | | | | 9,748 | | | 10,093 | |
| COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 9) | | | 0 | | 0 | |
| COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 8) | | COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 8) | | | 0 | | 0 |
| | | $ | 43,854 | | | $ | 44,464 | | | | $ | 44,617 | | | $ | 45,432 | |
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, 2021 | | Three Months Ended March 31, 2022 |
| | 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, 2021 | | 543 | | | $ | 54 | | | $ | 10,076 | | | $ | (5) | | | $ | (2,888) | | | $ | 7,237 | | |
| Balance, January 1, 2022 | | Balance, January 1, 2022 | | 570 | | | $ | 57 | | | $ | 10,238 | | | $ | (15) | | | $ | (1,605) | | | $ | 8,675 | |
| Net income | Net income | | 335 | | | 335 | | Net income | | 288 | | | 288 | |
| Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | (2) | | | (2) | | Other comprehensive loss, net of tax | | (1) | | | (1) | |
| Share-based benefit plans | | 1 | | | 2 | | | 2 | | |
| Stock Investment Plan and share-based benefit plans | | Stock Investment Plan and share-based benefit plans | | 1 | | | 20 | | | 20 | |
Cash dividends declared on common stock ($0.39 per share in March) | Cash dividends declared on common stock ($0.39 per share in March) | | (212) | | | (212) | | Cash dividends declared on common stock ($0.39 per share in March) | | (223) | | | (223) | |
| Balance, March 31, 2021 | | 544 | | | $ | 54 | | | $ | 9,866 | | | $ | (7) | | | $ | (2,553) | | | $ | 7,360 | | |
| Net income | | | | | | | | | | 58 | | | 58 | | |
| Other comprehensive loss, net of tax | | (2) | | | (2) | | |
| Share-based benefit plans | | 14 | | | 14 | | |
| Other | | Other | | (4) | | | (4) | |
| Balance, March 31, 2022 | | Balance, March 31, 2022 | | 571 | | | $ | 57 | | | $ | 10,031 | | | $ | (16) | | | $ | (1,317) | | | $ | 8,755 | |
| | Balance, June 30, 2021 | | 544 | | | $ | 54 | | | $ | 9,880 | | | $ | (9) | | | $ | (2,495) | | | $ | 7,430 | | |
| Net income | | | | | | | | | | 463 | | | 463 | | |
| Other comprehensive loss, net of tax | | (2) | | | (2) | | |
| Share-based benefit plans | | 0 | | 13 | | | 13 | | |
| Cash dividends declared on common stock ($0.39 per share in July and September) | | (425) | | | (425) | | |
| Balance, September 30, 2021 | | 544 | | | $ | 54 | | | $ | 9,468 | | | $ | (11) | | | $ | (2,032) | | | $ | 7,479 | | |
|
| | | Nine Months Ended September 30, 2020 | | Three Months Ended March 31, 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) | | 0 | $ | (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 | | |
| Net income | | | | | | | | | | 309 | | | 309 | | |
| Other comprehensive loss, net of tax | | (2) | | | (2) | | |
| Balance, March 31, 2021 | | Balance, March 31, 2021 | | 544 | | | $ | 54 | | | $ | 9,866 | | | $ | (7) | | | $ | (2,553) | | | $ | 7,360 | |
| | 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.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | For the Nine Months Ended September 30, | | For the Three Months Ended March 31, |
| (In millions) | (In millions) | | 2021 | | 2020 | (In millions) | | 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
| Net income | Net income | | $ | 856 | | | $ | 837 | | Net income | | $ | 288 | | | $ | 335 | |
| 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- | |
| Depreciation and amortization | Depreciation and amortization | | 1,162 | | | 804 | | Depreciation and amortization | | 359 | | | 454 | |
| | Deferred income taxes and investment tax credits, net | Deferred income taxes and investment tax credits, net | | 255 | | | 124 | | Deferred income taxes and investment tax credits, net | | 77 | | | 82 | |
| | Retirement benefits, net of payments | Retirement benefits, net of payments | | (310) | | | (218) | | Retirement benefits, net of payments | | (96) | | | (105) | |
| | Pension and OPEB mark-to-market adjustment | | — | | | 423 | | |
| Settlement agreement and tax sharing payments to the FES Debtors | | — | | | (978) | | |
| | Transmission revenue collections, net | | 120 | | | 1 | | |
| | Gain on sale of Yards Creek | Gain on sale of Yards Creek | | (109) | | | — | | Gain on sale of Yards Creek | | — | | | (109) | |
| 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 | | 76 | | | (33) | | Receivables | | (93) | | | 161 | |
| Materials and supplies | Materials and supplies | | 73 | | | (23) | | Materials and supplies | | (13) | | | 14 | |
| Prepaid taxes and other current assets | Prepaid taxes and other current assets | | (34) | | | (57) | | Prepaid taxes and other current assets | | (105) | | | (121) | |
| Accounts payable | Accounts payable | | 49 | | | (72) | | Accounts payable | | 147 | | | 43 | |
| | Accrued taxes | Accrued taxes | | (124) | | | 4 | | Accrued taxes | | (133) | | | (127) | |
| Accrued interest | Accrued interest | | 9 | | | 34 | | Accrued interest | | 6 | | | 7 | |
| Accrued compensation and benefits | Accrued compensation and benefits | | (2) | | | 65 | | Accrued compensation and benefits | | (106) | | | (129) | |
| Other current liabilities | Other current liabilities | | (19) | | | (16) | | Other current liabilities | | 10 | | | (7) | |
| Collateral, net | | 101 | | | 22 | | |
| | Other | Other | | 48 | | | (20) | | Other | | 14 | | | 35 | |
| Net cash provided from operating activities | Net cash provided from operating activities | | 2,104 | | | 851 | | Net cash provided from operating activities | | 355 | | | 533 | |
| | | 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 | | 1,500 | | | 3,425 | | Long-term debt | | — | | | 500 | |
| | Short-term borrowings, net | | Short-term borrowings, net | | 350 | | | — | |
| | Redemptions and repayments- | Redemptions and repayments- | | Redemptions and repayments- | |
| Long-term debt | Long-term debt | | (58) | | | (1,110) | | Long-term debt | | (1,046) | | | (29) | |
| Short-term borrowings, net | Short-term borrowings, net | | (2,200) | | | (700) | | Short-term borrowings, net | | — | | | (750) | |
| | Make-whole premiums paid on debt redemptions | | Make-whole premiums paid on debt redemptions | | (38) | | | — | |
| | Common stock dividend payments | Common stock dividend payments | | (636) | | | (634) | | Common stock dividend payments | | (222) | | | (212) | |
| Other | Other | | (16) | | | (44) | | Other | | (8) | | | (18) | |
| Net cash provided from (used for) financing activities | | (1,410) | | | 937 | | |
| Net cash used for financing activities | | Net cash used for financing activities | | (964) | | | (509) | |
| | | CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | CASH FLOWS FROM INVESTING ACTIVITIES: | |
| Property additions | Property additions | | (1,768) | | | (1,979) | | Property additions | | (520) | | | (604) | |
| | Proceeds from sale of Yards Creek | Proceeds from sale of Yards Creek | | 155 | | | — | | Proceeds from sale of Yards Creek | | — | | | 155 | |
| Sales of investment securities held in trusts | Sales of investment securities held in trusts | | 29 | | | 45 | | Sales of investment securities held in trusts | | 6 | | | 5 | |
| Purchases of investment securities held in trusts | Purchases of investment securities held in trusts | | (37) | | | (63) | | Purchases of investment securities held in trusts | | (9) | | | (7) | |
| | Asset removal costs | Asset removal costs | | (178) | | | (175) | | Asset removal costs | | (49) | | | (47) | |
| Other | Other | | (12) | | | 1 | | Other | | (20) | | | (1) | |
| Net cash used for investing activities | Net cash used for investing activities | | (1,811) | | | (2,171) | | Net cash used for investing activities | | (592) | | | (499) | |
| | | | Net change in cash, cash equivalents, and restricted cash | Net change in cash, cash equivalents, and restricted cash | | (1,117) | | | (383) | | Net change in cash, cash equivalents, and restricted cash | | (1,201) | | | (475) | |
| Cash, cash equivalents, and restricted cash at beginning of period | Cash, cash equivalents, and restricted cash at beginning of period | | 1,801 | | | 679 | | Cash, cash equivalents, and restricted cash at beginning of period | | 1,511 | | | 1,801 | |
| Cash, cash equivalents, and restricted cash at end of period | Cash, cash equivalents, and restricted cash at end of period | | $ | 684 | | | $ | 296 | | Cash, cash equivalents, and restricted cash at end of period | | $ | 310 | | | $ | 1,326 | |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
FIRSTENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Note Number | Note Number | | Page Number | Note Number | | Page Number |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | 6 | 6 | | | | | |
| | | 7 | 7 | | | | | |
| | | 8 | 8 | | | | | |
| | 9 | 9 | | | | | |
| | 10 | | | |
| |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Terms.
FE was incorporated under Ohio law in 1996. FE’s principal business is the holding, directly or indirectly, of all of the outstanding equity of its principal subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), JCP&L, ME, PN, FESC, MP, AGC (a wholly owned subsidiary of MP), PE, WP, and FET and its principal subsidiaries (ATSI, MAIT and TrAIL). In addition, FE holds all of the outstanding equity of other direct subsidiaries including: AE Supply, FirstEnergy Properties, Inc., FEV, 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 24,000 miles of lines and 2 regional transmission operation centers. AGC and MP control 3,580 MWs of total capacity.
PN, as lessee of the property of its subsidiary, the Waverly Electric Light & Power Company, serves approximately 4,000 customers in the Waverly, New York vicinity. On February 10, 2021, PN entered into an agreement to transfer its customers and the related assets in Waverly, New York to Tri-County Rural Electric Cooperative; the completion of such transfer is subject to several closing conditions including regulatory approval, which 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, 2020.2021.
FE and its subsidiaries follow GAAP and comply with the related regulations, orders, policies and practices prescribed by the SEC, FERC, and, as applicable, the PUCO, the PPUC, the MDPSC, the NYPSC, the WVPSC, the VSCC and the NJBPU. The accompanying interim financial statements are unaudited, but reflect all adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair statement of the financial statements. The preparation of financial statements in conformity with GAAP requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The reported results of operations are not necessarily indicative of results of operations for any future period. FE and its subsidiaries have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
FE and its subsidiaries consolidate all majority-owned subsidiaries over which they exercise control and, when applicable, entities for which they have a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation as appropriate and permitted pursuant to GAAP. FE and its subsidiaries consolidate a VIE when it is determined that it is the primary beneficiary. Investments in affiliates over which FE and its subsidiaries have the ability to exercise significant influence, but do not have a controlling financial interest, follow the equity method of accounting. Under the equity method, the interest in the entity is reported as an investment in the Consolidated Balance Sheets and the percentage of FE’s ownership share of the entity’s earnings is reported in the Consolidated Statements of Income and Comprehensive Income.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Capitalized Financing Costs
For each of the three months ended September 30,March 31, 2022 and 2021, and 2020, capitalized financing costs on FirstEnergy’s Consolidated Statements of Income include $13 million of allowance for equity funds used during construction and $7 million and $8 million, respectively, of capitalized interest. For each of the nine months ended September 30, 2021 and 2020, capitalized financing costs on FirstEnergy’s Consolidated Statements of Income include $34 million and $36 million, respectively, of allowance for equity funds used during construction and $20$6 million and $21 million, respectively, of capitalized interest.interest in both periods.
COVID-19
FirstEnergy is continuously evaluating the COVID-19 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, 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. 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 monitoringcontinues to provide flexibility for approximately 7,000 of its supply chain12,400 employees to work from home. Pandemic safety and is working closelycleaning protocols were implemented for those workers who have continued to report to a FirstEnergy work location during the pandemic, ensuring FirstEnergy employees can report directly to job sites and work with essential vendorsthe same small group of employees every day. FirstEnergy continues to understandassess its work from home policies to allow for a flexible workplace to continue for its employees after the continued impact the COVID-19 pandemic is having on its 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.pandemic.
FirstEnergy continues to effectively manage operations during the pandemic in order to provide critical service to customerscustomers. FirstEnergy has experienced supply chain challenges during the COVID-19 pandemic. Lead times have increased across numerous material categories, with some as much as doubling from previous times. Some key suppliers have struggled with labor shortages and believes it is well positionedraw material availability, which along with increasing inflationary pressure, have increased the costs of certain materials, equipment and contractors. FirstEnergy has taken steps to manage through the economic slowdown. FirstEnergy Distributionmitigate these risks and Transmission revenues benefit from geographic and economic diversity across a five-statedoes not currently expect service territory, which also allows for flexibility withdisruptions or any material impact on its capital investments and measures to maintain sufficient liquidity over the next twelve months.spending plan. 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. This analysis includes consideration of the outbreak of COVID-19 and the impact on customer receivable balances outstanding and write-offs since the pandemic began.
Beginning March 13, 2020, FirstEnergy temporarily suspended customer disconnections for nonpayment and ceased collection activities as a result of During the ongoing pandemic and in accordance with state regulatory requirements. The temporary suspension of disconnections for nonpayment and ceasing of collection activities extended into the fourthfirst quarter of 2020 but resumed for many customers before2022, various regulatory actions including extensions on moratoriums, certain restrictions on disconnections, and extended installment plan offerings continue to impact the endlevel of 2020, except in New Jersey where the moratorium was extended until the end of 2021. Customers are subject to each state's applicable regulations on winter moratoriums for residential customers, which begin as early as November 1, 2020, and were in effect until April 15, 2021. During 2021, FirstEnergy has experienced a reduction in the amount of receivables that are past due by greater than 30 days since the end of 2020. While total customerbalances in certain states. However, certain states have resumed normal collections activity and 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 certain federal stimulus and state funding being made available to assist with past due utility bills.levels have declined towards pre-pandemic levels. As a result of this qualitative analysis, FirstEnergy did not recognize any incrementalrecognized a $25 million decrease to its allowance for uncollectible expensecustomer receivables during the first quarter of 2022, of which $15 million was applied to existing deferred regulatory assets. Additionally, as a result of these pandemic-related moratoriums and certain customer installment or extended payment plans offered, the allowance for uncollectible accounts on receivables in 2022 continue to be elevated due to the nine months ended September 30, 2021.extension of when certain write-offs would have otherwise occurred.
Receivables from customers also include PJM receivables resulting from transmission and wholesale sales. FirstEnergy’s uncollectible risk on PJM receivables is minimal due to the nature of PJM’s settlement process whereby members of PJM legally agree to share the cost of defaults and as a result there is no allowance for doubtful accounts.
Activity in the allowance for uncollectible accounts on customer receivables for the ninethree months ended September 30, 2021March 31, 2022 and for the year ended December 31, 20202021 are as follows:
| | | | | | | | |
| | (In millions) |
| | |
Balance, January 1, 2020 | | $ | 46 | |
Charged to income (1)
| | 174 | |
Charged to other accounts (2)
| | 46 | |
Write-offs | | (102) | |
Balance, December 31, 20202021 | | $ | 164 | |
Charged to income (3)(1) | | 3054 | |
Charged to other accounts (2) | | 3442 | |
| Write-offs | | (69)(101) | |
Balance, September 30,December 31, 2021 | | $ | 159 | |
Charged to income(3) | | (5) | |
Charged to other accounts (2) | | 39 | |
| Write-offs | | (61) | |
| Balance, March 31, 2022 | | $ | 132 | |
(1) $10312 million of which was deferred for future recovery in the twelve months ended December 31, 2020.2021.
(2) Represents recoveries and reinstatements of accounts written off for uncollectible accounts.
(3) $8(11) million of which was deferred for future recoveryrefund to customers in the ninethree months ended September 30, 2021.March 31, 2022.
Goodwill
Sale of Minority Interest in FirstEnergy evaluates goodwill for impairment annually on July 31 and more frequently if indicators of impairment arise. For 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 included: growth rates, interest rates, expected capital expenditures, utility sector market performance, regulatory and legal developments, and other market considerations. It was determined that the fair values of these reporting units were, more likely than not, greater than their carrying values and a quantitative analysis was not necessary.
Short-Term Borrowings/ Revolving Credit FacilitiesLLC
On October 18,November 6, 2021, FE,FirstEnergy, along with FET, the Utilities, and the Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities with 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,P&SA, with Brookfield and provideBrookfield Guarantors, pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for aggregate commitmentsa purchase price of $4.5$2.375 billion. KATCo, which is currently a subsidiary of FET, will become a wholly owned subsidiary of FE prior to the closing of the transaction and will remain in the Regulated Transmission segment. The 2021 Credit Facilities are available until October 18, 2026, as follows:transaction is subject to customary closing conditions, including approval from the FERC and review by the CFIUS. On January 5, 2022, the parties to this transaction submitted an application to FERC requesting approval of the transaction no later than April 30, 2022. On April 14, 2022, CFIUS notified FET and Brookfield that it has determined that there were no unresolved national security issues and its review of the transaction was concluded. On April 21, 2022, FERC approved the matter. The transaction is now expected to close at the end of May 2022.
•FEPursuant to the terms of the FET P&SA, in connection with the closing, Brookfield, FET and FirstEnergy Corp will enter into the 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
•MPLLC Agreement. The FET LLC Agreement, among other things, provides for the governance, exit, capital and PE, $400 million revolving credit facility
•Transmission Companies, $850 million credit facility
distribution, and other arrangements for FET from and following the closing. Under the 2021 Credit Facilities, an aggregate amountFET LLC Agreement, Brookfield will be entitled to appoint a number of $4.5 billion is availabledirectors to be borrowed, repaidthe FET Board, in approximate proportion to Brookfield’s ownership percentage in FET (rounded to the next whole number). Upon the closing, the FET Board will consist of 5 directors, 1 appointed by Brookfield and reborrowed, subject4 appointed by FE. The FET LLC Agreement contains certain investor protections, including, among other things, requiring Brookfield's approval for FET and its subsidiaries to each borrower’s respective sublimit for each borrower undertake certain major actions. Under the respective facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and eachterms of the operating companies withinFET LLC Agreement, for so long as Brookfield holds a 9.9% interest in FET, Brookfield’s consent is required for FET or any of its subsidiaries to incur indebtedness (other than the businesses.refinancing of existing indebtedness on commercially reasonable terms reflecting then-current credit market conditions) that would reasonably be expected to result in FET’s consolidated Debt-to-Capital Ratio (as defined in the FET LLC Agreement) equaling or exceeding (i) prior to the fifth anniversary of the effective date, 65%, and (ii) thereafter, 70%.
New Accounting Pronouncements
Recently Adopted Pronouncements
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. FirstEnergy adopted the guidance as of January 1, 2021, with no material impact 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 representrepresents a disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2021March 31, 2022 and 2020, by type of service from each reportable segment:2021:
| | | For the Three Months Ended September 30, 2021 | | For the Three Months Ended March 31, 2022 |
| Revenues by Type of Service | Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total | Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | | (In millions) | | | (In millions) |
| Distribution services | Distribution services | | $ | 1,534 | | | $ | — | | | $ | (25) | | | $ | 1,509 | | Distribution services | | $ | 1,348 | | | $ | — | | | $ | (28) | | | $ | 1,320 | |
| Retail generation | Retail generation | | 1,054 | | | — | | | (13) | | | 1,041 | | Retail generation | | 1,094 | | | — | | | (17) | | | 1,077 | |
| Wholesale sales | Wholesale sales | | 117 | | | — | | | 5 | | | 122 | | Wholesale sales | | 90 | | | — | | | 6 | | | 96 | |
| Transmission | Transmission | | — | | | 411 | | | — | | | 411 | | Transmission | | — | | | 451 | | | — | | | 451 | |
| Other | Other | | 30 | | | — | | | — | | | 30 | | Other | | 26 | | | — | | | — | | | 26 | |
| Total revenues from contracts with customers | Total revenues from contracts with customers | | $ | 2,735 | | | $ | 411 | | | $ | (33) | | | $ | 3,113 | | Total revenues from contracts with customers | | $ | 2,558 | | | $ | 451 | | | $ | (39) | | | $ | 2,970 | |
| ARP | | — | | | — | | | — | | | — | | |
| Other non-customer revenue | | 24 | | | 4 | | | (17) | | | 11 | | |
| | Other revenue unrelated to contracts with customers | | Other revenue unrelated to contracts with customers | | 31 | | | 2 | | | (14) | | | 19 | |
| Total revenues | Total revenues | | $ | 2,759 | | | $ | 415 | | | $ | (50) | | | $ | 3,124 | | Total revenues | | $ | 2,589 | | | $ | 453 | | | $ | (53) | | | $ | 2,989 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2021 |
| Revenues by Type of Service | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments (1) | | Total |
| | (In millions) |
| Distribution services | | $ | 1,339 | | | $ | — | | | $ | (26) | | | $ | 1,313 | |
| Retail generation | | 935 | | | — | | | (12) | | | 923 | |
| Wholesale sales | | 69 | | | — | | | 4 | | | 73 | |
| Transmission | | — | | | 401 | | | — | | | 401 | |
| Other | | 33 | | | — | | | — | | | 33 | |
| Total revenues from contracts with customers | | $ | 2,376 | | | $ | 401 | | | $ | (34) | | | $ | 2,743 | |
ARP (2) | | (27) | | | — | | | — | | | (27) | |
| Other revenue unrelated to contracts with customers | | 21 | | | 4 | | | (15) | | | 10 | |
| Total revenues | | $ | 2,370 | | | $ | 405 | | | $ | (49) | | | $ | 2,726 | |
(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.
Other non-customer revenue includes revenue from late payment charges of $9 million and $6 million for the three months ended September 30, 2021 and 2020, respectively. Other non-customer revenue also includes revenue from derivatives of $3 million and $8 million for the three months ended September 30, 2021 and 2020, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) Reflects amountsamount the Ohio Companies refunded to customers that was previously collected under decoupling mechanisms, with interest. See Note 8, “Regulatory Matters,” for further discussion on Ohio decoupling rates.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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. See Note 8,7, “Regulatory Matters,” for further discussion on Ohio decoupling rates.
Other non-customer revenue unrelated to contracts with customers includes revenue from late payment charges of $27$10 million and $22$9 million for the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, respectively. Other non-customer revenue unrelated to contracts with customers also includes revenue from derivatives of $5 million and $14$9 million for the ninethree months ended September 30, 2021 and 2020, respectively.March 31, 2022.
Regulated Distribution
The Regulated Distribution segment distributes electricity through FirstEnergy’s 10 utility operating companies and also controls 3,580 MWs of regulated electric generation capacity located primarily in West Virginia and 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 8,7, “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,March 31, 2022 and 2021, and 2020, by class:
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended March 31, | | |
| Revenues by Customer Class | Revenues by Customer Class | | 2021 | | 2020 | | 2021 | | 2020 | Revenues by Customer Class | | 2022 | | 2021 | | |
| | | (In millions) | | | (In millions) |
| Residential | Residential | | $ | 1,666 | | | $ | 1,621 | | | $ | 4,410 | | | $ | 4,220 | | Residential | | $ | 1,542 | | | $ | 1,457 | | | |
| Commercial | Commercial | | 619 | | | 589 | | | 1,722 | | | 1,640 | | Commercial | | 597 | | | 541 | | | |
| Industrial | Industrial | | 284 | | | 278 | | | 810 | | | 814 | | Industrial | | 283 | | | 258 | | | |
| Other | Other | | 19 | | | 20 | | | 55 | | | 61 | | Other | | 20 | | | 18 | | | |
| Total Revenues | Total Revenues | | $ | 2,588 | | | $ | 2,508 | | | $ | 6,997 | | | $ | 6,735 | | Total Revenues | | $ | 2,442 | | | $ | 2,274 | | | |
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, revenues 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 had ARPs in Ohio primarily for decoupling revenue in 2020, and has reflected refunds of decoupling revenue owed to customers as reductions to ARPs in 2021. Please see Note 8,7, “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 derived from forward-looking formula rates. See Note 8,7, “Regulatory Matters,” for additional information.
Forward-looking formula 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. 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,March 31, 2022 and 2021, and 2020, by transmission owner:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| Transmission Owner | | 2021 | | 2020 | | 2021 | | 2020 |
| | (In millions) |
| ATSI | | $ | 206 | | | $ | 202 | | | $ | 604 | | | $ | 598 | |
| TrAIL | | 59 | | | 61 | | | 176 | | | 182 | |
| MAIT | | 75 | | | 68 | | | 222 | | | 183 | |
| JCP&L | | 41 | | | 43 | | | 126 | | | 122 | |
| MP, PE and WP | | 30 | | | 34 | | | 95 | | | 100 | |
| | | | | | | | |
| 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. 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 a $125 million tax sharing payment to the FES 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.
Summarized Results of Discontinued Operations
Summarized results of discontinued operations for the three and nine months ended September 30, 2021 and 2020, were 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 nine 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 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, of approximately $4.9 billion, net of unrecognized tax benefits of $316 million, for the remaining tax basis in the stock of the FES Debtors. Tax-effected, the worthless stock deduction is approximately $1.0 billion, net of valuation allowances recorded against the state tax benefit ($19 million) and the aforementioned unrecognized tax benefits ($68 million). In conjunction with filing the 2020 consolidated federal income tax return during the third quarter of 2021, FirstEnergy computed a final federal NOL allocation between the FES Debtors and FirstEnergy consolidated that resulted in FirstEnergy recording an increase to the consolidated NOL carryforward of approximately $289 million ($61 million tax-effected). | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | |
| Transmission Owner | | 2022 | | 2021 | | | | |
| | (In millions) |
| ATSI | | 217 | | | $ | 206 | | | | | |
| TrAIL | | 63 | | | 59 | | | | | |
| MAIT | | 79 | | | 67 | | | | | |
| JCP&L | | 60 | | | 36 | | | | | |
| MP, PE and WP | | 32 | | | 33 | | | | | |
| | | | | | | | |
| Total Revenues | | $ | 451 | | | $ | 401 | | | | | |
4.3. EARNINGS PER SHARE OF COMMON STOCK
Basic EPS is computed using the weighted average number of common shares outstanding during the relevant period as the denominator. The denominator for diluted EPS of common stock reflects the weighted average of common shares outstanding plus the potential additional common shares that could result if dilutive securities and other agreements to issue common stock were exercised.
Diluted EPS reflects the dilutive effect of potential common shares from share-based awards. The dilutive effect of outstanding share-based awards was computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of the award would be used to purchase common stock at the average market price for the period.
The following table reconciles basic and diluted EPS of common stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 March 31, |
| Reconciliation of Basic and Diluted EPS | | | | | | 2022 | | 2021 |
| | | | | | |
| (In millions, except per share amounts) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net Income | | | | | | $ | 288 | | | $ | 335 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Share count information: | | | | | | | | |
| Weighted average number of basic shares outstanding | | | | | | 570 | | | 543 | |
| Assumed exercise of dilutive stock options and awards | | | | | | 1 | | | 1 | |
| | | | | | | | |
| Weighted average number of diluted shares outstanding | | | | | | 571 | | | 544 | |
| | | | | | | | |
| EPS of Common Stock: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Basic EPS of common stock | | | | | | $ | 0.51 | | | $ | 0.62 | |
| | | | | | | | |
| | | | | | | | |
| Diluted EPS of common stock | | | | | | $ | 0.50 | | | $ | 0.62 | |
For the three months ended March 31, 2022 and March 31, 2021, no shares from stock options and awards were excluded from the calculation of diluted shares outstanding, as their inclusion would have been antidilutive.
5.4. 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, | | 2021 | | 2020 | | 2021 | | 2020 | |
| For the Three Months Ended March 31, | | For the Three Months Ended March 31, | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | (In millions) | | | (In millions) |
| Service costs | Service costs | | $ | 48 | | | $ | 47 | | | $ | 1 | | | $ | 1 | | Service costs | | $ | 46 | | | $ | 49 | | | $ | 1 | | | $ | 1 | |
| Interest costs | Interest costs | | 57 | | | 71 | | | 3 | | | 4 | | Interest costs | | 68 | | | 56 | | | 3 | | | 3 | |
| Expected return on plan assets | Expected return on plan assets | | (163) | | | (156) | | | (10) | | | (9) | | Expected return on plan assets | | (164) | | | (163) | | | (10) | | | (10) | |
Amortization of prior service costs (credits)(1) | Amortization of prior service costs (credits)(1) | | 1 | | | 1 | | | (4) | | | (4) | | Amortization of prior service costs (credits)(1) | | 1 | | | 1 | | | (3) | | | (4) | |
| | Net periodic credits, including amounts capitalized | Net periodic credits, including amounts capitalized | | $ | (57) | | | $ | (37) | | | $ | (10) | | | $ | (8) | | Net periodic credits, including amounts capitalized | | $ | (49) | | | $ | (57) | | | $ | (9) | | | $ | (10) | |
| Net periodic credits, recognized in earnings | Net periodic credits, recognized in earnings | | $ | (80) | | | $ | (56) | | | $ | (10) | | | $ | (8) | | Net periodic credits, recognized in earnings | | $ | (69) | | | $ | (78) | | | $ | (9) | | | $ | (10) | |
|
(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, 2021as of March 31, 2022 and 2020, respectively.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) 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.
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, which among other things, extended shortfall amortization periods and modification of the interest rate stabilization rules for single-employer plans thereby impacting funding requirements. As a result, FirstEnergy does not currently expect to have a required contribution to the pension plan based on various assumptions, including annual expected rate of returns for assets of 7.5%. However, FirstEnergy may elect to contribute to the pension plan voluntarily.
Service costs, net of capitalization, are reported within Other operating expenses on FirstEnergy’s Consolidated Statements of Income. Non-service costs, other than the pension and OPEB mark-to-market adjustment, which is separately shown, are reported within Miscellaneous income, net, within Other Income (Expense) on FirstEnergy’s Consolidated Statements of Income.
6.5. INCOME TAXES
FirstEnergy’s interim effective tax rates reflect the estimated annual effective tax rates for 20212022 and 2020.2021. 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,March 31, 2022 and 2021, was 22.4% and 2020, was 17.5% and 20.1%20.6%, respectively. The change in effective tax rate was primarily due to a $29 million decrease in the reserve for
unrecognizedvaluation allowance against certain municipal deferred tax benefits primarily related to positions on nondeductible interest under Section 163(j) that were effectively settled with the IRS in closing out audits of the 2018 and 2019 consolidated federal income tax returns.
FirstEnergy’s effective tax rate on continuing operations for the nine months ended September 30, 2021 and 2020, was 25.1% and 13.4%, respectively. In 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.
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, 2021, FirstEnergy recorded 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 West Virginia deferred taxes (as discussed further below), partially offset by an increase of $15 million for benefits related to certain federal tax credits. As of September 30, 2021, it is reasonably possible that within the next twelve months FirstEnergy could record a net decrease of approximately $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 $24 million would impact FirstEnergy’s effective tax rate.
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. While the Act is primarily an economic stimulus package, it also, among other changes, expanded the scope of Section 162(m) of the Internal Revenue Code that limits deductions on certain executive officer compensation. FirstEnergy does not currently expect these changes to have a material impact.
On April 9, 2021, West Virginia enacted legislation changing the state’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 in the second quarter of 2021.assets.
In August 2021,February 2022, the IRS completed its examination of FirstEnergy’s 2018 and 20192020 federal income tax returnsreturn and issued a Full Acceptance LettersLetter with no adjustmentsadjustment to FirstEnergy’s taxable incomeincome. There was no material change to FirstEnergy’s reserve for uncertain tax positions for the first three months ended March 31, 2022, and it remains reasonably possible that
approximately $31 million of unrecognized tax benefits may be resolved in either year. Tax year 2020 is currently under review by the IRS.next twelve months as a result of settlements with taxing authorities or the statute of limitations expiring, of which $24 million would ultimately affect FirstEnergy’s effective tax rate.
7.6. FAIR VALUE MEASUREMENTS
RECURRING FAIR VALUE MEASUREMENTS
Authoritative accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The three levels of the fair value hierarchy and a description of the valuation techniques are as follows:
| | | | | | | | |
| Level 1 | - | Quoted prices for identical instruments in active market. |
| | |
| Level 2 | - | Quoted prices for similar instruments in active market. |
| - | Quoted prices for identical or similar instruments in markets that are not active. |
| - | Model-derived valuations for which all significant inputs are observable market data. |
Models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
| | | | | | | | |
| Level 3 | - | Valuation inputs are unobservable and significant to the fair value measurement. |
FirstEnergy produces a long-term power and capacity price forecast annually with periodic updates as market conditions change. When underlying prices are not observable, prices from the long-term price forecast are used to measure fair value.
FTRs are financial instruments that entitle the holder to a stream of revenues (or charges) based on the hourly day-ahead congestion price differences across transmission paths. FTRs are acquired by FirstEnergy in the annual, monthly and long-term PJM auctions and are initially recorded using the auction clearing price less cost. After initial recognition, FTRs’ carrying values are periodically adjusted to fair value using a mark-to-model methodology, which approximates market. The primary inputs into the model, which are generally less observable than objective sources, are the most recent PJM auction clearing prices and the FTRs’ remaining hours. The model calculates the fair value by multiplying the most recent auction clearing price by the remaining FTR hours less the prorated FTR cost. Significant increases or decreases in inputs in isolation may have resulted in a higher or lower fair value measurement.
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, 2021,March 31, 2022, from those used as of December 31, 2020.2021. 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, 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | (In millions) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Derivative assets FTRs(1) | $ | — | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 9 | | | $ | 9 | |
| | | | | | | | | | | | | | | |
| Equity securities | 2 | | | — | | | — | | | 2 | | | 2 | | | — | | | — | | | 2 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| U.S. state debt securities | — | | | 258 | | | — | | | 258 | | | — | | | 273 | | | — | | | 273 | |
Cash, cash equivalents and restricted cash(2) | 310 | | | — | | | — | | | 310 | | | 1,511 | | | — | | | — | | | 1,511 | |
Other(3) | — | | | 45 | | | — | | | 45 | | | — | | | 42 | | | — | | | 42 | |
| Total assets | $ | 312 | | | $ | 303 | | | $ | 1 | | | $ | 616 | | | $ | 1,513 | | | $ | 315 | | | $ | 9 | | | $ | 1,837 | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Derivative liabilities FTRs(1) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (1) | | | $ | (1) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total liabilities | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (1) | | | $ | (1) | |
| | | | | | | | | | | | | | | |
| Net assets (liabilities) | $ | 312 | | | $ | 303 | | | $ | 1 | | | $ | 616 | | | $ | 1,513 | | | $ | 315 | | | $ | 8 | | | $ | 1,836 | |
(1)Contracts are subject to regulatory accounting treatment and changes in market values do not impact earnings.
(2)Restricted cash of $107$27 million and $67$49 million as of September 30, 2021March 31, 2022 and December 31, 20202021 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 securitization or 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.
Level 3 Quantitative Information
The following table provides quantitative information for FTRs contracts that are classified as Level 3 in the fair value hierarchy for the period ended September 30, 2021:March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value, Net (In millions) | | Valuation
Technique | | Significant Input | | Range | | Weighted Average | | Units |
| FTRs | | $ | 1 | | | Model | | RTO auction clearing prices | | $ | 0.20 | | to | $ | 4.00 | | | $0.90 | | Dollars/MWH |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | |
INVESTMENTS
All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Investments other than cash and cash equivalents include equity securities, AFS debt securities and other investments. FirstEnergy has no debt securities held for trading purposes.
Generally, unrealized gains and losses on equity securities are recognized in income whereas unrealized gains and losses on AFS debt securities are recognized in AOCI. However, the spent nuclear fuel disposal trusts of JCP&L, ME and PN are subject to regulatory accounting with all gains and losses on equity and AFS debt securities offset against regulatory assets.
Spent Nuclear Fuel Disposal Trusts
JCP&L holds debt securities within the spent nuclear fuel disposal trust, which are classified as AFS securities, recognized at fair market value. The trust is intended for funding spent nuclear fuel disposal fees to the DOE associated with the previously owned Oyster Creek and TMI-1 nuclear power plants.
The following table summarizes the amortized cost basis, unrealized gains, unrealized losses and fair values of investments held in spent nuclear fuel disposal trusts as of September 30, 2021,March 31, 2022, and December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022(1) | | December 31, 2021(2) |
| | Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | (In millions) |
| | | | | | | | | | | | | | | | |
| Debt securities | | $ | 279 | | | $ | — | | | $ | (21) | | | $ | 258 | | | $ | 280 | | | $ | 2 | | | $ | (9) | | | $ | 273 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(1) Excludes short-term cash investments of $12$13 million.
(2) Excludes short-term cash investments of $9$11 million.
Proceeds from the sale of investments in AFS debt securities, realized gains and losses on those sales and interest and dividend income for the three and nine months ended September 30,March 31, 2022 and 2021, and 2020, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020(1) | | 2021 | | 2020(1) |
| | (In millions) | | | | |
| Sale proceeds | | $ | 16 | | | $ | 6 | | | $ | 29 | | | $ | 45 | |
| Realized gains | | — | | | — | | | — | | | 4 | |
| Realized losses | | (1) | | | — | | | (2) | | | (7) | |
| | | | | | | | |
| 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. | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | For the Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| | (In millions) | | | | |
| Sale proceeds | | $ | 6 | | | $ | 5 | | | | | |
| Realized gains | | — | | | — | | | | | |
| Realized losses | | (1) | | | — | | | | | |
| | | | | | | | |
| Interest and dividend income | | 3 | | | 3 | | | | | |
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 $349$375 million and $322$371 million as of September 30, 2021,March 31, 2022, and December 31, 2020,2021, 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, 2021March 31, 2022 and December 31, 2020:2021:
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | (In millions) | | (In millions) |
| Carrying value | Carrying value | $ | 23,819 | | | $ | 22,377 | | Carrying value | $ | 22,900 | | | $ | 23,946 | |
| Fair value | Fair value | $ | 27,018 | | | $ | 25,465 | | Fair value | $ | 23,754 | | | $ | 27,043 | |
The fair values of long-term debt and other long-term obligations reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective period. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to those of FirstEnergy. FirstEnergy classified short-term borrowings, long-term debt and other long-term obligations as Level 2 in the fair value hierarchy as of September 30, 2021,March 31, 2022, and December 31, 2020.2021.
In December 2021, notice of redemption was provided for all remaining $850 million of FE’s 4.25% Notes, Series B, due 2023, which was completed on January 20, 2022, with a make-whole premium of approximately $38 million.
20On January 27, 2022, CEI instructed its indenture trustee to provide notice of redemption for all remaining $150 million of CEI’s 2.77% Senior Notes, Series A, due 2034, for redemption which occurred on March 14, 2022.
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. | |
8.7. REGULATORY MATTERS
STATE REGULATION
Each of the Utilities' retail rates, conditions of service, issuance of securities and other matters are subject to regulation in the states in which it operates - in Maryland by the MDPSC, in New Jersey by the NJBPU, in Ohio by the PUCO, in Pennsylvania by the PPUC, in West Virginia by the WVPSC and in New York by the NYPSC. The transmission operations of PE in Virginia, ATSI in Ohio, and the Transmission Companies in Pennsylvania are subject to certain regulations of the VSCC, PUCO and PPUC, respectively. In addition, under Ohio law, municipalities may regulate rates of a public utility, subject to appeal to the PUCO if not acceptable to the utility. Further, if any of the FirstEnergy affiliates were to engage in the construction of significant new transmission facilities, depending on the state, they may be required to obtain state regulatory authorization to site, construct and operate the new transmission facility.
MARYLAND
PE operates under MDPSC approved base rates that were effective as of March 23, 2019. PE also provides SOS pursuant to a combination of settlement agreements, MDPSC orders and regulations, and statutory provisions. SOS supply is competitively
procured in the form of rolling contracts of varying lengths through periodic auctions that are overseen by the MDPSC and a third-party monitor. Although settlements with respect to SOS supply for PE customers have expired, service continues in the same manner until changed by order of the MDPSC. PE recovers its costs plus a return for providing SOS. PE expects to file a new base rate case in early 2023, consistent with the MDPSC’s order issued on March 22, 2019.
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's approved 2018-20202021-2023 EmPOWER Maryland plan continues and expands upon prior years' programs and adds new programs, for a projected total investment of $116approximately $148 million over the three-year period. PE recovers program investments with a return through an annually reconciled surcharge, with most costs subject to recovery over a five-year period with a return on the unamortized balance. 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 with an estimated investment of approximately $148 million over the three-year period with similar recovery. The MDPSC approved the plan on December 18, 2020.
On March 22, 2019, MDPSC issued an order approving PE’s 2018 base rate case filing, which among other things, approved an 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 reflecting a slight increase in expense and is seeking the difference to be deferred for future recovery in PE’s next base rate case. On 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 filed testimony recommending an annual reduction of $9.6 million. On May 26, 2021, the judge issued a Proposed Order which would reduce PE’s base rates by $2.1 million. PE filed an appeal of the Proposed Order to the 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). In July 2020, 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 for customers as of JanuaryNovember 1, 2017.2021. JCP&L provides BGS for retail customers who do not choose a third-party EGS and for customers of third-party EGSs that fail to provide the contracted service. All New Jersey EDCs participate in this competitive BGS procurement process and recover BGS costs directly from customers as a charge separate from base rates.
JCP&L has instituted energy efficiency and peak demand reduction programs in accordance with the New Jersey Clean Energy Act as approved by the NJBPU in April 2021. The NJBPU approved plans include recovery of lost revenues resulting from the programs and a three-year plan including total program costs of $203 million, of which $158 million of investment is recovered over a ten-year amortization period with a return as well as operations and maintenance expenses and financing costs of $45 million recovered on an annual basis.
In December 2017, the NJBPU issued proposed rules to modify its current CTA policy in base rate cases to: (i) calculate savings using a five-year look back from the beginning of the test year; (ii) allocate savings with 75% retained by the company and 25% allocated to ratepayers;customers; 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.calculation. On January 17, 2019, the NJBPU approved the proposed CTA rules with no changes. On May 17, 2019, the NJ Rate Counsel filed an appeal with the Appellate Division of the Superior Court of New Jersey and on June 7, 2021, the courtSuperior Court issued an Orderorder reversing the NJBPU’s CTA rules and remanded the case back to the NJBPU. Specifically, the court’sCourt’s ruling requires 100% of the CTA savings to be credited to customers in lieu of the NJBPU’s current policy requiring 25%. The court’s rulingOn December 6, 2021, the NJBPU issued proposed amended rules modifying its current CTA policy in base rate cases consistent with the Superior Court’s June 7, 2021 order. Comments were filed on March 3, 2022. Once the proposed rules are final, they will be applied on a prospective basis.basis in a future base rate case, however, it is not expected to have a material adverse effect on FirstEnergy’s results or financial condition.
On February 18, 2020, JCP&L submitted a filing with the NJBPU requesting a distribution base rate increase. On October 28, 2020, the NJBPU approved a stipulated settlement between JCP&L and various parties, providingresolving JCP&L’s request for among other things,distribution base rate increase. The settlement provided for a $94 million annual base distribution revenues increase for JCP&L based on an ROE of 9.6%, which will becomebecame effective for customers on November 1, 2021. Until the rates become effective, and starting on January 1, 2021,The settlement additionally provided that JCP&L would be subject to a management audit. The management audit began 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, be applied to reduce JCP&L’s existing regulatory asset for previously deferred storm costs. 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 first 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 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 Reliability Plus projects placed into service from July 1, 2020 through December 31, 2020 were reasonable and 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. As 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 included in the 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. 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,May 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.is currently ongoing.
On August 27, 2020, JCP&L filed an AMI Program with the NJBPU, which proposesproposed 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 then proposed 3-year deployment iswas part of the 20-year AMI Program that is expectedwas projected to cost a total of approximately $732 million and proposesproposed 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 reflectsreflected increases in the AMI Program’s costs. Under the revised AMI Program, during the first six years of the AMI Program from 2022 through 2027, JCP&L estimates costcosts of $494 million, consisting of capital expenditures of approximately $390 million, incremental operations and maintenance expenses of approximately $73 million and cost of removal of $31 million. On February 8, 2022, JCP&L expectsfiled with the NJBPU a stipulation entered into with the NJBPU staff, NJ Rate Counsel and others, that, pending NJBPU approval, would affirm the terms of the revised AMI Program. The Stipulation, which was approved by NJBPU order byon February 23, 2022, also provides that the end of 2021.
On June 10, 2020,revised AMI Program-related capital costs, the NJBPU issued an order establishing a framework forlegacy meter stranded costs, and 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-year amortization period and its operations and maintenance expenses on an annual basis,expense will be eligibledeferred and placed in regulatory assets, with such amounts sought 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, beginningrecovered 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. On April 23, 2021, JCP&L filed a Stipulation of Settlement with the NJBPU for approval of recovery of lost revenues resulting from the programs and a three-year plan including total program costs of $203 million, of which $158 million of investment is recovered over a ten year amortization period with a return as well as operations and maintenance expenses and financing costs of $45 million recovered on an annual basis. On April 27, 2021, the NJBPU issued an Order approving the Stipulation of Settlement.subsequent base rate cases.
On July 2, 2020, the NJBPU issued an order allowing New Jersey utilities to track and create a regulatory asset for future recovery of all prudently incurred incremental costs arising from the COVID-19 pandemic beginning March 9, 2020 through September 30, 2021, orand continuing until the New Jersey Governor issues an order stating that the COVID-19 pandemic is no longer in effect. New Jersey utilities can request recovery of such regulatory asset in a stand-alone COVID-19 regulatory asset filing or future base rate case. On October 28, 2020, the NJBPU issued an order expanding the scope of the proceeding to examine all pandemic issues, including recovery of the COVID-19 regulatory assets, by way of a generic proceeding. Through various Executive Ordersexecutive orders issued
by the New Jersey Governor, Murphy, the moratorium period iswas extended to December 31, 2021. On December 21, 2021, the moratorium on residential disconnections for certain entities providing utility service was extended until March 15, 2022. The moratorium on residential disconnections was not extended for investor-owned electric utilities such as JCP&L, but does require that investor-owned electric public utilities offer qualifying residential customers deferred payment arrangements meeting certain minimum criteria prior to disconnecting service.Additionally, while the moratorium on residential disconnections for certain entities providing electric service was not extended after March 15, 2022, new legislation was enacted on March 25, 2022, prohibiting utilities from disconnecting electric service to customers that have applied for utility bill assistance before June 15, 2022 until such time as the state agency administering the assistance program makes a decision on the application and further requiring that all utilities offer a deferred payment arrangement meeting certain minimum criteria after the state agency’s decision on the application has been made.
The recent credit rating actions taken on October 28, 2020, by S&P and Fitch triggered a requirement from variousPursuant to an 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 December 11, 2020, the NJBPU held 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 Orderorder requiring all New Jersey electric distribution companies to file electric vehicle programs.programs, JCP&L filed its electric vehicle program on March 1, 2021, which consists2021. JCP&L’s proposed electric vehicle program consisted of six sub-programs, including a consumer education and outreach initiative that would begin on January 1, 2022, and continue over a four-year period. The total proposed budget for the electric vehicle program is approximately $50 million, including investments of which $16 million is capital expenditures and $34 million is for operations and maintenance expenses.expenses of $34 million. 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 becomebecame 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,November 12, 2021, JCP&L filed a letter with the presiding commissioner requesting a suspension of the procedural schedule in order to allow the parties to continue settlement discussion. On November 23, 2021, the presiding commissioner entered an order suspending the procedural schedule. JCP&L expects an order from 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 atby the end of May 2021 and is currently ongoing.the second quarter of 2022.
OHIO
The Ohio Companies operate under PUCO approved base distribution rates approved by the PUCOthat became effective in 2009. The Ohio Companies currently operate under ESP IV, effective June 1, 2016 and continuing through May 31, 2024, that continues the supply of power to non-shopping customers at a market-based price set through an auction process. ESP IV also continues the Rider DCR, which supports continued investment related to the distribution system for the benefit of customers, with increased revenue caps of $20 million per year from June 1, 2019 through May 31, 2022; and $15 million per year from June 1, 2022 through May 31, 2024. In addition, ESP IV includes: (1) continuation of a base distribution rate freeze through May 31, 2024; (2) a goal across FirstEnergy to reduce CO2 emissions by 90% below 2005 levels by 2045; and (3) contributions, totaling $51 million to: (a) fund energy conservation programs, economic development and job retention in the Ohio Companies’ service territories; (b) establish a fuel-fund in each of the Ohio Companies’ service territories to assist low-income customers; and (c) establish a Customer Advisory Council to ensure preservation and growth of the competitive market in Ohio.
ESP IV further provided for the Ohio Companies to collect DMR revenues, but the SCOH reversed the PUCO’s decision to include DMR in ESP IV. Subsequently, 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. On July 15, 2019, the OCC filed an 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 remanded 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 measured, and make other necessary determinations. FirstEnergy is unable to predict the outcome of these proceedings but has not deemed a liability probable as of September 30, 2021.
On July 23, 2019, Ohio enacted HB 6, which included provisions supporting nuclear energy, authorizing 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 24, 2021, the PUCO found that statewide energy efficiency mandates had been achieved, and ordered that Ohio electric utilities’ energy efficiency and peak demand reduction cost recovery riders terminate. Third-parties have challenged the Ohio Companies’ 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 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 Ohio electric utilities, and provided for the ending of current energy efficiency program mandates. HB 128 was effective June 30, 2021. As FirstEnergy would not have financially benefited from the mechanism to provide support to nuclear energy in Ohio, there is no expected additional impact to FirstEnergy due to the repeal of that provision in HB 128.
As further discussed below, in connection with a partial settlement with the OAG and other parties, the Ohio Companies filed an 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, with interest, which total approximately $27 million. On April 22, 2021, in anticipation of the effective date of HB 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, or promptly upon obtaining PUCO approval. On July 7, 2021, the 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, 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 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’ applications 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. 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 January 12, 2021, the PUCO consolidated 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 individual 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. On October 18, 2021, the attorney examiner issued a procedural schedule setting hearings for December 13, 2021, to 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 audit of the Ohio Companies’ Rider DCR for 2017, the PUCO issued an order on June 16, 2021, directing the Ohio Companies to 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 audit and DMR audit dockets, requesting the PUCO to open an investigation and management audit, hire an independent auditor, and require FirstEnergy to show it did not improperly use money collected from consumers or violate any utility regulatory laws, rules or orders in its activities regarding HB 6. On December 30, 2020, in response to the OCC's motion, the PUCO reopened the DMR audit docket, and directed PUCO staff to solicit a third-party auditor and conduct a full review of the DMR to ensure funds collected from ratepayerscustomers through the DMR were only used for the purposes established in ESP IV. On June 2, 2021, the PUCO selected an auditor and athe auditor filed the final audit report ison January 14, 2022, which made certain findings and recommendations. The report found that spending of DMR revenues was not required to be filed by December 16, 2021.tracked, and that DMR revenues, like all rider revenues, are placed into the regulated money pool as a matter of routine, where the funds lose their identity. Therefore, the report could not suggest that DMR funds were used definitively for direct or indirect support for grid modernization. The report also concluded that there was no documented evidence that ties revenues from the DMR to lobbying for the passage of HB 6, but also could not rule out with certainty uses of DMR funds to support the passage of HB 6. The report further recommended that the regulated companies' money pool be audited more frequently and the Ohio Companies adopt formal dividend policies.
On September 15, 2020, the PUCO opened a new proceeding to review the political and charitable spending by the Ohio Companies in support of HB 6 and the subsequent referendum effort, and directing the Ohio Companies to show cause, demonstrating that the costs of any political or charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any rates or charges paid by ratepayers.customers. The Ohio Companies initially filed a response on September 30, 2020, stating that the costs of any political andor charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any 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. Oncustomers, but on August 6, 2021, the Ohio Companies filed a supplemental response explaining that, in light of the new facts revealed byset forth in 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 thatfurther discussed below, political or charitable spending in support of HB 6, or the subsequent referendum effort, affected pole attachment rates paid by approximately $15 thousand, which will be refunded to those customers.thousand. On October 26, 2021, the OCC filed a motion requesting the PUCO to order an independent external audit to investigate FE’s political and charitable spending related to HB 6, and to appoint an independent review panel to retain and oversee the auditor. In November and December 2021, parties filed comments and reply comments regarding the Ohio Companies’ original and supplemental responses to the PUCO’s September 15, 2020, show cause directive. On March 9, 2022, the PUCO directed its staff to seek the services of a third-party auditor to determine whether the show cause
demonstration submitted by the Ohio Companies is sufficient to ensure that the cost of any political or charitable spending in support of HB 6 or the subsequent referendum effort was not included, directly or indirectly, in any rates or charges paid by ratepayers.
In connection with an ongoing audit of the Ohio Companies’ policies and procedures relating to the code of conduct rules between affiliates, on November 4, 2020, the PUCO initiated an additional corporate separation audit as a result of the FirstEnergy leadership transition announcement made on October 29, 2020, as further discussed below. The additional audit is to ensure compliance by the Ohio Companies and their affiliates with corporate separation laws and the Ohio Companies’ corporate separation plan. The additional audit is for the period from November 2016 through October 2020. The final audit report was filed on September 13, 2021. The audit report makes no findings of major non-compliance with Ohio corporate separation requirements, minor non-compliance with eight requirements, and findings of compliance with 23 requirements. AParties filed comments and reply comments on the audit report, and a PUCO attorney examiner has issued a procedural schedule for the filing of comments and reply comments and testimony, as well assetting an evidentiary hearing on February 10,August 22, 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,November 1, 2021, the Citizens’ Utility Board of Ohio filed a complaintCompanies, together with the OCC, PUCO againstStaff, and several other signatories, entered into an Ohio Stipulation with the intent of resolving the ongoing energy efficiency rider audits, various SEET proceedings, including the Ohio Companies. The complaint allegesCompanies’ 2017 SEET proceeding, and the Ohio Companies’ quadrennial ESP review, each of which was pending before the PUCO. Specifically, the Ohio Stipulation provides that the Ohio Companies’ new charges resulting from HB 6,current ESP IV passes the required statutory test for their prospective SEET review as part of the Quadrennial Review of ESP IV, and any increased rates resulting from proceedings over whichexcept for limited circumstances, the former PUCO Chairman presided, are unjustsignatory parties have agreed not to challenge the Ohio Companies’ SEET return on equity calculation methodology for their 2021-2024 SEET proceedings. The Ohio Stipulation additionally affirms that: (i) the Ohio Companies’ ESP IV shall continue through its previously authorized term of May 31, 2024; and unreasonable, and that(ii) 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 towill file a new distributiontheir next base rate case at the earliest
possible date;in May 2024, and thatfurther, no signatory party will seek to adjust the Ohio Companies’ corporate separation plans be modified to introduce institutional controls.base distribution rates before that time, except in limited circumstances. The Ohio Companies further agreed to refund $96 million to customers in connection with the 2017-2019 SEET cases, and to provide $210 million in future rate reductions for all customers, including $80 million in 2022, $60 million in 2023, $45 million in 2024, and $25 million in 2025. The PUCO approved the 2017-2019 SEET refunds and 2022 rate reductions December 1, 2021, and refunds began in January 2022. Future rate reductions are contestingrecognized as a reduction to regulated distribution segment’s revenue in the complaint.Consolidated Statements of Income as they are provided to the Ohio Companies’ customers.
In connection with an ongoing annual audit of the Ohio Companies’ Rider DCR for 2020, and as a result of disclosures in FirstEnergy’s Form 10-K for the year ended December 31, 2020 (filed on February 18, 2021), the PUCO expanded the scope of the audit on March 10, 2021, to include a review of certain transactions that were either improperly classified, misallocated, or lacked supporting documentation, and to determine whether funds collected from ratepayerscustomers were used to pay the vendors, and if so, whether or not the funds associated with those payments should be returned to ratepayerscustomers through Rider DCR or through an alternative proceeding. TheOn August 3, 2021, the auditor filed its final report on this phase of the audit, and the parties submitted comments and reply comments on this audit report was filedin October 2021. Additionally, 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 auditorin this proceeding to determine if the costs of the naming rights for FirstEnergy Stadium have been recovered from ratepayersthe Ohio Companies’ customers. On November 19, 2021, the auditor filed its final report, in which the auditor concluded that the FirstEnergy Stadium naming rights expenses were not recovered from Ohio customers. On December 15, 2021, the PUCO further expanded the scope of the audit to include an investigation into an apparent nondisclosure of a side agreement in the Ohio Companies’ ESP IV settlement proceedings, but stayed its expansion of the audit until otherwise ordered by the 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 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.PUCO.
See Note 9,8, "Commitments, Guarantees and Contingencies" below for additional details on the government investigations and subsequent litigation surrounding the investigation of HB 6.
PENNSYLVANIA
The Pennsylvania Companies operate under rates approved by the PPUC, effective as of January 27, 2017. These rates were adjusted forOn November 18, 2021, the net impactPPUC issued orders to each 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 directing they operate under DSPs for the June 1, 2019 through May 31, 2023 delivery period, which DSPs provide for the competitive procurement of generation supply for customers who do not choosereceive service from an alternative EGS or for customers of alternative EGSs that fail to provide the contracted service.EGS. Under the 2019-2023 DSPs, supply will be provided by wholesale suppliers through a mix of 3, 12 and 24-month energy contracts, as well as two RFPs for 2-year SREC contracts for ME, PN and Penn. On December 14, 2021, the Pennsylvania Companies filed proposed DSPs for provision of generation for the June 1, 2023 through May 31, 2027 delivery period, to be sourced through competitive procurements for customers who do not receive service from an alternative EGS. An evidentiary hearing was held on April 13, 2022, and the parties filed a partial settlement with the PPUC resolving most of the issues in the proceeding on April 20, 2022. The remaining issues in the proceeding, which are limited to the treatment of customer-generated energy and renewable energy credit production will be resolved through briefing. Under the
2023-2027 DSPs, supply is proposed to be provided through a mix of 12 and 24-month energy contracts, as well as long-term solar PPAs.
In March 2018, the PPUC approved adjusted customer rates of the Pennsylvania Companies to reflect the net impact of the Tax Act. As a result, the Pennsylvania Companies established riders that, beginning July 1, 2018, refunded to customers tax savings attributable to the Tax Act as compared to the amounts established in their most recent base rate proceedings on a current and going forward basis. The amounts recorded as savings for the total period of January 1 through June 30, 2018, were tracked and were to be addressed for treatment in a future proceeding. On May 17, 2021, the Pennsylvania Companies filed petitions with the PPUC proposing to refund the net savings for the January through June 2018 period to customers beginning January 1, 2022. On November 18, 2021, the PPUC approved the Pennsylvania Companies' proposed refunds, but also revised a previous methodology for calculating the net tax savings, which resulted in additional tax savings attributable to the Tax Act to be refunded to customers and directed the Pennsylvania Companies to file new petitions to propose the timing and methodology to provide these additional refunds to customers. The Pennsylvania Companies recalculated the net impact for 2018 through 2021 under the revised PPUC methodology in comparison to amounts already refunded to customers under the existing riders, which resulted in an additional $61 million in savings, with interest, to be provided to customers. As a result, FirstEnergy recognized a pre-tax charge of $61 million in the fourth quarter of 2021 associated with the additional refund and based on the November 2021 PPUC order and methodology. The Pennsylvania Companies filed petitions to propose the timing and methodology of the refund of these amounts on February 17, 2022. If approved, the Pennsylvania Companies would refund these amounts beginning July 1, 2022, and continuing through the end of the year.
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 were filed November 30, 2020. A settlement has been reached in this matter, and a joint petition seeking approval of that settlementapproved by the parties was filedPPUC without modification on February 16, 2021. On March 25, 2021, the PPUC issued an order approving the settlement without modification.2021.
Pennsylvania EDCs are permitted to seek PPUC approval of an LTIIP for infrastructure improvements and costs related to highway relocation projects, after which a DSIC may be approved to recover LTIIP costs. On January 16, 2020, the PPUC approved the Pennsylvania Companies’ LTIIPs for the five-year period beginning January 1, 2020 and ending December 31, 2024 for a total capital investment of approximately $572 million for certain infrastructure improvement initiatives. On June 25, 2021, the Pennsylvania OCA filed a complaint against Penn’s quarterly DSIC rate, disputing the recoverability of the Companies’ automated distribution management system investment under the DSIC mechanism. Penn responded on July 19, 2021, and submitted its direct testimony on October 13, 2021.On January 26, 2022, the parties filed a joint petition for settlement that resolves all issues in this matter pending PPUC approval.
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, whichrates. The decision was appealed by the Pennsylvania OCA to the Pennsylvania Supreme Court and in July 2021 the court upheld the Pennsylvania Commonwealth Court. The Commonwealth Court reversedCourt’s reversal of 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. On 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. On March 19, 2021, the PPUC entered an order lifting the moratorium in total effective March 31, 2021, subject to certain additional guidelines regarding the duration of payment arrangements and reporting obligations.
WEST VIRGINIA
MP and PE provide electric service to all customers through traditional cost-based, regulated utility ratemaking and operate under WVPSC approved rates approved by the WVPSCthat became effective in February 2015. MP and PE recover net power supply costs, including fuel costs, purchased power costs and related expenses, net of related market sales revenue through the ENEC. MP’s and PE’s ENEC rate is updated annually.
On 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 proposesproposed 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. AOn August 12, 2021, a unanimous settlement was reached with all the parties agreeing to a $7.7 million rate reduction beginning January 1, 2022, with a true-up in the ENEC proceeding each year. The settlement was presented toOn November 30, 2021, the WVPSC approved the settlement on August 18, 2021, and an order is expected to be issued this year.all terms, except for the proposed effective date of the rate reduction, which was held in abeyance until further notice.
On August 27, 2021, MP and PE filed with the WVPSC their annual ENEC case requesting an increase in ENEC rates of $19.6 million beginning January 1, 2022, representingwhich represented a 1.5% increase into the rates versus those currently in effect. OnceWVPSC issued an order on December 29, 2021, granting the requested $19.6 million increase in ENEC rates. Among other things, the order requires MP and PE to refund to its large industrial customers their respective portion of the $7.7 million rate reduction discussed above and also requires MP and PE to negotiate a PPA for its capacity shortfall and a reasonable reserve margin if certain conditions are met. By order dated March 2, 2022, the WVPSC reopened the case to determine whether rates should be increased to recover growing ENEC under-recoveries. MP and PE proposed a $94 million rate increase to address the growing under-recoveries and a hearing was held on March 24, 2022. Any interim rate increase approved by WVPSC would be expected to begin May 1, 2022.
On December 3, 2021 and on December 27, 2021, the WVPSC approved settlements granting MP and PE a $16 million increase in rates effective January 1, 2022, and permitting the continuation of the vegetation management program and surcharge for another two years. WVPSC additionally ordered MP and PE to perform equipment inspections within a reasonable time after vegetation management occurs on a circuit.
On November 22, 2021, MP and PE filed with the WVPSC their plan to construct 50 MWs of solar generation at five sites in West Virginia. The plan includes a tariff to offer solar power to West Virginia customers and cost recovery for MP and PE from other customers through a surcharge for any solar investment not fully subscribed by their customers. A hearing was held on March 16 and 17, 2022, and an order is issuedexpected in the ADIT case discussed above, itsecond quarter of 2022. The solar generation project, if approved, is expected to cost approximately $110 million and begin being in-serviced by the end of 2023 with all construction completed at the other sites no later than the end of 2025.
On December 17, 2021, MP and PE filed with the WVPSC for approval of environmental compliance projects at the Ft. Martin and Harrison Power Stations to comply with the EPA’s ELG and operate these plants beyond 2028. The request includes a supplement will be filed loweringsurcharge to recover the request by $7.7expected $142 million by taking into account the rate decreasecapital investment and $3 million in annual operation and maintenance expense. A hearing has been set for in August 2022, with a ruling from the case. A procedural schedule has been issued setting a hearingWVPSC expected in the fall of 2022. If approved, construction would be expected to be completed by the end of 2025. See Note 8, “Commitments, Guarantees and Contingencies - Environmental Matters - Clean Water Act" below, for additional details on December 3, 2021.the EPA's ELG.
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. On February 4, 2022, FERC filed the final audit report for the period of January 1, 2015 through September 30, 2021, which included several findings and recommendations. FirstEnergy has accepted the findings and recommendations of the final audit report. The audit report included a finding and related recommendation that FirstEnergy may have used an inappropriate methodology for allocation of certain costs to regulatory capital accounts under certain FERC regulations and reporting. As such, FirstEnergy is currently performing an analysis of these costs and how it impacted certain wholesale transmission customer rates. FirstEnergy is unable to predict or estimate the final outcome or impact of this audit.analysis and audit, however, it could result in refunds, with interest, to certain wholesale transmission customers and/or write-offs of previously capitalized costs if they are determined to be nonrecoverable.
ATSI Transmission Formula Rate
On May 1, 2020, ATSI filed amendments to its formula rate to recover regulatory assets for certain costs that ATSI incurred as a result of its 2011 move from MISO to PJM, certain costs allocated to ATSI by FERC for transmission projects that were constructed by other MISO transmission owners, and certain costs for transmission-related vegetation management programs. A portion of these costs would have been charged to the Ohio Companies. Additionally, ATSI proposed certain income tax-related adjustments and certain tariff changes addressing the revenue credit components of the formula rate template. On June 30, 2020, FERC issued an initial order accepting the tariff amendments subject to refund and setting the matter for hearing and settlement proceedings. ATSI and the parties to the FERC proceeding subsequently were able to reach settlement, and on October 14, 2021, filed the settlement with FERC. As a result of the filed settlement, FirstEnergy recognized a $21 million pre-tax charge during the third quarter of 2021, which 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 not expected to have a material impact on FirstEnergy or ATSI. The uncontested settlement is pending beforewas approved by FERC for approval.on March 24, 2022 without modification.
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 to: (i) deduct any excess ADIT from or add any deficient ADIT to their rate base; (ii) raise or lower their income tax allowances by any amortized excess or deficient ADIT; and (iii) incorporate a new permanent worksheet into their rates that will annually track information related to excess or deficient ADIT. Per FERC directives, ATSI submitted its compliance filing on May 1, 2020. MAIT submitted its compliance filing on June 1, 2020. Certain intervenors filed protests of the compliance filings,On November 18, 2021, FERC issued an order that: (i) accepted ATSI proposed tariff amendments to which ATSI and MAIT responded. On October 28, 2020, FERC staff requested additional information about ATSI’s proposedits rate base adjustment mechanism, effective January 27, 2020; (ii) directed ATSI to make a further compliance filing by January 17, 2022; and (iii) set the amount of ATSI’s recorded ADIT balances as of December 31, 2017, for hearing and settlement procedures. ATSI submitted the requested information on November 25, 2020.compliance filing, and is participating in settlement negotiations. On May 4,December 3, 2021, FERC staff requested additional information aboutissued an order that (i) accepted MAIT’s proposed tariff amendments to its rate base adjustment mechanism, effective January 27, 2020; (ii) directed MAIT to make a further compliance filing by February 1, 2022; and (iii) set the amount of MAIT’s recorded ADIT balances as of December 31, 2017 for hearing and settlement procedures. MAIT submitted the requested information on June 3, 2021. On June 24, 2021, an intervenor protested the supplemental information that MAIT submitted, to which MAIT responded.compliance filing, and is participating in settlement negotiations. 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. TheseOn March 31, 2022, FERC issued an order, ruling that TrAIL’s compliance filings each remainfiling partially complied with the requirements of Order No. 864 and directing TrAIL to submit a further compliance filing on or before May 31, 2022 to address certain additional items that according to FERC further will enhance transparency. The PATH compliance filing remains pending before FERC. MP, WP and PE (as holders of a “stated” transmission rate when Order No. 864 issued) are addressing these requirements in the transmission formula rates amendments that were filed on October 29, 2020, and which have been accepted by FERC effective January 1, 2021, subject to refund, pending further hearing and settlement procedures, addressed further below. JCP&L addressed these requirements as part of itsprocedures. MP, WP and PE are engaged in settlement negotiations with other parties to this proceeding.
ATSI ROE – Ohio Consumers Counsel v. ATSI, et al.
On February 24, 2022, the OCC filed a complaint with FERC against ATSI, AEP’s Ohio affiliates and AEPSC, and Duke Energy Ohio, LLC asserting that FERC should reduce the ROE utilized in the utilities’ transmission formula rate case, whichrates by eliminating the 50 basis point adder associated with RTO membership, effective February 24, 2022. The OCC contends that this result is required
because Ohio law mandates that transmission owning utilities join an RTO and that the 50 basis point adder is applicable only where RTO membership is voluntary. ATSI disagrees with OCC’s characterization and set forth its reasons for such disagreement in a combined motion to dismiss and answer that was resolved by a settlement approved byfiled with FERC on April 15, 2021, addressed further below.March 31, 2022. On that same date, AEP and Duke filed separate motions to dismiss and answers to the OCC complaint, and several other parties filed comments. ATSI is currently evaluating whether to file an additional answer to respond to certain of the comments.
Transmission ROE Methodology
On May 20, 2021, in a case not involving FirstEnergy, FERC issued Opinion No. 575 in which it reiterated the nationwide ROE methodology set forth in 2020 in Opinion Nos. 569-A and 569-B. Under this methodology, FERC employs 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 rejected the use of the expected earnings methodology in calculating the authorized ROE. 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 applied a standard consistent with Opinion Nos. 569-A and 569-B. FERC’s Opinion Nos. 569-A and 569-B, upon which Opinion No. 575 is based, have been appealed to the D.C. Circuit. FirstEnergy is not participating in the 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 filed on June 25, 2021, and reply comments were filed on July 26, 2021. The rulemaking remains pending before FERC. FirstEnergy is a member of PJM and its transmission subsidiaries could be affected by the supplemental proposed rule. FirstEnergy participated in comments on the supplemental rulemaking that were submitted by a group of PJM transmission owners and by various industry trade groups. If there were to be any changes to FirstEnergy transmission incentive ROE, such changes will be applied on a prospective basis.
JCP&L Transmission Formula Rate
On October 30, 2019, JCP&L filed tariff amendments with FERC to implement 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 subsequently were able to reach settlement, 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 implement a forward-looking formula transmission rate, to be effective January 1, 2021. In addition, on October 30, 2020, KATCo filed a proposed new tariff to establish a forward-looking formula rate and requested that the new rate become effective January 1, 2021. In its filing, KATCo explained that while it currently owns no transmission assets, it may build new transmission facilities in the Allegheny zone, and that it may seek required state and federal authorizations to acquire transmission assets from PE and WP by January 1, 2022. These transmission rate filings were accepted for filing by FERC on December 31, 2020, effective January 1, 2021, subject to refund, pending further hearing and settlement procedures and were consolidated into a single proceeding. MP, PE and WP, and KATCo are engaged in settlement negotiations with the other parties to the formula rate proceedings. KATCo will be included in the Regulated Transmission reportable segment.
9.8. COMMITMENTS, GUARANTEES AND CONTINGENCIES
GUARANTEES AND OTHER ASSURANCES
FirstEnergy has various financial and performance guarantees and indemnifications, which are issued in the normal course of business. These contracts include performance guarantees, stand-by letters of credit, debt guarantees, surety bonds and indemnifications. FirstEnergy enters into these arrangements to facilitate commercial transactions with third parties by enhancing the value of the transaction to the third party.
As of September 30, 2021,March 31, 2022, outstanding guarantees and other assurances aggregated approximately $1.1 billion, consisting of parental guarantees on behalf of its consolidated subsidiaries ($586 million), other guarantees ($68602 million) and other assurances ($469468 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.
As of September 30, 2021, $55March 31, 2022, $52 million of collateral has been posted by FE or its 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, 2021:March 31, 2022:
| | Potential Collateral Obligations | Potential Collateral Obligations | | | | | Utilities and FET | | FE | | Total | Potential Collateral Obligations | | | | | Utilities and Transmission Companies | | FE | | Total |
| | | | | (In millions) | | | | (In millions) |
| Contractual Obligations for Additional Collateral | Contractual Obligations for Additional Collateral | | | | | | Contractual Obligations for Additional Collateral | | | | | |
| | Upon Further Downgrade | Upon Further Downgrade | | | | | $ | 32 | | | $ | — | | | $ | 32 | | Upon Further Downgrade | | | | | $ | 43 | | | $ | — | | | $ | 43 | |
| Surety Bonds (Collateralized Amount) (1) | Surety Bonds (Collateralized Amount) (1) | | | | | 56 | | | 258 | | | 314 | | Surety Bonds (Collateralized Amount) (1) | | | | | 57 | | | 258 | | | 315 | |
| Total Exposure from Contractual Obligations | Total Exposure from Contractual Obligations | | | | | $ | 88 | | | $ | 258 | | | $ | 346 | | Total Exposure from Contractual Obligations | | | | | $ | 100 | | | $ | 258 | | | $ | 358 | |
(1)Surety Bonds are not tied to a credit rating. Surety Bonds’ impact assumes maximum contractual obligations, which is ordinarily 100% of the face amount of the surety bond except with the respect to $39 million of surety bond obligations for which the collateral obligation is capped at 60% of the face amount, and typical obligations require 30 days to cure.
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 was $68 million as of September 30, 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. On July 28, 2015, the D.C. Circuit ordered the EPA to reconsider the CSAPR caps on NOx and SO2 emissions from power plants in 13 states, including West Virginia. This followed the 2014 U.S. Supreme Court ruling generally upholding the EPA’s regulatory approach under CSAPR but questioning whether the EPA required upwind states to reduce emissions by more than their contribution to air pollution in downwind states. The EPA issued a CSAPR Update on September 7, 2016, reducing summertime NOx emissions from power plants in 22 states in the eastern U.S., including West Virginia, beginning in 2017. Various states and other stakeholders appealed the CSAPR Update to the D.C. Circuit in November and December 2016. On September 13, 2019, the D.C. Circuit remanded the CSAPR Update to the EPA citing that the rule did not eliminate upwind states’ significant contributions to downwind states’ air quality attainment requirements within applicable attainment deadlines.
Also during this time, in March 2018, the State of New York filed a CAA Section 126 petition with the EPA alleging that NOx emissions from nine states (including West Virginia) significantly contribute to New York’s inability to attain the ozone NAAQS. The petition sought suitable emission rate limits for large stationary sources that are allegedly affecting New York’s air quality within the three years allowed by CAA Section 126. On September 20, 2019, the EPA denied New York’s CAA Section 126 petition. On October 29, 2019, the State of New York appealed the denial of its petition to the D.C. Circuit. On July 14, 2020, the D.C. Circuit reversed and remanded the New York petition to the EPA for further consideration. On March 15, 2021, the EPA issued a revised CSAPR Update that addresses, among other things, the remands of the prior CSAPR Update and the New York Section 126 Petition.petition. In December 2021, MP purchased NOx emissions allowances to comply with 2021 ozone season requirements. On April 6, 2022, the EPA published proposed rules seeking to impose further significant reductions in EGU NOx emissions in 25 states, including West Virginia. The EPA held a virtual public hearing regarding the proposed rules on April 21, 2022, with comments due June 6, 2022. Depending on the outcome of any appeals and how the EPA and the states ultimately implement the revised CSAPR Update, the future cost of compliance may materially impact FirstEnergy's operations, cash flows and financial condition.
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 several initiatives to reduce GHG emissions at the state, federal and international level. Certain northeastern states are participating in the RGGI and western states led by California, have implemented programs, primarily cap and trade mechanisms, to control emissions of certain GHGs. Additional policies reducing GHG emissions, such as demand reduction programs, renewable portfolio standards and renewable subsidies have been implemented across the nation.
In September 2016, the U.S. joined in adopting the agreement reached on December 12, 2015, at the United Nations Framework Convention on Climate Change meetings in Paris to reduce GHG.GHGs. The Paris Agreement’s non-binding obligations to limit global
warming to below two degrees Celsius became effective on November 4, 2016. On June 1, 2017, the Trump Administration announced that the U.S. would cease all participation in the Paris Agreement. On January 20, 2021, President Biden signed an executive order re-adopting the agreement on behalf of the U.S. In November 2020, FirstEnergy published its Climate Story which includes its climate position and strategy, as well as a new comprehensive and ambitious GHG emission goal. FirstEnergy pledged to achieve carbon neutrality by 2050 and set an interim goal for a 30% reduction in GHGGHGs 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,generation, will be developed by working collaboratively with regulators in West Virginia. Determination of the useful life of the regulated coal-fired generating facilitiesgeneration 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’sFirstEnergy��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 GHGGHGs under the Clean Air Act,” concluding that concentrations of several key GHGs constitute an "endangerment" and may be regulated as "air pollutants" under the CAA and mandated measurement and reporting of GHG emissions from certain sources, including electric generating plants. Subsequently, the EPA released its final CPP regulations in August 2015 to reduce CO2 emissions from existing fossil fuel-fired EGUs and finalized separate regulations imposing CO2 emission limits for new, modified, and reconstructed fossil fuel-fired EGUs. Numerous states and private parties filed appeals and motions to stay the CPP with the D.C. Circuit in October 2015. On February 9, 2016, the U.S. Supreme Court stayed the rule during the pendency of the challenges to the D.C. Circuit and U.S. Supreme Court. On March 28, 2017, an executive order, entitled “Promoting Energy Independence and Economic Growth,” instructed the EPA to review the CPP and related rules addressing GHG emissions and suspend, revise or rescind the rules if appropriate. On June 19, 2019, the EPA repealed the CPP and replaced it with the ACE rule that established guidelines for states to develop standards of performance to address GHG emissions from existing coal-fired power plants.generation. On January 19, 2021, the D.C. Circuit vacated and remanded the ACE rule declaring that the EPA was “arbitrary and capricious” in its rule making and, as such, the ACE rule is no longer in effect and all actions thus far taken by states to implement the federally mandated rule are now null and void. The D.C. Circuit decision was appealed by several states, including West Virginia, as well as other interested parties. On February 28, 2022, the U.S. Supreme Court heard oral arguments on the matter is subject to legal challenge. Depending on the outcomes of further appealsthe appeal 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.
On September 30, 2015, the EPA finalized new, more stringent effluent limits for the Steam Electric Power Generating category (40 CFR Part 423) for arsenic, mercury, selenium and nitrogen for wastewater from wet scrubber systems and zero discharge of pollutants in ash transport water. The treatment obligations were to phase-in as permits are renewed on a five-year cycle from 2018 to 2023. However, on April 13, 2017, the EPA granted a Petition for Reconsideration and on September 18, 2017, the EPA postponed certain compliance deadlines for two years. On August 31, 2020, the EPA issued a final rule revising the effluent limits for discharges from wet scrubber systems, retaining the zero-discharge standard for ash transport water, (with some limited discharge allowances), and extending the deadline for compliance to December 31, 2025 for both. In addition, the EPA allows for less stringent limits for sub-categories of generating units based on capacity utilization, flow volume from the scrubber system, and unit retirement date. The EPA is reconsidering the ELG rule with a publicly announced target of issuing a proposed revised rule in the Fall of 2022 and a final rule by the Spring of 2023. In the interim, the rule issued on August 31, 2020, remains in effect. Depending on the outcome of appeals and how final rules are ultimately implemented, and the compliance options MP elects to take with the new rules, the compliance with these standards, which could includerequire additional capital expenditures or changes in operations at the Ft. Martin and Harrison power stations may be substantial and changesfrom what was filed with the WVPSC in December 2021 that seeks approval of environmental compliance projects to MP’s operations at those power stations may also result.comply with the EPA’s ELG.
On September 29, 2016, FirstEnergy receivedAfter the completion of a request fromnegotiated settlement, a complaint was filed by the EPA for information pursuant to CWA Section 308(a) for information concerning boron exceedances of effluent limitations establishedand PA DEP on January 10, 2022 in the NPDES PermitFederal District Court for the former Mitchell Power Station’s Mingo landfill, owned by WP. On November 1, 2016,Western District of Pennsylvania, alleging, among other things, that WP provided an initial response that contained information related to a similar boron issue at the former Springdale Power Station’s 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 has fully complied 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 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 Department of Justice issued a letter and tolling agreement to WP on behalf of the EPA alleging violations ofviolated the CWA at the Springdale and Mingo landfills and seeking to enter settlement negotiations in lieu of filing a complaint. To settle allegedconnection with past boron exceedances at both facilities,WP’s Springdale and Mingo landfills. On January 11, 2022, WP has agreed toentered into a consent decree with the EPA and PA DEP resolving the matters addressed in the complaint, which, among other things, required a civil penalty of $610 thousand. The District Court entered the Consent Decree as final on March 17, 2022 and WP subsequently paid the penalty amount of $610 thousand to be paid over two years. It is expected that WP will sign a Consent Decree memorializing the pipeline construction milestones and the civil penalty payments in the fourth quarter of 2021.as required therein.
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 allowed 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 2024.2024, which request is pending technical review by the EPA. AE Supply continues to operate McElroy’s Run as a disposal facility for FG’s Pleasants Power Station.
FE or its subsidiaries have been named as potentially responsible parties at waste disposal sites, which may require cleanup under the CERCLA. Allegations of disposal of hazardous substances at historical sites and the liability involved are often unsubstantiated and subject to dispute; however, federal law provides that all potentially responsible parties for a particular site may be liable on a joint and several basis. Environmental liabilities that are considered probable have been recognized on the Consolidated Balance Sheets as of September 30,March 31, 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 $101110 million have been accrued through September 30, 2021,March 31, 2022, of which, approximately $67$70 million are for environmental remediation of former MGP and gas holder facilities in New Jersey, which are being recovered by JCP&L through a non-bypassable SBC. FE or its subsidiaries could be found potentially responsible for additional amounts or additional sites, but the loss or range of losses cannot be determined or reasonably estimated at this time.
OTHER LEGAL PROCEEDINGS
United States v. Larry Householder, et al.
On July 21, 2020, a complaint and supporting affidavit containing federal criminal allegations were unsealed against the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. Also, on July 21, 2020, and in connection with the investigation, FirstEnergy received subpoenas for records from the U.S. Attorney’s Office for the 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 this matter. Under the DPA, FE has agreed to the filing of a criminal information charging FE with one count of conspiracy to commit honest services wire fraud. The DPA requires that FirstEnergy, among other obligations: (i) continue to cooperate with the U.S. Attorney’s Office in all matters relating to the conduct described in the DPA and other conduct under investigation by the U.S. government; (ii) pay a criminal monetary penalty totaling $230 million within sixty days, which shall consist of (x) $115 million paid by FE to the United States Treasury and (y) $115 million paid by FE to the ODSA to fund certain assistance programs, as determined by the ODSA, for the benefit of low-income Ohio electric utility customers; (iii) publish a list of all payments made in 2021 to either 501(c)(4) entities or to entities known by FirstEnergy to be operating for the benefit of a public official, either directly or indirectly, and update the same on a quarterly basis during the term of the DPA; (iv) issue a public statement, as dictated in the DPA, regarding FE’s use of 501(c)(4) entities; and (v) continue to implement and review its compliance and ethics program, internal controls, policies and procedures designed, implemented and enforced to prevent and detect violations of the U.S. laws throughout its operations, and to take certain related remedial measures. The $230 million payment will neither be recovered in rates or charged to FirstEnergy customers nor will FirstEnergy seek any tax deduction related to such payment. The entire amount of the monetary penalty was recognized as expense in the second quarter of 2021, and paid in the third quarter of 2021. Under the terms of the DPA, the criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA.
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). NoUnless otherwise indicated, no contingency has been reflected in FirstEnergy’s consolidated financial statements with respect to these lawsuits as a loss is neither probable, nor is a loss or range of a loss reasonably estimable.
•Owens v.In re FirstEnergy Corp. et al. and Frand v. FirstEnergy Corp. et al.Securities Litigation (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. FE believes that it is probable that it will incur a loss in connection with the resolution of this lawsuit. Given the ongoing nature and complexity of such litigation, FE cannot yet reasonably estimate a loss or range of loss.
•GendrichMFS Series Trust I, et al. v. Anderson,FirstEnergy Corp., et al. and SloanBrighthouse Funds II – MFS Value Portfolio, et al. v. Anderson,FirstEnergy Corp., et al. (Common Pleas(Federal District Court, Summit County, OH);S.D. Ohio) on July 26, 2020December 17, 2021 and July 31, 2020, respectively,February 21, 2022, purported stockholders of FE filed shareholder derivative action lawsuitscomplaints 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 officers, and certain current and former officers of EH. The complaints allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act by issuing alleged misrepresentations or omissions regarding FE’s business and its results of operations, and seek the same relief as the In re FirstEnergy officers, alleging civil Racketeer InfluencedCorp. Securities Litigation described above. FE believes that it is probable that it will incur losses in connection with the resolution of these lawsuits. Given the ongoing nature and Corrupt Organizations Act violations and related state law claims. These actions have been 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 ascomplexity of such litigation, FE cannot yet reasonably estimate a defendant was filed on September 27, 2021 and remains pending. Discovery is proceeding.loss or range of loss.
•State of Ohio ex rel. Dave Yost, Ohio Attorney General v. FirstEnergy Corp., et al. and City of Cincinnati and City of Columbus v. FirstEnergy Corp. (Common Pleas Court, Franklin County, OH)OH, all actions have been consolidated); on September 23, 2020 and October 27, 2020, the OAG and the cities of Cincinnati and Columbus, respectively, filed complaints against several parties including FE (the OAG also named FES as a defendant), each alleging civil violations of the Ohio Corrupt Activity Act in connection with the passage of HB 6. On January 13, 2021, the OAG filed a motion for a temporary restraining order and preliminary injunction against FirstEnergy seeking to enjoin FirstEnergy from collecting the Ohio Companies' decoupling rider. On January 31, 2021, FE reached a partial settlement with the OAG and the cities of Cincinnati and Columbus with respect to the temporary restraining order and preliminary injunction request and related issues. In connection with the partial settlement, the Ohio Companies filed an application on February 1, 2021, with the PUCO to set their respective decoupling riders (CSR) to zero. On February 2, 2021, the PUCO approved the application of the Ohio Companies setting the rider to zero and no additional customer bills will include new decoupling rider charges after February 8, 2021. These actions have been consolidated. The cases are stayed pending final resolution of the United States v. Larry Householder, et al. criminal proceeding described above, although on August 13, 2021, new defendants were added to the complaint, including two former officers of FirstEnergy. On November 9, 2021, the OAG filed a motion to lift the agreed-upon stay, which FE opposed on November 19, 2021; the motion remains pending. On December 2, 2021, the cities and FE entered a stipulated dismissal with prejudice of the cities’ suit.
•Smith v. FirstEnergy Corp. et al., Buldas v. FirstEnergy Corp. et al., and Hudock and Cameo Countertops, Inc. v. FirstEnergy Corp. et al. (Federal District Court, S.D. Ohio, all actions have been consolidated); on July 27, 2020, July 31, 2020, and August 5, 2020, respectively, purported customers of FE filed putative class action lawsuits against FE and FESC, as well as certain current and former FE officers, alleging civil Racketeer Influenced and Corrupt Organizations Act violations and related state law claims. FE agreed to a settlement to resolve these claims on April 11, 2022. In the fourth quarter of 2021, FirstEnergy recognized a pre-tax reserve of $37.5 million in the aggregate with respect to these lawsuits and the Emmons lawsuit below.
•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,the Ohio Companies, along with FES, alleging several causes of action, including negligence and/or gross negligence, breach of contract, unjust enrichment, and unfair or deceptive consumer acts or practices. FE agreed to a settlement to resolve these claims on April 11, 2022. In the fourth quarter of 2021, FirstEnergy recognized a pre-tax reserve of $37.5 million in the aggregate with respect to this lawsuit and the lawsuits above consolidated with Smith in the S.D. Ohio alleging, among other things, civil violations of the Racketeer Influenced and Corrupt Organizations Act.
On October 1,February 9, 2022, FE, acting through the SLC, agreed to a settlement term sheet to resolve the following shareholder derivative lawsuits relating to HB 6 and the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder that were filed in the S.D. Ohio, the N.D. Ohio, and the Ohio Court of Common Pleas, Summit County:
•Gendrich v. Anderson, et al. and Sloan v. Anderson, et al. (Common Pleas Court, Summit County, OH, all actions have been consolidated); on July 26, 2020 plaintiffsand July 31, 2020, respectively, purported stockholders of FE filed shareholder derivative action lawsuits against certain FE directors and officers, alleging, among other things, breaches of fiduciary duty.
•Miller v. Anderson, et al. (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. (Federal 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 Exchange Act.
On March 11, 2022, the parties executed a stipulation and agreement of settlement, and filed a First Amended Complaint, adding asmotion the same day requesting preliminary settlement approval in the S.D. Ohio. The settlement agreement, if approved, will fully resolve the shareholder derivative lawsuits above and stipulates a plaintiff a purported customerseries of FirstEnergy and alleging a civil violationcorporate governance enhancements, that has resulted or is expected to result in the following:
•Six members of the Ohio Corrupt Activity ActFE Board, Messrs. Michael J. Anderson, Donald T. Misheff, Thomas N. Mitchell, Christopher D. Pappas and civil conspiracy againstLuis A. Reyes, and Ms. Julia L. Johnson are not standing for re-election at FE’s 2022 annual shareholder meeting;
•A special FE FESC and FES. On May 4, 2021, the court granted the defendants’ motionBoard committee of at least three recently appointed independent directors will be formed to dismiss plaintiffs’ breach of contract claims and denied the remainderinitiate a review process of the motionscurrent senior executive team, to dismiss. begin within 30 days of the 2022 annual shareholder meeting;
•The defendants submitted answersFE Board will oversee FE’s lobbying and political activities, including periodically reviewing and approving political and lobbying action plans prepared by management;
•An FE Board committee of recently appointed independent directors will oversee the implementation and third-party audits of the FE Board-approved action plans with respect to the complaint on June 1, 2021. Discovery is proceeding.political and lobbying activities;
•FE will implement enhanced disclosure to shareholders of political and lobbying activities, including enhanced disclosure in its annual proxy statement; and
•FE will further align financial incentives of senior executives to proactive compliance with legal and ethical obligations.
The settlement also includes a payment to FirstEnergy of $180 million, to be paid by insurance after court approval, less any court-ordered attorney’s fees awarded to plaintiffs.
In letters dated January 26, and February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the Division is conducting an investigation of FirstEnergy’s lobbying and governmental affairs activities concerning HB 6, and staff directed FirstEnergy to preserve and maintain all documents and information related to the same as such have been developed as part of an ongoing non-public audit being conducted by FERC's Division of Audits and Accounting. While no contingency has been reflected in itsthe consolidated financial statements, FirstEnergy believes that it is probable that it will incur a loss in connection with the resolution of the FERC investigation. Given the ongoing nature and complexity of the review, inquiries and investigations, FirstEnergy cannot yet reasonably estimate a loss or range of loss that may arise from the resolution of the FERC investigation.
The outcome of any of these lawsuits, governmental investigations and audit areis 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.
Internal Investigation Relating to United States v. Larry Householder, et al.
As previously disclosed, a committee of independent members of the FE Board has 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 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. Additionally, on November 8, 2020, the Senior Vice President and Chief Legal Officer, and 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. Subsequently, 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 purported consulting agreement discussed above.
Additionally, 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.
Also, in connection with the internal investigation, FirstEnergy identified certain transactions, which, in some instances, extended back ten years of 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.
The internal investigation has revealed no new material issues since FirstEnergy’s Form 10-K was filed on February 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 8,7, “Regulatory Matters.”
FirstEnergy accrues legal liabilities only when it concludes that it is probable that it has an obligation for such costs and can reasonably estimate the amount of such costs. In cases where FirstEnergy determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss if such estimate can be made. If it were ultimately determined that FE or its subsidiaries have legal liability or are otherwise made subject to liability based on any of the matters referenced above, it could have a material adverse effect on FE’s or its subsidiaries’ financial condition, results of operations, and cash flows.
10.9. SEGMENT INFORMATION
FE and its subsidiaries are principally involved in the transmission, distribution and generation of electricity through its reportable segments, Regulated Distribution and Regulated Transmission.
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 3,580 MWs of regulated electric generation capacity located primarily in West Virginia and Virginia. The segment’s results reflect the costs of securing and delivering electric generation from transmission facilities to customers, including the deferral and amortization of certain related costs. Included within the segment is $45 million of assets classified as held for sale as of December 31,
On April 6, 2020, associated with theJCP&L signed an asset purchase agreement with Yards Creek; see Note 8, “Regulatory Matters,”Creek Energy, LLC, a subsidiary of LS Power to sell its 50% interest in the Yards Creek pumped-storage hydro generation facility. With the receipt of all required regulatory approvals,
the transaction was consummated on March 5, 2021 and resulted in a $109 million gain within the regulated distribution segment in the first quarter of 2021. The gain from the transaction was applied against and reduced JCP&L’s existing regulatory asset for additional information.previously deferred storm costs and, as a result, was offset by expense in the “Amortization (deferral) of regulatory assets, net”, line on the Consolidated Statements of Income, resulting in no earnings impact to FirstEnergy or JCP&L.
The Regulated Transmission segment provides transmission infrastructure owned and operated by the Transmission Companies and certain of FirstEnergy’s utilities (JCP&L, MP, PE and WP) to transmit electricity from generation sources to distribution facilities. The segment’s revenues are primarily derived from forward-looking formula rates. Forward-looking rates recover costs that FERC 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 rate base and costs. The segment’s results also reflect the net transmission expenses related to the delivery of electricity on FirstEnergy’s transmission facilities. On November 6, 2021, FirstEnergy, along with FET, entered into the FET P&SA, with Brookfield and Brookfield Guarantors pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction is subject to customary closing conditions, including approval from the FERC and review by the CFIUS. CFIUS completed its review on April 14, 2022 and FERC approved the transaction on April 21, 2022. The transaction is expected to close at the end of May 2022. KATCo, which is currently a subsidiary of FET, will become a wholly owned subsidiary of FE prior to the closing of the transaction and will remain in the Regulated Transmission segment.
Corporate/Other reflects corporate support and other costs not charged or attributable to the Utilities or Transmission Companies, including FE’s retained Pension and OPEB assets and liabilities of the FES Debtors, interest expense on FE’s
holding company debt and other investments or businesses that do not constitute an operating segment. Reconciling adjustments for the elimination of inter-segment transactions are shown separately in the following table of Segment Financial Information. As of September 30, 2021,March 31, 2022, 67 MWs of electric generating capacity, representing AE Supply’s OVEC capacity entitlement, wasis included in continuing operations of Corporate/Other. As of September 30, 2021,March 31, 2022, Corporate/Other had approximately $7.4 billion of FE holding company debt.
Financial information for each of FirstEnergy’s reportablebusiness segments and reconciliations to consolidated amounts is presented in the tables below:below. FirstEnergy evaluates segment performance based on Net income (loss).
Segment Financial Information
| | For the Three Months Ended | For the Three Months Ended | | Regulated Distribution | | Regulated Transmission | | Corporate/ Other | | Reconciling Adjustments | | FirstEnergy Consolidated | For the Three Months Ended | | Regulated Distribution | | Regulated Transmission | | Corporate/ Other | | Reconciling Adjustments | | FirstEnergy Consolidated |
| | | (In millions) | | | (In millions) |
| | September 30, 2021 | | |
| | March 31, 2022 | | March 31, 2022 | |
| External revenues | | External revenues | | $ | 2,532 | | | $ | 451 | | | $ | 6 | | | $ | — | | | $ | 2,989 | |
| Internal revenues | | Internal revenues | | 57 | | | 2 | | | — | | | (59) | | | — | |
| Total revenues | | Total revenues | | $ | 2,589 | | | $ | 453 | | | $ | 6 | | | $ | (59) | | | $ | 2,989 | |
| Depreciation | | Depreciation | | 235 | | | 86 | | | 2 | | | 17 | | | 340 | |
| Amortization (deferral) of regulatory assets, net | | Amortization (deferral) of regulatory assets, net | | (38) | | | 1 | | | — | | | — | | | (37) | |
| | Miscellaneous income (expense), net | | Miscellaneous income (expense), net | | 85 | | | 6 | | | 17 | | | (2) | | | 106 | |
| | Interest expense | | Interest expense | | 129 | | | 59 | | | 127 | | | (2) | | | 313 | |
| Income taxes (benefits) | | Income taxes (benefits) | | 69 | | | 41 | | | (27) | | | — | | | 83 | |
| Net income (loss) | | Net income (loss) | | 265 | | | 125 | | | (102) | | | — | | | 288 | |
| Property additions | | Property additions | | $ | 317 | | | $ | 197 | | | $ | 6 | | | $ | — | | | $ | 520 | |
| | | March 31, 2021 | | March 31, 2021 | |
| External revenues | External revenues | | $ | 2,708 | | | $ | 411 | | | $ | 5 | | | $ | — | | | $ | 3,124 | | External revenues | | $ | 2,321 | | | $ | 401 | | | $ | 4 | | | $ | — | | | $ | 2,726 | |
| Internal revenues | Internal revenues | | 51 | | | 4 | | | — | | | (55) | | | — | | Internal revenues | | 49 | | | 4 | | | — | | | (53) | | | — | |
| Total revenues | Total revenues | | $ | 2,759 | | | $ | 415 | | | $ | 5 | | | $ | (55) | | | $ | 3,124 | | Total revenues | | $ | 2,370 | | | $ | 405 | | | $ | 4 | | | $ | (53) | | | $ | 2,726 | |
| Depreciation | Depreciation | | 229 | | | 82 | | | (1) | | | 16 | | | 326 | | Depreciation | | 226 | | | 81 | | | 1 | | | 15 | | | 323 | |
| Amortization of regulatory assets, net | Amortization of regulatory assets, net | | 29 | | | 1 | | | — | | | — | | | 30 | | Amortization of regulatory assets, net | | 87 | | | 5 | | | — | | | — | | | 92 | |
| | Miscellaneous income (expense), net | Miscellaneous income (expense), net | | 102 | | | 12 | | | 23 | | | (1) | | | 136 | | Miscellaneous income (expense), net | | 107 | | | 11 | | | 22 | | | (5) | | | 135 | |
| | Interest expense | Interest expense | | 133 | | | 62 | | | 89 | | | (1) | | | 283 | | Interest expense | | 128 | | | 61 | | | 101 | | | (5) | | | 285 | |
| Income taxes (benefits) | Income taxes (benefits) | | 108 | | | 23 | | | (43) | | | — | | | 88 | | Income taxes (benefits) | | 82 | | | 33 | | | (28) | | | — | | | 87 | |
| Income (loss) from continuing operations | | 416 | | | 70 | | | (70) | | | — | | | 416 | | |
| Net income (loss) | | Net income (loss) | | 313 | | | 109 | | | (87) | | | — | | | 335 | |
| Property additions | Property additions | | $ | 326 | | | $ | 202 | | | $ | 14 | | | $ | — | | | $ | 542 | | Property additions | | $ | 321 | | | $ | 273 | | | $ | 10 | | | $ | — | | | $ | 604 | |
| | | 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 | | |
| As of March 31, 2022 | | As of March 31, 2022 | |
| Total assets | Total assets | | $ | 30,546 | | | $ | 12,660 | | | $ | 648 | | | $ | — | | | $ | 43,854 | | Total assets | | $ | 30,883 | | | $ | 13,070 | | | $ | 664 | | | $ | — | | | $ | 44,617 | |
| Total goodwill | Total goodwill | | $ | 5,004 | | | $ | 614 | | | $ | — | | | $ | — | | | $ | 5,618 | | Total goodwill | | $ | 5,004 | | | $ | 614 | | | $ | — | | | $ | — | | | $ | 5,618 | |
| | As of December 31, 2020 | | |
| As of December 31, 2021 | | As of December 31, 2021 | |
| Total assets | Total assets | | $ | 30,855 | | | $ | 12,592 | | | $ | 1,017 | | | $ | — | | | $ | 44,464 | | Total assets | | $ | 30,812 | | | $ | 13,237 | | | $ | 1,383 | | | $ | — | | | $ | 45,432 | |
| Total goodwill | Total goodwill | | $ | 5,004 | | | $ | 614 | | | $ | — | | | $ | — | | | $ | 5,618 | | 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 3,580 MWs of regulated electric generation capacity located primarily in West Virginia and Virginia. The segment’s results reflect the costs of securing and delivering electric generation from transmission facilities to customers, including the deferral and amortization of certain related costs.
The Regulated Transmission segment provides transmission infrastructure owned and operated by the Transmission Companies and certain of FirstEnergy’s utilities (JCP&L, MP, PE and WP) to transmit electricity from generation sources to distribution facilities. The segment’s revenues are primarily derived from forward-looking formula rates. Forward-looking rates recover costs that FERC 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 rate base and costs. The segment’s results also reflect the net transmission expenses related to the delivery of electricity on FirstEnergy’s transmission facilities. On November 6, 2021, FirstEnergy, along with FET, entered into the FET P&SA, with Brookfield and Brookfield Guarantors pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction is subject to customary closing conditions, including approval from the FERC and review by the CFIUS. CFIUS completed its review on April 14, 2022 and FERC approved the transaction on April 21, 2022. The transaction is expected to close at the end of May 2022.
Corporate/Other reflects corporate support and other costs not charged or attributable to the Utilities or Transmission Companies, including FE’s retained Pension and OPEB assets and liabilities of the FES Debtors, interest expense on FE’s holding company debt and other investments or businesses that do not constitute an operating segment. Additionally, reconciling adjustments for the elimination of inter-segment transactions are included in Corporate/Other. As of September 30, 2021,March 31, 2022, 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, 2021,March 31, 2022, Corporate/Other had approximately $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.
FirstEnergy's core values encompass what matters most to the company. They guide the decisions we make and the actions we take. FirstEnergy's core values should inspire our actions today and shine a light on who we aspire to be in the future.
FirstEnergy Core Values:
•Integrity: We always act ethically with honesty, humility and accountability.
•Safety: We keep ourselves and others safe.
•Diversity, Equity and Inclusion: We embrace differences, ensure every employee is treated fairly and create a culture where everyone feels they belong.
•Performance Excellence: We pursue excellence and seek opportunities for growth, innovation and continuous improvement.
•Stewardship: We positively impact our customers, communities and other stakeholders, and strive to protect the environment.
Employees are encouraged and expected to have conversations with their leaders and peers about the core values and FirstEnergy's commitment to building a culture centered on integrity.
At FirstEnergy, we are dedicated to staying true to our mission and core values. We understand the impact our company can make in the world around us, which means pursuing initiatives and goals that align with our foundational principles, support our ESG and strategic priorities, and positively impact our stakeholders.
To solidify our role as an industry leader, we have developed a long-term strategy with priorities that are centered on our mission statement. These priorities reflect a strong foundation with an unrelenting customer focus that emphasizes modern experiences, new growth and affordable energy bills, and is leading and enabling the energy transition to a clean, resilient and secure electric grid.
We are proud of the steps we’ve already taken to demonstrate our commitment to our strategy and look forward to improving our performance and executing on these strategic priorities.
FirstEnergy's Business
As a fully regulated electric utility, FirstEnergy is focused on stable and predictable earnings and cash flow from its Regulated Distribution and Regulated Transmission business unitsbusinesses that deliver enhanced customer service and reliability.
FirstEnergy's Regulated Distribution business is comprised of a geographically and regulatory diverse collection of electric utilities delivering customer-focused sustainable growth. This business operates in a territory of 65,000 square miles, across the Midwest & Mid-Atlantic regions, one of the largest contiguous territories in the United States, and allows the Utilities to be uniquely positioned for growth through investments that strengthen the grid and enable the clean energy transition, with approximately $9 billion in investment plans (or 53% of the total FirstEnergy investment plan) from 2021 to 2025. Through its investment plan, Regulated Distribution has improved reliability and added operating flexibility to the distribution infrastructure, which provide benefits to the customers and communities those Utilities serve.
In addition to our investments to rebuild critical infrastructure and improve reliability, current and future distribution investment opportunities that supports FE's dividend.support our ESG and strategic priorities include:
•Advanced Metering Infrastructure – install smart meters and related infrastructure;
•Grid Modernization Investments that support distribution automation and voltage and var optimization;
•Installation of electric vehicle charging stations;
•Connected LED Streetlights – strategic goal to convert 100% of streetlights owned by the Utilities to smart LEDs by 2030;
•Alternative Generation that lowers our carbon footprint;
•Information Systems – enhance our core information infrastructure of our distribution systems; and
•Supporting economic development to attract new business.
FirstEnergy's Regulated Transmission business is a premier, high quality transmission business, with over 24,000 miles of transmission lines in operation and one of the largest transmission systems in PJM. The Transmission Companies and certain of FirstEnergy's utilities (JCP&L, MP, PE and WP) are focused on "Energizing the Future" with investments that support clean
energy, improve grid reliability and resiliency and support a carbon neutral future. "Energizing the Future" is the centerpiece of FirstEnergy’s regulated investment strategy with all investments recovered under FERC-regulated forward-looking formula rates, and approximately $8 billion in investment plans (or 45% of the total FirstEnergy investment plan) from 2021 to 2025. FirstEnergy believes there are incremental investment opportunities for its existing transmission infrastructure of over $20 billion beyond those identified through 2025, which are expected to strengthen grid and cyber-security and make the transmission system more reliable, robust, secure and resistant to extreme weather events, with improved operational flexibility.
In addition to our Energizing the Future investments, current and future transmission investment opportunities that support our ESG and strategic priorities include:
•Transmission Asset Health Center: real-time monitoring to reduce outages and lower expenses;
•Integrating digital technology to enhance equipment monitoring and lower costs;
•Exploring real-time technologies: emerging technologies to enhance data collection; and
•Making smart investments to modernize the grid to integrate future renewables.
On JulyNovember 6, 2021, FirstEnergy, along with FET, entered into the FET P&SA with Brookfield and the Brookfield Guarantors, pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that Brookfield will own 19.9% of the issued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction is subject to customary closing conditions, including approval from the FERC and review by the CFIUS. CFIUS completed its review on April 14, 2022 and FERC approved the transaction on April 21, 2020,2022. The transaction is expected to close at the end of May 2022.
On December 13, 2021, FE privately issued to BIP Securities II-B L.P., an affiliate of Blackstone Infrastructure Partners L.P., 25,588,535 shares of FE’s common stock, par value $0.10 per share, at a complaintprice of $39.08 per share, representing an investment of $1.0 billion. In addition, FE nominated Sean T. Klimczak, the Blackstone Infrastructure Partners-selected representative, to stand for election to the FE Board at the 2022 annual shareholders’ meeting. On April 21, 2022, FERC approved the Blackstone representative’s ability to participate as a voting member of the FE Board.
On October 18, 2021, FE, FET, the Utilities, and supporting affidavit containing federal criminal allegations were unsealed against the now former Ohio House Speaker Larry HouseholderTransmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and other individualsRegulated Transmission businesses, and entities allegedly affiliatedeach of the operating companies within the businesses. See “Capital Resources and Liquidity" below for additional details.
Together, these transactions enhance FirstEnergy's credit profile, provide funding for the strategic investments discussed above, and address all of FirstEnergy's equity plans, with Mr. Householder. Also,the exception of annual issuances of up to $100 million under regular dividend reinvestment plans and employee benefit stock investment plans, through at least 2025.
FE Forward
FirstEnergy is also working to transform how it conducts business and serves its customers, to achieve value potential in a sustainable way and help FirstEnergy achieve its strategic priorities. In February 2021, FirstEnergy announced a new initiative to build upon FirstEnergy’s strong operations and business fundamentals and deliver immediate value and resilience, with substantial working capital improvements and capital efficiencies ramping up through 2024. Called "FE Forward," the initiative plays a critical first step in FirstEnergy’s transformation journey as it looks to enhance the organization, focus on July 21, 2020,performance excellence, and refocus the investment strategy through a range of opportunities.
By 2024, FE Forward is projected to generate approximately $380 million in annualized capital expenditure efficiencies, as well as, approximately $250 million in working capital improvements by 2023. This program includes an estimated $150 million of costs to achieve through 2023, which are expected to be self-funded through these efficiencies. FirstEnergy plans to redeploy the capital expenditure efficiencies in a more diverse capital program that over the long-term, continues to support our strategy as discussed above and using 2022 as baseline, operating expenses are projected to naturally decline 1% annually allowing for strategic flexibility and customer affordability. 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 investigation,long-term continues to support a smarter and cleaner electric grid, and maintain affordable customer bills. Specifically, FirstEnergy received subpoenas for records fromcurrently expects to redeploy these capital efficiencies into several projects, including, grid modernization, energy efficiency programs, smart meter and electric vehicle charging, and solar generation investments. As part of these efforts, FirstEnergy will evaluate the U.S. Attorney’s Officeappropriate cadence to initiate rates cases on a state-by-state basis to best support FirstEnergy’s customer-focused strategic priorities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| FE Forward Expected Capital Expenditure Efficiencies and Working Capital Improvements | | 2021
Actual | | 2022
Forecast | | 2023
Forecast | | 2024
Forecast | | 2025
Forecast | | Total |
| | (In millions) |
| Gross Capital Expenditure Efficiencies | | $ | 210 | | | $ | 280 | | | $ | 380 | | | $ | 380 | | | $ | 380 | | | $ | 1,630 | |
| Cost to Achieve (+/- 10%) | | (40) | | | (80) | | | (30) | | | — | | | — | | | (150) | |
| Net Capital Expenditure Efficiencies | | $ | 170 | | | $ | 200 | | | $ | 350 | | | $ | 380 | | | $ | 380 | | | $ | 1,480 | |
| Working Capital Improvements | | 130 | | | 120 | | | — | | | — | | | — | | | 250 | |
| Total Cash Flow Improvements | | $ | 300 | | | $ | 320 | | | $ | 350 | | | $ | 380 | | | $ | 380 | | | $ | 1,730 | |
ClimateStory
Our long-term strategy reiterates and supports our position that climate change is among the most important issues of our time and our commitment to doing our part to ensure a bright and sustainable future for the S.D. Ohio.communities we serve. As part of our Climate Strategy, we’re focused on enabling our customers to thrive in a reduced carbon future. This includes transmission and distribution investments discussed above, investments in solar generation and supporting clean energy options, our efforts towards electrifying the economy, and driving energy efficiency.
Additionally, we plan to reduce our company-wide GHG emissions within our direct operational control (Scope 1) by 30% by 2030 (from our 2019 baseline), as we work toward carbon neutrality by 2050. Key steps in reducing our emissions and improving the efficiency of our operations include:
•Replacing Aging Equipment: We are responsibly replacing aging equipment on our transmission system that contains SF6, a greenhouse gas commonly used in electric utility equipment;
•Electrifying our Vehicle Fleet: We are targeting 30% electrification of our light-duty and aerial truck fleet by 2030 and 100% electrification by 2050. To reach our electrification goal, we’ve committed to 100% electric or hybrid vehicle purchases for our light-duty and aerial truck fleet moving forward, beginning with the first hybrid electric vehicle additions to the fleet in 2021;
•Using Generation Efficiencies and Flexibility: We are utilizing operational flexibilities, such as heat rate improvements through equipment upgrades, operational monitoring systems, and auxiliary power reductions at our generation facilities that will enable us to reach our interim 2030 goal of a 30% GHG reduction from 2019 levels, while continuing to provide customers with safe and reliable electricity; and
•Transitioning Away from Coal Generation: We expect to thoughtfully transition away from our regulated coal generation fleet no later than 2050, and in 2021, FirstEnergy was not awaresought approval to construct a solar generation source of at least 50 MWs in West Virginia. Also in 2021, FirstEnergy filed plans with the WVPSC to comply with EPA ELG rules that would keep MP’s generation plants responsibly operating beyond 2028, however, FirstEnergy intends to begin a broad stakeholder dialogue regarding planned operational end dates of 2035 and 2040 for Ft. Martin and Harrison, respectively, which further supports our Climate Strategy.
Future resource plans to achieve carbon reductions, including potential changes in operations or any determination of retirement dates of the criminal allegations, affidavit 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 subpoenas before July 21, 2020.continued collection of net plant in rates after retirement, securitization, sale, impairment or regulatory disallowances. If MP is unable to recover these costs, it could have a material adverse effect on FirstEnergy’s and/or MP’s financial condition, results of operations, and cash flow.
HB 6 and Related Investigations
On July 21, 2021, FE entered into a three-year DPA with the U.S. Attorney’s Office that, subject to court proceedings, resolves the U.S. Attorney’s Office investigation into FirstEnergy relating to FirstEnergy’s lobbying and governmental affairs activities concerning HB 6 which, amongrelated to the federal criminal allegations made in July 2020, against former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. Among other things, the DPA required FE to pay a monetary penalty of $230 million, which FE paid in the third quarter of 2021. Under the DPA, FE agreed to the filing of a criminal information charging FE with one count of conspiracy to commit honest services wire fraud. The $230 million payment 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, theThe criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA.
In addition to the subpoenas referenced above, theThe OAG, certain FE shareholders and FirstEnergyFE customers filed several lawsuits against FirstEnergy and certain current and former directors, officers and other employees, each relating to the allegations against the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. On February 9, 2022, FE, acting through the SLC, agreed to a settlement term sheet to resolve multiple shareholder derivative lawsuits that were filed in the S.D. Ohio,
the N.D. Ohio, and the Ohio Court of Common Pleas, Summit County. On March 11, 2022, the parties executed a stipulation and agreement of settlement, and filed a motion the same day requesting preliminary settlement approval in the S.D. Ohio. The settlement agreement, if approved, will fully resolve these shareholder derivative lawsuits and includes a series of corporate governance enhancements, that has resulted or is expected to result in the following:
•Six members of the FE Board, Messrs. Michael J. Anderson, Donald T. Misheff, Thomas N. Mitchell, Christopher D. Pappas and Luis A. Reyes, and Ms. Julia L. Johnson, are not standing for re-election at FE’s 2022 annual shareholder meeting;
•A special FE Board committee of at least three recently appointed independent directors will be formed to initiate a review process of the current senior executive team, to begin within 30 days of the 2022 annual shareholder meeting;
•The FE Board will oversee FE’s lobbying and political activities, including periodically reviewing and approving political and lobbying action plans prepared by management;
•An FE Board committee of recently appointed independent directors will oversee the implementation and third-party audits of the FE Board-approved action plans with respect to political and lobbying activities;
•FE will implement enhanced disclosure to shareholders of political and lobbying activities, including enhanced disclosure in its annual proxy statement; and
•FE will further align financial incentives of senior executives to proactive compliance with legal and ethical obligations.
The settlement also includes a payment to FirstEnergy of $180 million, to be paid by insurance after court approval, less any court-ordered attorney’s fees awarded to plaintiffs.
In addition, on August 10, 2020, the SEC, through its Division of Enforcement, issued an order directing an investigation of possible securities laws violations by FE, and on September 1, 2020, issued subpoenas to FE and certain FE officers. Subsequently, on April 28, 2021, the SEC issued an additional subpoena to FE. Further, in a letterletters dated January 26, and February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the Divisionit is investigating FirstEnergy’s lobbying and governmental affairs activities concerning HB 6.
A committee of independent membersFirstEnergy has taken numerous steps to address challenges posed by the HB 6 investigations and improve its compliance culture, including the ongoing refreshment of the FE Board, was put in place to direct an internal investigation related to the ongoing government investigations. In addition, the FE Board formed a sub-committeehiring of the Audit Committee to, together with the FE Board, assess FirstEnergy’s compliance program and implement potential changes, as appropriate. FirstEnergy has taken the following steps to address current challenges and improve its compliance culture:
•Certain members ofkey senior management, including the former Chief Executive Officer, were terminated for violating certain FirstEnergy policies and code of conduct.
•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. In March 2021, Mr. Strah was elected to the position of Chief Executive Officer and a Director of the FE Board.
•FirstEnergy’s Chief Legal Officer 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.
•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 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. 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 Code of Business Conduct, which:
◦Promotes and emphasizes FirstEnergy’s commitment to compliance 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 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.
•During the third quarter of 2021, FirstEnergy appointed new senior leaders committed to supporting transparency and integrity, including:
◦Vice President of Internal Audit,
◦Vice President and Chief Risk Officer,strengthening and
◦Director of Ethics & Compliance.
•FirstEnergy completed additional steps toward enhancing FirstEnergy’s compliance culture through several initiatives. Although the overall compliance program, including:
◦Completionoutcome of the Office of Ethics & Compliance charter,
◦Delivered a Chief Ethics & Compliance Officer-led Code Awareness training to senior leaderHB 6 investigations and individuals with significant roles in FirstEnergy’s control environment,
◦Conducted leader-led training on the Code of Business 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 appropriatestate regulatory agencies to address these amounts.
audits remain unknown, FirstEnergy has also taken several 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 of 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 is committed to pursuing an open dialogue in an appropriate manner with the 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 the PUCO staff, and interested
stakeholders in the regulatory process, is an important step towards removing uncertainties about regulatory concerns in Ohio and critical to re-establishing trust in FirstEnergy and restoring its reputation.Companies.
Despite the many disruptions FirstEnergy is currently facing, the leadership team remains committed and focused on executing its strategy and running the business. See “Outlook - Other Legal Proceedings” below for additional details on the government investigations, the DPA, and subsequent litigation surrounding the investigation of HB 6. See also “Outlook - State Regulation - Ohio” below for details on the PUCO proceeding reviewing political and charitable spending and legislative activity in response to the investigation of HB 6. The outcome of the government investigations, PUCO proceedings, legislative activity, and any of these lawsuits is uncertain and could have a material adverse effect on FirstEnergy’s financial condition, results of operations, and cash flows. As discussed below, FirstEnergy has 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, for among other things, to address the outcomes of the ongoing government investigations and related lawsuits and regulatory actions.
On October 18, 2021, FE, FET, the Utilities, and the Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities with 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 $4.5 billion. The 2021 Credit Facilities are available until October 18, 2026, as follows:
•FE and FET, $1.0 billion revolving credit facility
•Ohio Companies, $800 million revolving credit facility
•Pennsylvania Companies, $950 million revolving credit facility
•JCP&L, $500 million revolving credit facility
•MP and PE, $400 million revolving credit facility
•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 each borrower under the respective facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses.
FirstEnergy is 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 and 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.
| | | | | | | | | | | | | | | | | | | | |
| | 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, 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. 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 24,000 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 recovered under forward-looking formula rates at the Transmission Companies effective January 1, 2021. Regulated Transmission has also experienced significant growth as part of its Energizing the Future transmission plan with plans to invest up to $5.15 billion in capital from 2020 to 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.
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 ongoing 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 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.
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 environment better and our communities stronger.
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. In addition, FirstEnergy has also set a fleet electrification goal in which beginning in 2021, FirstEnergy plans for 100% of new purchases for its 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 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.
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 Strategic Plan includes specific targets related to:
•Enhancing a culture of compliance through transparency and accountability;
•Enabling a smarter, more resilient electric system;
•Embracing innovation across the organization;
•Meeting the challenges of climate change;
•Developing a diverse and inclusive workforce, including 2025 goals to increase the number of employees and leaders from underrepresented racial and ethnic groups by 30% each and targeting 20% of supply chain spend to be with diverse suppliers;
•Building collaborative relationships, marked by trust and respect, with all stakeholders;
•Strengthening FirstEnergy’s safety-first culture; and
•Delivering strong and predictable financial results.
FINANCIAL OVERVIEW AND RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| | | | | | | | | | | | | | | | |
| Revenues | | $ | 3,124 | | | $ | 3,022 | | | $ | 102 | | | 3 | % | | $ | 8,472 | | | $ | 8,253 | | | $ | 219 | | | 3 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Operating expenses | | 2,493 | | | 2,301 | | | 192 | | | 8 | % | | 6,970 | | | 6,485 | | | 485 | | | 7 | % |
| | | | | | | | | | | | | | | | |
| Operating income | | 631 | | | 721 | | | (90) | | | (12) | % | | 1,502 | | | 1,768 | | | (266) | | | (15) | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Other expenses, net | | (127) | | | (145) | | | 18 | | | 12 | % | | (422) | | | (855) | | | 433 | | | 51 | % |
| | | | | | | | | | | | | | | | |
| Income before income taxes | | 504 | | | 576 | | | (72) | | | (13) | % | | 1,080 | | | 913 | | | 167 | | | 18 | % |
| | | | | | | | | | | | | | | | |
| Income taxes | | 88 | | | 116 | | | (28) | | | (24) | % | | 271 | | | 122 | | | 149 | | | NM |
| | | | | | | | | | | | | | | | |
| Income from continuing operations | | 416 | | | 460 | | | (44) | | | (10) | % | | 809 | | | 791 | | | 18 | | | 2 | % |
| | | | | | | | | | | | | | | | |
| Discontinued operations, net of tax | | 47 | | | (6) | | | 53 | | | NM | | 47 | | | 46 | | | 1 | | | NM |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 463 | | | $ | 454 | | | $ | 9 | | | 2 | % | | $ | 856 | | | $ | 837 | | | $ | 19 | | | 2 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
*NM= not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | For the Three Months Ended March 31, | | |
| | 2022 | | 2021 | | Change | | | | | | |
| | | | | | | | | | | | | | | | |
| Revenues | | $ | 2,989 | | | $ | 2,726 | | | $ | 263 | | | 10 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Operating expenses | | 2,430 | | | 2,167 | | | 263 | | | 12 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Operating income | | 559 | | | 559 | | | — | | | — | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Other expenses, net | | (188) | | | (137) | | | (51) | | | (37) | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Income before income taxes | | 371 | | | 422 | | | (51) | | | (12) | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Income taxes | | 83 | | | 87 | | | (4) | | | (5) | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 288 | | | $ | 335 | | | $ | (47) | | | (14) | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
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 10,9, “Segment Information,” of the Notes to Consolidated Financial Statements.
Summary of Results of Operations — Third Quarter 2021First Three Months of 2022 Compared with Third Quarter 2020First Three Months of 2021
Financial results for FirstEnergy’s business segments in the third quarterfirst three months of 20212022 and 20202021 were as follows:
| | Third Quarter 2021 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated | |
| First Three Months 2022 Financial Results | | First Three Months 2022 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | | (In millions) | | | (In millions) |
| Revenues: | Revenues: | | | | | | | Revenues: | | | | | | |
| Electric | Electric | | $ | 2,705 | | | $ | 411 | | | $ | (33) | | | $ | 3,083 | | Electric | | $ | 2,532 | | | $ | 451 | | | $ | (39) | | | $ | 2,944 | |
| Other | Other | | 54 | | | 4 | | | (17) | | | 41 | | Other | | 57 | | | 2 | | | (14) | | | 45 | |
| | Total Revenues | Total Revenues | | 2,759 | | | 415 | | | (50) | | | 3,124 | | Total Revenues | | 2,589 | | | 453 | | | (53) | | | 2,989 | |
| | Operating Expenses: | Operating Expenses: | | | | | | | | | Operating Expenses: | | | | | | | | |
| Fuel | Fuel | | 132 | | | — | | | — | | | 132 | | Fuel | | 140 | | | — | | | — | | | 140 | |
| Purchased power | Purchased power | | 869 | | | — | | | 5 | | | 874 | | Purchased power | | 870 | | | — | | | 5 | | | 875 | |
| Other operating expenses | Other operating expenses | | 747 | | | 138 | | | (29) | | | 856 | | Other operating expenses | | 798 | | | 90 | | | (68) | | | 820 | |
| | Provision for depreciation | Provision for depreciation | | 229 | | | 82 | | | 15 | | | 326 | | Provision for depreciation | | 235 | | | 86 | | | 19 | | | 340 | |
| | Amortization of regulatory assets, net | | 29 | | | 1 | | | — | | | 30 | | |
| Amortization (deferral) of regulatory assets, net | | Amortization (deferral) of regulatory assets, net | | (38) | | | 1 | | | — | | | (37) | |
| General taxes | General taxes | | 206 | | | 62 | | | 7 | | | 275 | | General taxes | | 215 | | | 66 | | | 11 | | | 292 | |
| | Total Operating Expenses | Total Operating Expenses | | 2,212 | | | 283 | | | (2) | | | 2,493 | | Total Operating Expenses | | 2,220 | | | 243 | | | (33) | | | 2,430 | |
| | Operating Income (Loss) | Operating Income (Loss) | | 547 | | | 132 | | | (48) | | | 631 | | Operating Income (Loss) | | 369 | | | 210 | | | (20) | | | 559 | |
| | Other Income (Expense): | Other Income (Expense): | | | | | | | | | Other Income (Expense): | | | | | | | | |
| | | Miscellaneous income, net | Miscellaneous income, net | | 102 | | | 12 | | | 22 | | | 136 | | Miscellaneous income, net | | 85 | | | 6 | | | 15 | | | 106 | |
| | Interest expense | Interest expense | | (133) | | | (62) | | | (88) | | | (283) | | Interest expense | | (129) | | | (59) | | | (125) | | | (313) | |
| Capitalized financing costs | Capitalized financing costs | | 8 | | | 11 | | | 1 | | | 20 | | Capitalized financing costs | | 9 | | | 9 | | | 1 | | | 19 | |
| Total Other Expense | Total Other Expense | | (23) | | | (39) | | | (65) | | | (127) | | Total Other Expense | | (35) | | | (44) | | | (109) | | | (188) | |
| | Income (Loss) Before Income Taxes (Benefits) | Income (Loss) Before Income Taxes (Benefits) | | 524 | | | 93 | | | (113) | | | 504 | | Income (Loss) Before Income Taxes (Benefits) | | 334 | | | 166 | | | (129) | | | 371 | |
| Income taxes (benefits) | Income taxes (benefits) | | 108 | | | 23 | | | (43) | | | 88 | | Income taxes (benefits) | | 69 | | | 41 | | | (27) | | | 83 | |
| Income (Loss) From Continuing Operations | | 416 | | | 70 | | | (70) | | | 416 | | |
| Discontinued operations, net of tax | | — | | | — | | | 47 | | | 47 | | |
| | Net Income (Loss) | Net Income (Loss) | | $ | 416 | | | $ | 70 | | | $ | (23) | | | $ | 463 | | Net Income (Loss) | | $ | 265 | | | $ | 125 | | | $ | (102) | | | $ | 288 | |
|
| | Third Quarter 2020 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated | |
| First Three Months 2021 Financial Results | | First Three Months 2021 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | | (In millions) | | | (In millions) |
| Revenues: | Revenues: | | | | | | | Revenues: | | | | | | |
| | Electric | Electric | | $ | 2,600 | | | $ | 408 | | | $ | (35) | | | $ | 2,973 | | Electric | | $ | 2,316 | | | $ | 401 | | | $ | (34) | | | $ | 2,683 | |
| Other | Other | | 61 | | | 5 | | | (17) | | | 49 | | Other | | 54 | | | 4 | | | (15) | | | 43 | |
| | Total Revenues | Total Revenues | | 2,661 | | | 413 | | | (52) | | | 3,022 | | Total Revenues | | 2,370 | | | 405 | | | (49) | | | 2,726 | |
| | Operating Expenses: | Operating Expenses: | | | | | | | | | Operating Expenses: | | | | | | | | |
| Fuel | Fuel | | 101 | | | — | | | — | | | 101 | | Fuel | | 118 | | | — | | | — | | | 118 | |
| Purchased power | Purchased power | | 762 | | | — | | | 4 | | | 766 | | Purchased power | | 714 | | | — | | | 4 | | | 718 | |
| Other operating expenses | Other operating expenses | | 913 | | | 86 | | | (62) | | | 937 | | Other operating expenses | | 728 | | | 67 | | | (43) | | | 752 | |
| | Provision for depreciation | Provision for depreciation | | 223 | | | 79 | | | 14 | | | 316 | | Provision for depreciation | | 226 | | | 81 | | | 16 | | | 323 | |
| | Deferral of regulatory assets, net | | (91) | | | — | | | — | | | (91) | | |
| Amortization of regulatory assets, net | | Amortization of regulatory assets, net | | 87 | | | 5 | | | — | | | 92 | |
| General taxes | General taxes | | 199 | | | 59 | | | 14 | | | 272 | | General taxes | | 201 | | | 62 | | | 10 | | | 273 | |
| | Gain on sale of Yards Creek | | Gain on sale of Yards Creek | | (109) | | | — | | | — | | | (109) | |
| Total Operating Expenses | Total Operating Expenses | | 2,107 | | | 224 | | | (30) | | | 2,301 | | Total Operating Expenses | | 1,965 | | | 215 | | | (13) | | | 2,167 | |
| | Operating Income (Loss) | Operating Income (Loss) | | 554 | | | 189 | | | (22) | | | 721 | | Operating Income (Loss) | | 405 | | | 190 | | | (36) | | | 559 | |
| | Other Income (Expense): | Other Income (Expense): | | | | | | | | | Other Income (Expense): | | | | | | | | |
| | Miscellaneous income, net | Miscellaneous income, net | | 81 | | | 7 | | | 12 | | | 100 | | Miscellaneous income, net | | 107 | | | 11 | | | 17 | | | 135 | |
| | Interest expense | Interest expense | | (124) | | | (55) | | | (87) | | | (266) | | Interest expense | | (128) | | | (61) | | | (96) | | | (285) | |
| Capitalized financing costs | Capitalized financing costs | | 11 | | | 9 | | | 1 | | | 21 | | Capitalized financing costs | | 11 | | | 2 | | | — | | | 13 | |
| Total Other Expense | Total Other Expense | | (32) | | | (39) | | | (74) | | | (145) | | Total Other Expense | | (10) | | | (48) | | | (79) | | | (137) | |
| | Income (Loss) Before Income Taxes (Benefits) | Income (Loss) Before Income Taxes (Benefits) | | 522 | | | 150 | | | (96) | | | 576 | | Income (Loss) Before Income Taxes (Benefits) | | 395 | | | 142 | | | (115) | | | 422 | |
| Income taxes (benefits) | Income taxes (benefits) | | 109 | | | 35 | | | (28) | | | 116 | | Income taxes (benefits) | | 82 | | | 33 | | | (28) | | | 87 | |
| Income (Loss) From Continuing Operations | | 413 | | | 115 | | | (68) | | | 460 | | |
| Discontinued operations, net of tax | | — | | | — | | | (6) | | | (6) | | |
| | Net Income (Loss) | Net Income (Loss) | | $ | 413 | | | $ | 115 | | | $ | (74) | | | $ | 454 | | Net Income (Loss) | | $ | 313 | | | $ | 109 | | | $ | (87) | | | $ | 335 | |
|
| | Changes Between Third Quarter 2021 and Third Quarter 2020 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated | |
| Changes Between First Three Months 2022 and First Three Months 2021 Financial Results | | Changes Between First Three Months 2022 and First Three Months 2021 Financial Results | | Regulated Distribution | | Regulated Transmission | | Corporate/Other and Reconciling Adjustments | | FirstEnergy Consolidated |
| | | | (In millions) | | | (In millions) |
| Revenues: | Revenues: | | | | | | | Revenues: | | | | | | |
| | Electric | Electric | | $ | 105 | | | $ | 3 | | | $ | 2 | | | $ | 110 | | Electric | | $ | 216 | | | $ | 50 | | | $ | (5) | | | $ | 261 | |
| Other | Other | | (7) | | | (1) | | | — | | | (8) | | Other | | 3 | | | (2) | | | 1 | | | 2 | |
| | Total Revenues | Total Revenues | | 98 | | | 2 | | | 2 | | | 102 | | Total Revenues | | 219 | | | 48 | | | (4) | | | 263 | |
| | Operating Expenses: | Operating Expenses: | | | | | | | | | Operating Expenses: | | | | | | | | |
| Fuel | Fuel | | 31 | | | — | | | — | | | 31 | | Fuel | | 22 | | | — | | | — | | | 22 | |
| Purchased power | Purchased power | | 107 | | | — | | | 1 | | | 108 | | Purchased power | | 156 | | | — | | | 1 | | | 157 | |
| Other operating expenses | Other operating expenses | | (166) | | | 52 | | | 33 | | | (81) | | Other operating expenses | | 70 | | | 23 | | | (25) | | | 68 | |
| | Provision for depreciation | Provision for depreciation | | 6 | | | 3 | | | 1 | | | 10 | | Provision for depreciation | | 9 | | | 5 | | | 3 | | | 17 | |
| | Amortization (deferral) of regulatory assets, net | Amortization (deferral) of regulatory assets, net | | 120 | | | 1 | | | — | | | 121 | | Amortization (deferral) of regulatory assets, net | | (125) | | | (4) | | | — | | | (129) | |
| General taxes | General taxes | | 7 | | | 3 | | | (7) | | | 3 | | General taxes | | 14 | | | 4 | | | 1 | | | 19 | |
| | Gain on sale of Yards Creek | | Gain on sale of Yards Creek | | 109 | | | — | | | — | | | 109 | |
| | Total Operating Expenses | Total Operating Expenses | | 105 | | | 59 | | | 28 | | | 192 | | Total Operating Expenses | | 255 | | | 28 | | | (20) | | | 263 | |
| | Operating Income (Loss) | Operating Income (Loss) | | (7) | | | (57) | | | (26) | | | (90) | | Operating Income (Loss) | | (36) | | | 20 | | | 16 | | | — | |
| | Other Income (Expense): | Other Income (Expense): | | | | | | | | | Other Income (Expense): | | | | | | | | |
| | Miscellaneous income, net | Miscellaneous income, net | | 21 | | | 5 | | | 10 | | | 36 | | Miscellaneous income, net | | (22) | | | (5) | | | (2) | | | (29) | |
| | Interest expense | Interest expense | | (9) | | | (7) | | | (1) | | | (17) | | Interest expense | | (1) | | | 2 | | | (29) | | | (28) | |
| Capitalized financing costs | Capitalized financing costs | | (3) | | | 2 | | | — | | | (1) | | Capitalized financing costs | | (2) | | | 7 | | | 1 | | | 6 | |
| Total Other Expense | Total Other Expense | | 9 | | | — | | | 9 | | | 18 | | Total Other Expense | | (25) | | | 4 | | | (30) | | | (51) | |
| | Income (Loss) Before Income Taxes (Benefits) | Income (Loss) Before Income Taxes (Benefits) | | 2 | | | (57) | | | (17) | | | (72) | | Income (Loss) Before Income Taxes (Benefits) | | (61) | | | 24 | | | (14) | | | (51) | |
| Income taxes (benefits) | Income taxes (benefits) | | (1) | | | (12) | | | (15) | | | (28) | | Income taxes (benefits) | | (13) | | | 8 | | | 1 | | | (4) | |
| Income (Loss) From Continuing Operations | | 3 | | | (45) | | | (2) | | | (44) | | |
| Discontinued operations, net of tax | | — | | | — | | | 53 | | | 53 | | |
| | Net Income (Loss) | Net Income (Loss) | | $ | 3 | | | $ | (45) | | | $ | 51 | | | $ | 9 | | Net Income (Loss) | | $ | (48) | | | $ | 16 | | | $ | (15) | | | $ | (47) | |
|
Regulated Distribution — Third Quarter 2021First Three Months of 2022 Compared with Third Quarter 2020 First Three Months of 2021
Regulated Distribution’s net income increased $3decreased $48 million in the third quarterfirst three months of 2021,2022, as compared to the same period of 2020,2021, primarily resulting from higher other operating expenses, customer rate credits associated with the implementation of the base distribution rate case in New Jersey, lowerPUCO-approved Ohio Stipulation, and higher pension and OPEB expenses, and a reduction to a reserve previously recorded in 2010, partially offset by higher weather-related demand, as well as the absence of a $27 million refund for previously collected decoupling and lost distribution revenues in Ohio, higher interest expense, and lower weather-related demand.with interest.
Revenues —
The $98$219 million increase in total revenues resulted from the following sources:
| | | For the Three Months Ended September 30, | | For the Three Months Ended March 31, |
| Revenues by Type of Service | Revenues by Type of Service | | 2021 | | 2020 | | Increase (Decrease) | Revenues by Type of Service | | 2022 | | 2021 | | Increase |
| | | (In millions) | | | (In millions) |
Distribution(1) | | $ | 1,534 | | | $ | 1,528 | | | $ | 6 | | |
Distribution services(1) | | Distribution services(1) | | $ | 1,348 | | | $ | 1,312 | | | $ | 36 | |
| | Generation sales: | Generation sales: | | Generation sales: | |
| Retail | Retail | | 1,054 | | | 1,005 | | | 49 | | Retail | | 1,094 | | | 935 | | | 159 | |
| Wholesale | Wholesale | | 117 | | | 67 | | | 50 | | Wholesale | | 90 | | | 69 | | | 21 | |
| Total generation sales | Total generation sales | | 1,171 | | | 1,072 | | | 99 | | Total generation sales | | 1,184 | | | 1,004 | | | 180 | |
| | | Other | Other | | 54 | | | 61 | | | (7) | | Other | | 57 | | | 54 | | | 3 | |
| Total Revenues | Total Revenues | | $ | 2,759 | | | $ | 2,661 | | | $ | 98 | | Total Revenues | | $ | 2,589 | | | $ | 2,370 | | | $ | 219 | |
(1) Includes $25$(27) million of ARP revenues for the three months ended September 30, 2020, respectively.
Distribution services revenues increased $6$36 million in the third quarter of 2021,first three months 2022, as compared to the same period of 2020,2021, primarily resulting from the higher recovery of transmission expenses, higher weather-related usage and customer demand, and the absence of a $27 million refund for previously collected decoupling revenues in Ohio, partially offset by customer rate credits associated with the absence of decoupling and lost distribution revenues inPUCO-approved Ohio the elimination of energy efficiency mandates and energy efficiency programs in Ohio, and lower weather-related demand. Stipulation.
Distribution services by customer class are summarized in the following table:
| | | For the Three Months Ended September 30, | | | For the Three Months Ended March 31, | |
| (In thousands) | (In thousands) | | Actual | | Weather-Adjusted | | (In thousands) | | Actual | | Weather-Adjusted | |
| Electric Distribution MWH Deliveries | Electric Distribution MWH Deliveries | | 2021 | | 2020 | | Increase (Decrease) | | 2021 | | 2020 | | Increase | | Electric Distribution MWH Deliveries | | 2022 | | 2021 | | Increase | | 2022 | | 2021 | | Increase (Decrease) | |
| | Residential | Residential | | 15,652 | | | 16,091 | | | (2.7) | % | | 15,200 | | | 15,157 | | | 0.3 | % | | Residential | | 15,213 | | | 14,890 | | | 2.2 | % | | 15,170 | | | 15,397 | | | (1.5) | % | |
Commercial(1) | Commercial(1) | | 9,785 | | | 9,589 | | | 2.0 | % | | 9,672 | | | 9,360 | | | 3.3 | % | | Commercial(1) | | 9,291 | | | 8,631 | | | 7.6 | % | | 9,265 | | | 8,853 | | | 4.7 | % | |
| Industrial | Industrial | | 14,018 | | | 13,560 | | | 3.4 | % | | 14,018 | | | 13,533 | | | 3.6 | % | | Industrial | | 13,583 | | | 13,257 | | | 2.5 | % | | 13,583 | | | 13,258 | | | 2.5 | % | |
| | Total Electric Distribution MWH Deliveries | Total Electric Distribution MWH Deliveries | | 39,455 | | | 39,240 | | | 0.5 | % | | 38,890 | | | 38,050 | | | 2.2 | % | | Total Electric Distribution MWH Deliveries | | 38,087 | | | 36,778 | | | 3.6 | % | | 38,018 | | | 37,508 | | | 1.4 | % | |
(1) Includes street lighting.
Distribution deliveries to residential, commercial and industrial customers reflect the cancellation of the state mandated COVID-19 stay-at-home orders. Residential and commercial distribution deliveries were also impacted by lowerhigher weather-related customer usage. CoolingHeating degree days were 6%4% above 2021 and 1% below 2020 and 11% above normal. Increases in industrial deliveries were primarily seen infrom the steel and chemicalother manufacturing sectors.
Compared to pre-pandemic levels in 2019, weather-adjusted residential distribution deliveries in the first quarter of 2022 were relatively unchanged, while commercial and industrial deliveries were down by approximately 4.1% and 2.7%, respectively, and reflects a continued trend over the last several quarters of customer usage returning back to pre-pandemic levels.
The following table summarizes the price and volume factors contributing to the $99$180 million increase in generation revenues for the third quarterfirst three months of 2021,2022, as compared to the same period of 2020:2021:
| | | | | | | | |
| Source of Change in Generation Revenues | | Increase (Decrease) |
| | | (In millions) |
| Retail: | | |
| Change in sales volumes | | $ | (6)62 | |
| Change in prices | | 5597 | |
| | | 49159 | |
| Wholesale: | | |
| Change in sales volumes | | 3 (15) | |
| Change in prices | | 2615 | |
| Capacity revenue | | 21 | |
| | 5021 | |
| | |
| Change in Generation Revenues | | $ | 99180 | |
The decreaseincrease in retail generation sales volumes was primarily due to lowerhigher weather-related usage.usage and decreased customer shopping in New Jersey, Ohio and Pennsylvania. Total generation provided by alternative suppliers as a percentage of total MWH deliveries in the first three months of 2022, as compared to the same period of 2021, decreased to 44% from 46% in New Jersey, 84% from 85% in Ohio, and to 59% from 61% in Pennsylvania. The increase in retail generation prices primarily resulted from higher non-shopping generation auction rates in Pennsylvania, partially offset by a lower ENEC ratePennsylvania. Retail generation sales, excluding those in West Virginia.Virginia, have no material impact to earnings.
Wholesale generation revenues increased $50$21 million in the third quarterfirst three months of 2021,2022, as compared to the same period of 2020,in 2021, primarily due to an increase in spot market energy prices and higher capacity revenues.revenues, partially offset by lower volumes due to lower generation output. 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 $105 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to the following:
•Fuel expense increased $31 million in the third quarter of 2021, as compared to the same period of 2020, primarily due to higher unit costs, partially offset by lower generation output resulting from planned outages. Due to the ENEC, fuel expense has no material impact on current period earnings.
•Purchased power costs increased $107 million 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 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 pole 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$255 million, primarily due to the following:
•Fuel costs increased $86$22 million during the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, primarily due to higher unit costs, and increasedpartially offset by lower generation output. Due to the ENEC, fuel expense has no material impact on current earnings.
•Purchased power costs increased $130$156 million during the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, primarily due to higher market prices, increased volumes as described above and increased capacity expenses, partially offset by lower unit costs and the expiration of a NUG contract.expenses.
| | | | | | | | |
| Source of Change in Purchased Power | | Increase (Decrease) |
|
| | | (In millions) |
| | |
| | |
| | |
| | |
| Purchases: | | |
| Change due to unit costs | | $ | (35)83 | |
| Change due to volumes | | 9746 | |
| | | 62129 | |
| Capacity | | 6827 | |
| | |
| Change in Purchased Power Costs | | $ | 130156 | |
•Other operating expenses decreased $174increased $70 million in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, primarily due to:
•Lower storm restoration costs of $133 million, which were mostly deferred for future recovery, resulting in no material impact on current period earnings.
•Lower uncollectible expense of $87 million, of which $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 $93$29 million. These costs are deferred for future recovery, resulting in no material impact on current period earnings.
•Higher other operating and maintenance expenses of $50$20 million primarily associated with increased laborresulting from lower capitalization of vegetation management costs.
•Higher expenses of $13 million resulting from lower capitalization of corporate support and vegetation management expenses, partially offset by fewer planned outages at the regulated generation facilities.costs.
•Higher employee benefit costs of approximately $9$7 million.
•Higher storm expenses of $6 million, of which $2 million was deferred for future recovery, resulting in no material impact on current period earnings.
•Higher West Virginia vegetation management, energy efficiency and other state mandated program costs of $3 million, which are deferred for future recovery, resulting in no material impact on earnings.
•Higher other operating and maintenance expenses of $2 million, primarily associated with higher regulated generation planned outage spend.
•Lower uncollectible expenses of $10 million, of which $5 million was deferred for future recovery.
•Depreciation expense increased $12$9 million in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, 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.base.
•Amortization (deferral) of regulatory assets, net increased $191decreased $125 million in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, primarily due to:
◦$109 million decrease due to the absence of the 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 COVID-19
◦$32 million related costs, and a decreaseto net decreases in deferral of accretion expense as a result of the TMI-2 transfer,other amortizations, partially offset by the amortization
◦$16 million of a regulatory liability as part of the New Jersey base rate case implementation in 2021, higherlower generation and transmission related deferrals and lower Pennsylvania smart meter amortization.deferrals.
•General taxes increased $16$14 million in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, primarily due to higher Ohio property and Pennsylvania gross receipt taxes.
•GainThe absence of the gain on sale of the Yards Creek Generating Facility of $109 million which was netted against the New Jersey storm deferral, as described above, resulting in no impact to earnings.
Other Expense —
Other expense decreased $292increased $25 million in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, primarily due to a $257 million pension and OPEB mark-to-market adjustment in 2020 and higher net miscellaneous income resulting from lower pension and OPEB non-service 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.lower asset performance on company-owned life insurance plans.
Income Taxes —
Regulated Distribution’s effective tax rate was 20.6%20.7% and 15.3%20.8% for the ninethree months ended September 30,March 31, 2022 and 2021, and 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 NineThree Months of 20212022 Compared with First NineThree Months of 20202021
Regulated Transmission’s net income decreased $51increased $16 million in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, 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 ATSIMAIT and MAIT.JCPL, and higher capitalized financing costs.
Revenues —
Total revenues increased $35$48 million, primarily due to the recovery of incremental operating expenses and a higher rate base at ATSI and MAIT, partially offset by a lower rate base at TrAIL.base.
The following table shows revenues by transmission asset owner:
| | | For the Nine Months Ended September 30, | | | | For the Three Months Ended March 31, | | |
| Revenues by Transmission Asset Owner | Revenues by Transmission Asset Owner | | 2021 | | | 2020 | | | Increase (Decrease) | Revenues by Transmission Asset Owner | | 2022 | | | 2021 | | | Increase (Decrease) |
| | | (In millions) | | | (In millions) |
| ATSI | ATSI | | $ | 607 | | | | $ | 601 | | | | $ | 6 | | ATSI | | $ | 217 | | | | $ | 207 | | | | $ | 10 | |
| TrAIL | TrAIL | | 182 | | | | 188 | | | | (6) | | TrAIL | | 65 | | | | 61 | | | | 4 | |
| MAIT | MAIT | | 222 | | | | 187 | | | | 35 | | MAIT | | 79 | | | | 68 | | | | 11 | |
| JCP&L | JCP&L | | 126 | | | | 122 | | | | 4 | | JCP&L | | 60 | | | | 36 | | | | 24 | |
| MP, PE and WP | MP, PE and WP | | 96 | | | | 100 | | | | (4) | | MP, PE and WP | | 32 | | | | 33 | | | | (1) | |
| | Total Revenues | Total Revenues | | $ | 1,233 | | | | $ | 1,198 | | | | $ | 35 | | Total Revenues | | $ | 453 | | | | $ | 405 | | | | $ | 48 | |
Operating Expenses —
Total operating expenses increased $99$28 million in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, 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.base, partially offset by lower amortization of regulatory assets. Nearly all operating expenses are recovered through formula rates, resulting in no material impact on current period earnings.
Other Expense —
Total other expense decreased $3$4 million in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, primarily due to a $19 million pension and OPEB mark-to-market adjustment in the first quarter of 2020, partially offset by higher interest expense associated with new debt issuances at FET and increased borrowings under the former FET Revolving Facility and prior year formula rate true-ups.capitalized financing costs.
Income Taxes —
Regulated Transmission’s effective tax rate was 24.0%24.7% and 22.9%23.2% for the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, respectively.
Corporate / Other — First NineThree Months of 20212022 Compared with First NineThree Months of 20202021
Financial results at Corporate/Other resulted in a $133$15 million increase in net loss in the first ninethree months of 2021,2022, as compared to the same period of 2020,2021, primarily due to the $230 million DPA monetary penalty, higher interest expense due to increased long-term debt,from a make-whole premium resulting from the redemption of $850 million of FE’s notes, see “Capital Resources and Liquidity” below, and a valuation reserve against certain municipal deferred tax assets in the first quarter of 2022, partially offset by higher investment earnings and lower investigation and other 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 absence of tax benefits from accelerated amortization of certain investment tax credits recognized in 2020, partially offset by the absence of a pension and OPEB mark-to-market adjustment in 2020 and higher returns on certain equity method investments.costs.
For the nine months ended September 30, 2021, FirstEnergy recorded a gain from discontinued operations, net of tax, of $47 million. The gain was primarily due to income tax benefits from the final true-up to the worthless stock deduction and a final federal NOL allocation between the FES Debtors and FirstEnergy resulting from the filing of the 2020 FirstEnergy federal income tax return during the third quarter of 2021.
REGULATORY ASSETS AND LIABILITIES
Regulatory assets represent incurred costs that have been deferred because of their probable future recovery from customers through regulated rates. Regulatory liabilities represent amounts that are expected to be credited to customers through future regulated rates or amounts collected from customers for costs not yet incurred. FirstEnergy, the Utilities and the Transmission Companies net their regulatory assets and liabilities based on federal and state jurisdictions.
Management assesses the probability of recovery of regulatory assets, and settlement of regulatory liabilities, at each balance sheet date and whenever new events occur. Factors that may affect probability includerelate to changes in the regulatory environment, issuance of a regulatory commission order or passage of new legislation. Management applies judgment in evaluating the evidence availableUpon material changes to assess the probability of recovery ofthese factors, where applicable, FirstEnergy will record new 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 FirstEnergyliabilities and regulators. Certain of thesewill assess whether it is probable that currently recorded regulatory assets totaling approximately $104 million and $117 million as of September 30, 2021 and December 31, 2020, respectively, are recorded based on prior precedentliabilities will be recovered or anticipated recovery based on rate making premises without a specific order, of which, $64 million as of September 30, 2021, are includedsettled in a settlement pending with FERC. See Note 8, "Regulatory Matters" for additional information.future rates.
The following table provides information about the composition of net regulatory assets and liabilities as of September 30, 2021,March 31, 2022, and December 31, 2020,2021, and the changes during the ninethree months ended September 30, 2021:March 31, 2022:
| | Net Regulatory Assets (Liabilities) by Source | Net Regulatory Assets (Liabilities) by Source | | September 30,
2021 | | December 31,
2020 | | Change | Net Regulatory Assets (Liabilities) by Source | | March 31,
2022 | | December 31,
2021 | | Change |
| | | | (In millions) | | | (In millions) |
| Customer payables for future income taxes | Customer payables for future income taxes | | $ | (2,289) | | | $ | (2,369) | | | $ | 80 | | Customer payables for future income taxes | | $ | (2,303) | | | $ | (2,345) | | | $ | 42 | |
| Spent nuclear fuel disposal costs | Spent nuclear fuel disposal costs | | (100) | | | (102) | | | 2 | | Spent nuclear fuel disposal costs | | (87) | | | (101) | | | 14 | |
| Asset removal costs | Asset removal costs | | (646) | | | (721) | | | 75 | | Asset removal costs | | (650) | | | (646) | | | (4) | |
| Deferred transmission costs | Deferred transmission costs | | 92 | | | 319 | | | (227) | | Deferred transmission costs | | (30) | | | (3) | | | (27) | |
| Deferred generation costs | Deferred generation costs | | 61 | | | 17 | | | 44 | | Deferred generation costs | | 163 | | | 118 | | | 45 | |
| Deferred distribution costs | Deferred distribution costs | | 81 | | | 79 | | | 2 | | Deferred distribution costs | | 75 | | | 49 | | | 26 | |
| Contract valuations | | 16 | | | 41 | | | (25) | | |
| | Storm-related costs | Storm-related costs | | 670 | | | 748 | | | (78) | | Storm-related costs | | 673 | | | 660 | | | 13 | |
| Uncollectible and COVID-19 related costs | Uncollectible and COVID-19 related costs | | 59 | | | 97 | | | (38) | | Uncollectible and COVID-19 related costs | | 55 | | | 56 | | | (1) | |
| Energy efficiency program costs | Energy efficiency program costs | | 46 | | | 42 | | | 4 | | Energy efficiency program costs | | 47 | | | 47 | | | — | |
| New Jersey societal benefit costs | New Jersey societal benefit costs | | 103 | | | 112 | | | (9) | | New Jersey societal benefit costs | | 106 | | | 109 | | | (3) | |
| Regulatory transition costs | Regulatory transition costs | | (24) | | | (20) | | | (4) | | Regulatory transition costs | | (18) | | | (18) | | | — | |
| Vegetation management | Vegetation management | | 22 | | | 22 | | | — | | Vegetation management | | 39 | | | 33 | | | 6 | |
| Other | Other | | (16) | | | (9) | | | (7) | | Other | | (25) | | | (12) | | | (13) | |
| Net Regulatory Liabilities included on the Consolidated Balance Sheets | Net Regulatory Liabilities included on the Consolidated Balance Sheets | | $ | (1,925) | | | $ | (1,744) | | | $ | (181) | | Net Regulatory Liabilities included on the Consolidated Balance Sheets | | $ | (1,955) | | | $ | (2,053) | | | $ | 98 | |
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.the Tax Act. These amounts are being amortized over the period in which the related deferred tax assets reverse, which is generally over the expected life of the underlying asset.
Spent nuclear fuel disposal costs - Reflects amounts collected from customers, and the investment income, losses and changes in fair value of the trusts for spent nuclear fuel disposal costs related to the former nuclear generating facilities, Oyster Creek and TMI-1.
Asset removal costs - Primarily represents the rates charged to customers that include a provision for the cost of future activities to remove assets, including obligations for which an ARO has been recognized, that are expected to be incurred at the time of retirement.
Deferred transmission costs - Primarily representsReflects differences between revenues earned based on actual costs for the formula-rate Transmission Companies and the amounts billed. Amountsbilled, which amounts are recorded as a regulatory asset or liability and recovered or refunded, respectively, in subsequent periods. Also included is the recovery of non-market based costs or fees charged to certain of the Utilities by various regulatory bodies including FERC and RTOs, which can include PJM charges and credits for service including, but not limited to, procuring transmission services and transmission enhancement.
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) in subsequent periods.
Contract valuations - Includes the amortization of purchase accounting adjustments at PE which were recorded in connectionand remaining refunds owed to customers associated with the Allegheny Energy, Inc. merger representing the fair value of NUG purchased power contracts (amortized over the life of the contracts through 2030).PUCO-approved Ohio Stipulation.
Storm-related costs - Relates to the deferral of storm costs, net of recovery, which vary by jurisdiction. Approximately $158$190 million and $167$148 million are currently being recovered through rates as of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively.
Uncollectible and COVID-19 related costs - Includes the deferral of prudently incurred incremental costs 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. Investments in certain of these energy efficiency programs earn a long-term return.
New Jersey societal benefit costs - Primarily relates to regulatory assets associated with manufactured gas plantMGP 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 certain distribution vegetation management costs as well as MAIT vegetation management costs (amortized through 2024).
The following table provides information about the composition of net regulatory assets that do not earn a current return as of September 30, 2021March 31, 2022 and December 31, 2020,2021, of which approximately $192$332 million and $195$228 million, respectively, are currently being recovered through rates over varying periods, through 2068, depending on the nature of the deferral and the jurisdiction.
| | Regulatory Assets by Source Not Earning a Current Return | Regulatory Assets by Source Not Earning a Current Return | | September 30,
2021 | | December 31,
2020 | | Change | | Regulatory Assets by Source Not Earning a Current Return | | March 31,
2022 | | December 31,
2021 | | Change | |
| | | (In millions) | | | | (In millions) | |
| | Deferred transmission costs | Deferred transmission costs | | $ | 14 | | | $ | 17 | | | $ | (3) | | | Deferred transmission costs | | $ | 9 | | | $ | 13 | | | $ | (4) | | |
| Deferred generation costs | Deferred generation costs | | 10 | | | 5 | | | 5 | | | Deferred generation costs | | 112 | | | 50 | | | 62 | | |
| | Storm-related costs | Storm-related costs | | 561 | | | 654 | | | (93) | | | Storm-related costs | | 569 | | | 549 | | | 20 | | |
| COVID-19 related costs | COVID-19 related costs | | 66 | | | 66 | | | — | | | COVID-19 related costs | | 63 | | | 65 | | | (2) | | |
| | Regulatory transition costs | Regulatory transition costs | | 13 | | | 16 | | | (3) | | | Regulatory transition costs | | 12 | | | 13 | | | (1) | | |
| Vegetation management | Vegetation management | | 20 | | | 22 | | | (2) | | | Vegetation management | | 28 | | | 31 | | | (3) | | |
| Other | Other | | 12 | | | 9 | | | 3 | | | Other | | 14 | | | 11 | | | 3 | | |
| Regulatory Assets Not Earning a Current Return | Regulatory Assets Not Earning a Current Return | | $ | 696 | | | $ | 789 | | | $ | (93) | | | Regulatory Assets Not Earning a Current Return | | $ | 807 | | | $ | 732 | | | $ | 75 | | |
CAPITAL RESOURCES AND LIQUIDITY
FirstEnergy’s business is capital intensive, requiring significant resources to fund operating expenses, construction and other investment expenditures, scheduled debt maturities and interest payments, dividend payments, and potential contributions to its pension plan.
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 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.
FE and its distribution and transmission subsidiaries expect their existing sources of liquidity to remain sufficient to meet their respective anticipated obligations. In addition to internal sources to fund liquidity and capital requirements for the remainder of 20212022 and beyond, FE and its distribution and transmission subsidiaries expect to rely on external sources of funds. Short-term cash requirements not met by cash provided from operations are generally satisfied through short-term borrowings. Long-term cash needs may be met through the issuance of long-term debt by FE and certain of its distribution and transmission subsidiaries to, among other things, fund capital expenditures and other capital-like investments, and refinance short-term and maturing long-term debt, subject to market conditions and other factors.
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, 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. 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 TransmissionDistribution and Regulated DistributionTransmission 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,November 6, 2021, FirstEnergy, along with FET, entered into the FES Debtors announcedFET P&SA with Brookfield and the Brookfield Guarantors, pursuant to which FET agreed to issue and sell to Brookfield at the closing, and Brookfield agreed to purchase from FET, certain newly issued membership interests of FET, such that in order to facilitate an orderly financial restructuring, they filed voluntary petitions under Chapter 11Brookfield will own 19.9% of the United States Bankruptcy Codeissued and outstanding membership interests of FET, for a purchase price of $2.375 billion. The transaction is subject to customary closing conditions, including approval from the FERC and review by the CFIUS. CFIUS completed its review on April 14, 2022 and FERC approved the transaction on April 21, 2022. The transaction is expected to close at the end of May 2022.
On December 13, 2021, FE privately issued to BIP Securities II-B L.P., an affiliate of Blackstone Infrastructure Partners L.P., 25,588,535 shares of FE’s common stock, par value $0.10 per share, at a price of $39.08 per share, representing an investment of $1.0 billion. In addition, FE nominated Sean T. Klimczak, the Blackstone Infrastructure Partners-selected representative, to stand for election to the FE Board at the 2022 annual shareholders’ meeting. On April 21, 2022, FERC approved the Blackstone representative’s ability to participate as a voting member of the FE Board.
On October 18, 2021, FE, FET, the Utilities, and the Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses. See “Capital Resources and Liquidity" below for additional details.
Together, these transactions enhance FirstEnergy's credit profile, provide funding for the strategic investments discussed above, and address all of FirstEnergy's equity plans, with the Bankruptcy Court. On February 27, 2020, the FES Debtors effectuated their plan, emerged from bankruptcyexception of annual issuances of up to $100 million under regular dividend reinvestment plans and FirstEnergy tendered the bankruptcy court approved settlement payments totaling $853 million and a $125 million tax sharing payment to the FES Debtors.employee benefit stock investment plans, through at least 2025.
FirstEnergy is continuously evaluating the COVID-19 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, 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. 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 monitoringcontinues to provide flexibility for approximately 7,000 of its supply chain12,400 employees to work from home. Pandemic safety and is working closelycleaning protocols were implemented for those workers who have continued to report to a FirstEnergy work location during the pandemic, ensuring FirstEnergy employees can report directly to job sites and work with essential vendorsthe same small group of employees every day. FirstEnergy continues to understandassess its work from home policies to allow for a flexible workplace to continue for its employees after the continued impact the COVID-19 pandemic is having on its 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.pandemic.
FirstEnergy continues to effectively manage operations during the pandemic in order to provide critical service to customerscustomers. FirstEnergy has experienced supply chain challenges during the COVID-19 pandemic. Lead times have increased across numerous material categories, with some as much as doubling from previous times. Some key suppliers have struggled with labor shortages and believes it is well positionedraw material availability, which along with increasing inflationary pressure, have increased the costs of certain materials, equipment and contractors. FirstEnergy has taken steps to manage through the economic slowdown. FirstEnergy Distributionmitigate these risks and Transmission revenues benefit from geographic and economic diversity across a five-statedoes not currently expect service territory, which also allows for flexibility withdisruptions or any material impact on its capital investments and measures to maintain sufficient liquidity over the next twelve months.spending plan. 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 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.
Despite the many disruptions FirstEnergy is currently facing, the leadership team remains committed and focused on executing its strategy and running the business. See “Outlook - Other Legal Proceedings” below for additional details on the government investigations, the DPA, and subsequent litigation surrounding the investigation of HB 6. See also “Outlook - State Regulation - Ohio” below for details on the PUCO proceeding reviewing political and charitable spending and legislative activity in response to the investigation of HB 6. The outcome of the government investigations, PUCO proceedings, legislative activity, and any of these lawsuits is uncertain and could have a material adverse effect on FirstEnergy’s financial condition, results of operations and cash flows. As discussed below, FirstEnergy has 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, for among other things, to address the outcomes of the ongoing government investigations and related lawsuits and regulatory actions.
As of September 30, 2021,March 31, 2022, FirstEnergy’s net deficit in working capital (current assets less current liabilities) was primarily due to accounts payable, current portions of long-term debt, short-term borrowings and accrued interest, taxes, and compensation and
benefits. FirstEnergy believes its cash from operations and available liquidity will be sufficient to meet its current working capital needs.
Short-Term Borrowings / Revolving Credit Facilities
On October 18, 2021, FE, FET, the Utilities, and the Transmission Companies entered into the 2021 Credit Facilities, which were six separate senior unsecured five-year syndicated revolving credit facilities with JPMorgan Chase Bank, N.A., Mizuho Bank, Ltd. and PNC Bank, National Association (collectively, the “2021 Credit Facilities”), whichthat replace the FE Revolving Facility and the FET Revolving Facility, and provide for aggregate commitments of $4.5 billion. The 2021 Credit Facilities are available until October 18, 2026, as follows:
•FE and FET, $1.0 billion revolving credit facilityfacility;
•Ohio Companies, $800 million revolving credit facilityfacility;
•Pennsylvania Companies, $950 million revolving credit facilityfacility;
•JCP&L, $500 million revolving credit facilityfacility;
•MP and PE, $400 million revolving credit facilityfacility; and
•Transmission Companies, $850 million credit facilityfacility.
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 each borrower under the respective facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses.
Borrowings under the 2021 Credit Facilities may be used for working capital and other general corporate purposes. Generally, borrowings under each of the credit facilities are available to each borrower separately and mature on the earlier of 364 days from the date of borrowing or the commitment termination date, as the same may be extended. Each of the 2021 Credit Facilities contain financial covenants requiring each borrower, with the exception of FE, to maintain a consolidated debt-to-total-capitalization ratio (as defined under each of the credit facilities)2021 Credit Facilities) of no more than 65%, and 75% for FET, measured at the end of each fiscal quarter. FE is required under its 2021 Credit Facility to maintain a consolidated interest coverage ratio of not less than 2.50 times, measured at the end of each fiscal quarter for the last four fiscal quarters beginning with the quarter ending December 31, 2021.
FirstEnergy’s 2021 Credit Facilities bear interest at fluctuating interest rates, primarily based on LIBOR. LIBOR tends to fluctuate based on general interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions. FirstEnergy has not hedged its interest rate exposure with respect to its floating rate debt. Accordingly, FirstEnergy’s interest expense for any particular period will fluctuate based on LIBOR and other variable interest rates. On July 27, 2017, the Financial Conduct AuthorityFCA (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 LimitedIBA (the entity that calculates and publishes LIBOR), or IBA, and FCA made public statements regarding the future cessation of LIBOR. IBA permanently ceased publication for 1-week and 2-month LIBOR settings and all settings for non-USD LIBOR on December 31, 2021. According to the FCA, IBA will permanently cease to publish each of theovernight, 1-month, 3-month, 6-month and 12-month 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 such end dates, and there is considerable uncertainty regarding the publication or representativeness of LIBOR beyond such end dates. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is seeking to replace U.S. dollar LIBOR with a newly created index, (the secured overnight financing rate or SOFR),SOFR, calculated based on repurchase agreements backed by treasury securities. FirstEnergy’s 2021 Credit Facilities provide a mechanism to automatically transition to a SOFR-based benchmark when all United States dollar LIBOR settings are no longer provided or are no longer representative. In addition, FirstEnergy’s 2021 Credit Facilities provide an option for the applicable borrower and lender to jointly elect to transition early to a SOFR-based benchmark, or in certain circumstances, an alternative benchmark replacement. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere. To the extent these interest rates increase, interest expense will increase. If sources of capital for us are reduced, capital costs could increase materially. Restricted access to capital markets and/or increased borrowing costs could have an adverse effect on FirstEnergy’s results of operations, cash flows, financial condition and liquidity.
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 $2.2 billion$350 million of outstanding short-term borrowings as of March 31, 2022, and no short-term borrowings as of December 31, 2020, and no outstanding short-term borrowings as of September 30, 2021. FirstEnergy’s available liquidity from external sources as of October 25, 2021,April 18, 2022, was as follows:
| | | | | | | | | | | | | | | | | | | | | |
| Revolving Credit Facility | | Maturity | | Commitment | | Available Liquidity | |
| | | | | (In millions) | |
| FE and FET | | October 2026 | | $ | 1,000 | | | $ | 997 | | |
| Ohio Companies | | October 2026 | | 800 | | | 800 | | |
| Pennsylvania Companies | | October 2026 | | 950 | | | 950 | | |
| JCP&L | | October 2026 | | 500 | | | 499 | | |
| MP and PE | | October 2026 | | 400 | | | 400 | | |
| Transmission Companies | | October 2026 | | 850 | | | 850 | | |
| | Subtotal | | $ | 4,500 | | | $ | 4,496 | | |
| Cash and cash equivalents | | — | | | 557 | | |
| | Total | | $ | 4,500 | | | $ | 5,053 | | |
| | | | | | | | | | | | | | | | | | | | | |
| Revolving Credit Facility | | Maturity | | Commitment | | Available Liquidity | |
| | | | | (In millions) | |
| FE and FET | | October 2026 | | $ | 1,000 | | | $ | 647 | | |
| 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 | | | $ | 4,146 | | |
| Cash and cash equivalents | | — | | | 383 | | |
| | Total | | $ | 4,500 | | | $ | 4,529 | | |
The following table summarizes the limitations on short-term indebtedness applicable to each borrower under current regulatory approvals and applicable statutory and/or charter limitations as of October 25, 2021:March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Borrower | | | | | | | | Regulatory and
Other Short-Term Debt Limitations | | | |
| | | | | | | | | | | | (In millions) | | | |
| FE | | | | | | | | | | | | $ | — | | (1) | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| FET | | | | | | | | | | | | — | | (1) | | |
| OE | | | | | | | | | | | | 500 | | (2) | | |
| CEI | | | | | | | | | | | | 500 | | (2) | | |
| TE | | | | | | | | | | | | 300 | | (2) | | |
| JCP&L | | | | | | | | | | | | 500 | | (2) | | |
| ME | | | | | | | | | | | | 500 | | (2) | | |
| PN | | | | | | | | | | | | 300 | | (2) | | |
| WP | | | | | | | | | | | | 200 | | (2) | | |
| MP | | | | | | | | | | | | 500 | | (2) | | |
| PE | | | | | | | | | | | | 150 | | (2) | | |
| ATSI | | | | | | | | | | | | 500 | | (2) | | |
| Penn | | | | | | | | | | | | 100 | | (2) | | |
| TrAIL | | | | | | | | | | | | 400 | | (2) | | |
| MAIT | | | | | | | | | | | | 400 | | (2) | | |
| | | | | | | | | | | | | | | |
(1)No limitations.
(2)Includes amounts which may be borrowed under the regulated companies’ money pool. | | | | | | | | | | | | | | | | | | | | | | | | |
| Individual Borrower | | | | | | | | Regulatory and
Other Short-Term Debt Limitations | | |
| | | | | | | | | | | | (In millions) | | |
| FE and FET | | | | | | | | | | | | N/A | | |
| OE, CEI, JCP&L, ME, MP, and ATSI | | | | | | | | | | | | $ | 500 | | (1) | |
| TE and PN | | | | | | | | | | | | 300 | | (1) | |
| WP | | | | | | | | | | | | 200 | | (1) | |
| PE | | | | | | | | | | | | 150 | | (1) | |
| Penn | | | | | | | | | | | | 100 | | (1) | |
| TrAIL and MAIT | | | | | | | | | | | | 400 | | (1) | |
| | | | | | | | | | | | | | |
(1) Includes amounts which may be borrowed under the regulated companies’ money pool. | |
Subject to each borrower’s sublimit, the amounts noted below are available for the issuance of LOCs (subject to borrowings drawn under the 2021 Credit Facilities) expiring up to one year from the date of issuance. The stated amount of outstanding LOCs will count against total commitments available under each of the 2021 Credit Facilities and against the applicable borrower’s borrowing sublimit. As of March 31, 2022, FirstEnergy had $4 million in outstanding LOCs.
| | | | | | | | |
| Revolving Credit Facility | | LOC Availability |
| (In millions) |
| FE and FET | | $ | 100 | |
| Ohio Companies | | 150 | |
| Pennsylvania Companies | | 200 | |
| JCP&L | | 100 | |
| MP and PE | | 100 | |
| Transmission Companies | | 2,500200 | |
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 are 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, 2021,March 31, 2022, the borrowers were in compliance with the applicable interest coverage and debt-to-total-capitalization ratio covenants in each case as defined under the former revolving credit facilities.2021 Credit Facilities.
FirstEnergy Money Pools
FirstEnergy’s utility operating subsidiary companies also have the ability to borrow from each other and FE to meet their short-term working capital requirements. Similar but separate arrangements exist among FirstEnergy’s unregulated companies with AE Supply, FE, FET, FEV and certain other unregulated subsidiaries. FESC administers these money pools and tracks surplus funds of FE and the respective regulated and unregulated subsidiaries, as the case may be, as well as proceeds available from bank borrowings. Companies receiving a loan under the money pool agreements must repay the principal amount of the loan, together
with accrued interest, within 364 days of borrowing the funds. The rate of interest is the same for each company receiving a loan from their respective pool and is based on the average cost of funds available through the pool. The average interest rate for borrowings through the thirdfirst quarter of 20212022 was 1.26%0.37% per annum for the regulated companies’ money pool and 0.74%0.52% 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 October 25, 2021:April 18, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Corporate Credit Rating | | Senior Secured | | Senior Unsecured | | Outlook/WatchCreditWatch (1) |
| Issuer | | S&P | | Moody’s | | Fitch | | S&P | | Moody’s | | Fitch | | S&P | | Moody’s | | Fitch | | S&P | | Moody’s | | Fitch |
| FE | | BBBBB- | | Ba1 | | BB+ | | — | | — | | — | | BBBB+ | | Ba1 | | BB+ | | CW-P | | S | | SP | | P |
| AGC | | BBBB+ | | Baa2 | | BBB- | | — | | — | | — | | — | | — | | — | | CW-PS | | S | | SP |
| ATSI | | BB+BBB | | A3 | | BBB- | | — | | — | | — | | BBB-BBB | | A3 | | BBB | | CW-PS | | S | | SP |
| CEI | | BB+BBB | | Baa2 | | BBB- | | BBB+A- | | A3 | | BBB+ | | BBB-BBB | | Baa2 | | BBB | | CW-PS | | N | | SP |
| FET | | BBBBB- | | Baa2 | | BB+ | | — | | — | | — | | BBBB+ | | Baa2 | | BB+ | | CW-PS | | S | | SP |
| JCP&L | | BB+BBB | | A3 | | BBB- | | — | | — | | — | | BBB-BBB | | A3 | | BBB | | CW-PS | | S | | SP |
| ME | | BB+BBB | | A3 | | BBB- | | — | | — | | — | | BBB-BBB | | A3 | | BBB | | CW-PS | | S | | SP |
| MAIT | | BB+BBB | | A3 | | BBB- | | — | | — | | — | | BBB-BBB | | A3 | | BBB | | CW-PS | | S | | SP |
| MP | | BB+BBB | | Baa2 | | BBB- | | BBB+A- | | A3 | | BBB+ | | BBB-BBB | | Baa2 | | — | | CW-PS | | S | | SP |
| OE | | BB+BBB | | A3 | | BBB- | | BBB+A- | | A1 | | BBB+ | | BBB-BBB | | A3 | | BBB | | CW-P | | NS | | S | | P |
| PN | | BB+BBB | | Baa1 | | BBB- | | — | | — | | — | | BBB-BBB | | Baa1 | | BBB | | CW-PS | | S | | SP |
| Penn | | BB+BBB | | A3 | | BBB- | | BBB+A- | | A1 | | BBB+ | | — | | — | | — | | CW-PS | | S | | SP |
| PE | | BB+BBB | | Baa2 | | BBB- | | BBB+A- | | A3 | | BBB+ | | — | | — | | — | | CW-PS | | S | | SP |
| TE | | BB+BBB | | Baa1 | | BBB- | | BBB+A- | | A2 | | BBB+ | | — | | — | | — | | CW-PS | | N | | SP |
| TrAIL | | BB+BBB | | A3 | | BBB- | | — | | — | | — | | BBB-BBB | | A3 | | BBB | | CW-PS | | S | | SP |
| WP | | BB+BBB | | A3 | | BBB- | | BBB+A- | | A1 | | BBB+ | | — | | — | | — | | CW-PS | | S | | SP |
(1) S = Stable, P = Positive, N = Negative CW-P = CreditWatch with Positive Implications
On July 23, 2021, S&P revised the CreditWatch implications to positive from negative on the ratings of FE and its subsidiaries.
On July 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 to stable from negative.
On October 19, 2021, S&P issued a one-notch upgrade to all applicable ratings for the following subsidiaries: ATSI, CEI, JCP&L, ME, MAIT, MP, OE, PN, Penn, PE, TE, TrAIL, and WP. The CreditWatch Positive designation on FE and all subsidiaries is unchanged. The ratings of FE and FET were affirmed.
The applicable undrawn and drawn margin on the 2021 Credit Facilities are subject to ratings based pricing grids. The applicable fee paid on the undrawn commitments under the 2021 Credit Facilities are based on each borrower’s senior unsecured non-credit enhanced debt ratings as determined by S&P and Moody’s. The fee paid on actual borrowings are determined based on each borrower’s senior unsecured non-credit enhanced debt ratings as determined by S&P and Moody’s.
The interest rate payable on approximately $3.85$3.0 billion in FE’s senior unsecured notes are subject to adjustments from time to time if the ratings on the notes from any one or more of S&P, Moody’s and Fitch decreases to a rating set forth in the applicable governing documents. Generally a one-notch downgrade by the applicable rating agency may result in a 25 basis 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 limitsinterest coverage ratio in the former credit facilities and 2021 Credit Facilities previously discussed.Facilities. As of September 30, 2021, FE and its subsidiariesMarch 31, 2022, FirstEnergy could have issued additional debtincur approximately $790 million of approximately $6.0 billion,incremental interest expense or incurredincur a $3.2$2.0 billion reduction to equity,the consolidated interest coverage earnings numerator, as defined under the covenant, and FE would remain within the limitations of the financial covenants requiredcovenant requirements by the former FE Revolving Facility.2021 Credit Facilities.
Cash Requirements and Commitments
FirstEnergy has certain obligations and commitments to make future payments under contracts. For an in-depth discussion of FirstEnergy’s cash requirements and commitments, see “Capital Resources and Liquidity - Cash Requirements and Commitments " in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" within FirstEnergy’s Form 10-K for the year ended December 31, 2021 (filed on February 16, 2022).
Changes in Cash Position
As of September 30, 2021,March 31, 2022, FirstEnergy had approximately $577$283 million of cash and cash equivalents and $107$27 million of restricted cash compared to approximately $1.7$1.5 billion of cash and cash equivalents and $67$49 million of restricted cash as of December 31, 2020,2021, 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 the DPA penalty in the third quarter of 2021, theThe 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 Statements of Cash Flows combine cash flows from discontinued operations with cash flows from continuing operations within each cash flow category. For the nine months ended September 30, 2021 and 2020, cash flows from operating activities includes income from discontinued operations of $47 million and $46 million, respectively.
In the first ninethree months of 2021,2022, cash provided from operating activities was approximately $2.1 billion$355 million compared to $851$533 million in the same period of 2020.2021. The increasedecrease in cash provided from operating activities is primarily due to rate refunds and rate credits provided to Ohio customers during the first quarter of 2022 under the PUCO-approved Ohio Stipulation, higher operating expenses from lower capitalization of certain vegetation management and corporate support costs, and the absence of a $978 million cash settlement and tax sharing payment made toaccounts receivable working capital improvements in the FES Debtors upon their emergence in February 2020, higher distribution deliveries, impactfirst quarter of 2021, when collection activity improved since the start of the distribution rider and transmission investment recovery, and increased collections of customer account receivable balances,pandemic. These decreases in cash flow from operating activities are partially offset by cash flow generated from capital investments made since the DPA penalty paid in the thirdfirst quarter of 2021.2021 and improvements in accounts payable working capital from the implementation of FE Forward initiatives.
Cash Flows From Financing Activities
In the first ninethree months of 2021,2022, cash provided from (used for)used for financing activities was $(1.4) billion$964 million compared to $937$509 million during the same period of 2020.2021. The following table summarizes new debt financing redemptions, repayments, short-term borrowingsactivities for the first three months of 2022 and dividends:
| | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| Securities Issued or Redeemed / Repaid | | 2021 | | 2020 |
| | | (In millions) |
| | | | |
| New Issues | | | | |
| Unsecured notes | | $ | 1,150 | | | $ | 3,250 | |
| | | | |
| Senior secured notes | | 150 | | | — | |
| FMBs | | 200 | | | 175 | |
| | | | |
| | $ | 1,500 | | | $ | 3,425 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Redemptions / Repayments | | | | |
| Term loan | | $ | — | | | $ | (750) | |
| Unsecured notes | | — | | | (250) | |
| | | | |
| FMBs | | — | | | (50) | |
| | | | |
| Senior secured notes | | (58) | | | (60) | |
| | | $ | (58) | | | $ | (1,110) | |
| | | | |
| | | | |
| | | | |
| Short-term borrowings redemptions, net | | $ | (2,200) | | | $ | (700) | |
| | | | |
| | | | |
| | | | |
| Common stock dividend payments | | $ | (636) | | | $ | (634) | |
| | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| Securities Issued or Redeemed / Repaid | | 2022 | | 2021 |
| | | (In millions) |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| New issues - Unsecured notes | | $ | — | | | $ | 500 | |
| | | | |
| Redemptions / Repayments: | | | | |
| | | | |
| Unsecured notes | | (1,000) | | | — | |
| | | | |
| FMBs | | (25) | | | — | |
| | | | |
| Senior secured notes | | (21) | | | (29) | |
| | | $ | (1,046) | | | $ | (29) | |
| | | | |
| Make-whole premiums paid on debt redemptions | | $ | (38) | | | $ | — | |
| | | | |
| Short-term borrowings/(redemptions), net | | $ | 350 | | | $ | (750) | |
| | | | |
| | | | |
| | | | |
| Common stock dividend payments | | $ | (222) | | | $ | (212) | |
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. |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash Flows From Investing Activities
Cash used for investing activities in the first ninethree months of 20212022 principally represented cash used for property additions. The following table summarizes investing activities for the first ninethree months of 20212022 and 2020:2021:
| | | For the Nine Months Ended September 30, | | Increase | | For the Three Months Ended March 31, | | Increase |
| Cash Used for Investing Activities | Cash Used for Investing Activities | | 2021 | | 2020 | | (Decrease) | Cash Used for Investing Activities | | 2022 | | 2021 | | (Decrease) |
| | | (In millions) | | | (In millions) |
| Property Additions: | Property Additions: | | Property Additions: | |
| Regulated Distribution | Regulated Distribution | | $ | 993 | | | $ | 1,115 | | | $ | (122) | | Regulated Distribution | | $ | 317 | | | $ | 321 | | | $ | (4) | |
| Regulated Transmission | Regulated Transmission | | 732 | | | 817 | | | (85) | | Regulated Transmission | | 197 | | | 273 | | | (76) | |
| Corporate / Other | Corporate / Other | | 43 | | | 47 | | | (4) | | Corporate / Other | | 6 | | | 10 | | | (4) | |
| Proceeds from sale of Yards Creek | Proceeds from sale of Yards Creek | | (155) | | | — | | | (155) | | Proceeds from sale of Yards Creek | | — | | | (155) | | | 155 | |
| Investments | | 29 | | | 18 | | | 11 | | |
| | | Asset removal costs | Asset removal costs | | 178 | | | 175 | | | 3 | | Asset removal costs | | 49 | | | 47 | | | 2 | |
| Other | Other | | (9) | | | (1) | | | (8) | | Other | | 23 | | | 3 | | | 20 | |
| | $ | 1,811 | | | $ | 2,171 | | | $ | (360) | | | $ | 592 | | | $ | 499 | | | $ | 93 | |
|
Cash used for investing activities for the thirdfirst quarter of 2021 decreased $3602022 increased $93 million, compared to the same period of 2020,2021, primarily due to the absence of proceeds from the sale of Yards Creek andreceived in the first quarter of 2021, partially offset by lower capital expenditures.property additions.
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, 2021,March 31, 2022, was approximately $1.1 billion, as summarized below:
| | | | | | | | |
| Guarantees and Other Assurances | | Maximum Exposure |
| | | (In millions) |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| FE’s Guarantees on Behalf of its Consolidated Subsidiaries | | |
| Deferred compensation arrangements | | $ | 488520 | |
| Vehicle leases | | 75 | |
AE Supply asset sales(1)
| | 15 | |
| Other | | 87 | |
| | 586602 | |
| | |
| FE’s Guarantees on Other Assurances | | |
| Surety Bonds | | 330 | |
Global holding facility | | 68 | |
| Deferred compensation arrangements | | 130134 | |
LOCs and other | | 94 | |
| | 537468 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Total Guarantees and Other Assurances | | $ | 1,1231,070 | |
(1)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 environmental liabilities associated with Pleasants Power Station, and the second being limited solely to environmental liabilities for the McElroy’s Run CCR Impoundment 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.
As ofSeptember 30, 2021, $55 March 31, 2022, $52 million of collateral has been posted by FE or its 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, 2021:March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Potential Collateral Obligations | | | | | | Utilities and FET | | FE | | Total |
| | | (In millions) |
| Contractual Obligations for Additional Collateral | | | | | | | | | | |
| | | | | | | | | | |
| Upon further downgrade | | | | | | $ | 32 | | | $ | — | | | $ | 32 | |
| | | | | | | | | | |
Surety Bonds (collateralized amount)(1) | | | | | | 56 | | | 258 | | | 314 | |
| Total Exposure from Contractual Obligations | | | | | | $ | 88 | | | $ | 258 | | | $ | 346 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Potential Collateral Obligations | | | | | | Utilities and Transmission Companies | | FE | | Total |
| | | (In millions) |
| Contractual Obligations for Additional Collateral | | | | | | | | | | |
| | | | | | | | | | |
| Upon further downgrade | | | | | | $ | 43 | | | $ | — | | | $ | 43 | |
| | | | | | | | | | |
Surety Bonds (collateralized amount)(1) | | | | | | 57 | | | 258 | | | 315 | |
| Total Exposure from Contractual Obligations | | | | | | $ | 100 | | | $ | 258 | | | $ | 358 | |
(1)Surety bonds are not tied to a credit rating. Surety Bonds’ impact assumes maximum contractual obligations, which is ordinarily 100% of the face amount of the surety bond except with respect to $39 million of surety bond obligations for which the collateral obligation is capped at 60% of the face amount, and typical obligations require 30 days to cure.
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 was $68 million as of September 30, 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 FirstEnergy.
Commodity Price Risk
FirstEnergy has limited exposure to financial risks resulting from fluctuating commodity prices, such as prices for electricity, coal and energy transmission. FirstEnergy’s Risk Management 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, 2021,March 31, 2022, FirstEnergy has a net asset of $9$1 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, 2021,March 31, 2022, the FirstEnergy pension plan assets were allocated approximately as follows: 35% in equity securities, 32%25% in fixed income securities, 8%12% in absolute return strategies,alternatives, 10% in real estate, 8%11% in private debt/equity, 2%5% in derivatives and 5%2% in cash and short-term securities. As further discussed below, dueDue 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 and FirstEnergy may elect to contribute to the pension plan voluntarily. As of September 30, 2021,March 31, 2022, FirstEnergy’s OPEB plan assets were allocated approximately as follows: 48%50% in equity securities, 51%47% in fixed income securities and 1%3% in cash and short-term securities. See Note 5,4, “Pension and Other Post-Employment Benefits,” of the Notes to Consolidated Financial Statements for additional details on FirstEnergy’s pension and OPEB plans.
In the ninethree months ended September 30, 2021,March 31, 2022, FirstEnergy’s pension and OPEB plan assets have gainedlost approximately 3.4%5.8% and 8.5%4.8%, respectively, as compared to an annual expected return on plan assets of 7.5%.
Interest Rate Risk
FirstEnergy recognizes net actuarial gains or losses for its pension and OPEB plans in the fourth quarter of each year and whenever a plan is determined to qualify for a remeasurement. A primary factor contributing to these actuarial gains and losses are changes in the discount rates used to value pension and OPEB obligations as of the measurement date and the difference between expected and actual returns on the plans’ assets.
Estimating FirstEnergy utilizes a spot rate approach in the final discount rate asestimation of the year-end remeasurement date is difficultcomponents of benefit cost by applying specific spot rates along the full yield curve to predict based on current market conditions. However, if FirstEnergy were to recognize the remeasurement asrelevant projected cash flows. As of March 31, 2022, the end of the third quarter of 2021, the pre-tax mark-to-market gain would have been approximately $90 million based on the discountspot rate of approximately 3.0% as of September 30, 2021,was 3.75% and a return on the3.65% for pension and OPEB plans’ assets based on actual investment performance throughobligations, respectively, as compared to 3.02% and 2.84% as of December 31, 2021, respectively. At this time, FirstEnergy is unable to determine or project the third quartermark-to-market adjustment that may be recorded as of 2021. If the discount rate was to increase (or decrease) by 25 basis points, FirstEnergy would expect the pre-tax mark-to-market gain to increase (or decrease) by approximately $370 million.December 31, 2022.
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. FE 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
AMERICAN RESCUE PLAN ACT OF 2021
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. While the Act is primarily an economic stimulus package, it also, among other changes, expanded the scope of Section 162(m) of the Internal Revenue Code that limits deductions on certain executive officer compensation. FirstEnergy does not currently expect these changes to have a material impact.
STATE REGULATION
Each of the Utilities' retail rates, conditions of service, issuance of securities and other matters are subject to regulation in the states in which it operates - in Maryland by the MDPSC, in New Jersey by the NJBPU, in Ohio by the PUCO, in Pennsylvania by the PPUC, in West Virginia by the WVPSC and in New York by the NYPSC. The transmission operations of PE in Virginia, ATSI in Ohio, and the Transmission Companies in Pennsylvania are subject to certain regulations of the VSCC, PUCO and PPUC, respectively. In addition, under Ohio law, municipalities may regulate rates of a public utility, subject to appeal to the PUCO if not acceptable to the utility. Further, if any of the FirstEnergy affiliates were to engage in the construction of significant new transmission facilities, depending on the state, they may be required to obtain state regulatory authorization to site, construct and operate the new transmission facility.
MARYLAND
PE operates under MDPSC approved base rates that were effective as of March 23, 2019. PE also provides SOS pursuant to a combination of settlement agreements, MDPSC orders and regulations, and statutory provisions. SOS supply is competitively procured in the form of rolling contracts of varying lengths through periodic auctions that are overseen by the MDPSC and a third-party monitor. Although settlements with respect to SOS supply for PE customers have expired, service continues in the same manner until changed by order of the MDPSC. PE recovers its costs plus a return for providing SOS. PE expects to file a new base rate case in early 2023, consistent with the MDPSC’s order issued on March 22, 2019.
The EmPOWER Maryland program requires each electric utility to file a plan to reduce electric consumption and demand 0.2% per year, up to the ultimate goal of 2% annual savings, for the duration of the 2018-2020 and 2021-2023 EmPOWER Maryland program cycles to the extent the MDPSC determines that cost-effective programs and services are available. PE's approved 2018-20202021-2023 EmPOWER Maryland plan continues and expands upon prior years' programs and adds new programs, for a projected total investment of $116approximately $148 million over the three-year period. PE recovers program investments with a return through an annually reconciled surcharge, with most costs subject to recovery over a five-year period with a return on the unamortized balance. 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 with an estimated investment of approximately $148 million over the three-year period with similar recovery. The MDPSC approved the plan on December 18, 2020.
On March 22, 2019, MDPSC issued an order approving PE’s 2018 base rate case filing, which among other things, approved an 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 reflecting a slight increase in expense and is seeking the difference to be deferred for future recovery in PE’s next base rate case. On 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 filed testimony recommending an annual reduction of $9.6 million. On May 26, 2021, the judge issued a Proposed Order which would reduce PE’s base rates by $2.1 million. PE filed an appeal of the Proposed Order to the 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). In July 2020, 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 for customers as of JanuaryNovember 1, 2017.2021. JCP&L provides BGS for retail customers who do not choose a third-party EGS and for customers of third-party EGSs that fail to provide the contracted service. All New Jersey EDCs participate in this competitive BGS procurement process and recover BGS costs directly from customers as a charge separate from base rates.
JCP&L has instituted energy efficiency and peak demand reduction programs in accordance with the New Jersey Clean Energy Act as approved by the NJBPU in April 2021. The NJBPU approved plans include recovery of lost revenues resulting from the programs and a three-year plan including total program costs of $203 million, of which $158 million of investment is recovered over a ten-year amortization period with a return as well as operations and maintenance expenses and financing costs of $45 million recovered on an annual basis.
In December 2017, the NJBPU issued proposed rules to modify its current CTA policy in base rate cases to: (i) calculate savings using a five-year look back from the beginning of the test year; (ii) allocate savings with 75% retained by the company and 25% allocated to ratepayers;customers; 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.calculation. On January 17, 2019, the NJBPU approved the proposed CTA rules with no changes. On May 17, 2019, the NJ Rate Counsel filed an appeal with the Appellate Division of the Superior Court of New Jersey and on June 7, 2021, the courtSuperior Court issued an Orderorder reversing the NJBPU’s CTA rules and remanded the case back to the NJBPU. Specifically, the court’sCourt’s ruling requires 100% of the CTA savings to be credited to customers in lieu of the NJBPU’s current policy requiring 25%. The court’s rulingOn December 6, 2021, the NJBPU issued proposed amended rules modifying its current CTA policy in base rate cases consistent with the Superior Court’s June 7, 2021 order. Comments were filed on March 3, 2022. Once the proposed rules are final, they will be applied on a prospective basis.basis in a future base rate case, however, it is not expected to have a material adverse effect on FirstEnergy’s results or financial condition.
On February 18, 2020, JCP&L submitted a filing with the NJBPU requesting a distribution base rate increase. On October 28, 2020, the NJBPU approved a stipulated settlement between JCP&L and various parties, providingresolving JCP&L’s request for among other things,distribution base rate increase. The settlement provided for a $94 million annual base distribution revenues increase for JCP&L based on an ROE of 9.6%, which will becomebecame effective for customers on November 1, 2021. Until the rates become effective, and starting on January 1, 2021,The settlement additionally provided that JCP&L would be subject to a management audit. The management audit began 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, be applied to reduce JCP&L’s existing regulatory asset for previously deferred storm costs. 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 first 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 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 Reliability Plus projects placed into service from July 1, 2020 through December 31, 2020 were reasonable and 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. As 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 included in the 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. 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,May 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.is currently ongoing.
On August 27, 2020, JCP&L filed an AMI Program with the NJBPU, which proposesproposed 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 then proposed 3-year deployment iswas part of the 20-year AMI Program that is expectedwas projected to cost a total of approximately $732 million and proposesproposed 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 reflectsreflected increases in the AMI Program’s costs. Under the revised AMI Program, during the first six years of the AMI Program from 2022 through 2027, JCP&L estimates costcosts of $494 million, consisting of capital expenditures of approximately $390 million, incremental operations and maintenance expenses of approximately $73 million and cost of removal of $31 million. On February 8, 2022, JCP&L expectsfiled with the NJBPU a stipulation entered into with the NJBPU staff, NJ Rate Counsel and others, that, pending NJBPU approval, would affirm the terms of the revised AMI Program. The Stipulation, which was approved by NJBPU order byon February 23, 2022, also provides that the end of 2021.revised AMI Program-related capital costs, the legacy meter stranded costs, and the operations and maintenance expense will be deferred and placed in regulatory assets, with such amounts sought to be recovered in the JCP&L’s subsequent base rate cases.
On 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-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. On April 23, 2021, JCP&L filed a Stipulation of Settlement with the NJBPU for approval of recovery of lost revenues resulting from the programs and a three-year plan including total program costs of $203 million, of which $158 million of investment is recovered over a ten year amortization period with a return as well as operations and maintenance expenses and financing costs of $45 million recovered on an annual basis. On April 27, 2021, the NJBPU issued an Order approving the 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, orand continuing until the New Jersey Governor issues an order stating that the COVID-19 pandemic is no longer in effect. New Jersey utilities can request recovery of such regulatory asset in a stand-alone COVID-19 regulatory asset filing or future base rate case. On October 28, 2020, the NJBPU issued an order expanding the scope of the proceeding to examine all pandemic issues, including recovery of the COVID-19 regulatory assets, by way of a generic proceeding. Through various Executive Ordersexecutive orders issued by the New Jersey Governor, Murphy, the moratorium period iswas extended to December 31, 2021. On December 21, 2021, the moratorium on residential disconnections for certain entities providing utility service was extended until March 15, 2022. The moratorium on residential disconnections was not extended for investor-owned electric utilities such as JCP&L, but does require that investor-owned electric public utilities offer qualifying residential customers deferred payment arrangements meeting certain minimum criteria prior to disconnecting service.Additionally, while the moratorium on residential disconnections for certain entities providing electric service was not extended after March 15, 2022, new legislation was enacted on March 25, 2022, prohibiting utilities from disconnecting electric service to customers that have applied for utility bill assistance before June 15, 2022 until such time as the state agency administering the assistance program makes a decision on the application and further requiring that all utilities offer a deferred payment arrangement meeting certain minimum criteria after the state agency’s decision on the application has been made.
The recent credit rating actions taken on October 28, 2020, by S&P and Fitch triggered a requirement from variousPursuant to an 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 December 11, 2020, the NJBPU held 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 Orderorder requiring all New Jersey electric distribution companies to file electric vehicle programs.programs, JCP&L filed its electric vehicle program on March 1, 2021, which consists2021. JCP&L’s proposed electric vehicle program consisted of six sub-programs, including a consumer education and outreach initiative that would begin on January 1, 2022, and continue over a four-year period. The total proposed budget for the electric vehicle program is approximately $50 million, including investments of which $16 million is capital expenditures and $34 million is for operations and maintenance expenses.expenses of $34 million. 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 becomebecame 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,November 12, 2021, JCP&L filed a letter with the presiding commissioner requesting a suspension of the procedural schedule in order to allow the parties to continue settlement discussion. On November 23, 2021, the presiding commissioner entered an order suspending the procedural schedule. JCP&L expects an order from 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 atby the end of May 2021 and is currently ongoing.the second quarter of 2022.
OHIO
The Ohio Companies operate under PUCO approved base distribution rates approved by the PUCOthat became effective in 2009. The Ohio Companies currently operate under ESP IV, effective June 1, 2016 and continuing through May 31, 2024, that continues the supply of power to non-shopping customers at a market-based price set through an auction process. ESP IV also continues the Rider DCR, which supports continued investment related to the distribution system for the benefit of customers, with increased revenue caps of $20 million per year from June 1, 2019 through May 31, 2022; and $15 million per year from June 1, 2022 through May 31, 2024. In addition, ESP IV includes: (1) continuation of a base distribution rate freeze through May 31, 2024; (2) a goal across FirstEnergy to reduce CO2 emissions by 90% below 2005 levels by 2045; and (3) contributions, totaling $51 million to: (a) fund energy conservation programs, economic development and job retention in the Ohio Companies’ service territories; (b) establish a fuel-fund in each of the Ohio Companies’ service territories to assist low-income customers; and (c) establish a Customer Advisory Council to ensure preservation and growth of the competitive market in Ohio.
ESP IV further provided for the Ohio Companies to collect DMR revenues, but the SCOH reversed the PUCO’s decision to include DMR in ESP IV. Subsequently, 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. On July 15, 2019, the OCC filed an 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 remanded 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 measured, and make other necessary determinations. FirstEnergy is unable to predict the outcome of these proceedings but has not deemed a liability probable as of September 30, 2021.
On July 23, 2019, Ohio enacted HB 6, which included provisions supporting nuclear energy, authorizing 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 24, 2021, the PUCO found that statewide energy efficiency mandates had been achieved, and ordered that Ohio electric utilities’ energy efficiency and peak demand reduction cost recovery riders terminate. Third-parties have challenged the Ohio Companies’ 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 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 Ohio electric utilities, and provided for the ending of current energy efficiency program mandates. HB 128 was effective June 30, 2021. As FirstEnergy would not have financially benefited from the mechanism to provide support to nuclear energy in Ohio, there is no expected additional impact to FirstEnergy due to the repeal of that provision in HB 128.
As further discussed below, in connection with a partial settlement with the OAG and other parties, the Ohio Companies filed an 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, with interest, which total approximately $27 million. On April 22, 2021, in anticipation of the effective date of HB 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, or promptly upon obtaining PUCO approval. On July 7, 2021, the 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, 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 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’ applications 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. 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 January 12, 2021, the PUCO consolidated 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 individual 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. On October 18, 2021, the attorney examiner issued a procedural schedule setting hearings for December 13, 2021, to 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 audit of the Ohio Companies’ Rider DCR for 2017, the PUCO issued an order on June 16, 2021, directing the Ohio Companies to 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 audit and DMR audit dockets, requesting the PUCO to open an investigation and management audit, hire an independent auditor, and require FirstEnergy to show it did not improperly use money collected from consumers or violate any utility regulatory laws, rules or orders in its activities regarding HB 6. On December 30, 2020, in response to the OCC's motion, the PUCO reopened the DMR audit docket, and directed PUCO staff to solicit a third-party auditor and conduct a full review of the DMR to ensure funds collected from ratepayerscustomers through the DMR were only used for the purposes established in ESP IV. On June 2, 2021, the PUCO selected an auditor and athe auditor filed the final audit report ison January 14, 2022, which made certain findings and recommendations. The report found that spending of DMR revenues was not required to be filed by December 16, 2021.tracked, and that DMR revenues, like all rider revenues, are placed into the regulated money pool as a matter of routine, where the funds lose their identity. Therefore, the report could not suggest that DMR funds were used definitively for direct or indirect support for grid modernization. The report also concluded that there was no documented evidence that ties revenues from the DMR to lobbying for the passage of HB 6, but also could not rule out with certainty uses of DMR funds to support the passage of HB 6. The report further recommended that the regulated companies' money pool be audited more frequently and the Ohio Companies adopt formal dividend policies.
On September 15, 2020, the PUCO opened a new proceeding to review the political and charitable spending by the Ohio Companies in support of HB 6 and the subsequent referendum effort, and directing the Ohio Companies to show cause, demonstrating that the costs of any political or charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any rates or charges paid by ratepayers.customers. The Ohio Companies initially filed a response on September 30, 2020, stating that the costs of any political andor charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any 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. Oncustomers, but on August 6, 2021, the Ohio Companies filed a supplemental response explaining that, in light of the new facts revealed byset forth in 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 further discussed below,
political or charitable spending in support of HB 6, or the subsequent referendum effort, affected pole attachment rates paid by approximately $15 thousand, which will be refunded to those customers.thousand. On October 26, 2021, the OCC filed a motion requesting the PUCO to order an independent external audit to investigate FE’s political and charitable spending related to HB 6, and to appoint an independent review panel to retain and oversee the auditor. In November and December 2021, parties filed comments and reply comments regarding the Ohio Companies’ original and supplemental responses to the PUCO’s September 15, 2020, show cause directive. On March 9, 2022, the PUCO directed its staff to seek the services of a third-party auditor to determine whether the show cause demonstration submitted by the Ohio Companies is sufficient to ensure that the cost of any political or charitable spending in support of HB 6 or the subsequent referendum effort was not included, directly or indirectly, in any rates or charges paid by ratepayers.
In connection with an ongoing audit of the Ohio Companies’ policies and procedures relating to the code of conduct rules between affiliates, on November 4, 2020, the PUCO initiated an additional corporate separation audit as a result of the FirstEnergy leadership transition announcement made on October 29, 2020, as further discussed below. The additional audit is to ensure compliance by the Ohio Companies and their affiliates with corporate separation laws and the Ohio Companies’ corporate separation plan. The additional audit is for the period from November 2016 through October 2020. The final audit report was filed on September 13, 2021. The audit report makes no findings of major non-compliance with Ohio corporate separation requirements, minor non-compliance with eight requirements, and findings of compliance with 23 requirements. AParties filed comments and reply comments on the audit report, and a PUCO attorney examiner has issued a procedural schedule for the filing of comments and reply comments and testimony, as well assetting an evidentiary hearing on February 10,August 22, 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,November 1, 2021, the Citizens’ Utility Board of Ohio filed a complaintCompanies, together with the OCC, PUCO againstStaff, and several other signatories, entered into an Ohio Stipulation with the intent of resolving the ongoing energy efficiency rider audits, various SEET proceedings, including the Ohio Companies. The complaint allegesCompanies’ 2017 SEET proceeding, and the Ohio Companies’ quadrennial ESP review, each of which was pending before the PUCO. Specifically, the Ohio Stipulation provides that the Ohio Companies’ new charges resulting from HB 6,current ESP IV passes the required statutory test for their prospective SEET review as part of the Quadrennial Review of ESP IV, and any increased rates resulting from proceedings over whichexcept for limited circumstances, the former PUCO Chairman presided, are unjustsignatory parties have agreed not to challenge the Ohio Companies’ SEET return on equity calculation methodology for their 2021-2024 SEET proceedings. The Ohio Stipulation additionally affirms that: (i) the Ohio Companies’ ESP IV shall continue through its previously authorized term of May 31, 2024; and unreasonable, and that(ii) 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 towill file a new distributiontheir next base rate case at the earliest possible date;in May 2024, and thatfurther, no signatory party will seek to adjust the Ohio Companies’ corporate separation plans be modified to introduce institutional controls.base distribution rates before that time, except in limited circumstances. The Ohio Companies further agreed to refund $96 million to customers in connection with the 2017-2019 SEET cases, and to provide $210 million in future rate reductions for all customers, including $80 million in 2022, $60 million in 2023, $45 million in 2024, and $25 million in 2025. The PUCO approved the 2017-2019 SEET refunds and 2022 rate reductions December 1, 2021, and refunds began in January 2022. Future rate reductions are contestingrecognized as a reduction to regulated distribution segment’s revenue in the complaint.Consolidated Statements of Income as they are provided to the Ohio Companies’ customers.
In connection with an ongoing annual audit of the Ohio Companies’ Rider DCR for 2020, and as a result of disclosures in FirstEnergy’s Form 10-K for the year ended December 31, 2020 (filed on February 18, 2021), the PUCO expanded the scope of the audit on March 10, 2021, to include a review of certain transactions that were either improperly classified, misallocated, or lacked supporting documentation, and to determine whether funds collected from ratepayerscustomers were used to pay the vendors, and if so, whether or not the funds associated with those payments should be returned to ratepayerscustomers through Rider DCR or through an alternative proceeding. TheOn August 3, 2021, the auditor filed its final report on this phase of the audit, and the parties submitted comments and reply comments on this audit report was filedin October 2021. Additionally, 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 auditorin this proceeding to determine if the costs of the naming rights for FirstEnergy Stadium have been recovered from ratepayersthe Ohio Companies’ customers. On November 19, 2021, the auditor filed its final report, in which the auditor concluded that the FirstEnergy Stadium naming rights expenses were not recovered from Ohio customers. On December 15, 2021, the PUCO further expanded the scope of the audit to include an investigation into an apparent nondisclosure of a side agreement in the Ohio Companies’ ESP IV settlement proceedings, but stayed its expansion of the audit until otherwise ordered by the 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 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.PUCO.
See “Outlook - Other Legal Proceedings” below for additional details on the government investigations and subsequent litigation surrounding the investigation of HB 6.
PENNSYLVANIA
The Pennsylvania Companies operate under rates approved by the PPUC, effective as of January 27, 2017. These rates were adjusted forOn November 18, 2021, the net impactPPUC issued orders to each 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 directing they operate under DSPs for the June 1, 2019 through May 31, 2023 delivery period, which DSPs provide for the competitive procurement of generation supply for customers who do not choosereceive service from an alternative EGS or for customers of alternative EGSs that fail to provide the contracted service.EGS. Under the 2019-2023 DSPs, supply will be provided by wholesale suppliers through a mix of 3, 12 and 24-month energy contracts, as well as two RFPs for 2-year SREC contracts for ME, PN and Penn. On
December 14, 2021, the Pennsylvania Companies filed proposed DSPs for provision of generation for the June 1, 2023 through May 31, 2027 delivery period, to be sourced through competitive procurements for customers who do not receive service from an alternative EGS. An evidentiary hearing was held on April 13, 2022, and the parties filed a partial settlement with the PPUC resolving most of the issues in the proceeding on April 20, 2022. The remaining issues in the proceeding, which are limited to the treatment of customer-generated energy and renewable energy credit production will be resolved through briefing. Under the 2023-2027 DSPs, supply is proposed to be provided through a mix of 12 and 24-month energy contracts, as well as long-term solar PPAs.
In March 2018, the PPUC approved adjusted customer rates of the Pennsylvania Companies to reflect the net impact of the Tax Act. As a result, the Pennsylvania Companies established riders that, beginning July 1, 2018, refunded to customers tax savings attributable to the Tax Act as compared to the amounts established in their most recent base rate proceedings on a current and going forward basis. The amounts recorded as savings for the total period of January 1 through June 30, 2018, were tracked and were to be addressed for treatment in a future proceeding. On May 17, 2021, the Pennsylvania Companies filed petitions with the PPUC proposing to refund the net savings for the January through June 2018 period to customers beginning January 1, 2022. On November 18, 2021, the PPUC approved the Pennsylvania Companies' proposed refunds, but also revised a previous methodology for calculating the net tax savings, which resulted in additional tax savings attributable to the Tax Act to be refunded to customers and directed the Pennsylvania Companies to file new petitions to propose the timing and methodology to provide these additional refunds to customers. The Pennsylvania Companies recalculated the net impact for 2018 through 2021 under the revised PPUC methodology in comparison to amounts already refunded to customers under the existing riders, which resulted in an additional $61 million in savings, with interest, to be provided to customers. As a result, FirstEnergy recognized a pre-tax charge of $61 million in the fourth quarter of 2021 associated with the additional refund and based on the November 2021 PPUC order and methodology. The Pennsylvania Companies filed petitions to propose the timing and methodology of the refund of these amounts on February 17, 2022. If approved, the Pennsylvania Companies would refund these amounts beginning July 1, 2022, and continuing through the end of the year.
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 were filed November 30, 2020. A settlement has been reached in this matter, and a joint petition seeking approval of that settlementapproved by the parties was filedPPUC without modification on February 16, 2021. On March 25, 2021, the PPUC issued an order approving the settlement without modification.2021.
Pennsylvania EDCs are permitted to seek PPUC approval of an LTIIP for infrastructure improvements and costs related to highway relocation projects, after which a DSIC may be approved to recover LTIIP costs. On January 16, 2020, the PPUC approved the Pennsylvania Companies’ LTIIPs for the five-year period beginning January 1, 2020 and ending December 31, 2024 for a total capital investment of approximately $572 million for certain infrastructure improvement initiatives. On June 25, 2021, the Pennsylvania OCA filed a complaint against Penn’s quarterly DSIC rate, disputing the recoverability of the Companies’ automated distribution management system investment under the DSIC mechanism. Penn responded on July 19, 2021, and submitted its direct testimony on October 13, 2021.On January 26, 2022, the parties filed a joint petition for settlement that resolves all issues in this matter pending PPUC approval.
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, whichrates. The decision was appealed by the Pennsylvania OCA to the Pennsylvania Supreme Court and in July 2021 the court upheld the Pennsylvania Commonwealth Court. The Commonwealth Court reversedCourt’s reversal of 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. On 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. On March 19, 2021, the PPUC entered an order lifting the moratorium in total effective March 31, 2021, subject to certain additional guidelines regarding the duration of payment arrangements and reporting obligations.
WEST VIRGINIA
MP and PE provide electric service to all customers through traditional cost-based, regulated utility ratemaking and operate under WVPSC approved rates approved by the WVPSCthat became effective in February 2015. MP and PE recover net power supply costs, including fuel costs, purchased power costs and related expenses, net of related market sales revenue through the ENEC. MP’s and PE’s ENEC rate is updated annually.
On 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 proposesproposed 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. AOn August 12, 2021, a unanimous settlement was reached with all the parties agreeing to a $7.7 million rate reduction beginning January 1, 2022, with a true-up in the ENEC proceeding each year. The settlement was presented toOn November 30, 2021, the WVPSC approved the settlement on August 18, 2021, and an order is expected to be issued this year.all terms, except for the proposed effective date of the rate reduction, which was held in abeyance until further notice.
On August 27, 2021, MP and PE filed with the WVPSC their annual ENEC case requesting an increase in ENEC rates of $19.6 million beginning January 1, 2022, representingwhich represented a 1.5% increase into the rates versus those currently in effect. OnceWVPSC issued an order on December 29, 2021, granting the requested $19.6 million increase in ENEC rates. Among other things, the order requires MP
and PE to refund to its large industrial customers their respective portion of the $7.7 million rate reduction discussed above and also requires MP and PE to negotiate a PPA for its capacity shortfall and a reasonable reserve margin if certain conditions are met. By order dated March 2, 2022, the WVPSC reopened the case to determine whether rates should be increased to recover growing ENEC under-recoveries. MP and PE proposed a $94 million rate increase to address the growing under-recoveries and a hearing was held on March 24, 2022. Any interim rate increase approved by WVPSC would be expected to begin May 1, 2022.
On December 3, 2021 and on December 27, 2021, the WVPSC approved settlements granting MP and PE a $16 million increase in rates effective January 1, 2022, and permitting the continuation of the vegetation management program and surcharge for another two years. WVPSC additionally ordered MP and PE to perform equipment inspections within a reasonable time after vegetation management occurs on a circuit.
On November 22, 2021, MP and PE filed with the WVPSC their plan to construct 50 MWs of solar generation at five sites in West Virginia. The plan includes a tariff to offer solar power to West Virginia customers and cost recovery for MP and PE from other customers through a surcharge for any solar investment not fully subscribed by their customers. A hearing was held on March 16 and 17, 2022, and an order is issuedexpected in the ADIT case discussed above, itsecond quarter of 2022. The solar generation project, if approved, is expected to cost approximately $110 million and begin being in-serviced by the end of 2023 with all construction completed at the other sites no later than the end of 2025.
On December 17, 2021, MP and PE filed with the WVPSC for approval of environmental compliance projects at the Ft. Martin and Harrison Power Stations to comply with the EPA’s ELG and operate these plants beyond 2028. The request includes a supplement will be filed loweringsurcharge to recover the request by $7.7expected $142 million by taking into account the rate decreasecapital investment and $3 million in annual operation and maintenance expense. A hearing has been set for in August 2022, with a ruling from the case. A procedural schedule has been issued setting a hearingWVPSC expected in the fall of 2022. If approved, construction would be expected to be completed by the end of 2025. See “Outlook - Environmental Matters - Clean Water Act" below, for additional details on December 3, 2021.the EPA's ELG.
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. On February 4, 2022, FERC filed the final audit report for the period of January 1, 2015 through September 30, 2021, which included several findings and recommendations. FirstEnergy has accepted the findings and recommendations of the final audit report. The audit report included a finding and related recommendation that FirstEnergy may have used an inappropriate methodology
for allocation of certain costs to regulatory capital accounts under certain FERC regulations and reporting. As such, FirstEnergy is currently performing an analysis of these costs and how it impacted certain wholesale transmission customer rates. FirstEnergy is unable to predict or estimate the final outcome or impact of this audit.analysis and audit, however, it could result in refunds, with interest, to certain wholesale transmission customers and/or write-offs of previously capitalized costs if they are determined to be nonrecoverable.
ATSI Transmission Formula Rate
On May 1, 2020, ATSI filed amendments to its formula rate to recover regulatory assets for certain costs that ATSI incurred as a result of its 2011 move from MISO to PJM, certain costs allocated to ATSI by FERC for transmission projects that were constructed by other MISO transmission owners, and certain costs for transmission-related vegetation management programs. A portion of these costs would have been charged to the Ohio Companies. Additionally, ATSI proposed certain income tax-related adjustments and certain tariff changes addressing the revenue credit components of the formula rate template. On June 30, 2020, FERC issued an initial order accepting the tariff amendments subject to refund and setting the matter for hearing and settlement proceedings. ATSI and the parties to the FERC proceeding subsequently were able to reach settlement, and on October 14, 2021, filed the settlement with FERC. As a result of the filed settlement, FirstEnergy recognized a $21 million pre-tax charge during the third quarter of 2021, which 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 not expected to have a material impact on FirstEnergy or ATSI. The uncontested settlement is pending beforewas approved by FERC for approval.on March 24, 2022 without modification.
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 to: (i) deduct any excess ADIT from or add any deficient ADIT to their rate base; (ii) raise or lower their income tax allowances by any amortized excess or deficient ADIT; and (iii) incorporate a new permanent worksheet into their rates that will annually track information related to excess or deficient ADIT. Per FERC directives, ATSI submitted its compliance filing on May 1, 2020. MAIT submitted its compliance filing on June 1, 2020. Certain intervenors filed protests of the compliance filings,On November 18, 2021, FERC issued an order that: (i) accepted ATSI proposed tariff amendments to which ATSI and MAIT responded. On October 28, 2020, FERC staff requested additional information about ATSI’s proposedits rate base adjustment mechanism, effective January 27, 2020; (ii) directed ATSI to make a further compliance filing by January 17, 2022; and (iii) set the amount of ATSI’s recorded ADIT balances as of December 31, 2017, for hearing and settlement procedures. ATSI submitted the requested information on November 25, 2020.compliance filing, and is participating in settlement negotiations. On May 4,December 3, 2021, FERC staff requested additional information aboutissued an order that (i) accepted MAIT’s proposed tariff amendments to its rate base adjustment mechanism, effective January 27, 2020; (ii) directed MAIT to make a further compliance filing by February 1, 2022; and (iii) set the amount of MAIT’s recorded ADIT balances as of December 31, 2017 for hearing and settlement procedures. MAIT submitted the requested information on June 3, 2021. On June 24, 2021, an intervenor protested the supplemental information that MAIT submitted, to which MAIT responded.compliance filing, and is participating in settlement negotiations. 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. TheseOn March 31, 2022, FERC issued an order, ruling that TrAIL’s compliance filings each remainfiling partially complied with the requirements of Order No. 864 and directing TrAIL to submit a further compliance filing on or before May 31, 2022 to address certain additional items that according to FERC further will enhance transparency. The PATH compliance filing remains pending before FERC. MP, WP and PE (as holders of a “stated” transmission rate when Order No. 864 issued) are addressing these requirements in the transmission formula rates amendments that were filed on October 29, 2020, and which have been accepted by FERC effective January 1, 2021, subject to refund, pending further hearing and settlement procedures, addressed further below. JCP&L addressed these requirements as part of itsprocedures. MP, WP and PE are engaged in settlement negotiations with other parties to this proceeding.
ATSI ROE – Ohio Consumers Counsel v. ATSI, et al.
On February 24, 2022, the OCC filed a complaint with FERC against ATSI, AEP’s Ohio affiliates and AEPSC, and Duke Energy Ohio, LLC asserting that FERC should reduce the ROE utilized in the utilities’ transmission formula rate case, whichrates by eliminating the 50 basis point adder associated with RTO membership, effective February 24, 2022. The OCC contends that this result is required because Ohio law mandates that transmission owning utilities join an RTO and that the 50 basis point adder is applicable only where RTO membership is voluntary. ATSI disagrees with OCC’s characterization and set forth its reasons for such disagreement in a combined motion to dismiss and answer that was resolved by a settlement approved byfiled with FERC on April 15, 2021, addressed further below.March 31, 2022. On that same date, AEP and Duke filed separate motions to dismiss and answers to the OCC complaint, and several other parties filed comments. ATSI is currently evaluating whether to file an additional answer to respond to certain of the comments.
Transmission ROE Methodology
On May 20, 2021, in a case not involving FirstEnergy, FERC issued Opinion No. 575 in which it reiterated the nationwide ROE methodology set forth in 2020 in Opinion Nos. 569-A and 569-B. Under this methodology, FERC employs 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 rejected the use of the expected earnings methodology in calculating the authorized ROE. 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 applied a standard consistent with Opinion Nos. 569-A and 569-B. FERC’s Opinion Nos. 569-A and 569-B, upon which Opinion No. 575 is based, have been appealed to the D.C. Circuit. FirstEnergy is not participating in the 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 filed on June 25, 2021, and reply comments were filed on July 26, 2021. The rulemaking remains pending before FERC. FirstEnergy is a member of PJM and its transmission subsidiaries could be affected by the supplemental proposed rule. FirstEnergy participated in comments on the supplemental rulemaking that were submitted by a group of PJM transmission owners and by various industry trade groups. If there were to be any changes to FirstEnergy transmission incentive ROE, such changes will be applied on a prospective basis.
JCP&L Transmission Formula Rate
On October 30, 2019, JCP&L filed tariff amendments with FERC to implement 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 subsequently were able to reach settlement, 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 implement a forward-looking formula transmission rate, to be effective January 1, 2021. In addition, on October 30, 2020, KATCo filed a proposed new tariff to establish a forward-looking formula rate and requested that the new rate become effective January 1, 2021. In its filing, KATCo explained that while it currently owns no transmission assets, it may build new transmission facilities in the Allegheny zone, and that it may seek required state and federal authorizations to acquire transmission assets from PE and WP by January 1, 2022. These transmission rate filings were accepted for filing by FERC on December 31, 2020, effective January 1, 2021, subject to refund, pending further hearing and settlement procedures and were consolidated into a single proceeding. MP, PE and WP, and KATCo are engaged in settlement negotiations with the other parties to the formula rate proceedings. 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. On July 28, 2015, the D.C. Circuit ordered the EPA to reconsider the CSAPR caps on NOx and SO2 emissions from power plants in 13 states, including West Virginia. This followed the 2014 U.S. Supreme Court ruling generally upholding the EPA’s regulatory approach under CSAPR but questioning whether the EPA required upwind states to reduce emissions by more than their contribution to air pollution in downwind states. The EPA issued a CSAPR Update on September 7, 2016, reducing summertime NOx emissions from power plants in 22 states in the eastern U.S., including West Virginia, beginning in 2017. Various states and other stakeholders appealed the CSAPR Update to the D.C. Circuit in November and December 2016. On September 13, 2019, the D.C. Circuit remanded the CSAPR Update to the EPA citing that the rule did not eliminate upwind states’ significant contributions to downwind states’ air quality attainment requirements within applicable attainment deadlines.
Also during this time, in March 2018, the State of New York filed a CAA Section 126 petition with the EPA alleging that NOx emissions from nine states (including West Virginia) significantly contribute to New York’s inability to attain the ozone NAAQS. The petition sought suitable emission rate limits for large stationary sources that are allegedly affecting New York’s air quality within the three years allowed by CAA Section 126. On September 20, 2019, the EPA denied New York’s CAA Section 126 petition. On October 29, 2019, the State of New York appealed the denial of its petition to the D.C. Circuit. On July 14, 2020, the
D.C. Circuit reversed and remanded the New York petition to the EPA for further consideration. On March 15, 2021, the EPA issued a revised CSAPR Update that addresses, among other things, the remands of the prior CSAPR Update and the New York Section 126 Petition.petition. In December 2021, MP purchased NOx emissions allowances to comply with 2021 ozone season requirements. On April 6, 2022, the EPA published proposed rules seeking to impose further significant reductions in EGU NOx emissions in 25 states, including West Virginia. The EPA held a virtual public hearing regarding the proposed rules on April 21, 2022, with comments due June 6, 2022. Depending on the outcome of any appeals and how the EPA and the states ultimately implement the revised CSAPR Update, the future cost of compliance may materially impact FirstEnergy's operations, cash flows and financial condition.
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 several initiatives to reduce GHG emissions at the state, federal and international level. Certain northeastern states are participating in the RGGI and western states led by California, have implemented programs, primarily cap and trade mechanisms, to control emissions of certain GHGs. Additional policies reducing GHG emissions, such as demand reduction programs, renewable portfolio standards and renewable subsidies have been implemented across the nation.
In September 2016, the U.S. joined in adopting the agreement reached on December 12, 2015, at the United Nations Framework Convention on Climate Change meetings in Paris to reduce GHG.GHGs. The Paris Agreement’s non-binding obligations to limit global warming to below two degrees Celsius became effective on November 4, 2016. On June 1, 2017, the Trump Administration announced that the U.S. would cease all participation in the Paris Agreement. On January 20, 2021, President Biden signed an executive order re-adopting the agreement on behalf of the U.S. In November 2020, FirstEnergy published its Climate Story which includes its climate position and strategy, as well as a new comprehensive and ambitious GHG emission goal. FirstEnergy pledged to achieve carbon neutrality by 2050 and set an interim goal for a 30% reduction in GHGGHGs 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,generation, will be developed by working collaboratively with regulators in West Virginia. Determination of the useful life of the regulated coal-fired generating facilitiesgeneration 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 GHGGHGs under the Clean Air Act,” concluding that concentrations of several key GHGs constitute an "endangerment" and may be regulated as "air pollutants" under the CAA and mandated measurement and reporting of GHG emissions from certain sources, including electric generating plants. Subsequently, the EPA released its final CPP regulations in August 2015 to reduce CO2 emissions from existing fossil fuel-fired EGUs and finalized separate regulations imposing CO2 emission limits for new, modified, and reconstructed fossil fuel-fired EGUs. Numerous states and private parties filed appeals and motions to stay the CPP with the D.C. Circuit in October 2015. On February 9, 2016, the U.S. Supreme Court stayed the rule during the pendency of the challenges to the D.C. Circuit and U.S. Supreme Court. On March 28, 2017, an executive order, entitled “Promoting Energy Independence and Economic Growth,” instructed the EPA to review the CPP and related rules addressing GHG emissions and suspend, revise or rescind the rules if appropriate. On June 19, 2019, the EPA repealed the CPP and replaced it with the ACE rule that established guidelines for states to develop standards of performance to address GHG emissions from existing coal-fired power plants.generation. On January 19, 2021, the D.C. Circuit vacated and remanded the ACE rule declaring that the EPA was “arbitrary and capricious” in its rule making and, as such, the ACE rule is no longer in effect and all actions thus far taken by states to implement the federally mandated rule are now null and void. The D.C. Circuit decision was appealed by several states, including West Virginia, as well as other interested parties. On February 28, 2022, the U.S. Supreme Court heard oral arguments on the matter is subject to legal challenge. Depending on the outcomes of further appealsthe appeal 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.
On September 30, 2015, the EPA finalized new, more stringent effluent limits for the Steam Electric Power Generating category (40 CFR Part 423) for arsenic, mercury, selenium and nitrogen for wastewater from wet scrubber systems and zero discharge of pollutants in ash transport water. The treatment obligations were to phase-in as permits are renewed on a five-year cycle from 2018 to 2023. However, on April 13, 2017, the EPA granted a Petition for Reconsideration and on September 18, 2017, the EPA postponed certain compliance deadlines for two years. On August 31, 2020, the EPA issued a final rule revising the effluent limits for discharges from wet scrubber systems, retaining the zero-discharge standard for ash transport water, (with some limited discharge allowances), and extending the deadline for compliance to December 31, 2025 for both. In addition, the EPA allows for less stringent limits for sub-categories of generating units based on capacity utilization, flow volume from the scrubber system, and unit retirement date. The EPA is reconsidering the ELG rule with a publicly announced target of issuing a proposed revised
rule in the Fall of 2022 and a final rule by the Spring of 2023. In the interim, the rule issued on August 31, 2020, remains in effect. Depending on the outcome of appeals and how final rules are ultimately implemented, and the compliance options MP elects to take with the new rules, the compliance with these standards, which could includerequire additional capital expenditures or changes in operations at the Ft. Martin and Harrison power stations may be substantial and changesfrom what was filed with the WVPSC in December 2021 that seeks approval of environmental compliance projects to MP’s operations at those power stations may also result.comply with the EPA’s ELG.
On September 29, 2016, FirstEnergy received
After the completion of a request fromnegotiated settlement, a complaint was filed by the EPA for information pursuant to CWA Section 308(a) for information concerning boron exceedances of effluent limitations establishedand PA DEP on January 10, 2022 in the NPDES PermitFederal District Court for the former Mitchell Power Station’s Mingo landfill, owned by WP. On November 1, 2016,Western District of Pennsylvania, alleging, among other things, that WP provided an initial response that contained information related to a similar boron issue at the former Springdale Power Station’s 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 has fully complied 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 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 Department of Justice issued a letter and tolling agreement to WP on behalf of the EPA alleging violations ofviolated the CWA at the Springdale and Mingo landfills and seeking to enter settlement negotiations in lieu of filing a complaint. To settle allegedconnection with past boron exceedances at both facilities,WP’s Springdale and Mingo landfills. On January 11, 2022, WP has agreed toentered into a consent decree with the EPA and PA DEP resolving the matters addressed in the complaint, which, among other things, required a civil penalty of $610 thousand. The District Court entered the Consent Decree as final on March 17, 2022 and WP subsequently paid the penalty amount of $610 thousand to be paid over two years. It is expected that WP will sign a Consent Decree memorializing the pipeline construction milestones and the civil penalty payments in the fourth quarter of 2021.as required therein.
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 allowed 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 2024.2024, which request is pending technical review by the EPA. AE Supply continues to operate McElroy’s Run as a disposal facility for FG’s Pleasants Power Station.
FE or its subsidiaries have been named as potentially responsible parties at waste disposal sites, which may require cleanup under the CERCLA. Allegations of disposal of hazardous substances at historical sites and the liability involved are often unsubstantiated and subject to dispute; however, federal law provides that all potentially responsible parties for a particular site may be liable on a joint and several basis. Environmental liabilities that are considered probable have been recognized on the Consolidated Balance Sheets as of September 30,March 31, 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 $101110 million have been accrued through September 30, 2021,March 31, 2022, of which, approximately $67$70 million are for environmental remediation of former MGP and gas holder facilities in New Jersey, which are being recovered by JCP&L through a non-bypassable SBC. FE or its subsidiaries could be found potentially responsible for additional amounts or additional sites, but the loss or range of losses cannot be determined or reasonably estimated at this time.
OTHER LEGAL PROCEEDINGS
United States v. Larry Householder, et al.
On July 21, 2020, a complaint and supporting affidavit containing federal criminal allegations were unsealed against the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder. Also, on July 21, 2020, and in connection with the investigation, FirstEnergy received subpoenas for records from the U.S. Attorney’s Office for the 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 this matter. Under the DPA, FE has agreed to the filing of a criminal information charging FE with one count of conspiracy to commit honest services wire fraud. The DPA requires that FirstEnergy, among other obligations: (i) continue to cooperate with the U.S. Attorney’s Office in all matters relating to the conduct described in the DPA and other conduct under investigation by the U.S. government; (ii) pay a criminal monetary penalty totaling $230 million within sixty days, which shall consist of (x) $115
million paid by FE to the United States Treasury and (y) $115 million paid by FE to the ODSA to fund certain assistance programs, as determined by the ODSA, for the benefit of low-income Ohio electric utility customers; (iii) publish a list of all payments made in 2021 to either 501(c)(4) entities or to entities known by FirstEnergy to be operating for the benefit of a public official, either directly or indirectly, and update the same on a quarterly basis during the term of the DPA; (iv) issue a public statement, as dictated in the DPA, regarding FE’s use of 501(c)(4) entities; and (v) continue to implement and review its compliance and ethics program, internal controls, policies and procedures designed, implemented and enforced to prevent and detect violations of the U.S. laws throughout its operations, and to take certain related remedial measures. The $230 million payment will neither be recovered in rates or charged to FirstEnergy customers nor will FirstEnergy seek any tax deduction related to such payment. The entire amount of the monetary penalty was recognized as expense in the second quarter of 2021, and paid in the third quarter of 2021. Under the terms of the DPA, the criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA.
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). NoUnless otherwise indicated, no contingency has been reflected in FirstEnergy’s consolidated financial statements with respect to these lawsuits as a loss is neither probable, nor is a loss or range of a loss reasonably estimable.
•Owens v.In re FirstEnergy Corp. et al. and Frand v. FirstEnergy Corp. et al.Securities Litigation (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. FE believes that it is probable that it will incur a loss in connection with the resolution of this lawsuit. Given the ongoing nature and complexity of such litigation, FE cannot yet reasonably estimate a loss or range of loss.
•GendrichMFS Series Trust I, et al. v. Anderson,FirstEnergy Corp., et al. and SloanBrighthouse Funds II – MFS Value Portfolio, et al. v. Anderson,FirstEnergy Corp., et al. (Common Pleas(Federal District Court, Summit County, OH);S.D. Ohio) on July 26, 2020December 17, 2021 and July 31, 2020, respectively,February 21, 2022, purported stockholders of FE filed shareholder derivative action lawsuitscomplaints 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 officers, and certain current and former officers of EH. The complaints allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act by issuing alleged misrepresentations or omissions regarding FE’s business and its results of operations, and seek the same relief as the In re FirstEnergy officers, alleging civil Racketeer InfluencedCorp. Securities Litigation described above. FE believes that it is probable that it will incur losses in connection with the resolution of these lawsuits. Given the ongoing nature and Corrupt Organizations Act
violations and related state law claims. These actions have been 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 ascomplexity of such litigation, FE cannot yet reasonably estimate a defendant was filed on September 27, 2021 and remains pending. Discovery is proceeding.loss or range of loss.
•State of Ohio ex rel. Dave Yost, Ohio Attorney General v. FirstEnergy Corp., et al. and City of Cincinnati and City of Columbus v. FirstEnergy Corp. (Common Pleas Court, Franklin County, OH)OH, all actions have been consolidated); on September 23, 2020 and October 27, 2020, the OAG and the cities of Cincinnati and Columbus, respectively, filed complaints against several parties including FE (the OAG also named FES as a defendant), each alleging civil violations of the Ohio Corrupt Activity Act in connection with the passage of HB 6. On January 13, 2021, the OAG filed a motion for a temporary restraining order and preliminary injunction against FirstEnergy seeking to enjoin FirstEnergy from collecting the Ohio Companies' decoupling rider. On January 31, 2021, FE reached a partial settlement with the OAG and the cities of Cincinnati and Columbus with respect to the temporary restraining order and preliminary injunction request and related issues. In connection with the partial settlement, the Ohio Companies filed an application on February 1, 2021, with the PUCO to set their respective decoupling riders (CSR) to zero. On February 2, 2021, the PUCO approved the application of the Ohio Companies setting the rider to zero and no additional customer bills will include new decoupling rider charges after February 8, 2021. These actions have been consolidated. The cases are stayed pending final resolution of the United States v. Larry Householder, et al. criminal proceeding described above, although on August 13, 2021, new defendants were added to the complaint, including two former officers of FirstEnergy. On November 9, 2021, the OAG filed a motion to lift the agreed-upon stay, which FE opposed on November 19, 2021; the motion remains pending. On December 2, 2021, the cities and FE entered a stipulated dismissal with prejudice of the cities’ suit.
•Smith v. FirstEnergy Corp. et al., Buldas v. FirstEnergy Corp. et al., and Hudock and Cameo Countertops, Inc. v. FirstEnergy Corp. et al. (Federal District Court, S.D. Ohio, all actions have been consolidated); on July 27, 2020, July 31, 2020, and August 5, 2020, respectively, purported customers of FE filed putative class action lawsuits against FE and FESC, as well as certain current and former FE officers, alleging civil Racketeer Influenced and Corrupt Organizations Act violations and related state law claims. FE agreed to a settlement to resolve these claims on April 11, 2022. In the fourth quarter of 2021, FirstEnergy recognized a pre-tax reserve of $37.5 million in the aggregate with respect to these lawsuits and the Emmons lawsuit below.
•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,the Ohio Companies, along with FES, alleging several causes of action, including negligence and/or gross negligence, breach of contract, unjust enrichment, and unfair or deceptive consumer acts or practices. FE agreed to a settlement to resolve these claims on April 11, 2022. In the fourth quarter of 2021, FirstEnergy recognized a pre-tax reserve of $37.5 million in the aggregate with respect to this lawsuit and the lawsuits above consolidated with Smith in the S.D. Ohio alleging, among other things, civil violations of the Racketeer Influenced and Corrupt Organizations Act.
On October 1,February 9, 2022, FE, acting through the SLC, agreed to a settlement term sheet to resolve the following shareholder derivative lawsuits relating to HB 6 and the now former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with Mr. Householder that were filed in the S.D. Ohio, the N.D. Ohio, and the Ohio Court of Common Pleas, Summit County:
•Gendrich v. Anderson, et al. and Sloan v. Anderson, et al. (Common Pleas Court, Summit County, OH, all actions have been consolidated); on July 26, 2020 plaintiffsand July 31, 2020, respectively, purported stockholders of FE filed shareholder derivative action lawsuits against certain FE directors and officers, alleging, among other things, breaches of fiduciary duty.
•Miller v. Anderson, et al. (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. (Federal 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 Exchange Act.
On March 11, 2022, the parties executed a stipulation and agreement of settlement, and filed a First Amended Complaint, adding asmotion the same day requesting preliminary settlement approval in the S.D. Ohio. The settlement agreement, if approved, will fully resolve the shareholder derivative lawsuits above and stipulates a plaintiff a purported customerseries of FirstEnergy and alleging a civil violationcorporate governance enhancements, that has resulted or is expected to result in the following:
•Six members of the Ohio Corrupt Activity ActFE Board, Messrs. Michael J. Anderson, Donald T. Misheff, Thomas N. Mitchell, Christopher D. Pappas and civil conspiracy againstLuis A. Reyes, and Ms. Julia L. Johnson are not standing for re-election at FE’s 2022 annual shareholder meeting;
•A special FE FESC and FES. On May 4, 2021, the court granted the defendants’ motionBoard committee of at least three recently appointed independent directors will be formed to dismiss plaintiffs’ breach of contract claims and denied the remainderinitiate a review process of the motionscurrent senior executive team, to dismiss. begin within 30 days of the 2022 annual shareholder meeting;
•The defendants submitted answersFE Board will oversee FE’s lobbying and political activities, including periodically reviewing and approving political and lobbying action plans prepared by management;
•An FE Board committee of recently appointed independent directors will oversee the implementation and third-party audits of the FE Board-approved action plans with respect to the complaint on June 1, 2021. Discovery is proceeding.political and lobbying activities;
•FE will implement enhanced disclosure to shareholders of political and lobbying activities, including enhanced disclosure in its annual proxy statement; and
•FE will further align financial incentives of senior executives to proactive compliance with legal and ethical obligations.
The settlement also includes a payment to FirstEnergy of $180 million, to be paid by insurance after court approval, less any court-ordered attorney’s fees awarded to plaintiffs.
In letters dated January 26, and February 22, 2021, staff of FERC's Division of Investigations notified FirstEnergy that the Division is conducting an investigation of FirstEnergy’s lobbying and governmental affairs activities concerning HB 6, and staff directed FirstEnergy to preserve and maintain all documents and information related to the same as such have been developed as part of an ongoing non-public audit being conducted by FERC's Division of Audits and Accounting. While no contingency has been reflected in itsthe consolidated financial statements, FirstEnergy believes that it is probable that it will incur a loss in connection with the resolution of the FERC investigation. Given the ongoing nature and complexity of the review, inquiries and investigations, FirstEnergy cannot yet reasonably estimate a loss or range of loss that may arise from the resolution of the FERC investigation.
The outcome of any of these lawsuits, governmental investigations and audit areis 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.
Internal Investigation Relating to United States v. Larry Householder, et al.
As previously disclosed, a committee of independent members of the FE Board has 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 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. Additionally, on November 8, 2020, the Senior Vice President and Chief Legal Officer, and 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. Subsequently, 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 purported consulting agreement discussed above.
Additionally, 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.
Also, in connection with the internal investigation, FirstEnergy identified certain transactions, which, in some instances, extended back ten years of 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.
The internal investigation has revealed no new material issues since FirstEnergy’s Form 10-K was filed on February 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 8,7, “Regulatory Matters.”
FirstEnergy accrues legal liabilities only when it concludes that it is probable that it has an obligation for such costs and can reasonably estimate the amount of such costs. In cases where FirstEnergy determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss if such estimate can be made. If it were ultimately determined that FE or its subsidiaries have legal liability or are otherwise made subject to liability based on any of the matters referenced above, it could have a material adverse effect on FE’s or its subsidiaries’ financial condition, results of operations, and cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, "Organization and Basis of Presentation," for a discussion of new accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “FirstEnergy Corp. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk Information” in Item 2 above.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The management of FirstEnergy, with the participation of the chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, have reviewed and evaluated the effectiveness of its disclosure controls and procedures, (asas defined under the Exchange Act, in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of September 30, 2021.the end of the period covered by this report. Based on that evaluation, the chief executive officerChief Executive Officer and chief financial officerChief Financial Officer of FirstEnergy have concluded that its disclosure controls and procedures were effective as ofSeptember 30, 2021.
Remediation of Previous Material Weakness in Internal Control Over Financial Reporting
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.
FirstEnergy 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 FirstEnergy’s policies and its code of conduct, which resulted in inappropriate conduct that was inconsistent with FirstEnergy’s policies and its code of conduct.
This material weakness did not result in a material misstatement of FirstEnergy’s annual or interim consolidated financial statements. However, this material weakness could have resulted in material misstatements to the annual or interim consolidated financial statements that would not have been prevented or detected.
Management and the FE Board take FirstEnergy’s internal control over financial reporting and the integrity of its financial statements seriously. FirstEnergy has completed the documentation and testingend 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, along with the Audit Committee, and its subcommittee, remediated the material weaknessperiod covered by focusing on people, training, and communication as detailed in the following remedial activities:
•the appointment of a new Chief Executive Officer to improve the tone at the top;
•the termination of certain members of senior management, including FirstEnergy’s former Chief Executive Officer, for violations of certain FirstEnergy 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;
•the establishment of a 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 implementation of changes (as appropriate) in FirstEnergy’s compliance 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 and the FE Board are committed to maintaining a strong internal control environment and believe the above efforts, which have been tested and are operating effectively, have effectively remediated the material weakness.this report.
(b) Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2021,March 31, 2022, 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)Act) that have materially affected, or are reasonably likely to materially affect, FirstEnergy’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required for Part II, Item 1 is incorporated by reference to the discussions in Note 8,7, “Regulatory Matters,” and Note 9,8, “Commitments, Guarantees and Contingencies,” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
ITEM 1A. RISK FACTORS
You should carefully consider the risk factors discussed in "Item 1A. Risk Factors" in FirstEnergy’s Annual Report on Form 10-K for the year ended December 31, 2020, and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021, and June 30, 2021, which could materially affect FirstEnergy’s business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| | | | | | | | | | | |
| Exhibit Number | Description |
| | | |
| (A) | 10.1 | | CreditForm of 2022-2024 Cash-Based Performance-Adjusted Restricted Stock Unit Award 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) |
| (A) | 10.2 | | CreditForm of 2022-2024 Stock-Based Performance-Adjusted Restricted Stock Unit Award 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. 4 to Credit Agreement, dated as of July 21, 2021, among 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 (incorporated by reference to FirstEnergy’s Form 8-K filed July 22, 2021, Exhibit 10.2, File No. 333-21011) |
| 10.9 | | Waiver and Amendment No. 4 to Credit Agreement, dated as of 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 (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, 2021,March 31, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) related notes to these financial statements and (vi) document and entity information |
| 104 | | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document contained in Exhibit 101) |
(A) Provided herein in electronic format as an exhibit.
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, FirstEnergy has not filed as an exhibit to this Form 10-Q any instrument with respect to long-term debt if the respective total amount of securities authorized thereunder does not exceed 10% of its respective total assets, but hereby agrees to furnish to the SEC on request any such documents.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
October 28, 2021April 21, 2022
| | | | | |
| FIRSTENERGY CORP. |
| Registrant |
| |
| /s/ Jason J. Lisowski |
| Jason J. Lisowski |
| Vice President, Controller
and Chief Accounting Officer |
