Forward-Looking Statements: This Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 based on information currently available to management. Such statements are subject to certain risks and uncertainties and readers are cautioned not to place undue reliance on these forward-looking statements. These statements include declarations regarding management's intents, beliefs and current expectations. These statements typically contain, but are not limited to, the terms "anticipate," "potential," "expect," "forecast," "target," "will," "intend," "believe," "project," "estimate," "plan" and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, which may include the following (see Glossary of Terms for definitions of capitalized terms): •The potential liabilities, increased costs and unanticipated developments resulting from government investigations and agreements, including those associated with compliance with or failure to comply with the DPA. •The risks and uncertainties associated with government investigations and audits regarding HB 6 and related matters, including potential adverse impacts on federal or state regulatory matters, including, but not limited to, matters relating to rates. •The risks and uncertainties associated with litigation, arbitration, mediation, and similar proceedings, particularly regarding HB 6 related matters, including risks associated with obtaining dismissal of the derivative shareholder lawsuits. •Changes in national and regional economic conditions, including recession, inflationary pressure, supply chain disruptions, higher energy costs, and workforce impacts, affecting us and/or our customers and those vendors with which we do business. •Weather conditions, such as temperature variations and severe weather conditions, or other natural disasters affecting future operating results and associated regulatory actions or outcomes in response to such conditions. •Legislative and regulatory developments, including, but not limited to, matters related to rates, compliance and enforcement activity, cybersecurity, and climate change. •The risks associated with cyber-attacks and other disruptions to our, or our vendors', information technology system, which may compromise our operations, and data security breaches of sensitive data, intellectual property and proprietary or personally identifiable information. •The ability to accomplish or realize anticipated benefits from our FE Forward initiative and our other strategic and financial goals, including, but not limited to, overcoming current uncertainties and challenges associated with the ongoing government investigations, executing our transmission and distribution investment plans, greenhouse gas reduction goals, controlling costs, improving our credit metrics, growing earnings, strengthening our balance sheet, and satisfying the conditions necessary to close the FET Minority Equity Interest Sale. •Changing market conditions affecting the measurement of certain liabilities and the value of assets held in our pension trusts may negatively impact our forecasted growth rate, results of operations, and may also cause us to make contributions to our pension sooner or in amounts that are larger than currently anticipated. •Mitigating exposure for remedial activities associated with retired and formerly owned electric generation assets. •Changes to environmental laws and regulations, including, but not limited to, those related to climate change. •Changes in customers' demand for power, including, but not limited to, economic conditions, the impact of climate change, or energy efficiency and peak demand reduction mandates. •The ability to access the public securities and other capital and credit markets in accordance with our financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us, including the increasing number of financial institutions evaluating the impact of climate change on their investment decisions. •Actions that may be taken by credit rating agencies that could negatively affect either our access to or terms of financing or our financial condition and liquidity. •Changes in assumptions regarding factors such as economic conditions within our territories, the reliability of our transmission and distribution system, or the availability of capital or other resources supporting identified transmission and distribution investment opportunities. •The potential of non-compliance with debt covenants in our credit facilities. •The ability to comply with applicable reliability standards and energy efficiency and peak demand reduction mandates. •Human capital management challenges, including among other things, attracting and retaining appropriately trained and qualified employees and labor disruptions by our unionized workforce. •Changes to significant accounting policies. •Any changes in tax laws or regulations, including, but not limited to, the IRA of 2022, or adverse tax audit results or rulings. •The risks and other factors discussed from time to time in ourSEC filings. Dividends declared from time to time on our common stock during any period may in the aggregate vary from prior periods due to circumstances considered by the FE Board at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. 26 -------------------------------------------------------------------------------- These forward-looking statements are also qualified by, and should be read together with, the risk factors included in (a) Item 1A. Risk Factors, (b) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and (c) other factors discussed herein and in FirstEnergy's other filings with theSEC . 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 our 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. We expressly disclaim 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. Forward-looking and other statements in this Annual Report on Form 10-K regarding our Climate Strategy, including our GHG emission reduction goals, are not an indication that these statements are necessarily material to investors or required to be disclosed in our filings with theSEC . In addition, historical, current and forward-looking statements regarding climate matters, including GHG emissions, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve and assumptions that are subject to change in the future. 27 --------------------------------------------------------------------------------
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.
FirstEnergy is proceeding with the consolidation of the Pennsylvania Companies into a new, single operating entity. The PA Consolidation will require, among other steps: (a) the transfer of certainPennsylvania -based transmission assets owned by WP to KATCo, (b) the transfer of Class B equity interests of MAIT currently held by PN and ME to FE (and ultimately transferred to FET as part of the FET Minority Equity Interest Sale), (c) the formation of PA NewCo and (d) the merger of each of the Pennsylvania Companies with and into PA NewCo, with PA NewCo surviving such mergers as the successor-in-interest to all assets and liabilities of the Pennsylvania Companies. Following completion of the PA Consolidation, PA NewCo will be FE's only regulated utility inPennsylvania encompassing the operations previously conducted individually by the Pennsylvania Companies. Consummation of the PA Consolidation is contingent upon numerous conditions, including the approval of NYPSC, PPUC andFERC . Subject to receipt of such regulatory approvals, FirstEnergy expects that the PA Consolidation will close by early 2024. The Regulated Distribution segment distributes electricity through FirstEnergy's ten utility operating companies, serving approximately six million customers within 65,000 square miles ofOhio ,Pennsylvania ,West Virginia ,Maryland ,New Jersey andNew York , and purchases power for its POLR, SOS, SSO and default service requirements inOhio ,Pennsylvania ,New Jersey , andMaryland . This segment also controls 3,580 MWs of regulated electric generation capacity located primarily inWest Virginia andVirginia . 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 service areas of, and customers served by, FirstEnergy's regulated
distribution utilities as of
Company Area Served
Customers Served
(In thousands)
JCP&L Northern, Western and East Central New Jersey 1,158
OE Central and Northeastern Ohio 1,068
CEI Northeastern Ohio 755
WP Southwest, South Central and Northern Pennsylvania 737
PN Western Pennsylvania and Western New York 588
ME Eastern Pennsylvania 587
PE Western Maryland and Eastern West Virginia 439
MP Northern, Central and Southeastern West Virginia 396
TE Northwestern Ohio 315
Penn Western Pennsylvania 171
6,214
The Regulated Transmission segment provides transmission infrastructure owned
and operated by the Transmission Companies and certain of FirstEnergy's
utilities (JCP&L, MP, PE and WP) to transmit electricity from generation sources
to distribution facilities. The segment's revenues are primarily derived from
forward-looking formula rates. Under forward-looking formula rates, the revenue
requirement is updated annually based on a projected rate base and projected
costs, which is subject to an annual true-up based on actual rate base and
costs. The segment's results also reflect the net transmission expenses related
to the delivery of electricity on FirstEnergy's transmission facilities. On
November 6, 2021 , FirstEnergy, along with FET, entered into the FET P&SA I, 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
would own 19.9% of the issued and outstanding membership interests of FET, for a
purchase price of $2.375 billion . The transaction closed on May 31, 2022 .
On February 2, 2023 , FE, along with FET, entered into the FET P&SA II with
Brookfield and the Brookfield Guarantors, pursuant to which FE agreed to sell to
Brookfield at the closing, and Brookfield agreed to purchase from FE, an
incremental 30% equity interest in FET for a purchase price of $3.5 billion . The
purchase price will be payable in part by the issuance of a promissory note
expected to be in the principal amount of $1.75 billion . The remaining $1.75
billion of the purchase price will be payable in cash at the closing. As a
result of the consummation of the transaction, Brookfield's interest in FET will
increase from 19.9% to 49.9%, while FE will retain the remaining 50.1% ownership
interests of FET. The transaction is subject to customary closing conditions,
including approval from the FERC and certain state utility commissions, and
completion of review by the CFIUS. In addition, pursuant to the FET P&SA II,
FirstEnergy has agreed to make the necessary filings with the applicable
regulatory
28
--------------------------------------------------------------------------------authorities for the PA Consolidation. The FET Minority Equity Interest Sale is expected to close by early 2024. Upon closing, FET will continue to be consolidated in FirstEnergy's GAAP financial statements.
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 theFES 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 ofDecember 31, 2022 , 67 MWs of electric generating capacity, representing AE Supply's OVEC capacity entitlement, was also included in Corporate/Other for segment reporting. As ofDecember 31, 2022 , Corporate/Other had approximately$5.4 billion of FE holding company debt. 29 --------------------------------------------------------------------------------
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 EESG and strategic priorities, and positively impact our stakeholders.
To solidify our role as an industry leader, we have developed a long-term strategy with priorities that are centered on our mission statement. These priorities reflect a strong foundation with a customer-centered focus that emphasizes modern experiences, new growth and affordable energy bills, and enables the energy transition to a clean, resilient and secure electric grid.
We are proud of the steps we have already taken to demonstrate our commitment to our strategy and look forward to improving our performance and executing on these strategic priorities.
FirstEnergy's Business
As a fully regulated electric utility, FirstEnergy is focused on stable and predictable earnings and cash flow from its Regulated Distribution and Regulated Transmission businesses that deliver enhanced customer service and reliability.
FirstEnergy's Regulated Distribution business is comprised of a geographically and regulatory diverse collection of electric utilities delivering customer-focused sustainable growth. This business operates in a territory of 65,000 square miles, across the Midwest & Mid-Atlantic regions, one of the largest contiguous territories inthe 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 more than$9 billion in investment plans (or 53% of the total FirstEnergy investment plan) from 2021 to 2025. Through its investment plan, Regulated Distribution is focused on improving reliability and added operating flexibility to the distribution infrastructure, which provide benefits to the customers and communities those Utilities serve.
In addition to our investments to rebuild critical infrastructure and improve reliability, current and future distribution investment opportunities that support our EESG 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; •Energy efficiency and demand response initiatives that assist customers in lowering their overall energy bills while also helping us to reduce peak system demand; •Utility-Scale Solar Generation that lowers our carbon footprint; •Pilot program to install battery storage systems; •Information Systems - enhance our core information infrastructure of our distribution systems; and •Supporting economic development to attract new business.
FirstEnergy expects to file base rate cases in
30
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FirstEnergy's Regulated Transmission business is a premier, high quality
transmission business, with approximately 24,000 miles of transmission lines in
operation and one of the largest transmission systems in PJM. The Transmission
Companies and certain of FirstEnergy's utilities (JCP&L, MP, PE and WP) are
focused on "Energizing the Future" with investments that support clean 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
is a continued long-term pipeline of investment opportunities for its existing
transmission infrastructure 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 EESG 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; •JCP&L awarded approximately$723 million to connect clean energy generated byNew Jersey's offshore wind farms to the power grid; •Exploring real-time technologies: emerging technologies to enhance data collection; and •Making smart investments to modernize the grid to integrate future renewables. OnFebruary 2, 2023 , FE, along with FET, entered into the FET P&SA II withBrookfield and the Brookfield Guarantors, pursuant to which FE agreed to sell toBrookfield at the closing, andBrookfield agreed to purchase from FE, an incremental 30% equity interest in FET for a purchase price of$3.5 billion . The purchase price will be payable in part by the issuance of a promissory note expected to be in the principal amount of$1.75 billion . The remaining$1.75 billion of the purchase price will be payable in cash at the closing. As a result of the consummation of the transaction,Brookfield's interest in FET will increase from 19.9% to 49.9%, while FE will retain the remaining 50.1% ownership interests of FET. The transaction is subject to customary closing conditions, including approval from theFERC and certain state utility commissions, and completion of review by the CFIUS. In addition, pursuant to the FET P&SA II, FirstEnergy has agreed to make the necessary filings with the applicable regulatory authorities for the PA Consolidation. The FET Minority Equity Interest Sale is expected to close by early 2024. Upon closing, FET will continue to be consolidated in FirstEnergy's GAAP financial statements. FirstEnergy is proceeding with the consolidation of the Pennsylvania Companies into a new, single operating entity. The PA Consolidation will require, among other steps: (a) the transfer of certainPennsylvania -based transmission assets owned by WP to KATCo, (b) the transfer of Class B equity interests of MAIT currently held by PN and ME to FE (and ultimately transferred to FET as part of the FET Minority Equity Interest Sale), (c) the formation of PA NewCo and (d) the merger of each of the Pennsylvania Companies with and into PA NewCo, with PA NewCo surviving such mergers as the successor-in-interest to all assets and liabilities of the Pennsylvania Companies. Following completion of the PA Consolidation, PA NewCo will be FE's only regulated utility inPennsylvania encompassing the operations previously conducted individually by the Pennsylvania Companies. Consummation of the PA Consolidation is contingent upon numerous conditions, including the approval of NYPSC, PPUC andFERC . Subject to receipt of such regulatory approvals, FirstEnergy expects that the PA Consolidation will close by early 2024. OnDecember 13, 2021 , FE privately issued toBIP Securities II-B L.P. , an affiliate ofBlackstone 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 . OnApril 21, 2022 ,FERC approved theBlackstone representative's ability to participate as a voting member of the FE Board.Sean T. Klimczak , theBlackstone Infrastructure Partners -selected representative, was elected to the FE Board at the 2022 annual shareholders' meeting. OnOctober 18, 2021 , FE, FET, the Utilities, and the Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses. See "Capital Resources and Liquidity" below for additional details. Together, these transactions enhance FirstEnergy's credit profile, provide funding for the strategic investments discussed above, and address all of FirstEnergy's equity plans, with the exception of annual issuances of up to$100 million under regular dividend reinvestment plans and employee benefit stock investment plans, through at least 2025. Also, as with the recently completed FET transaction, premium valuations of our distribution and transmission businesses, together with growth in cash flow from operations resulting from the investment opportunities described above, could provide FirstEnergy future optionality to accelerate further strengthening of the balance sheet and enhance shareholder value. OnSeptember 15, 2022 , FirstEnergy announced that the FE Board had appointed Mr.John W. Somerhalder II to serve as Interim President and Chief Executive Officer of FirstEnergy, effective as ofSeptember 16, 2022 . In connection with his appointment as Interim President and Chief Executive Officer,Mr. Somerhalder will continue to serve as Chair of the FE Board. The FE Board is conducting a search of external candidates to identify a permanent President and Chief Executive Officer of FirstEnergy.Mr. Somerhalder's appointment follows the decision of Mr.Steven E. Strah onSeptember 15, 2022 , to retire as Director and President and Chief Executive Officer of FirstEnergy, effective as ofSeptember 16, 2022 . 31 --------------------------------------------------------------------------------
FE Forward
InFebruary 2021 , FirstEnergy announced a new transformation initiative, FE Forward, to build upon FirstEnergy's strong operations and business fundamentals and deliver immediate value and resilience, with targeted working capital improvements by 2022, and capital efficiencies ramping up through 2024 that would be redeployed in a more diverse capital investment program. In the two years that FE Forward has been active, we have built new solutions to serve our customers, changed how we plan and execute work in the field, established a "digital factory" within our information technology organization to automate and modernize our business solutions, reorganized the company to enable more efficiency and collaboration, and realized working capital improvements and annualized capital expenditures in line with our previously published expectations. After assessing our accomplishments and shortfalls, including the continuing challenges from inflation and supply chain disruptions, FE Forward has been integrated into our ongoing efforts for continuous improvement, including the strategic reduction of operating expenditures and continued reinvestment in a more diverse capital program in support of our long-term strategy. As such, FirstEnergy has transitioned away from measuring these cash flow metrics and will no longer publish a forecast of these metrics.
In addition to FE Forward, FirstEnergy will leverage other opportunities to
reduce costs - such as filling only critical positions, implementing our
facility optimization plans, as well as exploring other additional, sustainable
opportunities, such as reducing contractor spend. Similar to our PA
Consolidation discussed above, FirstEnergy is also evaluating the legal,
financial, operational, and branding benefits of consolidating the Ohio
Companies into a single
The result of our combined efforts will help build a stronger, more sustainable company for the near and long term.
Climate Strategy
Our commitment to climate is a significant component of our company's overarching strategy, especially our desire to enable the transition to a clean energy future. Executing our Climate Strategy and advancing the transition to clean energy requires addressing, among other things: emerging federal and state decarbonization goals; physical risks of climate change; industry trends and technology advancements; and customer expectations for cleaner energy, increased usage control, and more sustainable alternatives in transportation, manufacturing and industrial processes. Through our investment plan, we aim to enhance the resiliency, reliability and security of the electric system and support the integration of renewables, electric vehicles, grid modernization improvements and other emerging technologies. As part of our Climate Strategy, we are also committed to reducing GHG emissions. We've pledged to achieve carbon neutrality by 2050, with an interim 30% reduction in GHGs within our direct operational control (Scope 1) by 2030 based on 2019 levels. This Scope 1 GHG goal encompasses company-wide emissions across our transmission, distribution and regulated generation operations.
Key steps in working toward carbon neutrality by 2050 include:
•Reducing Sulfur hexafluoride Emissions: We're working to repair or replace, as appropriate, transmission breakers that leak Sulfur hexafluoride, which is a gas commonly used by energy companies as an electrical insulating material and arc extinguisher in high-voltage circuit breakers and switchgear. If escaped to the atmosphere, it acts as a potent GHG with a global warming potential significantly greater than CO2. •Electrifying our Vehicle Fleet: We're targeting 30% electrification of our light-duty and aerial truck fleet by 2030 and 100% electrification by 2050. To reach our electrification goal, we're striving for 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.
•Transitioning Away from Coal Generation: We've committed to moving beyond our two coal-fired generating plants no later than 2050. Our commitment is consistent with the depreciation rates filing we submitted to the WVPSC, in which we proposed end-of-life dates for the Fort Martin (2035) and Harrison (2040) plants. We intend to engage in a broad stakeholder dialogue and work closely with the WVPSC as we develop and seek approval for that future transition plan.
Future resource plans to achieve carbon reductions, including potential changes in operations or any determination of retirement dates of the regulated coal-fired generating facilities, will be developed by working collaboratively with regulators inWest 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. 32 --------------------------------------------------------------------------------
HB 6 and Related Investigations
OnJuly 21, 2021 , FE entered into a three-year DPA with theU.S. Attorney's Office that, subject to court proceedings, resolves theU.S. Attorney's Office investigation into FirstEnergy relating to FirstEnergy's lobbying and governmental affairs activities concerning HB 6 related to the federal criminal allegations made inJuly 2020 , against former Ohio House SpeakerLarry Householder and other individuals and entities allegedly affiliated withMr. Householder . Among other things, the DPA required FE to pay a monetary penalty of$230 million , which FE paid in the third quarter of 2021. Under the DPA, FE agreed to the filing of a criminal information charging FE with one count of conspiracy to commit honest services wire fraud. The$230 million payment will neither be recovered in rates or charged to FirstEnergy customers nor will FirstEnergy seek any tax deduction related to such payment. The criminal information will be dismissed after FirstEnergy fully complies with its obligations under the DPA. The OAG, certain FE shareholders and FE customers filed several lawsuits against FirstEnergy and certain current and former directors, officers and other employees, each relating to the allegations against the now former Ohio House SpeakerLarry Householder and other individuals and entities allegedly affiliated withMr. Householder . OnFebruary 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 theOhio Court of Common Pleas ,Summit County . OnMarch 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 . OnAugust 23, 2022 , the S.D.Ohio granted final approval of the settlement. OnSeptember 20, 2022 , a purported FE stockholder filed a motion for reconsideration of the S.D.Ohio's final settlement approval. The parties filed oppositions to that motion onOctober 11, 2022 and the motion is under consideration by the S.D.Ohio . The N.D.Ohio matter remains pending. The settlement agreement is expected to fully resolve these shareholder derivative lawsuits and includes a series of corporate governance enhancements, that have resulted in the following: •Six then-members of the FE Board did not stand for re-election at FE's 2022 annual shareholder meeting; •A special FE Board committee of at least three recently appointed independent directors was formed to initiate a review process of the then current senior executive team. The review of the senior executive team by the special FE Board committee and the FE Board was completed inSeptember 2022 ; •The FE Board will oversee FE's lobbying and political activities, including periodically reviewing and approving political and lobbying action plans prepared by management; •An FE Board committee of recently appointed independent directors will oversee the implementation and third-party audits of the FE Board-approved action plans with respect to political and lobbying activities; •FE will implement enhanced disclosure to shareholders of political and lobbying activities, including enhanced disclosure in its annual proxy statement; and •FE will further align financial incentives of senior executives to proactive compliance with legal and ethical obligations.
The settlement also includes a payment to FE of
In addition, onAugust 10, 2020 , theSEC , through itsDivision of Enforcement , issued an order directing an investigation of possible securities laws violations by FE, and onSeptember 1, 2020 , issued subpoenas to FE and certain FE officers. Subsequently, onApril 28, 2021 , andJuly 11, 2022 , theSEC issued additional subpoenas to FE. Further, in letters datedJanuary 26 , andFebruary 22, 2021 , staff ofFERC's Division of Investigations notified FirstEnergy that it is investigating FirstEnergy's lobbying and governmental affairs activities concerning HB 6. OnDecember 30, 2022 ,FERC approved a Stipulation and Consent Agreement that resolves the investigation. The agreement obligates FE to pay a civil penalty of$3.86 million , which was paid inJanuary 2023 , and to submit two annual compliance monitoring reports toFERC's Office of Enforcement regarding improvements to FirstEnergy's compliance programs. FirstEnergy has taken numerous steps to address challenges posed by the HB 6 investigations and improve its compliance culture, including the refreshment of the FE Board, the hiring of key senior executives committed to supporting transparency and integrity, and strengthening and enhancing FirstEnergy's compliance culture through several initiatives. Although the outcome of the HB 6 investigations and state regulatory audits remain unknown, FirstEnergy has also taken several proactive steps to reduce regulatory uncertainty affecting the Ohio Companies. FE terminatedCharles E. Jones as its chief executive officer effectiveOctober 29, 2020 . As a result ofMr. Jones' termination, and due to the determination of a committee of independent members of the FE Board thatMr. Jones violated certain FirstEnergy policies and its code of conduct, all grants, awards and compensation under FirstEnergy's short-term incentive compensation program and long-term incentive compensation program with respect toMr. Jones that were outstanding on the date of termination were forfeited. InNovember 2021 , after a determination by theCompensation Committee of the FE Board that a demand for recoupment was warranted pursuant to the Recoupment Policy, FE made a recoupment demand toMr. Jones of compensation previously paid to him totaling approximately$56 million , the maximum amount permissible under the Recoupment Policy. As such, any amounts payable toMr. Jones under the EDCP will be set off against FE's recoupment demand. There can be no assurance that the efforts to seek recoupment fromMr. Jones will be successful. 33 -------------------------------------------------------------------------------- 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. The Form 10-K discusses 2022 and 2021 items and year-over-year comparisons between 2022 and 2021. Discussions of 2020 items and year-over-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of FirstEnergy's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , filed with theSEC onFebruary 16, 2022 .
RESULTS OF OPERATIONS
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 14, "Segment Information," of the Notes to Consolidated Financial Statements.
Net income by business segment was as follows:
(In millions, except per share
amounts) For the Years Ended December 31, Increase (Decrease)
2022 2021 2020 2022 vs 2021 2021 vs 2020
Net Income By Business Segment:
Regulated Distribution $ 957 $ 1,288 $ 959 $ (331) $ 329
Regulated Transmission 394 408 464 (14) (56)
Corporate/Other (912) (457) (420) (455) (37)
Income from Continuing Operations
$ 1,003 $ (800) $ 236 Discontinued Operations - 44 76 (44) (32) Net Income$ 439 $ 1,283 $ 1,079 $ (844) (65.8) %$ 204 18.9 % Income attributable to noncontrolling interest (continuing operations) 33 - - 33 - Earnings attributable to FE$ 406 $ 1,283 $ 1,079 $ (877) (68.4) %$ 204
18.9 %
EPS Attributable to FE: Income from continuing operations, basic$ 0.71 $ 2.27 $ 1.85 $ (1.56) $ 0.42 Discontinued operation, basic - 0.08 0.14 (0.08) (0.06) Basic EPS$ 0.71 $ 2.35 $ 1.99 $ (1.64) (69.8) %$ 0.36 18.1 % Income from continuing operations, diluted$ 0.71 $ 2.27 $ 1.85 $ (1.56) $ 0.42 Discontinued operation, diluted - 0.08 0.14 (0.08) (0.06) Diluted EPS$ 0.71 $ 2.35 $ 1.99 $ (1.64) (69.8) %$ 0.36 18.1 % 34
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Summary of Results of Operations - 2022 Compared with 2021
Financial results for FirstEnergy's business segments for the years ended
Regulated Regulated Corporate/Other and FirstEnergy
2022 Financial Results Distribution Transmission Reconciling Adjustments Consolidated
(In millions)
Revenues:
Electric $ 10,596 $ 1,863 $ (159) $ 12,300
Other 205 5 (51) 159
Total Revenues 10,801 1,868 (210) 12,459
Operating Expenses:
Fuel 730 - - 730
Purchased power 3,843 - 20 3,863
Other operating expenses 3,404 616 (203) 3,817
Provision for depreciation 967 335 73 1,375
Deferral of regulatory assets, net (362) (3) - (365)
General taxes 831 255 43 1,129
Total Operating Expenses 9,413 1,203 (67) 10,549
Operating Income (Loss) 1,388 665 (143) 1,910
Other Income (Expense):
Debt redemption costs - - (171) (171)
Equity method investment earnings - - 168 168
Miscellaneous income, net 361 36 18 415
Pension and OPEB mark-to-market
adjustment (50) (15) 137 72
Interest expense (526) (230) (283) (1,039)
Capitalized financing costs 35 48 1 84
Total Other Expense (180) (161) (130) (471)
Income (Loss) Before Income Taxes
(Benefits) 1,208 504 (273) 1,439
Income taxes (benefits) 251 110 639 1,000
Net Income (Loss) $ 957 $ 394 $ (912) $ 439
Income attributable to noncontrolling
interest - 33 - 33
Earnings (Loss) Attributable to FE $ 957 $ 361 $ (912) $ 406
35
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Regulated Regulated Corporate/Other and FirstEnergy
2021 Financial Results Distribution Transmission Reconciling Adjustments Consolidated
(In millions)
Revenues:
Electric $ 9,498 $ 1,608 $ (140) $ 10,966
Other 213 10 (57) 166
Total Revenues 9,711 1,618 (197) 11,132
Operating Expenses:
Fuel 481 - - 481
Purchased power 2,947 - 17 2,964
Other operating expenses 2,967 358 (129) 3,196
Provision for depreciation 911 325 66 1,302
Amortization of regulatory assets, net 260 9 - 269
General taxes 789 248 36 1,073
DPA Penalty - - 230 230
Gain on sale of Yards Creek (109) - - (109)
Total Operating Expenses 8,246 940 220 9,406
Operating Income (Loss) 1,465 678 (417) 1,726
Other Income (Expense):
Debt redemption costs (1) (1) - (2)
Equity method investment earnings - - 31 31
Miscellaneous income, net 399 41 46 486
Pension and OPEB mark-to-market
adjustment 270 31 81 382
Interest expense (522) (247) (370) (1,139)
Capitalized financing costs 41 33 1 75
Total Other Expense 187 (143) (211) (167)
Income (Loss) from Continuing
Operations Before Income Taxes
(Benefits) 1,652 535 (628) 1,559
Income taxes (benefits) 364 127 (171) 320
Income (Loss) From Continuing
Operations 1,288 408 (457) 1,239
Discontinued Operations, net of tax - - 44 44 Net Income (Loss) $ 1,288 $ 408 $ (413)$ 1,283 36
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Changes Between 2022 and 2021
Financial Results Regulated Regulated Corporate/Other and FirstEnergy
Increase (Decrease) Distribution Transmission Reconciling Adjustments Consolidated
(In millions)
Revenues:
Electric $ 1,098 $ 255 $ (19) $ 1,334
Other (8) (5) 6 (7)
Total Revenues 1,090 250 (13) 1,327
Operating Expenses:
Fuel 249 - - 249
Purchased power 896 - 3 899
Other operating expenses 437 258 (74) 621
Provision for depreciation 56 10 7 73
Amortization (deferral) of regulatory
assets, net (622) (12) - (634)
General taxes 42 7 7 56
DPA penalty - - (230) (230)
Gain on sale of Yards Creek 109 - - 109
Total Operating Expenses 1,167 263 (287) 1,143
Operating Income (Loss) (77) (13) 274 184
Other Income (Expense):
Debt redemption costs 1 1 (171) (169)
Equity method investment earnings - - 137 137
Miscellaneous income, net (38) (5) (28) (71)
Pension and OPEB mark-to-market
adjustment (320) (46) 56 (310)
Interest expense (4) 17 87 100
Capitalized financing costs (6) 15 - 9
Total Other Expense (367) (18) 81 (304)
Income (Loss) from Continuing
Operations Before Income Taxes
(Benefits) (444) (31) 355 (120)
Income taxes (benefits) (113) (17) 810 680
Income (Loss) From Continuing
Operations (331) (14) (455) (800)
Discontinued Operations, net of tax - - (44) (44) Net Income (Loss) $ (331) $ (14) $ (499) $ (844) Income attributable to noncontrolling interest (continuing operations) - 33 -
33
Earnings (Loss) Attributable to FE $ (331) $ (47) $ (499) $ (877)
37--------------------------------------------------------------------------------
Regulated Distribution - 2022 Compared with 2021
Regulated Distribution's net income decreased$331 million in 2022, as compared to 2021, primarily resulting from higher other operating expenses, customer rate credits associated with the PUCO-approved Ohio Stipulation, change in pension and OPEB mark-to-market adjustments, and higher pension and OPEB expenses, partially offset by higher weather-related usage, rider revenues from capital investment programs, as well as the absence of a$27 million refund for previously collected decoupling revenues inOhio , with interest.
Revenues -
The$1,090 million increase in total revenues resulted from the following sources: For the Years Ended December 31, Increase Revenues by Type of Service 2022 2021 (Decrease) (In millions) Distribution services (1) $ 5,261$ 5,406 $ (145) Generation sales: Retail 4,841 3,730 1,111 Wholesale 494 362 132 Total generation sales 5,335 4,092 1,243 Other 205 213 (8) Total Revenues $ 10,801$ 9,711 $ 1,090 (1) Includes$(27) million of ARP revenues for the year endedDecember 31, 2021 , which is related to the Ohio Companies refund to customers that was previously collected under decoupling mechanisms, with interest. Distribution services revenues decreased$145 million in 2022, as compared to 2021, primarily resulting from customer rate credits associated with the PUCO-approved Ohio Stipulation, as well as adjusted customer rates of the Pennsylvania Companies associated with the Tax Act and lower transmission recovery, which has no material impact to current period earnings, partially offset by higher weather-related usage, the absence of a$27 million refund for previously collected decoupling revenues inOhio with interest, and higher rates associated with riders inOhio ,Pennsylvania andNew Jersey for the recovery of certain capital investment programs.
Distribution services by customer class are summarized in the following table:
For the Years Ended December 31,
(In thousands) Actual Weather-Adjusted
Electric Distribution MWH Increase
Deliveries 2022 2021 Increase 2022 2021 (Decrease)
Residential 55,995 55,624 0.7 % 55,081 55,678 (1.1) %
Commercial(1) 36,317 35,599 2.0 % 36,024 35,744 0.8 %
Industrial 55,169 54,027 2.1 % 55,169 54,027 2.1 %
Total Electric Distribution MWH
Deliveries 147,481 145,250 1.5 % 146,274 145,449 0.6 %
(1) Includes street lighting.
Residential and commercial distribution deliveries were impacted by higher
weather-related customer usage. Cooling degree days were 2.9% below 2021 and
11.5% above normal. Heating degree days were 8.4% above 2021 and 1.0% below
normal. Increases in industrial deliveries were primarily from the primary and
fabricated metal and transportation equipment manufacturing sectors.
Compared to pre-pandemic levels in 2019, weather-adjusted residential
distribution deliveries for the year ended
38-------------------------------------------------------------------------------- The following table summarizes the price and volume factors contributing to the$1,243 million increase in generation revenues in 2022, as compared to 2021: Source of Change in Generation Revenues Increase (Decrease) (In millions) Retail: Change in sales volumes $ 466 Change in prices 645 1,111 Wholesale: Change in sales volumes (15) Change in prices 184 Capacity revenue (37) 132 Change in Generation Revenues $ 1,243 The increase in retail generation sales volumes was primarily due to higher weather-related usage and decreased customer shopping inNew Jersey ,Ohio andPennsylvania . Total generation provided by alternative suppliers as a percentage of total MWH deliveries in 2022, as compared to 2021, decreased to 41% from 46% inNew Jersey , to 78% from 86% inOhio , and to 60% from 63% inPennsylvania . The increase in retail generation prices primarily resulted from higher non-shopping generation auction rates. Retail generation sales, excluding those inWest Virginia , have no material impact to earnings.
Wholesale generation revenues increased
Operating Expenses -
Total operating expenses increased
•Fuel expense increased
•Purchased power costs increased$896 million in 2022, as compared to 2021, primarily due to higher market prices and increased volumes as described above. Source of Change in Purchased Power Increase (Decrease) (In millions) Purchases Change due to unit costs $ 611 Change due to volumes 314 925 Capacity expense (29) Change in Purchased Power Costs $ 896 39
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•Other operating expenses increased
•Higher network transmission expenses of$99 million . These costs are deferred for future recovery, resulting in no material impact on current period earnings. •Higher expenses of$65 million resulting from lower capitalization of vegetation management costs. •Higher expenses of$59 million resulting from lower capitalization of corporate support costs. •Higher vegetation management inWest Virginia , energy efficiency and other state mandated program costs of$94 million , which are deferred for future recovery, resulting in no material impact on current period earnings. •Higher expenses of$19 million resulting from higher regulated generation planned outage spend. •Higher expenses of$18 million resulting from accelerated maintenance activities into 2022. •Higher other operating and maintenance expenses of$60 million , primarily associated with higher materials, contractor and labor costs. •Higher expense due to the absence of a$27 million reduction to a reserve recognized in the third quarter of 2021. •Lower uncollectible expenses of$4 million , which was deferred.
•Depreciation expense increased
•Amortization (deferral) of regulatory assets, net decreased
•$170 million decrease due to the return of certain Tax Act savings toPennsylvania customers, •$197 million decrease due to transmission and generation related deferrals primarily as a result of lower recovery of transmission related expenses, •$112 million decrease due to customer refunds associated with theOhio Stipulation, •$109 million decrease due to the absence of the reduction of theNew Jersey storm cost regulatory asset as a result of theYards Creek sale, and •$34 million decrease due to lower recovery of previously deferred uncollectible expenses as a result of a return to pre-pandemic levels •General taxes increased$42 million in 2022, as compared to 2021, primarily due to higher gross receipts and kWh taxes, andOhio property taxes, partially offset by lower West Virginia Business and Occupation taxes as a result of a state tax law change that became effectiveJuly 2021 . •The absence of the gain on sale of the Yards Creek Generating Facility of$109 million , which was netted against theNew Jersey storm deferral, as described above, resulting in no impact to earnings.
Other Expense -
Other expense increased$367 million in 2022, as compared to 2021, primarily due to a$320 million change in pension and OPEB mark-to-market adjustments, higher pension and OPEB non-service costs, higher interest from borrowings under the regulated money pool and lower capitalized interest, partially offset by lower borrowings under the revolving credit facilities.
Income Taxes
Regulated Distribution's effective tax rate was 20.8% and 22.0% for 2022 and 2021, respectively.
Regulated Transmission - 2022 Compared with 2021
Regulated Transmission's net income decreased$14 million in 2022, as compared to 2021, primarily due to a charge resulting from the filed settlement by MP, PE and WP withFERC inJanuary 2023 , as well as expected customer refunds associated with the FERC Audit, as further discussed below, partially offset by higher rate base and lower net financing costs.
Revenues -
Total revenues increased$250 million in 2022, as compared to 2021, primarily due to the recovery of higher recoverable expenses and a higher rate base, partially offset by expected customer refunds associated with the FERC Audit, as further discussed below. 40 --------------------------------------------------------------------------------
Revenues by transmission asset owner are shown in the following table:
For the Years Ended December 31,
Revenues by Transmission Asset Owner 2022 2021 Increase
(In millions)
ATSI $ 912 $ 801 $ 111
TrAIL 275 240 35
MAIT 340 289 51
JCP&L 203 164 39
MP, PE and WP 138 124 14
Total Revenues $ 1,868 $ 1,618 $ 250
Operating Expenses -
Total operating expenses increased $263 million in 2022, as compared to 2021,
primarily due to the reclassification of certain transmission capital assets to
operating expenses as a results of the FERC Audit, as further discussed below,
higher operating and maintenance expenses and a charge resulting from the filed
settlement with FERC in January 2023 , partially offset by a charge in the third
quarter of 2021 resulting from the filed ATSI settlement. Other than the
customer refunds and write-off of nonrecoverable transmission assets, nearly all
operating expenses are recovered through formula rates, resulting in no material
impact on current period earnings.
Other Expense -
Total other expense increased$18 million in 2022, as compared to 2021, primarily due to a$46 million change in the pension and OPEB mark-to-market adjustment, partially offset by lower interest on long-term debt and borrowings under the revolving credit facilities, higher unregulated money pool interest income at ATSI, MAIT and TrAIL, and higher capitalized financing cost.
Income Taxes -
Regulated Transmission's effective tax rate was 21.8% and 23.7% for 2022 and 2021, respectively.
Corporate/Other - 2022 Compared with 2021
Financial results from Corporate/Other and reconciling adjustments resulted in a$499 million increase in net loss for 2022 compared to 2021, primarily due to higher income tax expense resulting from an income tax charge of$752 million in 2022 representing the deferred tax liability associated with the deferred tax gain on the 19.9% sale of FET membership interests toBrookfield that closed inMay 2022 , as well as expenses associated with the FE debt redemptions. These were partially offset by the absence of the$230 million DPA monetary penalty, higher net investment income on certain equity method and other investments and the change in pension and OPEB mark-to-market adjustments. For the year endedDecember 31, 2021 , FirstEnergy recorded a gain from discontinued operations, net of tax, of$44 million . The gain was primarily due to income tax benefits from the final true-up to the worthless stock deduction and a final federal NOL allocation between theFES Debtors and FirstEnergy resulting from the filing of the 2020 FirstEnergy federal income tax return during 2021.
REGULATORY ASSETS AND LIABILITIES
Regulatory assets represent incurred costs that have been deferred because of
their probable future recovery from customers through regulated rates.
Regulatory liabilities represent amounts that are expected to be credited to
customers through future regulated rates or amounts collected from customers for
costs not yet incurred. FirstEnergy, the Utilities and the Transmission
Companies net their regulatory assets and liabilities based on federal and state
jurisdictions.
Management assesses the probability of recovery of regulatory assets, and
settlement of regulatory liabilities, at each balance sheet date and whenever
new events occur. Factors that may affect probability relate to changes in the
regulatory environment, issuance of a regulatory commission order or passage of
new legislation. Upon material changes to these factors, where applicable,
FirstEnergy will record new regulatory assets and liabilities and will assess
whether it is probable that currently recorded regulatory assets and liabilities
will be recovered or settled in future rates.
41
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The following table provides information about the composition of net regulatory
assets and liabilities as of December 31, 2022 and December 31, 2021 , and the
changes during the year ended December 31, 2022 :
As of December 31,
Net Regulatory Assets (Liabilities) by Source 2022 2021 Change
(In millions)
Customer payables for future income taxes$ (2,463) $ (2,345) $ (118) Spent nuclear fuel disposal costs (83) (101) 18 Asset removal costs (675) (646) (29) Deferred transmission costs 50 (3) 53 Deferred generation costs 235 118 117 Deferred distribution costs 164 49 115 Storm-related costs 683 660 23 Uncollectible and pandemic-related costs 63 56 7 Energy efficiency program costs 94 47 47 New Jersey societal benefit costs 94 109 (15) Vegetation management costs 63 33 30 Other (39) (30) (9) Net Regulatory Liabilities included on the Consolidated Balance Sheets$ (1,814) $ (2,053) $ 239
The following is a description of the regulatory assets and liabilities described above:
Customer payables for future income taxes - Reflects amounts to be recovered or refunded through future rates to pay income taxes that become payable when rate revenue is provided to recover items such as AFUDC-equity and depreciation of property, plant and equipment for which deferred income taxes were not recognized for ratemaking purposes, including amounts attributable to federal and state tax rate changes such as the Tax Act and Pennsylvania House Bill 1342. These amounts are being amortized over the period in which the related deferred tax assets reverse, which is generally over the expected life of the underlying asset. Spent nuclear fuel disposal costs - Reflects amounts collected from customers, and the investment income, losses and changes in fair value of the trusts for spent nuclear fuel disposal costs related to former nuclear generating facilities,Oyster Creek and TMI-1. Asset removal costs - Primarily represents the rates charged to customers that include a provision for the cost of future activities to remove assets, including obligations for which an ARO has been recognized, that are expected to be incurred at the time of retirement. Deferred transmission costs - Reflects differences between revenues earned based on actual costs for the formula-rate Transmission Companies and the amounts billed, including amounts expected to be refunded to, or recoverable from, wholesale transmission customers resulting from the FERC Audit, as further described below, which amounts are recorded as a regulatory asset or liability and recovered or refunded, respectively, in subsequent periods. Also included is the recovery of non-market based costs or fees charged to certain of the Utilities by various regulatory bodies includingFERC 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 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. Generally, the ENEC rate is updated annually. Deferred distribution costs - Primarily relates to the Ohio Companies' deferral of certain distribution-related expenses, including interest (amortized through 2034).
Storm-related costs - Relates to the deferral of storm costs, which vary by
jurisdiction. Approximately
Uncollectible and pandemic-related costs - Includes the deferral of incremental costs arising from the pandemic and in some cases including uncollectible expenses.
42
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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' Energy
Efficiency and Conservation 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.
Vegetation management costs - Relates to regulatory assets associated with the recovery of certain distribution vegetation management costs inNew Jersey andWest Virginia as well as certain transmission vegetation management costs at MAIT, ATSI and WP/PE (amortized through 2024, 2030 and 2036, respectively). The following table provides information about the composition of net regulatory assets that do not earn a current return as ofDecember 31, 2022 and 2021, of which approximately$511 million and$228 million , respectively, are currently being recovered through rates over varying periods, through 2068, depending on the nature of the deferral and the jurisdiction: Regulatory Assets by Source Not Earning a As of December 31, Current Return 2022 2021 Change (In millions) Deferred transmission costs $ 8 $ 13 $ (5) Deferred generation costs 262 63 199 Deferred distribution costs 27 2 25 Storm-related costs 568 549 19 Pandemic-related costs 70 65 5 Vegetation management 52 31 21 Other 10 9 1
Regulatory Assets Not Earning a Current Return
$ 732
CAPITAL RESOURCES AND LIQUIDITY
FirstEnergy's business is capital intensive, requiring significant resources to
fund operating expenses, construction and other investment expenditures,
scheduled debt maturities and interest payments, dividend payments and potential
contributions to its pension plan.
FE and its distribution and transmission subsidiaries expect their existing
sources of liquidity to remain sufficient to meet their respective anticipated
obligations. In addition to internal sources to fund liquidity and capital
requirements for 2023 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.
Investments for 2022 and forecasts for 2023, 2024, and 2025 by business segment
are included below:
2022 2023
Business Segment Actual Forecast 2024 Forecast (2) 2025 Forecast (2)
(In millions)
Regulated Distribution (1) $ 1,764 $ 1,650 $ 2,000 $ 2,175
Regulated Transmission 1,394 1,675 1,800 1,850
Corporate/Other 86 85 75 70
Total $ 3,244 $ 3,410 $ 3,875 $ 4,095
(1) Includes capital expenditures and capital-like investments that earn a return.
(2) FirstEnergy expects to update the forecast over the period for items such as regulatory filings and
approvals and other changes.
In alignment with FirstEnergy's strategy to invest in its Regulated Distribution
and Regulated Transmission segments as a fully regulated company, FirstEnergy is
focused on maintaining balance sheet strength and flexibility. Specifically, at
the regulated
43
--------------------------------------------------------------------------------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. OnFebruary 2, 2023 , FE, along with FET, entered into the FET P&SA II withBrookfield and the Brookfield Guarantors, pursuant to which FE agreed to sell toBrookfield at the closing, andBrookfield agreed to purchase from FE, an incremental 30% equity interest in FET for a purchase price of$3.5 billion . The purchase price will be payable in part by the issuance of a promissory note expected to be in the principal amount of$1.75 billion . The remaining$1.75 billion of the purchase price will be payable in cash at the closing. As a result of the consummation of the transaction,Brookfield's interest in FET will increase from 19.9% to 49.9%, while FE will retain the remaining 50.1% ownership interests of FET. The transaction is subject to customary closing conditions, including approval from theFERC and certain state utility commissions, and completion of review by the CFIUS. In addition, pursuant to the FET P&SA II, FirstEnergy has agreed to make the necessary filings with the applicable regulatory authorities for the PA Consolidation. The FET Minority Equity Interest Sale is expected to close by early 2024. Upon closing, FET will continue to be consolidated in FirstEnergy's GAAP financial statements. FirstEnergy is proceeding with the consolidation of the Pennsylvania Companies into a new, single operating entity. The PA Consolidation will require, among other steps: (a) the transfer of certainPennsylvania -based transmission assets owned by WP to KATCo, (b) the transfer of Class B equity interests of MAIT currently held by PN and ME to FE (and ultimately transferred to FET as part of the FET Minority Equity Interest Sale), (c) the formation of PA NewCo and (d) the merger of each of the Pennsylvania Companies with and into PA NewCo, with PA NewCo surviving such mergers as the successor-in-interest to all assets and liabilities of the Pennsylvania Companies. Following completion of the PA Consolidation, PA NewCo will be FE's only regulated utility inPennsylvania encompassing the operations previously conducted individually by the Pennsylvania Companies. Consummation of the PA Consolidation is contingent upon numerous conditions, including the approval of NYPSC, PPUC andFERC . Subject to receipt of such regulatory approvals, FirstEnergy expects that the PA Consolidation will close by early 2024. OnDecember 13, 2021 , FE privately issued toBIP Securities II-B L.P. , an affiliate ofBlackstone 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 . OnApril 21, 2022 ,FERC approved theBlackstone representative's ability to participate as a voting member of the FE Board.Sean T. Klimczak , theBlackstone Infrastructure Partners -selected representative, was elected to the FE Board at the 2022 annual shareholders' meeting. OnOctober 18, 2021 , FE, FET, the Utilities, and the Transmission Companies entered into six separate senior unsecured five-year syndicated revolving credit facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses. Together, these transactions enhance FirstEnergy's credit profile, provide funding for the strategic investments discussed above, and address all of FirstEnergy's equity plans, with the exception of annual issuances of up to$100 million under regular dividend reinvestment plans and employee benefit stock investment plans, through at least 2025. Also, as with the recently completed FET transaction, premium valuations of our distribution and transmission businesses, together with growth in cash flow from operations resulting from the investment opportunities described above, could provide FirstEnergy future optionality to accelerate further strengthening of the balance sheet and enhance shareholder value. Economic conditions following the global pandemic, have increased lead times across numerous material categories, with some as much as doubling from pre-pandemic lead times. Some key suppliers have struggled with labor shortages and raw material availability, which along with increasing inflationary pressure, have increased costs and decreased the availability of certain materials, equipment and contractors. FirstEnergy has taken steps to mitigate these risks and does not currently expect service disruptions or any material impact on its capital spending plan. However, the situation remains fluid and a prolonged continuation or further increase in supply chain disruptions could have an adverse effect on FirstEnergy's results of operations, cash flow and financial condition. As ofDecember 31, 2022 , FirstEnergy's net deficit in working capital (current assets less current liabilities) was primarily due to accounts payable, current portion of long-term debt and accrued interest, taxes, and compensation and benefits. FirstEnergy believes its cash from operations and available liquidity will be sufficient to meet its current working capital needs. 44 --------------------------------------------------------------------------------
Short-Term Borrowings / Revolving Credit Facilities
OnOctober 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 withJPMorgan Chase Bank, N.A .,Mizuho Bank, Ltd. andPNC Bank, National Association that replaced the FE Revolving Facility and the FET Revolving Facility, and provide for aggregate commitments of$4.5 billion . The 2021 Credit Facilities are available untilOctober 18, 2026 , as follows:
•FE and FET,
Under the 2021 Credit Facilities, an aggregate amount of$4.5 billion is available to be borrowed, repaid and reborrowed, subject to each borrower's respective sublimit under the respective facilities. These new credit facilities provide substantial liquidity to support the Regulated Distribution and Regulated Transmission businesses, and each of the operating companies within the businesses. Borrowings under the 2021 Credit Facilities may be used for working capital and other general corporate purposes. Generally, borrowings under each of the credit facilities are available to each borrower separately and mature on the earlier of 364 days from the date of borrowing or the commitment termination date, as the same may be extended. Each of the 2021 Credit Facilities contain financial covenants requiring each borrower, with the exception of FE, to maintain a consolidated debt-to-total-capitalization ratio (as defined under each of the 2021 Credit Facilities) of no more than 65%, and 75% for FET, measured at the end of each fiscal quarter. FE is required under its 2021 Credit Facility to maintain a consolidated interest coverage ratio of not less than 2.50 times, measured at the end of each fiscal quarter for the last four fiscal quarters beginning with the quarter endingDecember 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 theU.S. Federal Reserve and other central banks, the supply of and demand for credit in theLondon 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. OnJuly 27, 2017 , theFCA (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. Subsequently, onMarch 5, 2021 , IBA (the entity that calculates and publishes LIBOR) andFCA made public statements regarding the future cessation of LIBOR. IBA permanently ceased publication for 1-week and 2-month LIBOR settings and all settings for non-U.S. dollar LIBOR onDecember 31, 2021 . According to theFCA , IBA will permanently cease to publish overnight, 1-month, 3-month, 6-month and 12-month LIBOR settings onJune 30, 2023 . FirstEnergy's 2021 Credit Facilities provide a mechanism to automatically transition to a SOFR-based benchmark when allU.S. dollar LIBOR settings are no longer provided or are no longer representative. In addition, FirstEnergy's 2021 Credit Facilities provide an option for the applicable borrower and lender to jointly elect to transition early to a SOFR-based benchmark, or in certain circumstances, an alternative benchmark replacement. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in theUnited Kingdom ,the United States or elsewhere. During 2022, interest rates have increased significantly, which has caused the rate and interest expense on borrowings under the 2021 Credit Facilities to be significantly higher. 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. 45 -------------------------------------------------------------------------------- FirstEnergy had$100 million of short-term borrowings as ofDecember 31, 2022 . As ofDecember 31, 2021 , FirstEnergy had no outstanding short-term borrowings. FirstEnergy's available liquidity from external sources as ofFebruary 10, 2023 , was as follows: Revolving Credit Facilities Maturity Commitment Available Liquidity (In millions) FE and FET October 2026$ 1,000 $ 897 Ohio Companies October 2026 800 650 Pennsylvania Companies October 2026 950 800 JCP&L October 2026 500 499 MP and PE October 2026 400 400 Transmission Companies October 2026 850 850 Subtotal$ 4,500 $ 4,096 Cash and Cash equivalents - 224 Total$ 4,500 $ 4,320
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
Regulatory and Other Short-Term Debt
Individual Borrower Limitations
(In millions)
FE and FET N/A
OE, CEI, JCP&L, ME, MP and ATSI $ 500 (1)
TE, PN and WP 300 (1)
PE and Penn 150 (1)
TrAIL and MAIT 400 (1)
(1) Includes amounts which may be borrowed under the regulated companies' money pool.
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 ofDecember 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 200 The 2021 Credit Facilities do not contain provisions that restrict the ability to borrow or accelerate payment of outstanding advances in the event of any change in credit ratings of the borrowers. Pricing is defined in "pricing grids," whereby the cost of funds borrowed under the 2021 Credit Facilities are related to the credit ratings of the company borrowing the funds. Additionally, borrowings under each of the 2021 Credit Facilities are subject to the usual and customary provisions for acceleration upon the occurrence of events of default, including a cross-default for other indebtedness in excess of$100 million . As ofDecember 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 2021 Credit Facilities. 46 --------------------------------------------------------------------------------
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. During 2022, interest rates have increased significantly, which has caused the rate and interest on borrowings and lending under the money pools to be significantly higher. The average interest rate for borrowings in 2022 was 2.27% per annum for the regulated companies' money pool, as compared to 1.01% in 2021, and 2.14% per annum for the unregulated companies' money pool, as compared to 0.60% in 2021. 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
Corporate Credit Rating Senior Secured Senior Unsecured Outlook/CreditWatch (1)
Issuer S&P Moody's Fitch S&P Moody's Fitch S&P Moody's Fitch S&P Moody's Fitch
FE BBB- Ba1 BBB- - - - BB+ Ba1 BBB- P P S
AGC BB+ Baa2 BBB - - - - - - P S S
ATSI BBB A3 BBB - - - BBB A3 BBB+ P S S
CEI BBB Baa3 BBB A- Baa1 A- BBB Baa3 BBB+ P S S
FET BBB- Baa2 BBB- - - - BB+ Baa2 BBB- P S S
JCP&L BBB A3 BBB - - - BBB A3 BBB+ P S S
ME BBB A3 BBB - - - BBB A3 BBB+ P S S
MAIT BBB A3 BBB - - - BBB A3 BBB+ P S S
MP BBB Baa2 BBB A- A3 A- BBB Baa2 - S S S
OE BBB A3 BBB A- A1 A- BBB A3 BBB+ P S S
PN BBB Baa1 BBB - - - BBB Baa1 BBB+ P S S
Penn BBB A3 BBB A- A1 - - - - P S S
PE BBB Baa2 BBB A- A3 A- - - - S S S
TE BBB Baa2 BBB A- A3 A- - - - P S S
TrAIL BBB A3 BBB - - - BBB A3 BBB+ P S S
WP BBB A3 BBB A- A1 A- - - - P S S
(1) S = Stable, P = Positive
On
On
On
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 fees paid on actual borrowings are determined based on each borrower's senior unsecured non-credit enhanced debt ratings as determined by S&P and Moody's. The interest rates payable on approximately$2.1 billion in FE's senior unsecured notes are subject to adjustments from time to time if the ratings on the notes from any one or more of S&P, Moody's and Fitch decreases to a rating set forth in the applicable governing documents. Generally, a one-notch downgrade by the applicable rating agency may result in a 25 basis point coupon rate increase beginning at BB, Ba1, and BB+ for S&P, Moody's and Fitch, respectively, to the extent such rating is applicable to the series of outstanding senior unsecured notes, during the next interest period, subject to an aggregate cap of 2% from issuance interest rate. 47 -------------------------------------------------------------------------------- Debt capacity is subject to the consolidated interest coverage ratio in the 2021 Credit Facilities. As ofDecember 31, 2022 , FirstEnergy could incur approximately$780 million of incremental interest expense or incur an approximate$1.9 billion reduction to the consolidated interest coverage earnings numerator, as defined under the covenant, and FE would remain within the limitations of the financial covenant required by the 2021 Credit Facilities.
Cash Requirements and Commitments
FirstEnergy has certain obligations and commitments to make future payments under contracts, including contracts executed in connection with certain of the planned construction expenditures.
As of December 31, 2022 (Undiscounted): Total 2023 2024-2025 2026-2027 Thereafter
(In millions)
Long-term debt(1) $ 21,641 $ 344 $ 3,269 $ 3,079 $ 14,949
Short-term borrowings 100 100 - - -
Interest on long-term debt 10,669 925 1,690 1,458 6,596
Operating leases(2) 346 56 101 84 105
Finance leases(2) 33 9 10 9 5
Fuel and purchased power(3) 2,883 635 962 555 731
Committed investments(4) 3,767 1,393 1,246 1,128 -
Pension funding(5) 2,287 - 250 675 1,362
Total $ 41,726 $ 3,462 $ 7,528 $ 6,988 $ 23,748
(1) Excludes unamortized discounts and premiums, fair value accounting
adjustments and finance leases.
(2) See Note 8, "Leases," of the Notes to Consolidated Financial Statements.
(3) Based on estimated annual amounts under contract with fixed or minimum
quantities.
(4) Amounts represent committed capital expenditures and other capital-like
investments that earn a return
(5) As discussed below, FirstEnergy does not expect to have a required
contribution to the pension plan until 2025.
Excluded from the table above are estimates for the cash outlays from power
purchase contracts entered into by most of the Utilities and under which they
procure the power supply necessary to provide generation service to their
customers who do not choose an alternative supplier. Although actual amounts
will be determined by future customer behavior, consumption levels and power
prices, management currently estimates these cash outlays will be approximately
$4.3 billion in 2023.
The table above also excludes AROs, reserves for litigation, injuries and
damages and environmental remediation since the amount and timing of the cash
payments are uncertain. The table also excludes accumulated deferred income
taxes since cash payments for income taxes are determined based primarily on
taxable income for each applicable fiscal year.
FirstEnergy's pension and OPEB funding policy is based on actuarial computations
using the projected unit credit method. 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 until 2025, which, based on various
assumptions, including annual expected rate of return on assets of 8.0% in 2023,
is expected to be approximately $250 million . However, FirstEnergy may elect to
contribute to the pension plan voluntarily.
Changes in Cash Position
As ofDecember 31, 2022 , FirstEnergy had$160 million of cash and cash equivalents and$46 million of restricted cash compared to$1,462 million of cash and cash equivalents and$49 million of restricted cash as ofDecember 31, 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. The most significant use of cash from operating activities is buying electricity to serve non-shopping customers and paying fuel suppliers, employees, tax authorities, lenders and others for a wide range of materials and services.
Net cash provided from operating activities was
•Rate refunds and rate credits provided toOhio customers during 2022 under the PUCO-approved Ohio Stipulation, •Higher operating expenses from lower capitalization of certain vegetation management and corporate support costs, •Higher materials supplies inventory, primarily due to increased coal and fuel supply inventories to support regulated generation plant operations, 48 -------------------------------------------------------------------------------- •The absence of accounts receivable working capital improvements in 2021, when collection activity improved since the start of the pandemic. Accounts receivable working capital was also impacted by higher generation prices charged to customers and higher customer usage and demands, partially offset by, •Higher cash flow generated from regulated capital investments made since 2021, •Higher cash collateral receipts primarily from certain generation suppliers that serve shopping customers due to the rise in power prices, •Higher cash dividend distributions received by FEV from its equity investment inGlobal Holding , and •Improvements in accounts payable working capital, primarily from the implementation of certain FE Forward initiatives and higher purchased power costs. FirstEnergy's Consolidated Statements of Cash Flows combines cash flows from discontinued operations with cash flows from continuing operations within each cash flow category. The following table summarizes the major classes of cash flow items from discontinued operations for the years endedDecember 31, 2022 , 2021 and 2020: For the Years Ended December 31, (In millions) 2022 2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from discontinued operations $ -$ 44 $ 76 Gain on disposal, net of tax - (47) (76)
Cash Flows From Financing Activities
Cash provided from (used for) financing activities was$(912) million ,$(542) million , and$2.6 billion in 2022, 2021, and 2020, respectively. The following table summarizes financing activities for the years ended 2022, 2021, and 2020. For the Years Ended December 31, Financing Activities 2022 2021 2020 (In millions) New Issues Unsecured notes$ 300 $ 1,750 $ 3,250 FMBs 400 200 175 Senior secured notes - 150 - 700 2,100 3,425 Redemptions / Repayments Unsecured notes (2,737) (400) (250) Pollution control revenue bonds - (74) - FMBs (200) - (50) Term loan - - (750) Senior secured notes (68) (58) (64) (3,005) (532) (1,114) Proceeds from FET minority interest sale, net of transaction costs 2,348 - - Distributions to FET minority interest (21) - - Capital Call from FET minority interest 9 - -
Discounts (premiums) on debt issuances and redemptions, net
(151) 27 (4)
Common stock issuance - 1,000 -
Short-term borrowings, net 100 (2,200) 1,200
Common stock dividend payments (891) (849) (845)
Other (1) (88) (55)
$ (912) $ (542) $ 2,607
49--------------------------------------------------------------------------------
During the year ended
Amount
Company Type Redemption/Issuance Date Interest Rate Maturity (in Millions) Description
Redemptions
In December 2021, FE provided notice of
FE Unsecured Notes January, 2022 4.25% 2023 $850 redemption with a make-whole premium of
approximately $38 million ($30 million
after-tax).
Senior Secured On January 27, 2022, TE instructed its
TE Notes February, 2022 2.65% 2028 $25 indenture trustee to provide notice of partial
redemption.
Senior Notes, On February 11, 2022, CEI instructed its
CEI Series A March, 2022 2.77% 2034 $150 indenture trustee to provide notice of full
redemption.
WP FMBs April, 2022 3.34% 2022 $100 WP redeemed FMBs that became due.
FE Unsecured Notes June, 2022 2.85% 2022 $500 On May 23, 2022 FE provided notice of
redemption.
On May 25, 2022, FE commenced an offer to
purchase for cash a portion of its 2031 Notes
and 2047 Notes, which had $1.5 billion and $1
FE Unsecured Notes June, 2022 7.375% 2031 $715 billion principal amounts outstanding,
respectively. A portion of these notes were
redeemed for approximately $1.1 billion ,
including a tender premium of approximately
$101 million ($80 million after-tax). In
addition, FE recognized approximately
$7 million ($5 million after-tax) of deferred
FE Unsecured Notes June, 2022 4.85% 2047 $284 cash flow hedge losses and $10 million ($8
million after-tax) in other unamortized debt
costs and fees associated with the FE debt
redemptions.
Penn FMBs June, 2022 6.09% 2022 $100 Penn redeemed FMBs that became due.
Beginning in the third quarter of 2022, FE
repurchased a portion of the principal amount
FE Unsecured Notes August-November 2022 7.375% 2031 $128 of its 2031 Notes and 2047 Notes through the
open market for approximately $249 million
including a premium of approximately $11
million ($9 million after tax). In addition,
FE recognized approximately $3 million ($2
FE Unsecured Notes August-September 2022 4.85% 2047 $110 million after-tax) in other unamortized debt
costs related to the FE open market
repurchases.
Issuances
Proceeds were used to repay borrowings
Senior Unsecured outstanding under the regulated money pool, to
OE Notes September, 2022 5.50% 2033 $300 finance capital expenditures, to fund working
capital needs and for other general corporate
purposes.
Penn FMBs November, 2022 3.79% 2032 $150 Proceeds were used to repay short-term
borrowings.
WP FMBs November, 2022 5.29% 2033 $250 Proceeds were used to repay short-term
borrowings.
On
FE or its affiliates may, from time to time, seek to retire or purchase outstanding debt through open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as FE or its affiliates may determine, and will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.
Cash Flows From Investing Activities
Cash used for investing activities in 2022 principally represented cash used for
property additions. The following table summarizes cash used for (received from)
investing activities for the years ended 2022, 2021 and 2020:
For the Years Ended December 31,
Investing Activities 2022 2021 2020
(In millions)
Property Additions:
Regulated Distribution $ 1,513 $ 1,395 $ 1,514
Regulated Transmission 1,192 958 1,067
Corporate/Other 51 92 76
Proceeds from sale of Yards Creek -
(155) -
Investments 103 53 22
Asset removal costs 213 226 224
Other 4 (10) 5
$ 3,076 $ 2,559 $ 2,908
Cash used for investing activities during 2022 increased $517 million , compared
to 2021, primarily due to the absence of proceeds from the sale of Yards Creek
received in the first quarter of 2021 as well as planned project spend at
Regulated Distribution and Transmission.
50
--------------------------------------------------------------------------------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 LOCs, 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 ofDecember 31, 2022 , was approximately$1.0 billion , as summarized below: Guarantees and Other Assurances Maximum
Exposure
(In millions)
FE's Guarantees on Behalf of its Consolidated Subsidiaries
Deferred compensation arrangements $ 445
Vehicle leases 75
Other 8
528FE's Guarantees on Other Assurances
Surety Bonds
326
Deferred compensation arrangements 119
LOCs 4
449
Total Guarantees and Other Assurances $ 977
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 ofDecember 31, 2022 ,$50 million of net cash collateral has been posted by FE or its subsidiaries and is included in "Prepaid taxes and other current assets" on FirstEnergy's Consolidated Balance Sheets. FE or its subsidiaries are holding$206 million of net cash collateral as ofDecember 31, 2022 , from certain generation suppliers, primarily due to the rise in power prices, and such amount is included in "Other current liabilities" on FirstEnergy's Consolidated Balance Sheets. These credit-risk-related contingent features stipulate that if the subsidiary were to be downgraded or lose its investment grade credit rating (based on its senior unsecured debt rating), it would be required to provide additional collateral. The following table discloses the potential additional credit rating contingent contractual collateral obligations as ofDecember 31, 2022 :
Utilities and
Transmission
Potential Collateral Obligations Companies FE Total
(In millions)
Contractual Obligations for Additional
Collateral
Upon Further Downgrade $ 70 $ - $ 70
Surety Bonds (collateralized amount)(1) 61 249 310
Total Exposure from Contractual Obligations $
131
(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 obligations for which the collateral obligation is capped at 60% of the face amount, and typical obligations require 30 days to cure.
MARKET RISK INFORMATION
FirstEnergy uses various market risk sensitive instruments, including derivative
contracts, primarily to manage the risk of price and interest rate fluctuations.
FirstEnergy's Enterprise Risk Management Committee, comprised of members of
senior management, provides general oversight for risk management activities
throughout FirstEnergy.
51--------------------------------------------------------------------------------
Commodity Price Risk
FirstEnergy has limited exposure to financial risks resulting from fluctuating commodity prices, including prices for electricity, coal and energy transmission. FirstEnergy'sRisk Management Department andEnterprise Risk Management Committee are responsible for promoting the effective design and implementation of sound risk management programs and overseeing compliance with corporate risk management policies and established risk management practice. The valuation of derivative contracts is based on observable market information. As ofDecember 31, 2022 , FirstEnergy has a net asset of$9 million in non-hedge derivative contracts that are related to FTRs at certain of the Utilities. FTRs are subject to regulatory accounting and do not impact earnings.
Equity Price Risk
As ofDecember 31, 2022 , the FirstEnergy pension plan assets were allocated approximately as follows: 33% in public equity securities, 15% in fixed income securities, 9% in hedge funds, 3% in insurance-linked securities, 13% in real estate funds, 17% in private equity and debt funds, a net derivative liability of 1% and 11% in cash and short-term securities. Due to the American Rescue Plan Act of 2021, under current assumptions, including an expected annual return on assets of 8.0% in 2023, FirstEnergy does not currently expect to have a required contribution to the pension plan until 2025. 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 ofDecember 31, 2022 , FirstEnergy's OPEB plan assets were allocated approximately 47% in equity securities, 34% in fixed income securities and 19% in cash and short-term securities. See Note 5, "Pension and Other Post-Employment Benefits," of the Notes to Consolidated Financial Statements for additional details on FirstEnergy's pension and OPEB plans. During 2022, FirstEnergy's pension and OPEB plan assets have lost approximately$1,760 million or 19.5%, and$70 million or 13.7%, respectively, as compared to the annual expected return on plan assets of 7.5%.
Interest Rate Risk
FirstEnergy's exposure to fluctuations in market interest rates is reduced since all debt has fixed interest rates, as noted in the table below. FirstEnergy is subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. During 2022, interest rates have increased significantly, which has caused the rate and interest expense on borrowings under the 2021 Credit Facilities and refinanced debt to be significantly higher. Comparison of Carrying Value to Fair Value as ofDecember 31, 2022 Year of Maturity or Notice of Redemption 2023 2024 2025 2026 2027 There-after Total Fair Value (In millions) Assets: Investments Other Than Cash and Cash Equivalents: Fixed Income $ - $ - $ - $ - $ -$ 266 $ 266 $ 266 Average interest rate - % - % - % - % - % 1.3 % 1.3 % Liabilities: Long-term Debt: Fixed rate$ 344 $ 1,246 $ 2,023 $ 1,076 $ 2,003 $ 14,949 $ 21,641 $
19,784
Average interest rate 3.7 % 4.7 % 3.8 % 3.5 % 4.2 % 4.4 % 4.3 % FirstEnergy recognizes net actuarial gains or losses for its pension and OPEB plans in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. A primary factor contributing to these actuarial gains and losses are changes in the discount rates used to value pension and OPEB obligations as of the measurement date and the difference between expected and actual returns on the plans' assets. The remaining components of pension and OPEB expense, primarily service costs, interest cost on obligations, expected return on plan assets and amortization of prior service costs, are set at the beginning of the calendar year and are recorded on a monthly basis. Changes in asset performance and discount rates will not impact these pension costs during the year, however, future years could be impacted by changes in the market. 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 theU.S. Federal Reserve and other central banks, the supply of and demand for credit in theLondon 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 52 --------------------------------------------------------------------------------
LIBOR and other variable interest rates. During 2022, interest rates have increased significantly, which has caused the rate and interest expense on borrowings under the 2021 Credit Facilities to be significantly higher.
Economic Conditions
Economic conditions following the global pandemic, have increased lead times across numerous material categories, with some as much as doubling from pre-pandemic lead times. Some key suppliers have struggled with labor shortages and raw material availability, which along with increasing inflationary pressure, have increased costs and decreased the availability of certain materials, equipment and contractors. FirstEnergy has taken steps to mitigate these risks and does not currently expect service disruptions or any material impact on its capital spending plan. However, the situation remains fluid and a prolonged continuation or further increase in supply chain disruptions could have an adverse effect on FirstEnergy's results of operations, cash flow and financial condition. 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 requirements that counterparties maintain specified credit ratings) and require other assurances in the form of credit support or collateral in certain circumstance in order to limit counterparty credit risk. FirstEnergy has concentrations of suppliers and customers among electric utilities, financial institutions and energy marketing and trading companies. These concentrations may impact FirstEnergy's overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions. In the event an energy supplier of theOhio Companies, Pennsylvania Companies, JCP&L or PE inMaryland defaults on its obligation, the affected company would be required to seek replacement power in the market. In general, subject to regulatory review or other processes, it is expected that appropriate incremental costs incurred by these entities would be recoverable from customers through applicable rate mechanisms, thereby mitigating the financial risk for these entities. FirstEnergy's credit policies to manage credit risk include the use of an established credit approval process, daily credit mitigation provisions, such as margin, prepayment or collateral requirements. FirstEnergy and its subsidiaries may request additional credit assurance, in certain circumstances, in the event that the counterparties' credit ratings fall below investment grade, their tangible net worth falls below specified percentages or their exposures exceed an established credit limit.
PHYSICAL SECURITY AND CYBERSECURITY RISK
FirstEnergy is committed to protecting its customers, employees, facilities, and the ongoing reliability of its electric system. FirstEnergy works closely with state and federal agencies and its peers in the electric utility industry to identify physical and cyber security risks, exchange information, and put safeguards in place to comply with strict reliability and security standards. From a security standpoint, the electric utility sector is one of the most regulated industries. FirstEnergy has comprehensive cyber and physical security plans in place but does not publicly disclose details about these measures that could aid those who want to harm its customers, employees, facilities and the ongoing reliability of its electric system. The FE Board has identified cybersecurity as a key enterprise risk and prioritizes the mitigation of this risk. The FE Board receives cybersecurity updates from FirstEnergy's Information Technology organization at each of its regularly scheduled meetings.The Operations and Safety Committee reviews FirstEnergy's cybersecurity risk management practices and performance, primarily through reports provided by management, including the Chief Information Security Officer.The Operations and Safety Committee also reviews and discusses with management the steps taken to monitor, control, and mitigate such exposure. Among other things, these reports have focused on incident response management and recent cyber risk and cybersecurity developments. Security enhancements are also a key component of FirstEnergy's Energizing the Future transmission investment program. FirstEnergy invests heavily in sophisticated and layered security measures that use both technology and hard defenses to protect critical transmission facilities and its digital communications networks. Despite security measures and safeguards FirstEnergy has employed, including certain measures implemented pursuant to mandatory NERC Critical Infrastructure Protection standards, its infrastructure may be increasingly vulnerable to such attacks as a result of the rapidly evolving and increasingly sophisticated means by which attempts to defeat security measures and gain access to information technology systems may be made. Also, FirstEnergy, or its vendors and service providers, may be at an increased risk of a cyber-attack and/or data security breach due to the nature of its business. Any such cyber incident could result in significant lost revenue, the inability to conduct critical business functions and serve customers for a significant period of time, the use of significant management resources, legal claims or proceedings, regulatory penalties, significant remediation costs, increased regulation, increased capital costs, increased protection costs for enhanced cybersecurity systems or personnel, damage to FirstEnergy's reputation and/or the rendering of its internal controls ineffective, all of which could materially adversely affect FirstEnergy's business, results of operations, financial condition and reputation. 53 --------------------------------------------------------------------------------
OUTLOOK
INCOME TAXES
OnAugust 16, 2022 ,President Biden signed into law the IRA of 2022, which, among other things, imposes a new 15% corporate AMT based on AFSI applicable to corporations with a three-year average AFSI over$1 billion . The AMT is effective for the 2023 tax year and, if applicable, corporations must pay the greater of the regular corporate income tax or the AMT. Although NOL carryforwards created through the regular corporate income tax system cannot be used to reduce the AMT, financial statement net operating losses can be used to reduce AFSI and the amount of AMT owed. The IRA of 2022 as enacted requires theU.S. Treasury to provide regulations and other guidance necessary to administer the AMT, including further defining allowable adjustments to determine AFSI, which directly impacts the amount of AMT to be paid. Based on interim guidance issued by theU.S. Treasury in lateDecember 2022 , FirstEnergy continues to believe that it is more likely than not it will be subject to the AMT beginning 2023. Until finalU.S. Treasury guidance is issued, the amount of AMT FirstEnergy would pay could be significantly different than current estimates or it may not be a payer at all. The regulatory treatment of the impacts of this legislation will also be subject to the discretion of theFERC and state public utility commissions. Any adverse development in this legislation, including guidance from theU.S. Treasury and/ or theIRS or unfavorable regulatory treatment, could reduce future cash flows and impact financial condition.
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 - inMaryland by the MDPSC, inNew Jersey by the NJBPU, inOhio by the PUCO, inPennsylvania by the PPUC, inWest Virginia by the WVPSC and inNew York by the NYPSC. The transmission operations of PE inVirginia , ATSI inOhio , and the Transmission Companies inPennsylvania are subject to certain regulations of the VSCC, PUCO and PPUC, respectively. In addition, underOhio 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.
The following table summarizes the key terms of base distribution rate orders in
effect for the Utilities as of
Rates Effective For
Company Customers Allowed Debt/Equity Allowed ROE
CEI May 2009 51% / 49% 10.5%
ME(1) January 2017 48.8% / 51.2% Settled(2)
MP February 2015 54% / 46% Settled(2)
JCP&L November 2021(3) 48.6% / 51.4% 9.6%
OE January 2009 51% / 49% 10.5%
PE (West Virginia) February 2015 54% / 46% Settled(2)
PE (Maryland) March 2019 47% / 53% 9.65%
PN(1) January 2017 47.4% / 52.6% Settled(2)
Penn(1) January 2017 49.9% / 50.1% Settled(2)
TE January 2009 51% / 49% 10.5%
WP(1) January 2017 49.7% / 50.3% Settled(2)
(1) Reflects filed debt/equity as final settlement/orders do not specifically
include capital structure.
(2) Commission-approved settlement agreements did not disclose ROE rates.
(3) Rates were effective for customers on November 1, 2021 , but beginning
January 1, 2021 , JCP&L offset the impact to customers' bills by amortizing an
$86 million regulatory liability.
PE operates under MDPSC approved base rates that were effective as ofMarch 23, 2019 . PE also provides SOS pursuant to a combination of settlement agreements, MDPSC orders and regulations, and statutory provisions. SOS supply is competitively procured in the form of rolling contracts of varying lengths through periodic auctions that are overseen by the MDPSC and a third-party monitor. Although settlements with respect to SOS supply for PE customers have expired, service continues in the same manner until changed by order of the MDPSC. PE recovers its costs plus a return for providing SOS. The EmPOWER Maryland program requires each electric utility to file a plan to reduce electric consumption and demand 0.2% per year, up to the ultimate goal of 2% annual savings, for the duration of the 2021-2023 EmPOWER Maryland program cycles to the extent the MDPSC determines that cost-effective programs and services are available. PE's approved 2021-2023 EmPOWER Maryland plan continues and expands upon prior years' programs for a projected total investment of approximately$148 million over the three-year period. PE recovers program investments with a return through an annually reconciled surcharge, with most costs subject to recovery over a five-year period with a return on the unamortized balance. OnAugust 16, 2022 , the MDPSC ordered each utility to file, byOctober 28, 2022 , a set of plans for paying down all amortization balances by 54 -------------------------------------------------------------------------------- the scheduled expiration of the EmPOWER program onDecember 31, 2029 . PE submitted its required plan onOctober 28, 2022 , and, at the direction of the MDPSC, filed a revised plan onJanuary 11, 2023 .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.
JCP&L operates under NJBPU approved rates that took effect as ofJanuary 1, 2021 , and were effective for customers as ofNovember 1, 2021 . JCP&L provides BGS for retail customers who do not choose a third-party EGS and for customers of third- party EGSs that fail to provide the contracted service. AllNew 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 inApril 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. InDecember 2017 , the NJBPU issued proposed rules to modify its current CTA policy in base rate cases to: (i) calculate savings using a five-year look back from the beginning of the test year; (ii) allocate savings with 75% retained by the company and 25% allocated to customers; and (iii) exclude transmission assets of electric distribution companies in the savings calculation. OnJanuary 17, 2019 , the NJBPU approved the proposed CTA rules with no changes. OnMay 17, 2019 , the NJ Rate Counsel filed an appeal with the Appellate Division of theSuperior Court of New Jersey and onJune 7, 2021 , theSuperior Court issued an order reversing the NJBPU's CTA rules and remanded the case back to the NJBPU. Specifically, the Court's ruling requires 100% of the CTA savings to be credited to customers in lieu of the NJBPU's current policy requiring 25%. OnSeptember 19, 2022 , the NJBPU issued a notice to re-adopt its rules of practice, including proposed changes to the rules regarding CTA policy in base rate cases consistent with theSuperior Court's June 7, 2021 order. Once the proposed rules of practice are final, they will be applied on a prospective basis in a future base rate case, however, it is not expected to have a material adverse effect on FirstEnergy's results or financial condition. OnOctober 28, 2020 , the NJBPU approved a stipulated settlement between JCP&L and various parties, resolving JCP&L's request for distribution base rate increase. The settlement provided for a$94 million annual base distribution revenues increase for JCP&L based on an ROE of 9.6%, which became effective for customers onNovember 1, 2021 . The settlement additionally provided that JCP&L would be subject to a management audit, which began inMay 2021 and is currently ongoing. JCP&L is currently waiting for issuance of the final report. OnSeptember 14, 2021 , JCP&L submitted a supplemental filing with the NJBPU to revise a previously filed AMI Program, which proposed the deployment of approximately 1.2 million advanced meters. Under the revised AMI Program, during the first six years of the AMI Program from 2022 through 2027, JCP&L estimates costs of$494 million , consisting of capital investments of approximately$390 million , incremental operations and maintenance expenses of approximately$73 million and cost of removal of$31 million . OnFebruary 8, 2022 , JCP&L filed with the NJBPU a stipulation entered into with the NJBPU staff, NJ Rate Counsel and others, that, pending NJBPU approval, would affirm the terms of the revised AMI Program. The Stipulation, which was approved by NJBPU order onFebruary 23, 2022 , also provides that the revised AMI Program-related capital costs, the legacy meter stranded costs, and the operations and maintenance expense will be deferred and placed in regulatory assets, with such amounts sought to be recovered in the JCP&L's subsequent base rate cases. OnJuly 2, 2020 , the NJBPU issued an order allowingNew Jersey utilities to track and create a regulatory asset for future recovery of all prudently incurred incremental costs arising from the COVID-19 pandemic beginningMarch 9, 2020 and continuing until theNew 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. OnOctober 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. No moratorium on residential disconnections remains in effect for investor-owned electric utilities such as JCP&L, but investor-owned electric public utilities are required to offer qualifying residential customers deferred payment arrangements meeting certain minimum criteria prior to disconnecting service. Additionally, new legislation was enacted onMarch 25, 2022 , prohibiting utilities from disconnecting electric service to customers that have applied for utility bill assistance beforeJune 15, 2022 until such time as the state agency administering the assistance program makes a decision on the application and further requiring that all utilities offer a deferred payment arrangement meeting certain minimum criteria after the state agency's decision on the application has been made. Pursuant to an NJBPU order requiring allNew Jersey electric distribution companies to file electric vehicle programs, JCP&L filed its program onMarch 1, 2021 . JCP&L's proposed electric vehicle program consisted of six sub-programs, including a consumer education and outreach initiative that would begin onJanuary 1, 2022 , and continue over a four-year period. OnMay 2, 2022 , JCP&L filed with the NJBPU a stipulation entered into with the NJBPU staff, NJ Rate Counsel and others that provided a total budget of approximately$40 million for JCP&L's electric vehicle program, including investments of approximately$29 million and operations and maintenance expenses of approximately$11 million . Electric vehicle related capital and operations and 55 -------------------------------------------------------------------------------- maintenance costs shall be deferred and placed in separate regulatory assets for recovery in JCP&L's next base rate case. The stipulation was approved without modification by the NJBPU onJune 8, 2022 . OnSeptember 17, 2022 , in connection withMid-Atlantic Offshore Development, LLC , a transmission company jointly owned byShell New Energies US andEDF Renewables North America , JCP&L submitted a proposal to the NJBPU and PJM to build transmission infrastructure connecting offshore wind-generated electricity to theNew Jersey power grid. OnOctober 26, 2022 , the JCP&L proposal was accepted in an order issued by NJBPU. The proposal included approximately$723 million in investments to both build new and upgrade existing transmission infrastructure. JCP&L's proposal projects an investment ROE of 10.2% and includes the option for JCP&L to acquire up to a 20% equity stake inMid-Atlantic Offshore Development, LLC . The resulting rates associated with the project are expected to be shared among the ratepayers of allNew Jersey electric utilities. Construction is expected to begin in 2025.
The Ohio Companies operate under PUCO-approved base distribution rates that became effective in 2009. The Ohio Companies currently operate under ESP IV, effectiveJune 1, 2016 and continuing throughMay 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 fromJune 1, 2019 throughMay 31, 2022 ; and$15 million per year fromJune 1, 2022 throughMay 31, 2024 . In addition, ESP IV includes: (1) continuation of a base distribution rate freeze throughMay 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 aCustomer Advisory Council to ensure preservation and growth of the competitive market inOhio . OnMay 16, 2022 , the Ohio Companies filed their application for determination of the existence of SEET under ESP IV for calendar year 2021, which demonstrated that each of the individual Ohio Companies did not have significantly excessive earnings. OnJuly 15, 2022 , the Ohio Companies filed an application with the PUCO for approval of phase two of their distribution grid modernization plan that would, among other things, provide for the installation of an additional 700,000 smart meters, distribution automation equipment on approximately 240 distribution circuits, voltage regulating equipment on approximately 220 distribution circuits, and other investments and pilot programs in related technologies designed to provide enhanced customer benefits. The Ohio Companies propose that phase two will be implemented over a four-year budget period with estimated capital investments of approximately$626 million and operations and maintenance expenses of approximately$144 million over the deployment period. Under the proposal, costs of phase two of the grid modernization plan would be recovered through the Ohio Companies' AMI rider, pursuant to the terms and conditions approved in ESP IV. OnDecember 27, 2022 , the Ohio Companies filed a motion with the PUCO requesting a procedural schedule that would facilitate the issuance of an order by year-end 2023. OnNovember 1, 2021 , the Ohio Companies, together with the OCC, PUCO Staff, and several other signatories, entered into an Ohio Stipulation with the intent of resolving the ongoing energy efficiency rider audits, various SEET proceedings, including the Ohio Companies' 2017 SEET proceeding, and the Ohio Companies' quadrennial ESP review, each of which was pending before the PUCO. Specifically, the Ohio Stipulation provides that the Ohio Companies' current ESP IV passes the required statutory test for their prospective SEET review as part of the Quadrennial Review of ESP IV, and except for limited circumstances, the signatory parties have agreed not to challenge the Ohio Companies' SEET return on equity calculation methodology for their 2021-2024 SEET proceedings. TheOhio Stipulation additionally affirms that: (i) the Ohio Companies' ESP IV shall continue through its previously authorized term ofMay 31, 2024 ; and (ii) the Ohio Companies will file their next base rate case inMay 2024 , and further, no signatory party will seek to adjust the Ohio Companies' base distribution rates before that time, except in limited circumstances. The Ohio Companies further agreed to refund$96 million to customers in connection with the 2017-2019 SEET cases, and to provide$210 million in future rate reductions for all customers, including$80 million in 2022,$60 million in 2023,$45 million in 2024, and$25 million in 2025. The PUCO approved the 2017-2019 SEET refunds and 2022 rate reductions onDecember 1, 2021 , and refunds began inDecember 2021 . Current and future rate reductions are recognized as a reduction to regulated distribution segment's revenue in the Consolidated Statements of Income as they are provided to the Ohio Companies' customers. OnSeptember 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. OnDecember 30, 2020 , in response to the OCC's motion, the PUCO reopened the DMR audit docket, and directed PUCO staff to solicit a third-party auditor and conduct a full review of the DMR to ensure funds collected from customers through the DMR were only used for the purposes established in ESP IV. OnJune 2, 2021 , the PUCO selected an auditor and the auditor filed the final audit report onJanuary 14, 2022 , which made certain findings and recommendations. The report found that spending of DMR revenues was not required to be tracked, and that DMR revenues, like all rider revenues, are placed into the regulated money pool as a matter of routine, where the funds lose their identity. Therefore, the report could not suggest that DMR funds were used definitively for direct or indirect support for grid modernization. The report also concluded that 56 -------------------------------------------------------------------------------- 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 theOhio Companies adopt formal dividend policies. Final comments and responses were filed by parties during the second quarter of 2022. OnSeptember 15, 2020 , the PUCO opened a new proceeding to review the political and charitable spending by the Ohio Companies in support of HB 6 and the subsequent referendum effort, and directing the Ohio Companies to show cause, demonstrating that the costs of any political or charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any rates or charges paid by customers. The Ohio Companies initially filed a response stating that the costs of any political or charitable spending in support of HB 6, or the subsequent referendum effort, were not included, directly or indirectly, in any rates or charges paid by customers, but onAugust 6, 2021 , filed a supplemental response explaining that, in light of the facts set forth in the DPA and the findings of the Rider DCR audit report further discussed below, political or charitable spending in support of HB 6, or the subsequent referendum effort, affected pole attachment rates paid by approximately$15 thousand . OnOctober 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 andDecember 2021 , parties filed comments and reply comments regarding the Ohio Companies' original and supplemental responses to the PUCO'sSeptember 15, 2020 , show cause directive. OnMay 4, 2022 , the PUCO selected a third-party auditor to determine whether the show cause demonstration submitted by the Ohio Companies is sufficient to ensure that the cost of any political or charitable spending in support of HB 6 or the subsequent referendum effort was not included, directly or indirectly, in any rates or charges paid by ratepayers. In connection with an ongoing audit of the Ohio Companies' policies and procedures relating to the code of conduct rules between affiliates, onNovember 4, 2020 , the PUCO initiated an additional corporate separation audit as a result of the FirstEnergy leadership transition announcement made onOctober 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 theOhio Companies' corporate separation plan. The additional audit is for the period fromNovember 2016 throughOctober 2020 . The final audit report was filed onSeptember 13, 2021 . The audit report makes no findings of major non-compliance withOhio corporate separation requirements, minor non-compliance with eight requirements, and findings of compliance with 23 requirements. Parties filed comments and reply comments on the audit report. In connection with an ongoing annual audit of the Ohio Companies' Rider DCR for 2020, and as a result of disclosures in FirstEnergy's Form 10-K for the year endedDecember 31, 2020 (filed onFebruary 18, 2021 ), the PUCO expanded the scope of the audit onMarch 10, 2021 , to include a review of certain transactions that were either improperly classified, misallocated, or lacked supporting documentation, and to determine whether funds collected from customers were used to pay the vendors, and if so, whether or not the funds associated with those payments should be returned to customers through Rider DCR or through an alternative proceeding. OnAugust 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 inOctober 2021 . Additionally, onSeptember 29, 2021 , the PUCO expanded the scope of the audit in this proceeding to determine if the costs of the naming rights forFirstEnergy Stadium have been recovered from the Ohio Companies' customers. OnNovember 19, 2021 , the auditor filed its final report, in which the auditor concluded that theFirstEnergy Stadium naming rights expenses were not recovered fromOhio customers. OnDecember 15, 2021 , the PUCO further expanded the scope of the audit to include an investigation into an apparent nondisclosure of a side agreement in theOhio Companies' ESP IV settlement proceedings, but stayed its expansion of the audit until otherwise ordered by the PUCO. OnAugust 16, 2022 , theU.S. Attorney for theSouthern District ofOhio requested that the PUCO stay the above pending HB 6- related matters for a period of six months, which request was granted by the PUCO onAugust 24, 2022 . Unless otherwise ordered by the PUCO, the four cases are stayed in their entirety, including discovery and motions, and all related procedural schedules are vacated. In the fourth quarter of 2020, motions were filed with the PUCO requesting that the PUCO amend the Ohio Companies' riders for collecting the OVEC-related charges required by HB 6 to provide for refunds in the event such provisions of HB 6 are repealed. Neither the Ohio Companies nor FE benefit from the OVEC-related charges the Ohio Companies collect. Instead, the Ohio Companies are further required by HB 6 to remit all the OVEC-related charges they collect to non-FE Ohio electric distribution utilities. The Ohio Companies contested the motions, which are pending before the PUCO.
See "Outlook - Other Legal Proceedings" below for additional details on the government investigations and subsequent litigation surrounding the investigation of HB 6.
The Pennsylvania Companies operate under rates approved by the PPUC, effective as ofJanuary 27, 2017 . OnNovember 18, 2021 , the PPUC issued orders to each of the Pennsylvania Companies directing they operate under DSPs for theJune 1, 2019 throughMay 31, 2023 delivery period, which DSPs provide for the competitive procurement of generation supply for customers who do not receive service from an alternative EGS. Under the 2019-2023 DSPs, supply will be provided by wholesale suppliers through a mix of 3, 12 and 24-month energy contracts, as well as two RFPs for 2-year SREC contracts for ME, PN and Penn. On 57 --------------------------------------------------------------------------------December 14, 2021 , the Pennsylvania Companies filed proposed DSPs for provision of generation for theJune 1, 2023 throughMay 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 onApril 13, 2022 , and onApril 20, 2022 , the parties filed a partial settlement with the PPUC resolving certain of the issues in the proceeding and setting aside the remainder of the issues to be resolved through briefing. PPUC approved the partial settlement, without modification, onAugust 4, 2022 . Under the 2023-2027 DSPs, supply is proposed to be provided through a mix of 12 and 24-month energy contracts, as well as long-term solar PPAs. InMarch 2018 , the PPUC approved adjusted customer rates of thePennsylvania Companies to reflect the net impact of the Tax Act. As a result, the Pennsylvania Companies established riders that, beginningJuly 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 ofJanuary 1 through June 30, 2018 , were tracked and were to be addressed for treatment in a future proceeding. OnMay 17, 2021 , the Pennsylvania Companies filed petitions with the PPUC proposing to refund the net savings for the January throughJune 2018 period to customers beginningJanuary 1, 2022 . OnNovember 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 theNovember 2021 PPUC order and methodology. The Pennsylvania Companies filed petitions to propose the timing and methodology of the refund of these amounts onFebruary 17, 2022 . The Pennsylvania Companies' petitions and the proposed refunds addressed within were approved by the PPUC onJune 16, 2022 , without modification, effectiveJuly 1, 2022 , and which refunds were fully completed byDecember 31, 2022 . Pursuant to Pennsylvania Act 129 of 2008 and PPUC orders, thePennsylvania Companies implemented energy efficiency and peak demand reduction programs with 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. 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. OnJanuary 16, 2020 , the PPUC approved the Pennsylvania Companies' LTIIPs for the five-year period beginningJanuary 1, 2020 and endingDecember 31, 2024 for a total capital investment of approximately$572 million for certain infrastructure improvement initiatives. OnJune 25, 2021 , thePennsylvania Office of Consumer Advocate filed a complaint against Penn's quarterly DSIC rate, disputing the recoverability of the Companies' automated distribution management system investment under the DSIC mechanism. OnJanuary 26, 2022 , the parties filed a joint petition for settlement that resolves all issues in this matter, which was approved by the PPUC without modification onApril 14, 2022 . Following the Pennsylvania Companies' 2016 base rate proceedings, the PPUC ruled in a separate proceeding related to the DSIC mechanisms that thePennsylvania Companies were not required to reflect federal and state income tax deductions related to DSIC-eligible property in DSIC rates. The decision was appealed to thePennsylvania Supreme Court and inJuly 2021 the court upheld thePennsylvania Commonwealth Court's reversal of the PPUC's decision and remanded the matter back to the PPUC for determination as to how DSIC calculations shall account for ADIT and state taxes. The PPUC issued the order as directed, which was challenged by an intervening party. All parties have briefed the issue and await a ruling from the PPUC. Neither the PPUC's determination or the underlying order are expected to result in a material impact to FirstEnergy.
MP and PE provide electric service to all customers through traditional cost-based, regulated utility ratemaking and operate under WVPSC-approved rates that became effective inFebruary 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. OnDecember 29, 2021 , the WVPSC issued an order granting MP and PE's requested$19.6 million increase in ENEC rates, requiring, among other things, that MP and PE refund to its large industrial customers their respective portion of the$7.7 million rate reduction discussed above and also requires MP and PE to negotiate a PPA for its capacity shortfall and a reasonable reserve margin if certain conditions are met. By order datedMarch 2, 2022 , the WVPSC reopened the case to determine whether rates should be increased to recover growing ENEC under-recoveries. OnMay 17, 2022 , the WVPSC issued an order approving an interim rate increase of$94 million , effective for customer rates onMay 18, 2022 , subject to a prudence review during MP and PE's 2022 ENEC case.
On
58
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underrecovery during the review period (July 1, 2021 to June 30, 2022 ) of $144.9
million due to higher coal, reagent, and allowance expenses. This filing
additionally addresses, among other things, the WVPSC's May 2022 request for a
prudence review of current rates. At a hearing on December 8, 2022 , the parties
in the case presented a unanimous settlement to increase rates by approximately
$92 million , effective January 1, 2023 , and carry over to MP and PE's 2023 ENEC
case, approximately $92 million at a carrying charge of 4%. In an order dated
December 30, 2022 , the WVPSC approved the settlement with respect to the
proposed rate increase, but MP and PE rates remain subject to a prudence review
in their 2023 ENEC case. The order also instructs MP to evaluate the feasibility
of purchasing the Pleasants Power Station and file a summary of the evaluation
by March 31, 2023 .
On December 27, 2021 , the WVPSC approved a settlement granting MP and PE a $16
million increase in rates effective January 1, 2022 , and permitting the
continuation of the vegetation management program and surcharge for another two
years. WVPSC additionally ordered MP and PE to perform equipment inspections
within a reasonable time after vegetation management occurs on a circuit.
On November 22, 2021 , MP and PE filed with the WVPSC their plan to construct 50
MWs of solar generation at five sites in West Virginia . The plan includes a
tariff to offer solar power to West Virginia customers and cost recovery for MP
and PE from other customers through a surcharge for any solar investment not
fully subscribed by their customers. A hearing was held in mid-March 2022 and on
April 21, 2022 , the WVPSC issued an order approving, effective May 1, 2022 , the
requested tariff and requiring MP and PE to subscribe at least 85% of the
planned 50 MWs before seeking final tariff approval. MP and PE must seek
separate approval from the WVPSC to recover any solar generation costs in excess
of the approved tariff. The first solar generation site is expected to be
in-service by the end of 2023 and all construction completed at the other sites
no later than the end of 2025 at a total investment cost of approximately $110
million .
On December 17, 2021 , MP and PE filed with the WVPSC for approval of
environmental compliance projects at the Ft. Martin and Harrison Power Stations
to comply with the EPA 's ELG and operate these plants beyond 2028. The request
includes a surcharge to recover the expected $142 million capital investment and
$3 million in annual operation and maintenance expense. MP and PE reached a
settlement agreement with WVPSC staff and all intervenors, recommending: (i)
approval of the ELG compliance plan submitted by MP and PE and (ii) recovery of
costs through a surcharge. A ruling approving the settlement without
modification was issued by the WVPSC on September 12, 2022 , and construction is
expected to be completed by the end of 2025.
On January 13, 2023 , MP and PE filed a request with the WVPSC seeking approval
of new depreciation rates for existing and future capital assets. Specifically,
MP and PE are seeking to increase depreciation expense of $75.5 million per
year, primarily for regulated generation-related assets. Any depreciation rates
approved by the WVPSC would not become effective until new base rates were
established.
FERC REGULATORY MATTERS
Under theFPA ,FERC regulates rates for interstate wholesale sales and transmission of electric power, regulatory accounting and reporting under the Uniform System of Accounts, and other matters, including construction and operation of hydroelectric projects. With respect to their wholesale services and rates, the Utilities, AE Supply and the Transmission Companies are subject to regulation byFERC .FERC regulations require JCP&L, MP, PE, WP and the Transmission Companies to provide open access transmission service atFERC -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. The following table summarizes the key terms of rate orders in effect for transmission customer billings for FirstEnergy's transmission owner entities as ofDecember 31, 2022 : Company Rates Effective Capital Structure Allowed ROE ATSI January 1, 2015 Actual (13-month average) 10.38% JCP&L January 1, 2020 Actual (13-month average) 10.20% Actual (13-month MP January 1, 2021(1) average)(1) 11.35%(1) Actual (13-month PE January 1, 2021(1) average)(1) 11.35%(1) Actual (13-month WP January 1, 2021(1) average)(1) 11.35%(1) MAIT July 1, 2017 Lower of Actual (13-month 10.3% average) or 60% 12.7%(TrAIL the Line & Black Oak TrAIL July 1, 2008 Actual (year-end) SVC) 11.7% (All other projects) (1) Effective onJanuary 1, 2021 , MP, PE, and WP have implemented a forward-looking formula rate, which has been accepted byFERC , subject to refund, pending further hearing and settlement procedures. OnJanuary 18, 2023 , MP, PE, and WP submitted an uncontested settlement toFERC , which is subject toFERC approval, which includes an allowed ROE of 10.45% and a capital structure of the lower of actual (13-month average) or 56%. 59 --------------------------------------------------------------------------------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 byFERC to sell wholesale power in interstate commerce at market-based rates and have a market-based rate tariff on file withFERC , 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 theElectric Reliability Organization designated byFERC 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 andFERC 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 inFebruary 2019 . Among other matters, the audit is evaluating FirstEnergy's compliance with certain accounting and reporting requirements under variousFERC regulations. OnFebruary 4, 2022 ,FERC filed the final audit report for the period ofJanuary 1, 2015 throughSeptember 30, 2021 , which included several findings and recommendations that FirstEnergy has accepted. The audit report included a finding and related recommendation on FirstEnergy's methodology for allocation of certain corporate support costs to regulatory capital accounts under certainFERC regulations and reporting. Effective in the first quarter of 2022 and in response to the finding, FirstEnergy had implemented a new methodology for the allocation of these corporate support costs to regulatory capital accounts for its regulated distribution and transmission companies on a prospective basis. With the assistance of an independent outside firm, FirstEnergy completed an analysis during the third quarter of 2022 of these costs and how it impacted certainFERC -jurisdictional wholesale transmission customer rates for the audit period of 2015 through 2021. As a result of this analysis, FirstEnergy recorded in the third quarter of 2022 approximately$45 million ($34 million after-tax) in expected customer refunds, plus interest, due to its wholesale transmission customers and reclassified approximately$195 million of certain transmission capital assets to operating expenses for the audit period, of which$90 million ($67 million after-tax) are not expected to be recoverable and impacted FirstEnergy's earnings since they relate to costs capitalized during stated transmission rate time periods. These reclassifications also resulted in a reduction to the Regulated Transmission segment's rate base by approximately$160 million , which is not expected to materially impact FirstEnergy or the segment's future earnings. The expected wholesale transmission customer refunds were recognized as a reduction to revenue, and the amount of reclassified transmission capital assets that are not expected to be recoverable were recognized within "Other operating expenses" at the Regulated Transmission segment and on FirstEnergy's Consolidated Statements of Income.
ATSI Transmission Formula Rate
OnMay 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 byFERC 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. OnJune 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 theFERC proceeding subsequently were able to reach settlement, and onOctober 14, 2021 , filed the settlement withFERC . As a result of the filed settlement, FirstEnergy recognized a$21 million pre-tax charge during the third quarter of 2021, which reflects the difference between amounts originally recorded as regulatory assets and amounts which will ultimately be recovered as a result of the pending settlement. From a segment perspective, during the third quarter of 2021, the Regulated Transmission segment recorded a pre-tax charge of$48 million and the Regulated Distribution segment recognized a$27 million reduction to a reserve previously recorded in 2010. In addition, the settlement provides for partial recovery of future incurred costs allocated to ATSI by MISO for the above-referenced transmission projects that were constructed by other MISO transmission owners, which is not expected to have a material impact on FirstEnergy or ATSI. The uncontested settlement was approved byFERC onMarch 24, 2022 without modification. ATSI's compliance filing to implement the terms of the settlement was accepted byFERC without modification onJune 23, 2022 . 60 --------------------------------------------------------------------------------
FERC Actions on Tax Act
OnMarch 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 impactFERC -jurisdictional rates, including transmission rates. OnNovember 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; to maintain rate base neutrality (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. PerFERC directives, ATSI submitted its compliance filing onMay 1, 2020 . MAIT submitted its compliance filing onJune 1, 2020 . OnNovember 18, 2021 ,FERC issued an order that: (i) accepted ATSI's proposed tariff amendments to its rate base adjustment mechanism, effectiveJanuary 27, 2020 ; (ii) directed ATSI to make a further compliance filing byJanuary 17, 2022 ; and (iii) set the amount of ATSI's recorded ADIT balances as ofDecember 31, 2017 , for hearing and settlement procedures. ATSI submitted the compliance filing, and following settlement negotiations, filed an uncontested settlement agreement withFERC onOctober 18, 2022 . There is no timetable forFERC to rule on the settlement agreement. OnDecember 3, 2021 ,FERC issued an order that (i) accepted MAIT's proposed tariff amendments to its rate base adjustment mechanism, effectiveJanuary 27, 2020 ; (ii) directed MAIT to make a further compliance filing byFebruary 1, 2022 ; and (iii) set the amount of MAIT's recorded ADIT balances as ofDecember 31, 2017 for hearing and settlement procedures. MAIT submitted the compliance filing, and following settlement negotiations, filed an uncontested settlement agreement withFERC onOctober 18, 2022 . There is no timetable forFERC to rule on the settlement agreement. OnMay 15, 2020 , TrAIL submitted its compliance filing and onJune 1, 2020 , PATH submitted its required compliance filing. OnMay 4, 2021 ,FERC staff requested additional information about PATH's proposed rate base adjustment mechanism, and PATH submitted the requested information onJune 3, 2021 . OnJuly 12, 2021 ,FERC staff requested additional information about TrAIL's proposed rate base adjustment mechanism. TrAIL filed its response onAugust 6, 2021 . OnMarch 31, 2022 ,FERC issued an order, ruling that TrAIL's compliance filing partially complied with the requirements of Order No. 864 and directing TrAIL to submit a further compliance filing to address certain additional items that according toFERC will further enhance transparency. TrAIL submitted the compliance filing onMay 31, 2022 , andFERC accepted the compliance filing by letter order datedAugust 30, 2022 . OnApril 27, 2022 ,FERC issued an order on PATH's compliance filing, ruling that it partially complied with the requirements of Order No. 864 and directing PATH to submit a further compliance filing to address certain additional items. PATH submitted the compliance filing onJune 27, 2022 , andFERC accepted the compliance filing by letter order datedNovember 14, 2022 . MP, WP and PE - as holders of a "stated" transmission rate when Order No. 864 issued - addressed these requirements as part of the transmission rates amendments that were filed withFERC onOctober 29, 2020 . An uncontested settlement of all issues in that case was filed forFERC approval onJanuary 18, 2023 .
ATSI ROE - Ohio Consumers Counsel v. ATSI, et al.
OnFebruary 24, 2022 , the OCC filed a complaint withFERC against ATSI, AEP'sOhio affiliates and AEPSC, andDuke Energy Ohio, LLC asserting thatFERC should reduce the ROE utilized in the utilities' transmission formula rates by eliminating the 50 basis point adder associated with RTO membership, effectiveFebruary 24, 2022 . The OCC contends that this result is required becauseOhio law mandates that transmission owning utilities join an RTO and that the 50 basis point adder is applicable only where RTO membership is voluntary. ATSI disagrees with the OCC's characterization and set forth its reasons for such disagreement in a combined motion to dismiss and answer that was filed withFERC onMarch 31, 2022 . On that same date, AEP and Duke filed separate motions to dismiss and answers to the OCC complaint, and several other parties filed comments. ATSI filed a response to certain intervenors' filings onApril 28, 2022 . OnDecember 15, 2022 ,FERC denied the complaint as to ATSI and Duke, but granted it as to AEP. OnJanuary 17, 2023 , AEP and the OCC filed requests for rehearing and onFebruary 1, 2023 , FirstEnergy filed an answer to the OCC's rehearing request. FirstEnergy is unable to predict the outcome of this proceeding, but it is not expected to have a material impact.
Transmission ROE Incentive
OnMarch 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 onApril 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 onJune 25, 2021 , and reply comments were filed onJuly 26, 2021 . The rulemaking remains pending beforeFERC . 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's transmission incentive ROE, such changes will be applied on a prospective basis.
Allegheny Power Zone Transmission Formula Rate Filings
OnOctober 29, 2020 , MP, PE and WP filed tariff amendments withFERC to implement a forward-looking formula transmission rate, to be effectiveJanuary 1, 2021 . In addition, onOctober 30, 2020 , KATCo filed a proposed new tariff to establish a forward-looking formula rate and requested that the new rate become effectiveJanuary 1, 2021 . In its filing, KATCo explained that while it 61 -------------------------------------------------------------------------------- currently owns no transmission assets, it may build new transmission facilities in theAllegheny zone, and that it may seek required state and federal authorizations to acquire transmission assets from PE and WP byJanuary 1, 2022 . These transmission rate filings were accepted for filing byFERC onDecember 31, 2020 , effectiveJanuary 1, 2021 , subject to refund, pending further hearing and settlement procedures and were consolidated into a single proceeding. MP, PE and WP, and KATCo filed uncontested settlement agreements withFERC onJanuary 18, 2023 . There is no timetable forFERC to rule on the settlement agreements. Also onJanuary 25, 2023 , theFERC Chief Administrative Law Judge granted a motion of MP, PE, and WP for interim rates to implement certain aspects of the settled rate retroactive toJanuary 1, 2023 . As a result of the filed settlement, FirstEnergy recognized a$25 million pre-tax charge during the fourth quarter of 2022, which reflects the difference between amounts originally recorded as assets and amounts which will ultimately be recovered from customers as a result of the pending settlement. 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 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. OnJuly 28, 2015 , the D.C. Circuit ordered theEPA to reconsider the CSAPR caps on NOx and SO2 emissions from power plants in 13 states, includingWest Virginia . This followed the 2014U.S. Supreme Court ruling generally upholding theEPA 's regulatory approach under CSAPR but questioning whether theEPA required upwind states to reduce emissions by more than their contribution to air pollution in downwind states. TheEPA issued a CSAPR Update onSeptember 7, 2016 , reducing summertime NOx emissions from power plants in 22 states in the easternU.S. , includingWest Virginia , beginning in 2017. Various states and other stakeholders appealed the CSAPR Update to the D.C. Circuit in November andDecember 2016 . OnSeptember 13, 2019 , the D.C. Circuit remanded the CSAPR Update to theEPA citing that the rule did not eliminate upwind states' significant contributions to downwind states' air quality attainment requirements within applicable attainment deadlines. Also inMarch 2018 , theState of New York filed a CAA Section 126 petition with theEPA alleging that NOx emissions from nine states (includingWest Virginia ) significantly contribute toNew York's inability to attain the ozone National Ambient Air Quality Standards. The petition sought suitable emission rate limits for large stationary sources that are allegedly affectingNew York's air quality within the three years allowed by CAA Section 126. OnSeptember 20, 2019 , theEPA deniedNew York's CAA Section 126 petition. OnOctober 29, 2019 , theState of New York appealed the denial of its petition to the D.C. Circuit. OnJuly 14, 2020 , the D.C. Circuit reversed and remanded theNew York petition to theEPA for further consideration. OnMarch 15, 2021 , theEPA issued a revised CSAPR Update that addresses, among other things, the remands of the prior CSAPR Update and the New York Section 126 petition. InDecember 2021 , MP purchased NOx emissions allowances to comply with 2021 ozone season requirements. OnApril 6, 2022 , theEPA published proposed rules seeking to impose further significant reductions in EGU NOx emissions in 25 states, includingWest Virginia . TheEPA held a virtual public hearing regarding the proposed rules onApril 21, 2022 , and MP submitted written comments onJune 21, 2022 . Depending on the outcome of any appeals and how theEPA and the states ultimately implement the revised CSAPR Update, the future cost of compliance may materially impact FirstEnergy's operations, cash flows and financial condition.
Climate Change
There are several initiatives to reduce GHG emissions at the state, federal and international level. Certain northeastern states are participating in the RGGI and western states led byCalifornia , 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. InSeptember 2016 , theU.S. joined in adopting the agreement reached onDecember 12, 2015 , at theUnited Nations Framework Convention on Climate Change meetings inParis to reduce GHGs. The Paris Agreement's non-binding obligations to limit global warming to below two degrees Celsius became effective onNovember 4, 2016 . OnJune 1, 2017 , theTrump Administration announced that theU.S. would cease all participation in the Paris Agreement. OnJanuary 20, 2021 ,President Biden signed an executive order re-adopting the agreement on behalf of theU.S. InNovember 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 62 -------------------------------------------------------------------------------- pledged to achieve carbon neutrality by 2050 and set an interim goal for a 30% reduction in GHGs within FirstEnergy's direct operational control by 2030, based on 2019 levels. Future resource plans to achieve carbon reductions, including any determination of retirement dates of the regulated coal-fired generation, will be developed by working collaboratively with regulators inWest Virginia . Determination of the useful life of the regulated coal-fired generation could result in changes in depreciation, and/or continued collection of net plant in rates after retirement, securitization, sale, impairment, or regulatory disallowances. If MP is unable to recover these costs, it could have a material adverse effect on FirstEnergy's and/or MP's financial condition, results of operations, and cash flow. Furthermore, FirstEnergy cannot currently estimate the financial impact of climate change policies, although potential legislative or regulatory programs restricting CO2 emissions, or litigation alleging damages from GHG emissions, could require material capital and other expenditures or result in changes to its operations. InDecember 2009 , theEPA released its final "Endangerment and Cause or Contribute Findings for GHGs under the Clean Air Act," concluding that concentrations of several key GHGs constitute an "endangerment" and may be regulated as "air pollutants" under the CAA and mandated measurement and reporting of GHG emissions from certain sources, including electric generating plants. Subsequently, theEPA released its final CPP regulations inAugust 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 inOctober 2015 . OnFebruary 9, 2016 , theU.S. Supreme Court stayed the rule during the pendency of the challenges to theD.C. Circuit andU.S. Supreme Court . OnMarch 28, 2017 , an executive order, entitled "Promoting Energy Independence and Economic Growth," instructed theEPA to review the CPP and related rules addressing GHG emissions and suspend, revise or rescind the rules if appropriate. OnJune 19, 2019 , theEPA repealed the CPP and replaced it with the ACE rule that established guidelines for states to develop standards of performance to address GHG emissions from existing coal-fired generation. OnJanuary 19, 2021 , the D.C. Circuit vacated and remanded the ACE rule declaring that theEPA was "arbitrary and capricious" in its rule making and, as such, the ACE rule is no longer in effect and all actions thus far taken by states to implement the federally mandated rule are now null and void. Vacating the ACE Rule had the unintended effect of reinstating the CPP because the repeal of the CPP was a provision within the ACE Rule. The D.C. Circuit decision was appealed by several states and interested parties, includingWest Virginia , arguing that theEPA did not have the authorization under Section 111(d) of the Clean Air Act to require "generation shifting" as a way to limit GHGs. OnJune 30, 2022 , theU.S. Supreme Court held that theEPA 's regulation of GHGs under Section 111(d) of the Clean Air Act was not authorized byCongress and remanded the Rule to theEPA for further reconsideration.
Clean Water Act
Various water quality regulations, the majority of which are the result of the federal CWA and its amendments, apply to FirstEnergy's facilities. In addition, the states in which FirstEnergy operates have water quality standards applicable to FirstEnergy's operations. OnSeptember 30, 2015 , theEPA 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, onApril 13, 2017 , theEPA granted a Petition for Reconsideration and onSeptember 18, 2017 , theEPA postponed certain compliance deadlines for two years. OnAugust 31, 2020 , theEPA 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 toDecember 31, 2025 for both. In addition, theEPA 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. TheEPA is reconsidering the ELG rule with a publicly announced target of issuing a proposed revised rule in the Spring of 2023 and a final rule later in 2023. In the interim, the rule issued onAugust 31, 2020 , remains in effect. Depending on the outcome of appeals and how final rules are ultimately implemented, the compliance with these standards, could require additional capital expenditures or changes in operation at the Ft. Martin and Harrison power stations from what was approved by the WVPSC inSeptember 2022 to comply with the ELG rule.
Regulation of Waste Disposal
Federal and state hazardous waste regulations have been promulgated as a result of the Resource Conservation and Recovery Act, as amended, and the Toxic Substances Control Act. Certain CCRs, such as coal ash, were exempted from hazardous waste disposal requirements pending theEPA 's evaluation of the need for future regulation. InApril 2015 , theEPA 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. OnSeptember 13, 2017 , theEPA announced that it would reconsider certain provisions of the final regulations. OnJuly 29, 2020 , theEPA published a final rule again revising the date that certain CCR impoundments must cease accepting waste and initiate closure toApril 11, 2021 . The final rule also allows for an extension of the closure deadline based on meeting proscribed site-specific criteria. OnNovember 30, 2020 , AE Supply submitted a closure deadline extension request to theEPA seeking to extend the cease accepting waste date for the McElroy's Run CCR impoundment facility until 2024, which request is pending 63 --------------------------------------------------------------------------------
technical review by the
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 ofDecember 31, 2022 , based on estimates of the total costs of cleanup, FirstEnergy's proportionate responsibility for such costs and the financial ability of other unaffiliated entities to pay. Total liabilities of approximately$97 million have been accrued throughDecember 31, 2022 , of which, approximately$62 million are for environmental remediation of former MGP and gas holder facilities inNew 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
OnJuly 21, 2020 , a complaint and supporting affidavit containing federal criminal allegations were unsealed against the now former Ohio House SpeakerLarry Householder and other individuals and entities allegedly affiliated withMr. Householder . Also, onJuly 21, 2020 , and in connection with the investigation, FirstEnergy received subpoenas for records from theU.S. Attorney's Office for the Southern District Ohio . FirstEnergy was not aware of the criminal allegations, affidavit or subpoenas beforeJuly 21, 2020 . OnJuly 21, 2021 , FE entered into a three-year DPA with theU.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 theU.S. Attorney's Office in all matters relating to the conduct described in the DPA and other conduct under investigation by theU.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-incomeOhio 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 theU.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
OnAugust 10, 2020 , theSEC , through itsDivision of Enforcement , issued an order directing an investigation of possible securities laws violations by FE, and onSeptember 1, 2020 , issued subpoenas to FE and certain FE officers. OnApril 28, 2021 , andJuly 11, 2022 , theSEC issued additional subpoenas to FE, with which FE has complied. While no contingency has been reflected in its consolidated financial statements, FE believes that it is probable that it will incur a loss in connection with the resolution of theSEC 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 theSEC investigation. In addition to the subpoenas referenced above under "-United States v.Larry Householder , et. al." and theSEC 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 SpeakerLarry Householder and other individuals and entities allegedly affiliated withMr. Householder . The plaintiffs in each of the below cases seek, among other things, to recover an unspecified amount of damages (unless otherwise noted). Unless otherwise indicated, no contingency has been reflected in FirstEnergy's consolidated financial statements with respect to these lawsuits as a loss is neither probable, nor is a loss or range of a loss reasonably estimable. •In reFirstEnergy Corp. Securities Litigation (S.D.Ohio ); onJuly 28, 2020 andAugust 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, theLos Angeles County Employees Retirement Association , has been appointed by the court. A consolidated complaint was filed onFebruary 26, 2021 . The consolidated complaint alleges, on behalf of a proposed class of persons who purchased FE securities betweenFebruary 21, 2017 andJuly 21, 2020 , that FE and certain current or former FE officers violated Sections 10(b) and 20(a) of the Exchange Act by issuing 64 -------------------------------------------------------------------------------- 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 andJune 2020 . The class certification hearing is scheduled to take place onMarch 17, 2023 . FE believes that it is probable that it will incur a loss in connection with the resolution of this lawsuit. Given the ongoing nature and complexity of such litigation, FE cannot yet reasonably estimate a loss or range of loss. •MFS Series Trust I, et al. v.FirstEnergy Corp. , et al. and Brighthouse Funds II - MFS Value Portfolio, et al. v.FirstEnergy Corp. , et al. (S.D.Ohio ) onDecember 17, 2021 andFebruary 21, 2022 , purported stockholders of FE filed complaints against FE, certain current and former officers, and certain current and former officers of EH. The complaints allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act by issuing alleged misrepresentations or omissions regarding FE's business and its results of operations, and seek the same relief as the In reFirstEnergy Corp. Securities Litigation described above. FE believes that it is probable that it will incur losses in connection with the resolution of these lawsuits. Given the ongoing nature and complexity of such litigation, FE cannot yet reasonably estimate a loss or range of loss. •State ofOhio ex rel.Dave Yost ,Ohio Attorney General v.FirstEnergy Corp. , et al. andCity of Cincinnati and City of Columbus v.FirstEnergy Corp. (Common Pleas Court ,Franklin County, OH , all actions have been consolidated); onSeptember 23, 2020 andOctober 27, 2020 , the OAG and the cities ofCincinnati andColumbus , respectively, filed complaints against several parties including FE (the OAG also namedFES as a defendant), each alleging civil violations of the Ohio Corrupt Activity Act in connection with the passage of HB 6. OnJanuary 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. OnJanuary 31, 2021 , FE reached a partial settlement with the OAG and the cities ofCincinnati andColumbus with respect to the temporary restraining order and preliminary injunction request and related issues. In connection with the partial settlement, theOhio Companies filed an application onFebruary 1, 2021 , with the PUCO to set their respective decoupling riders (Conservation Support Rider) to zero. OnFebruary 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 afterFebruary 8, 2021 . The cases are stayed pending final resolution ofthe United States v.Larry Householder , et al. criminal proceeding described above, although onAugust 13, 2021 , new defendants were added to the complaint, including two former officers of FirstEnergy. OnNovember 9, 2021 , the OAG filed a motion to lift the agreed-upon stay, which FE opposed onNovember 19, 2021 ; the motion remains pending. OnDecember 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., andHudock and Cameo Countertops, Inc. v.FirstEnergy Corp. et al. (S.D.Ohio , all actions have been consolidated); onJuly 27, 2020 ,July 31, 2020 , andAugust 5, 2020 , respectively, purported customers of FE filed putative class action lawsuits against FE and FESC, as well as certain current and former FE officers, alleging civil Racketeer Influenced and Corrupt Organizations Act violations and related state law claims. FE agreed to a class settlement to resolve these claims onApril 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 theEmmons lawsuit below. OnJune 22, 2022 , the court preliminarily approved the class settlement and the final fairness hearing was held onNovember 9, 2022 . OnDecember 5, 2022 , the court issued an order memorializing its final approval of the class settlement. The settlement amount was satisfied onDecember 7, 2022 . •Emmons v.FirstEnergy Corp. et al. (Common Pleas Court ,Cuyahoga County, OH ); onAugust 4, 2020 , a purported customer of FirstEnergy filed a putative class action lawsuit against FE, FESC, the Ohio Companies, along withFES , alleging several causes of action, including negligence and/or gross negligence, breach of contract, unjust enrichment, and unfair or deceptive consumer acts or practices. FE agreed to a class settlement to resolve these claims onApril 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. OnJune 22, 2022 , the court preliminarily approved the class settlement and the final fairness hearing was held onNovember 9, 2022 . The S.D.Ohio issued a final written order approving the settlement onDecember 5, 2022 . The settlement amount was satisfied onDecember 7, 2022 . OnFebruary 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 SpeakerLarry Householder and other individuals and entities allegedly affiliated withMr. Householder that were filed in the S.D.Ohio , the N.D.Ohio , and theOhio 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); onJuly 26, 2020 andJuly 31, 2020 , respectively, purported stockholders of FE filed shareholder derivative action lawsuits against certain FE directors and officers, alleging, among other things, breaches of fiduciary duty. •Miller v. Anderson, et al. (N.D.Ohio ); Bloom, et al. v. Anderson, et al.; Employees Retirement System of theCity 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.; TheCity of Philadelphia Board of Pensions and Retirement v. Anderson et al.; Atherton v. Dowling et al.; Behar v. Anderson, et al. (S.D.Ohio , all actions have been consolidated); beginning onAugust 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. 65 -------------------------------------------------------------------------------- OnMarch 11, 2022 , the parties executed a stipulation and agreement of settlement, and filed a motion the same day requesting preliminary settlement approval in the S.D.Ohio , which the S.DOhio granted onMay 9, 2022 . Subsequently, following a hearing onAugust 4, 2022 , the S.D.Ohio granted final approval of the settlement onAugust 24, 2022 . The settlement agreement is expected to resolve fully these shareholder derivative lawsuits and includes a series of corporate governance enhancements, that have resulted in the following: •Six then-members of the FE Board did not stand for re-election at FE's 2022 annual shareholder meeting; •A special FE Board committee of at least three recently appointed independent directors was formed to initiate a review process of the then current senior executive team. The review of the senior executive team by the special FE Board committee and the FE Board was completed inSeptember 2022 ; •The FE Board will oversee FE's lobbying and political activities, including periodically reviewing and approving political and lobbying action plans prepared by management; •An FE Board committee of recently appointed independent directors will oversee the implementation and third-party audits of the FE Board-approved action plans with respect to political and lobbying activities; •FE will implement enhanced disclosure to shareholders of political and lobbying activities, including enhanced disclosure in its annual proxy statement; and •FE will further align financial incentives of senior executives to proactive compliance with legal and ethical obligations. The settlement also includes a payment to FE of$180 million , to be paid by insurance after the judgment has become final, less$36 million in court-ordered attorney's fees awarded to plaintiffs. OnSeptember 20, 2022 , a purported FE stockholder filed a motion for reconsideration of the S.D.Ohio's final settlement approval. The parties filed oppositions to that motion onOctober 11, 2022 and the motion is under consideration by the S.D.Ohio . The N.D.Ohio matter remains pending. OnJune 2, 2022 , the N.D.Ohio entered an order to show cause why the court should not appoint new plaintiffs' counsel, and thereafter, onJune 10, 2022 , the parties filed a joint motion to dismiss the matter without prejudice, which the N.D.Ohio denied onJuly 5, 2022 . OnAugust 15, 2022 , the N.D.Ohio issued an order stating its intention to appoint one group of applicants as new plaintiffs' counsel, and onAugust 22, 2022 , the N.D.Ohio ordered that any objections to the appointment be submitted byAugust 26, 2022 . The parties filed their objections by that deadline, and onSeptember 2, 2022 , the applicants responded to those objections. In the meantime, onAugust 25, 2022 , a purported FE stockholder represented by the applicants filed a motion to intervene, attaching a proposed complaint-in-intervention purporting to assert claims that the FE Board and officers breached their fiduciary duties and committed violations of Section 14(a) of the Exchange Act as well as a claim against a third party for professional negligence and malpractice. The parties filed oppositions to that motion to intervene onSeptember 8, 2022 , and the proposed intervenor's reply in support of his motion to intervene was filed onSeptember 22, 2022 .
On
In letters datedJanuary 26 , andFebruary 22, 2021 , staff ofFERC'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 byFERC's Division of Audits and Accounting . OnDecember 30, 2022 ,FERC approved a Stipulation and Consent Agreement that resolves the investigation. The agreement includes a FirstEnergy admission of violatingFERC's "duty of candor" rule and related laws, and obligates FirstEnergy to pay a civil penalty of$3.86 million , and to submit two annual compliance monitoring reports toFERC's Office of Enforcement regarding improvements to FirstEnergy's compliance programs. FE terminatedCharles E. Jones as its chief executive officer effectiveOctober 29, 2020 . As a result ofMr. Jones' termination, and due to the determination of a committee of independent members of the FE Board thatMr. Jones violated certain FirstEnergy policies and its code of conduct, all grants, awards and compensation under FirstEnergy's short-term incentive compensation program and long-term incentive compensation program with respect toMr. Jones that were outstanding on the date of termination were forfeited. InNovember 2021 , after a determination by theCompensation Committee of the FE Board that a demand for recoupment was warranted pursuant to the Recoupment Policy, FE made a recoupment demand toMr. Jones of compensation previously paid to him totaling approximately$56 million , the maximum amount permissible under the Recoupment Policy. As such, any amounts payable toMr. Jones under the EDCP will be set off against FE's recoupment demand. There can be no assurance that the efforts to seek recoupment fromMr. Jones will be successful. The outcome of any of these lawsuits, governmental investigations and audit is uncertain and could have a material adverse effect on FE's or its subsidiaries' reputation, business, financial condition, results of operations, liquidity, and cash flows. Other Legal Matters There are various lawsuits, claims (including claims for asbestos exposure) and proceedings related to FirstEnergy's normal business operations pending against FE or its subsidiaries. The loss or range of loss in these matters is not expected to be 66 --------------------------------------------------------------------------------
material to FE or its subsidiaries. The other potentially material items not otherwise discussed above are described under Note 12, "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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
FirstEnergy prepares consolidated financial statements in accordance with GAAP. Application of these principles often requires a high degree of judgment, estimates and assumptions that affect financial results. FirstEnergy's accounting policies require significant judgment regarding estimates and assumptions underlying the amounts included in the financial statements. Additional information regarding the application of accounting policies is included in the Notes to Consolidated Financial Statements.
Loss Contingencies
FirstEnergy is involved in a number of investigations, litigation, regulatory audits, arbitration, mediation, and similar proceedings, including those surrounding HB 6. FirstEnergy regularly assesses its liabilities and contingencies in connection with asserted or potential matters and establishes reserves when appropriate. In the preparation of the financial statements, FirstEnergy makes judgments regarding the future outcome of contingent events based on currently available information and accrues liabilities 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. Circumstances change over time and actual results may vary significantly from estimates. See Note 12, "Regulatory Matters" and Note 13, "Commitments, Guarantees and Contingencies," of the Notes to Consolidated Financial Statements for additional information.
Revenue Recognition
The accounting treatment for revenue recognition is based on the nature of the underlying transaction and applicable authoritative guidance. FirstEnergy accounts for revenues from contracts with customers under ASC 606, "Revenue from Contracts with Customers." Revenue from financial instruments, derivatives, late payment charges and 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 guidance.
Contracts with Customers
FirstEnergy follows the accrual method of accounting for revenues, recognizing
revenue for electricity that has been delivered to customers but not yet billed
through the end of the accounting period. The determination of Regulated
Distribution segment electricity sales to individual customers is based on meter
readings, which occur on a systematic basis throughout the month. At the end of
each month, electricity delivered to customers since the last meter reading is
estimated and a corresponding accrual for unbilled sales is recognized. The
determination of unbilled sales and revenues requires management to make
estimates regarding electricity available for retail load, transmission and
distribution line losses, demand by customer class, applicable billing demands,
weather-related impacts, number of days unbilled and tariff rates in effect
within each customer class.
Regulated Transmission segment revenues are primarily derived from
forward-looking formula rates. 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 rate base
and costs. Revenues and cash receipts for the stand-ready obligation of
providing transmission service are recognized ratably over time.
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. See Note 2, "Revenue," of the Notes to
Consolidated Financial Statements for additional information.
67
--------------------------------------------------------------------------------Regulatory Accounting
FirstEnergy's Regulated Distribution and Regulated Transmission segments are subject to regulation that sets the prices (rates) the Utilities and the Transmission Companies are permitted to charge customers based on costs that the regulatory agencies determine are permitted to be recovered. At times, regulatory agencies permit the future recovery of costs that would be currently charged to expense by an unregulated company. The ratemaking process results in the recording of regulatory assets and liabilities based on anticipated future cash inflows and outflows. FirstEnergy reviews 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 include changes in the regulatory environment, issuance of a regulatory commission order, or passage of new legislation. Upon material changes to these factors, where applicable, FirstEnergy will record new regulatory assets or liabilities and will assess whether it is probable that currently recorded regulatory assets and liabilities will be recovered or settled in future rates. If recovery of a regulatory asset is no longer probable, FirstEnergy will write-off that regulatory asset as a charge against earnings. FirstEnergy considers the entire regulatory asset balance as the unit of account for the purposes of balance sheet classification rather than the next years recovery and as such net regulatory assets and liabilities are presented in the non-current section on the FirstEnergy Consolidated Balance Sheets. See Note 12, "Regulatory Matters," of the Notes to Consolidated Financial Statements for additional information.
Pension and OPEB Accounting
FirstEnergy provides noncontributory qualified defined benefit pension plans that cover substantially all of its employees and non-qualified pension plans that cover certain employees. FirstEnergy provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee contributions, deductibles and co-payments, are also available upon retirement to certain employees, their dependents and, under certain circumstances, their survivors. FirstEnergy also has obligations to former or inactive employees after employment, but before retirement, for disability-related benefits. FirstEnergy pension and OPEB obligations are based on various assumptions in calculating these amounts. These assumptions include discount rates, health care cost trend rates, expected return on plan assets, compensation increases, retirement rates, mortality rates, among others. Actual results that differ from the assumptions and changes in assumptions affect future expenses and obligations. Discount Rate - In selecting an assumed discount rate, FirstEnergy considers currently available rates of return on high-quality fixed income investments expected to be available during the period to maturity of the pension and OPEB obligations. FirstEnergy utilizes a full yield curve approach in the estimation of the service and interest components of net periodic benefit costs for pension and other postretirement benefits by applying specific spot rates along the full yield curve to the relevant projected cash flows. Expected Return on Plan Assets - The expected return on pension and OPEB assets is based on input from investment consultants, including the trusts' asset allocation targets, the historical performance of risk-based and fixed income securities and other factors. The gains or losses generated as a result of the difference between expected and actual returns on plan assets is recognized as a pension and OPEB mark-to-market adjustment in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for remeasurement. The expected return on pension and OPEB assets for 2023 is 8.0% and 7.0%, respectively. . Mortality Rates - The mortality assumption is composed of a base table that represents the current expectation of life expectancy of the population adjusted by an improvement scale that attempts to anticipate future improvements in life expectancy. The Pri-2012 mortality table with projection scale MP-2021, actuarially adjusted to reflect increased mortality due to the ongoing impact of COVID-19 was utilized to determine the 2023 benefit cost and obligation as ofDecember 31, 2022 , for FirstEnergy's pension and OPEB plans. The MP-2021 scale was published in 2021 by theSociety of Actuaries . Health Care Trend Rates - Included in determining trend rate assumptions are the specific provisions of FirstEnergy's health care plans, the demographics and utilization rates of plan participants, actual cost increases experienced in FirstEnergy's health care plans, and projections of future medical trend rates. Net Periodic Benefit Costs (Credits) - In addition to service costs, interest on obligations, expected return on plan assets, and prior service costs, FirstEnergy recognizes in net periodic benefit costs a pension and OPEB mark-to-market adjustment for the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. 68 -------------------------------------------------------------------------------- The following table reflects the portion of pension and OPEB costs that were charged to expense, including any pension and OPEB mark-to-market adjustments, in the three years endedDecember 31, 2022 , 2021, and 2020: Net Periodic Benefit Costs (Credits) 2022 2021 2020 (In millions) Pension$ (389) $ (582) $ 254 OPEB (12) (170) (47) Total$ (401) $ (752) $ 207
The annual pension and OPEB mark-to-market adjustments, (gains) or losses, for
the years ended
FirstEnergy expects its 2023 pre-tax net periodic benefit expense including
amounts capitalized (excluding mark-to-market adjustments) to be approximately
Assumption Pension OPEB
Effective rate for interest on benefit obligations 5.10 % 5.06 %
Effective rate for service costs 5.34 % 5.41 %
Effective rate for interest on service costs 5.22 % 5.33 %
Expected return on plan assets 8.00 % 7.00 %
Rate of compensation increase 4.30 % N/A
The approximate effects on 2023 pension and OPEB net periodic benefit costs and the 2022 benefit obligation from changes in key assumptions are as follows:
Approximate Effect on 2023 Net Periodic Benefit Costs from Changes in Key
Assumptions
Assumption Change Pension OPEB Total
(In millions)
Discount rate Change by 0.25% (1) $
230
Expected return on plan assets Change by 0.25% $ 16$ 1 $ 17 Health care trend rate Change by 1.0% N/A$ 6 $ 6
(1) Assumes a parallel shift in yield curve.
Approximate Effect on 2022 Benefit Obligation from Changes in Key Assumptions
Assumption Change Pension OPEB Total
(In millions)
Discount rate Change by 0.25% (1) $ 233 $ 9 $ 242
Health care trend rate Change by 1.0% N/A $ 6 $ 6 (1) Assumes a parallel shift in yield curve.
See Note 5, "Pension and Other Postemployment Benefits," of the Notes to Consolidated Financial Statements for additional information.
69
--------------------------------------------------------------------------------Income Taxes
Judgment and the use of estimates are required in developing the provision for income taxes and reporting of tax-related assets and liabilities such as the interpretation of tax laws and associated regulations. FirstEnergy is required to make judgments regarding the potential tax effects of various transactions and results of operations in order to estimate its obligations to taxing authorities. Accounting for tax obligations requires judgments, including assessing whether tax benefits are more likely than not to be sustained, and estimating reserves for potential adverse outcomes regarding tax positions that have been taken. FirstEnergy records income taxes in accordance with the liability method of accounting. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recognized for tax purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. Deferred income tax liabilities related to temporary tax and accounting basis differences and tax credit carryforward items are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Deferred tax assets are recognized based on income tax rates expected to be in effect when they are settled. Actual income taxes could vary from estimated amounts due to the future impacts of various items, including future changes in income tax laws, forecasted results of operations, failure to successfully implement tax planning strategies, as well as results of audits and examinations of filed tax returns by taxing authorities.
See Note 7, "Taxes," of the Notes to Consolidated Financial Statements for additional information on income taxes.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, "Organization and Basis of Presentation," of the Notes to Consolidated Financial Statements for a discussion of new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A relating to market risk is set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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