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Section 1: 10-Q (10-Q)

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

FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________
Commission
 
Registrant; State of Incorporation;
 
I.R.S. Employer
File Number
 
Address; and Telephone Number
 
Identification No.
 
 
 
 
 
333-21011
 
FIRSTENERGY CORP.
 
34-1843785
 
 
(An Ohio Corporation)
 
 
 
 
76 South Main Street
 
 
 
 
Akron, OH 44308
 
 
 
 
Telephone (800)736-3402
 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
 
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ
 
 
 
Accelerated Filer o
 
 
 
Non-accelerated Filer (Do not check
if a smaller reporting company)
o
 
 
 
Smaller Reporting Company o
 
 
 
Emerging Growth Company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
 
OUTSTANDING
CLASS
 
AS OF MARCH 31, 2018
FirstEnergy Corp., $0.10 par value
 
476,909,318

FirstEnergy Web Site and Other Social Media Sites and Applications

FirstEnergy's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and all other documents filed with or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 are made available free of charge on or through the "Investors" page of FirstEnergy’s web site at www.firstenergycorp.com. The public may also read and copy any reports or other information that FirstEnergy files with the SEC at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the SEC's public reference room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services and the website maintained by the SEC at www.sec.gov.

These SEC filings are posted on the web site as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Additionally, FirstEnergy routinely posts additional important information, including press releases, investor presentations and notices of upcoming events under the "Investors" section of FirstEnergy’s web site and recognizes FirstEnergy’s web site as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under Regulation FD. Investors may be notified of postings to the web site by signing up for email alerts and RSS feeds on the "Investors" page of FirstEnergy's web site. FirstEnergy also uses Twitter® and Facebook® as additional channels of distribution to reach public investors and as a supplemental means of disclosing material non-public information for complying with its disclosure obligations under Regulation FD. Information contained on FirstEnergy’s web site, Twitter® handle or Facebook® page, and any corresponding applications of those sites, shall not be deemed incorporated into, or to be part of, this report.
 





Forward-Looking Statements: This Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 based on information currently available to management. Such statements are subject to certain risks and uncertainties and readers are cautioned not to place undue reliance on these forward-looking statements. These statements include declarations regarding management's intents, beliefs and current expectations. These statements typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” "forecast," "target," "will," "intend," “believe,” "project," “estimate," "plan" and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, which may include the following (see Glossary of Terms for definitions of capitalized terms):

The ability to successfully execute an exit of commodity-based generation that minimizes cash outflows and associated liabilities, including, without limitation, the losses, guarantees, claims and other obligations of FirstEnergy as such relate to the entities previously consolidated into FirstEnergy, including FES and FENOC, which have recently filed for bankruptcy protection.
The potential for litigation and demands for payment against FirstEnergy by FES and FENOC or certain of their creditors.
The risks associated with the bankruptcy cases of FES and FENOC, including, but not limited to, third-party motions in the cases that could adversely affect FirstEnergy, its liquidity or results of operations.
The ability to experience growth in the Regulated Distribution and Regulated Transmission segments and the effectiveness of our strategy to operate as a fully regulated business.
The accomplishment of our regulatory and operational goals in connection with our transmission and distribution investment plans, including, but not limited to, our planned transition to forward-looking formula rates.
Changes in assumptions regarding economic conditions within our territories, assessment of the reliability of our transmission and distribution system, or the availability of capital or other resources supporting identified transmission and distribution investment opportunities.
The ability to accomplish or realize anticipated benefits from strategic and financial goals, including, but not limited to, the ability to grow earnings in our regulated businesses, continue to reduce costs and to successfully execute our financial plans designed to improve our credit metrics and strengthen our balance sheet.
The risks and uncertainties associated with litigation, arbitration, mediation and like proceedings.
The uncertainties associated with the deactivation of our remaining commodity-based generating units, including the impact on vendor commitments, and as it relates to the reliability of the transmission grid, the timing thereof.
Costs being higher than anticipated and the success of our policies to control costs.
The uncertainty of the timing and amounts of the capital expenditures that may arise in connection with any litigation, including NSR litigation, or potential regulatory initiatives or rulemakings.
Changes in customers' demand for power, including, but not limited to, changes resulting from the implementation of state and federal energy efficiency and peak demand reduction mandates.
Economic and weather conditions affecting future sales, margins and operations, such as significant weather events, and all associated regulatory events or actions.
Changes in national and regional economic conditions affecting FirstEnergy and/or our major industrial and commercial customers, and other counterparties with which we do business.
The impact of labor disruptions by our unionized workforce.
The risks associated with cyber-attacks and other disruptions to our information technology system that may compromise our generation, transmission and/or distribution services and data security breaches of sensitive data, intellectual property and proprietary or personally identifiable information regarding our business, employees, shareholders, customers, suppliers, business partners and other individuals in our data centers and on our networks.
The impact of the regulatory process and resulting outcomes on the matters at the federal level and in the various states in which we do business, including, but not limited to, matters related to rates.
The impact of the federal regulatory process on FERC-regulated entities and transactions, in particular FERC regulation of PJM wholesale energy and capacity markets and cost-of-service rates, as well as FERC’s compliance and enforcement activity, including compliance and enforcement activity related to NERC’s mandatory reliability standards.
The uncertainties of various cost recovery and cost allocation issues resulting from ATSI's realignment into PJM.
The ability to comply with applicable state and federal reliability standards and energy efficiency and peak demand reduction mandates.
Other legislative and regulatory changes, including the federal administration's required review and potential revision of environmental requirements, including, but not limited to, the effects of the EPA's CPP, CCR, CSAPR and MATS programs, including our estimated costs of compliance, CWA waste water effluent limitations for power plants, and CWA 316(b) water intake regulation.
Changing market conditions that could affect the measurement of certain liabilities and the value of assets held in our pension trusts and other trust funds, and cause us and/or our subsidiaries to make additional contributions sooner, or in amounts that are larger, than currently anticipated.
The impact of changes to significant accounting policies.
The impact of any changes in tax laws or regulations, including the Tax Act, or adverse tax audit results or rulings.




The ability to access the public securities and other capital and credit markets in accordance with our financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us and our subsidiaries.
Further actions that may be taken by credit rating agencies that could negatively affect us and/or our subsidiaries’ access to financing, increase the costs thereof, LOCs and other financial guarantees, and the impact of these events on the financial condition and liquidity of FE and/or its subsidiaries.
Issues concerning the stability of domestic and foreign financial institutions and counterparties with which we do business.
The risks and other factors discussed from time to time in our SEC filings, and other similar factors.

Dividends declared from time to time on FE's common stock, and thereby on FE's preferred stock, during any period may in the aggregate vary from prior periods due to circumstances considered by FE's Board of Directors at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.

These forward-looking statements are also qualified by, and should be read together with, the risk factors included in FirstEnergy’s filings with the SEC, including but not limited to this Quarterly Report on Form 10-Q, which risk factors supersede and replace the risk factors contained in the Annual Report on Form 10-K, and any subsequent Quarterly Reports on Form 10-Q or Current Reports on Form 8-K. The foregoing review of factors also should not be construed as exhaustive. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor assess the impact of any such factor on FirstEnergy's business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. FirstEnergy expressly disclaims any obligation to update or revise, except as required by law, any forward-looking statements contained herein as a result of new information, future events or otherwise.








TABLE OF CONTENTS
 
Page
 
 
Part I. Financial Information
 
 
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
Item 4. Mine Safety Disclosures
 
 
Item 5. Other Information
 
 


i



GLOSSARY OF TERMS
The following abbreviations and acronyms are used in this report to identify FirstEnergy Corp. and its current and former subsidiaries:

AE
Allegheny Energy, Inc., a Maryland utility holding company that merged with a subsidiary of FirstEnergy on February 25, 2011, which subsequently merged with and into FE on January 1, 2014
AESC
Allegheny Energy Service Corporation, a subsidiary of FirstEnergy Corp.
AE Supply
Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of FE
AGC
Allegheny Generating Company, a generation subsidiary of AE Supply and equity method investee of MP
ATSI
American Transmission Systems, Incorporated, formerly a direct subsidiary of FE that became a subsidiary of FET in April 2012, which owns and operates transmission facilities
BU Energy
Buchanan Energy Company of Virginia, LLC, a subsidiary of AE Supply, and formerly a 50% owner in a joint venture that owns the Buchanan Generating Facility
Buchanan Energy
Buchanan Generation, LLC, formerly a joint venture between AE Supply and CNX Gas Corporation

CEI
The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary
CES
Competitive Energy Services, formerly a reportable operating segment of FirstEnergy
FE
FirstEnergy Corp., a public utility holding company
FENOC
FirstEnergy Nuclear Operating Company, a subsidiary of FE, which operates NG's nuclear generating facilities
FES
FirstEnergy Solutions Corp., together with its consolidated subsidiaries, FG, NG, FE Aircraft Leasing Corp., Norton Energy Storage L.L.C. and FGMUC, which provides unregulated energy-related products and services
FESC
FirstEnergy Service Company, which provides legal, financial and other corporate support services
FET
FirstEnergy Transmission, LLC, formerly known as Allegheny Energy Transmission, LLC, which is the parent of ATSI, TrAIL and MAIT, and has a joint venture in PATH
FEV
FirstEnergy Ventures Corp., which invests in certain unregulated enterprises and business ventures
FG
FirstEnergy Generation, LLC, a wholly owned subsidiary of FES, which owns and operates non-nuclear generating facilities
FGMUC
FirstEnergy Generation Mansfield Unit 1 Corp., a wholly owned subsidiary of FG, which has certain leasehold interests in a portion of Unit 1 at the Bruce Mansfield plant
FirstEnergy
FirstEnergy Corp., together with its consolidated subsidiaries
Global Holding
Global Mining Holding Company, LLC, a joint venture between FEV, WMB Marketing Ventures, LLC and Pinesdale LLC
Global Rail
Global Rail Group, LLC, a subsidiary of Global Holding that owns coal transportation operations near Roundup, Montana
GPU
GPU, Inc., former parent of JCP&L, ME and PN, that merged with FE on November 7, 2001
JCP&L
Jersey Central Power & Light Company, a New Jersey electric utility operating subsidiary
MAIT
Mid-Atlantic Interstate Transmission, LLC, a subsidiary of FET, which owns and operates transmission facilities
ME
Metropolitan Edison Company, a Pennsylvania electric utility operating subsidiary
MP
Monongahela Power Company, a West Virginia electric utility operating subsidiary
NG
FirstEnergy Nuclear Generation, LLC, a wholly owned subsidiary of FES, which owns nuclear generating facilities
OE
Ohio Edison Company, an Ohio electric utility operating subsidiary
Ohio Companies
CEI, OE and TE
PATH
Potomac-Appalachian Transmission Highline, LLC, a joint venture between FE and a subsidiary of AEP
PATH-Allegheny
PATH Allegheny Transmission Company, LLC
PATH-WV
PATH West Virginia Transmission Company, LLC
PE
The Potomac Edison Company, a Maryland and West Virginia electric utility operating subsidiary
Penn
Pennsylvania Power Company, a Pennsylvania electric utility operating subsidiary of OE
Pennsylvania Companies
ME, PN, Penn and WP
PN
Pennsylvania Electric Company, a Pennsylvania electric utility operating subsidiary
Signal Peak
Signal Peak Energy, LLC, an indirect subsidiary of Global Holding that owns mining operations near Roundup, Montana
TE
The Toledo Edison Company, an Ohio electric utility operating subsidiary
TrAIL
Trans-Allegheny Interstate Line Company, a subsidiary of FET, which owns and operates transmission facilities
Utilities
OE, CEI, TE, Penn, JCP&L, ME, PN, MP, PE and WP
WP
West Penn Power Company, a Pennsylvania electric utility operating subsidiary
 
 
The following abbreviations and acronyms are used to identify frequently used terms in this report:
AAA
American Arbitration Association
ADIT
Accumulated Deferred Income Taxes

ii



GLOSSARY OF TERMS, Continued

AEP
American Electric Power Company, Inc.
AFS
Available-for-sale
AFUDC
Allowance for Funds Used During Construction
ALJ
Administrative Law Judge
AOCI
Accumulated Other Comprehensive Income
ARO
Asset Retirement Obligation
ARP
Alternative Revenue Program
ARR
Auction Revenue Right
ASC
Accounting Standard Codification
ASU
Accounting Standards Update
Bankruptcy Court
U.S. Bankruptcy Court in the Northern District of Ohio in Akron
BGS
Basic Generation Service
BNSF
BNSF Railway Company
BRA
PJM RPM Base Residual Auction
BSPC
Bay Shore Power Company
CAA
Clean Air Act
CCR
Coal Combustion Residuals
CERCLA
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
CFR
Code of Federal Regulations
CO2
Carbon Dioxide
CPP
EPA's Clean Power Plan
CSAPR
Cross-State Air Pollution Rule
CSX
CSX Transportation, Inc.
CTA
Consolidated Tax Adjustment
CWA
Clean Water Act
DCR
Delivery Capital Recovery
DMR
Distribution Modernization Rider
DOE
United States Department of Energy
DPM
Distribution Platform Modernization
DR
Demand Response
DSIC
Distribution System Improvement Charge
DSP
Default Service Plan
EDC
Electric Distribution Company
EDCP
Executive Deferred Compensation Plan
EE&C
Energy Efficiency and Conservation
EGS
Electric Generation Supplier
ELPC
Environmental Law & Policy Center
EmPOWER Maryland
EmPOWER Maryland Energy Efficiency Act
ENEC
Expanded Net Energy Cost
EPA
United States Environmental Protection Agency
EPS
Earnings per Share
ERO
Electric Reliability Organization
ESP IV
Electric Security Plan IV
ESP IV PPA
Unit Power Agreement entered into on April 1, 2016 by and between the Ohio Companies and FES
Facebook®
Facebook is a registered trademark of Facebook, Inc.
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Fitch
Fitch Ratings
FMB
First Mortgage Bond
FPA
Federal Power Act
FTR
Financial Transmission Right
GAAP
Accounting Principles Generally Accepted in the United States of America

iii



GLOSSARY OF TERMS, Continued

GHG
Greenhouse Gases
HCl
Hydrochloric Acid
ICE
Intercontinental Exchange, Inc.
IIP
Infrastructure Investment Program
IRP
Integrated Resource Plan
IRS
Internal Revenue Service
kV
Kilovolt
KWH
Kilowatt-hour
LBR
Little Blue Run
LOC
Letter of Credit
LS Power
LS Power Equity Partners III, LP
LSE
Load Serving Entity
LTIIPs
Long-Term Infrastructure Improvement Plans
MATS
Mercury and Air Toxics Standards
MDPSC
Maryland Public Service Commission
MISO
Midcontinent Independent System Operator, Inc.
MLP
Master Limited Partnership
mmBTU
Million British Thermal Units
Moody’s
Moody’s Investors Service, Inc.
MOPR
Minimum Offer Price Rule
MVP
Multi-Value Project
MW
Megawatt
MWH
Megawatt-hour
NAAQS
National Ambient Air Quality Standards
NDT
Nuclear Decommissioning Trust
NERC
North American Electric Reliability Corporation
NJAPA
New Jersey Administrative Procedure Act
NJBPU
New Jersey Board of Public Utilities
NOL
Net Operating Loss
NOPR
Notice of Proposed Rulemaking
NOV
Notice of Violation
NOx
Nitrogen Oxide
NPDES
National Pollutant Discharge Elimination System
NRC
Nuclear Regulatory Commission
NS
Norfolk Southern Corporation
NSR
New Source Review
NUG
Non-Utility Generation
NYPSC
New York State Public Service Commission
OCA
Office of Consumer Advocate
OCC
Ohio Consumers' Counsel
OPEB
Other Post-Employment Benefits
OPIC
Other Paid-in Capital
ORC
Ohio Revised Code
OTTI
Other Than Temporary Impairments
OVEC
Ohio Valley Electric Corporation
PA DEP
Pennsylvania Department of Environmental Protection
PCB
Polychlorinated Biphenyl
PCRB
Pollution Control Revenue Bond
PJM
PJM Interconnection, L.L.C.
PJM Region
The aggregate of the zones within PJM
PJM Tariff
PJM Open Access Transmission Tariff
PM
Particulate Matter

iv



GLOSSARY OF TERMS, Continued

POLR
Provider of Last Resort
POR
Purchase of Receivables
PPA
Purchase Power Agreement
PPB
Parts Per Billion
PPUC
Pennsylvania Public Utility Commission
PSA
Power Supply Agreement
PSD
Prevention of Significant Deterioration
PUCO
Public Utilities Commission of Ohio
PURPA
Public Utility Regulatory Policies Act of 1978
RCRA
Resource Conservation and Recovery Act
REC
Renewable Energy Credit
Regulation FD
Regulation Fair Disclosure promulgated by the SEC
REIT
Real Estate Investment Trust
RFC
ReliabilityFirst Corporation
RFP
Request for Proposal
RGGI
Regional Greenhouse Gas Initiative
ROE
Return on Equity
RRS
Retail Rate Stability
RSS
Rich Site Summary
RTEP
Regional Transmission Expansion Plan
RTO
Regional Transmission Organization
RWG
Restructuring Working Group
S&P
Standard & Poor’s Ratings Service
SB310
Substitute Ohio Senate Bill No. 310
SBC
Societal Benefits Charge
SEC
United States Securities and Exchange Commission
Seventh Circuit
United States Court of Appeals for the Seventh Circuit
SIP
State Implementation Plan(s) Under the Clean Air Act
SO2
Sulfur Dioxide
Sixth Circuit
United States Court of Appeals for the Sixth Circuit
SOS
Standard Offer Service
SPE
Special Purpose Entity
SREC
Solar Renewable Energy Credit
SSO
Standard Service Offer
Tax Act
Tax Cuts and Jobs Act, adopted December 22, 2017
TDS
Total Dissolved Solid
TMI-2
Three Mile Island Unit 2
TO
Transmission Owner
Twitter®
Twitter is a registered trademark of Twitter, Inc.
U.S. Court of Appeals for the D.C. Circuit
United States Court of Appeals for the District of Columbia Circuit
VEPCO
Virginia Electric and Power Company

VIE
Variable Interest Entity
VMP
Vegetation Management Plan
VMS
Vegetation Management Surcharge
VSCC
Virginia State Corporation Commission
WVDEP
West Virginia Department of Environmental Protection
WVPSC
Public Service Commission of West Virginia
 

v



PART I. FINANCIAL INFORMATION

ITEM I.         Financial Statements

FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 

For the Three Months Ended March 31,
 
(In millions, except per share amounts)
 
2018
 
2017
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
Regulated Distribution
 
$
2,576

 
$
2,500

 
Regulated Transmission
 
323

 
313

 
Other
 
77

 
42

 
Total revenues*
 
2,976


2,855

 
 
 





 
OPERATING EXPENSES:
 





 
Fuel
 
187


204

 
Purchased power
 
825


791

 
Other operating expenses
 
962


657

 
Provision for depreciation
 
294


250

 
Amortization (deferral) of regulatory assets, net
 
(148
)

83

 
General taxes
 
259


242

 
Total operating expenses
 
2,379


2,227

 
 
 





 
OPERATING INCOME
 
597


628

 
 
 





 
OTHER INCOME (EXPENSE):
 





 
Miscellaneous income
 
67

 
14

 
Interest expense
 
(250
)

(245
)
 
Capitalized financing costs
 
15


12

 
Total other expense
 
(168
)

(219
)
 
 
 





 
INCOME BEFORE INCOME TAXES
 
429


409

 
 
 





 
INCOME TAXES
 
252


152

 
 
 





 
INCOME FROM CONTINUING OPERATIONS
 
177


257

 
 
 





 
Discontinued operations (net of income tax benefits of $890 and $26) (Note 3)
 
1,192


(52
)
 
 
 





 
NET INCOME
 
$
1,369


$
205

 
 
 
 
 
 
 
INCOME ALLOCATED TO PREFERRED STOCKHOLDERS (Note 4)
 
156

 

 
 
 
 
 
 
 
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
 
$
1,213

 
$
205

 
 
 





 
EARNINGS PER SHARE OF COMMON STOCK (Note 4):
 





 
Basic - Continuing Operations
 
$
0.04


$
0.58

 
Basic - Discontinued Operations
 
2.51


(0.12
)
 
Basic - Net Income Attributable to Common Stockholders
 
$
2.55


$
0.46

 
 
 





 
Diluted - Continuing Operations
 
$
0.04


$
0.58

 
Diluted - Discontinued Operations
 
2.50


(0.12
)
 
Diluted - Net Income Attributable to Common Stockholders
 
$
2.54


$
0.46

 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
 
 
 
 
 
Basic
 
476

 
443

 
Diluted
 
478

 
444

 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
 
$
0.72

 
$
0.72

 

* Includes excise tax collections of $102 million and $100 million in the three months ended March 31, 2018 and 2017, respectively.

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.


1



FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
For the Three Months Ended March 31,
 
(In millions)
 
2018
 
2017
 
 
 
 
 
 
 
NET INCOME
 
$
1,369

 
$
205

 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Pension and OPEB prior service costs
 
(18
)
 
(18
)
 
Amortized losses on derivative hedges
 
15

 
3

 
Change in unrealized gains on available-for-sale securities
 
(106
)
 
16

 
Other comprehensive income (loss)
 
(109
)
 
1

 
Income tax benefits on other comprehensive income (loss)
 
(53
)
 

 
Other comprehensive income (loss), net of tax
 
(56
)
 
1

 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
1,313

 
$
206

 
 
 
 
 
 
 

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.



2



FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share amounts)
 
March 31,
2018
 
December 31,
2017
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
248

 
$
588

Restricted cash
 
51

 
51

Receivables-
 
 

 
 
Customers, net of allowance for uncollectible accounts of $50 in 2018 and $49 in 2017
 
1,279

 
1,282

Affiliated companies, net of allowance for uncollectible accounts of $624
 
44

 

Other, net of allowance for uncollectible accounts of $1 in 2018 and 2017
 
159

 
170

Materials and supplies, at average cost
 
273

 
262

Prepaid taxes and other
 
254

 
151

Current assets - discontinued operations
 
2

 
606

 
 
2,310

 
3,110

PROPERTY, PLANT AND EQUIPMENT:
 
 

 
 

In service
 
37,717

 
37,270

Less — Accumulated provision for depreciation
 
10,267

 
10,098

 
 
27,450

 
27,172

Construction work in progress
 
1,120

 
1,004

 
 
28,570

 
28,176

 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT, NET - DISCONTINUED OPERATIONS
 
353

 
1,057

 
 
 
 
 
INVESTMENTS:
 
 

 
 

Nuclear plant decommissioning trusts
 
800

 
822

Nuclear fuel disposal trust
 
251

 
251

Other
 
252

 
255

Investments - discontinued operations
 

 
1,875

 
 
1,303

 
3,203

DEFERRED CHARGES AND OTHER ASSETS:
 
 

 
 

Goodwill
 
5,618

 
5,618

Regulatory assets
 
49

 
40

Other
 
592

 
697

Deferred charges and other assets - discontinued operations
 

 
356

 
 
6,259

 
6,711

 
 
$
38,795

 
$
42,257

LIABILITIES AND CAPITALIZATION
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Currently payable long-term debt
 
$
1,157

 
$
558

Short-term borrowings
 
1,200

 
300

Accounts payable
 
1,005

 
827

Accrued taxes
 
530

 
533

Accrued compensation and benefits
 
254

 
257

Collateral
 
37

 
39

Other
 
882

 
626

Current liabilities - discontinued operations
 

 
973

 
 
5,065

 
4,113

CAPITALIZATION:
 
 

 
 

Stockholders’ equity-
 
 

 
 

Common stock, $0.10 par value, authorized 700,000,000 shares - 476,909,318 and 445,334,111 shares outstanding as of March 31, 2018 and December 31, 2017, respectively
 
48

 
44

Mandatorily convertible preferred stock, $100 par value, authorized 5,000,000 shares - 1,616,000 shares issued and outstanding as of March 31, 2018
 
162

 

Other paid-in capital
 
11,937

 
10,001

Accumulated other comprehensive income
 
86

 
142

Accumulated deficit
 
(4,858
)
 
(6,262
)
Total stockholders’ equity
 
7,375

 
3,925

Long-term debt and other long-term obligations
 
16,740

 
18,816

 
 
24,115

 
22,741

NONCURRENT LIABILITIES:
 
 

 
 

Accumulated deferred income taxes
 
2,505

 
3,171

Retirement benefits
 
2,717

 
3,975

Regulatory liabilities
 
2,632

 
2,720

Asset retirement obligations
 
580

 
570

Adverse power contract liability
 
124

 
130

Other
 
1,057

 
1,438

Noncurrent liabilities - discontinued operations
 

 
3,399

 
 
9,615

 
15,403

COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 14)
 


 


 
 
$
38,795

 
$
42,257


The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.


3



FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
For the Three Months Ended March 31,
(In millions)
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
1,369

 
$
205

Adjustments to reconcile net income to net cash from operating activities-
 
 
 
 
Gain on deconsolidation, net of tax (Note 3)
 
(1,239
)
 

Depreciation and amortization, including nuclear fuel, regulatory assets, net, intangible assets and deferred debt-related costs
 
280

 
416

Deferred income taxes and investment tax credits, net
 
278

 
114

Retirement benefits, net of payments
 
(46
)
 
10

Pension trust contributions
 
(1,250
)
 

Unrealized (gain) loss on derivative transactions
 
(10
)
 
47

Changes in current assets and liabilities-
 
 
 
 
Receivables
 
32

 
68

Materials and supplies
 
36

 
11

Prepaid taxes and other
 
(144
)
 
(111
)
Accounts payable
 
96

 
45

Accrued taxes
 
(145
)
 
(131
)
Accrued compensation and benefits
 
(108
)
 
(137
)
Other current liabilities
 
(15
)
 
20

Collateral, net
 
(7
)
 
58

Other
 
(7
)
 
170

Net cash provided from (used for) operating activities
 
(880
)
 
785

 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
New Financing-
 
 
 
 
Long-term debt
 

 
250

Short-term borrowings, net
 
900

 
75

   Preferred stock issuance
 
1,616

 

   Common stock issuance
 
850

 

Redemptions and Repayments-
 
 
 
 
Long-term debt
 
(1,476
)
 
(211
)
Preferred stock dividend payments
 
(21
)
 

Common stock dividend payments
 
(171
)
 
(159
)
Other
 
(19
)
 
(13
)
Net cash provided from (used for) financing activities
 
1,679

 
(58
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Property additions
 
(583
)
 
(588
)
Nuclear fuel
 

 
(132
)
Proceeds from asset sales
 
20

 

Sales of investment securities held in trusts
 
300

 
738

Purchases of investment securities held in trusts
 
(322
)
 
(761
)
Notes receivable from affiliated companies
 
(500
)
 

Asset removal costs
 
(57
)
 
(35
)
Other
 
(1
)
 
(1
)
Net cash used for investing activites
 
(1,143
)
 
(779
)
 
 
 
 
 
Net change in cash and cash equivalents and restricted cash
 
(344
)
 
(52
)
Cash and cash equivalents and restricted cash at beginning of period
 
643

 
260

Cash and cash equivalents and restricted cash at end of period
 
$
299

 
$
208

 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Non-cash transaction, beneficial conversion feature (Note 4)
 
$
296

 
$

Non-cash transaction, deemed dividend preferred stock (Note 4)
 
$
(113
)
 
$

    
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.


4



FIRSTENERGY CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note
Number
 
Page
Number
 
 
 
 
 
 
2
Revenue
 
 
 
3
Discontinued Operations
 
 
 
4
Earnings Per Share of Common Stock
 
 
 
5
 
 
 
6
Accumulated Other Comprehensive Income
 
 
 
7
Income Taxes
 
 
 
8
Variable Interest Entities
 
 
 
9
Fair Value Measurements
 
 
 
10
Derivative Instruments
 
 
 
11
Capitalization
 
 
 
12
Asset Retirement Obligations
 
 
 
13
Regulatory Matters
 
 
 
14
Commitments, Guarantees and Contingencies
 
 
 
15
Segment Information
 
 
 
16
Subsequent Events
 
 
 



5



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Terms.

FE was incorporated under Ohio law in 1996. FE’s principal business is the holding, directly or indirectly, of all of the outstanding equity of its principal subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), JCP&L, ME, PN, FESC, AE Supply, MP, PE, WP, FET and its principal subsidiaries (ATSI, MAIT and TrAIL), and AESC. In addition, FE holds all of the outstanding equity of other direct subsidiaries including: FirstEnergy Properties, Inc., FEV, FELHC, Inc., GPU Nuclear, Inc., and Allegheny Ventures, Inc.

FE and its subsidiaries are principally involved in the transmission, distribution and generation of electricity. FirstEnergy’s ten utility operating companies comprise one of the nation’s largest investor-owned electric systems, based on serving over six million customers in the Midwest and Mid-Atlantic regions. FirstEnergy’s transmission operations include approximately 24,500 miles of lines and two regional transmission operation centers. Additionally, its regulated generation subsidiaries control 3,790 MWs of capacity.
These interim financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2017.

FE and its subsidiaries follow GAAP and comply with the related regulations, orders, policies and practices prescribed by the SEC, FERC, and, as applicable, the NRC, the PUCO, the PPUC, the MDPSC, the NYPSC, the WVPSC, the VSCC and the NJBPU. The accompanying interim financial statements are unaudited, but reflect all adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair statement of the financial statements. The preparation of financial statements in conformity with GAAP requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The reported results of operations are not necessarily indicative of results of operations for any future period. FE and its subsidiaries have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

FE and its subsidiaries consolidate all majority-owned subsidiaries over which they exercise control and, when applicable, entities for which they have a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation as appropriate. FE and its subsidiaries consolidate a VIE when it is determined that it is the primary beneficiary (see Note 8, "Variable Interest Entities"). Investments in affiliates over which FE and its subsidiaries have the ability to exercise significant influence, but do not have a controlling financial interest, follow the equity method of accounting. Under the equity method, the interest in the entity is reported as an investment in the Consolidated Balance Sheets and the percentage of FE's ownership share of the entity’s earnings is reported in the Consolidated Statements of Income and Comprehensive Income.

Certain prior year amounts have been reclassified to conform to the current year presentation, as discussed in "New Accounting Pronouncements" and Note 3, "Discontinued Operations."

FES and FENOC Chapter 11 Filing
On March 31, 2018, FES and FENOC announced that, in order to facilitate an orderly financial restructuring, they filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court (which is referred to throughout as the FES Bankruptcy). As a result of the bankruptcy filings, FirstEnergy has concluded that it no longer has a controlling interest in FES or FENOC as the entities are subject to the control of the Bankruptcy Court and, accordingly, as of March 31, 2018, FES and FENOC were deconsolidated from FirstEnergy’s consolidated financial statements. FE will account for its investments in FES and FENOC with fair values of zero. FE concluded that in connection with the disposal, FES and FENOC became discontinued operations. In connection with the disposal, FE has recorded a gain on deconsolidation of approximately $1.2 billion for the three months ended March 31, 2018. See Note 3, "Discontinued Operations," for additional information.

Capitalized Financing Costs

For each of the three months ended March 31, 2018 and 2017, capitalized financing costs on FirstEnergy's Consolidated Statements of Income include $11 million and $8 million, respectively, of allowance for equity funds used during construction and $4 million and $4 million, respectively, of capitalized interest.



6



Restricted Cash

Restricted cash primarily relates to the consolidated VIE's discussed in Note 8, "Variable Interest Entities." The cash collected from JCP&L, MP, PE and the Ohio Companies' customers is used to service debt of their respective funding companies.
New Accounting Pronouncements

Recently Adopted Pronouncements

ASU 2014-09, "Revenue from Contracts with Customers" (Issued May 2014 and subsequently updated to address implementation questions): The new revenue recognition guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. FirstEnergy evaluated its revenues and the new guidance had immaterial impacts to recognition practices upon adoption on January 1, 2018. As part of the adoption, FirstEnergy elected to apply the new guidance on a modified retrospective basis. FirstEnergy did not record a cumulative effect adjustment to retained earnings for initially applying the new guidance as no revenue recognition differences were identified in the timing or amount of revenue. In addition, upon adoption, certain immaterial financial statement presentation changes were implemented. See Note 2, " Revenue," for additional information on FirstEnergy revenues.

ASU 2016-01, "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" (Issued January 2016 and subsequently updated in 2018): ASU 2016-01 primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. FirstEnergy adopted this standard on January 1, 2018, and recognizes all gains and losses for equity securities in income with the exception of those that are accounted for under the equity method of accounting. The NDT equity portfolios of JCP&L, ME and PN will not be impacted as unrealized gains and losses will continue to be offset against regulatory assets or liabilities. As a result of adopting this standard, FirstEnergy recorded a cumulative effect adjustment to retained earnings of $115 million (pre-tax) on January 1, 2018, representing unrealized gains on equity securities with FES NDTs that were previously recorded to AOCI. Following deconsolidation of FES and FENOC, the adoption of this standard is not expected to have a material impact on FirstEnergy's financial statements as the majority of its equity securities are offset against a regulatory asset or liability.

ASU 2016-18, "Restricted Cash" (Issued November 2016): ASU 2016-18 addresses the presentation of changes in restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is required to be applied retrospectively. As a result of adopting this standard, FirstEnergy's statement of cash flows report changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Prior periods have been recasted to conform to the current year presentation.

ASU 2017-01, "Business Combinations: Clarifying the Definition of a Business" (Issued January 2017): ASU 2017-01 assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. FirstEnergy adopted ASU 2017-01 on January 1, 2018. The ASU will be applied prospectively to future transactions.

ASU 2017-04, "Goodwill Impairment" (Issued January 2017): Simplifies the accounting for goodwill impairment by removing Step 2 of the current test, which requires calculation of a hypothetical purchase price allocation. Under the revised guidance, goodwill impairment will be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill (currently Step 1 of the two-step impairment test). Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. FirstEnergy has elected to early adopt ASU 2017-04 as of January 1, 2018, and will apply this standard on a prospective basis.
ASU 2017-07, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (Issued March 2017): ASU 2017-07 requires entities to retrospectively (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented. In addition, only service costs are eligible for capitalization on a prospective basis. FirstEnergy adopted ASU 2017-07 on January 1, 2018. Because the non-service cost components of net benefit cost are no longer eligible for capitalization after December 31, 2017, FirstEnergy has recognized these components in income as a result of adopting this standard. FirstEnergy reclassified approximately $8 million of non-service costs from Other operating expense to Miscellaneous income for the three months ended March 31, 2017.

ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" (Issued February 2018): ASU 2018-02 allows entities to reclassify from AOCI to retained earnings stranded tax effects resulting from the Tax Act. FirstEnergy early adopted this standard during the first quarter of 2018 and has elected to present the change in the period of adoption. Upon adoption, FirstEnergy recorded a $22 million cumulative effect adjustment for stranded tax effects, such as pension and OPEB prior service costs and losses on derivative hedges, to retained earnings on January 1, 2018, of which $8 million was related to FES and FENOC.

ASU 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118" (Issued March 2018): ASU 2018-05, effective 2018, expands income tax accounting and disclosure guidance to include SAB 118 issued by the SEC in December 2017. SAB 118 provides guidance on accounting for the income tax effects of the Tax Act and


7



among other things allows for a measurement period not to exceed one year for companies to finalize the provisional amounts recorded as of December 31, 2017. See Note 7, "Income taxes," for additional information on FirstEnergy's accounting for the Tax Act.

Recently Issued Pronouncements - The following new authoritative accounting guidance issued by the FASB has not yet been adopted. Unless otherwise indicated, FirstEnergy is currently assessing the impact such guidance may have on its financial statements and disclosures, as well as the potential to early adopt where applicable. FirstEnergy has assessed other FASB issuances of new standards not described below or in the 2017 Annual Report on Form 10-K based upon the current expectation that such new standards will not significantly impact FirstEnergy's financial reporting. Below is an update to the discussion of pronouncements contained in the 2017 Annual Report on Form 10-K.

ASU 2016-02, "Leases (Topic 842)" (Issued February 2016) and ASU 2018-01,"Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842" (Issued January 2018): ASU 2016-02 will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. In addition, new qualitative and quantitative disclosures of the amounts, timing, and uncertainty of cash flows arising from leases will be required. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. ASU 2018-01 (same effective date and transition requirements as ASU 2016-02) provides an optional transition practical expedient that, if elected, would not require an entity to reconsider its accounting for existing land easements that are not currently accounted for under the old leases standard. FirstEnergy does not plan to adopt these standards early. Lessors and lessees will be required to apply a modified retrospective transition approach, which requires adjusting the accounting for any leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. FirstEnergy expects an increase in assets and liabilities; however, it is currently assessing the impact on its Consolidated Financial Statements, including monitoring utility industry implementation guidance. FirstEnergy is in the process of developing a complete lease inventory, as well as identifying, assessing and documenting technical accounting issues, policy considerations and financial reporting implications. In addition, FirstEnergy is implementing a third-party software tool that will assist with the initial adoption and ongoing compliance.
2. REVENUE

FirstEnergy accounts for revenues from contracts with customers under ASC 606, Revenue from Contracts with Customers, which became effective January 1, 2018. As part of the adoption of ASC 606, FirstEnergy applied the new standard on a modified retrospective basis analyzing open contracts as of January 1, 2018. However, no cumulative effect adjustment to retained earnings was necessary as no revenue recognition differences were identified when comparing the revenue recognition criteria under ASC 606 to previous requirements.

Revenue from leases, financial instruments, other contractual rights or obligations and other revenues that are not from contracts with customers are outside the scope of the new standard and accounted for under other existing GAAP. FirstEnergy has elected to exclude sales taxes and other similar taxes collected on behalf of third parties from revenue as prescribed in the new standard. As a result, tax collections and remittances within the scope of this election are excluded from recognition in the income statement and instead recorded through the balance sheet, consistent with FirstEnergy’s accounting process prior to the adoption of ASC 606. Excise and gross receipts taxes that are assessed on FirstEnergy are not subject to the election and are included in revenue. FirstEnergy has elected the optional invoice practical expedient for most of its revenues and, with the exception of JCP&L transmission, 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. For a qualitative overview of FirstEnergy's performance obligations, see below.

FirstEnergy’s revenues are primarily derived from electric service provided by its Utilities and transmission (ATSI, TrAIL and MAIT) subsidiaries.



8



The following table represents a disaggregation of revenue from contracts with customers for the three months ended March 31, 2018, by type of service from each reportable segment:
 
 
For the Three Months Ended March 31, 2018
Revenues by Type of Service
 
Regulated Distribution
 
Regulated Transmission
 
Corporate/Other and Reconciling Adjustments (1)
 
Total
 
 
(In millions)
Distribution services (2)
 
$
1,281

 
$

 
$
(12
)
 
$
1,269

Retail generation
 
1,040

 

 
(14
)
 
1,026

Wholesale sales
 
123

 

 
120

 
243

Transmission (2)
 

 
319

 

 
319

Other
 
35

 

 

 
35

Total revenues from contracts with customers
 
$
2,479

 
$
319

 
$
94

 
$
2,892

ARP
 
64

 

 

 
64

Other non-customer revenue
 
33

 
4

 
(17
)
 
20

Total revenues
 
$
2,576

 
$
323

 
$
77

 
$
2,976

(1) Includes eliminations and reconciling adjustments of inter-segment revenues.
(2) Includes $76 million in reductions to revenue related to amounts subject to refund resulting from the Tax Act ($72 million at Regulated Distribution and $4 million at Regulated Transmission).

Other non-customer revenue includes revenue from derivatives of $10 million for the three months ended March 31, 2018.

Regulated Distribution

The Regulated Distribution segment distributes electricity through FirstEnergy’s ten utility operating companies and also controls 3,790 MWs of regulated electric generation capacity located primarily in West Virginia, Virginia and New Jersey. Each of the Utilities earn revenue from state-regulated rate tariffs under which it provides distribution services to residential, commercial and industrial customers in its service territory. The Utilities are obligated under the regulated construct to deliver power to customers reliably, as it is needed, which creates an implied monthly contract with the end-use customer. See Note 13, "Regulatory Matters," for additional information on rate recovery mechanisms. Distribution and electric revenues are recognized over time as electricity is distributed and delivered to the customer and the customers consume the electricity immediately as delivery occurs.

Retail generation sales relate to POLR, SOS, SSO and default service requirements in Ohio, Pennsylvania, New Jersey and Maryland, as well as generation sales in West Virginia that are regulated by the WVPSC. Certain of the Utilities have default service obligations to provide power to non-shopping customers who have elected to continue to receive service under regulated retail tariffs. The volume of these sales varies depending on the level of shopping that occurs. Supply plans vary by state and by service territory. Default service for the Ohio Companies, Pennsylvania Companies, JCP&L and PE's Maryland jurisdiction are provided through a competitive procurement process approved by each state's respective commission.

The following table represents a disaggregation of the Regulated Distribution segment revenue from contracts with distribution service and retail generation customers for the three months ended March 31, 2018, by class:
 
 
For the Three Months Ended March 31, 2018
Revenues by Customer Class
 
 
 
(In millions)
Residential
 
$
1,463

Commercial
 
580

Industrial
 
254

Other
 
24

Total Revenues
 
$
2,321


Wholesale sales primarily consist of generation and capacity sales into the PJM market from FirstEnergy's regulated electric generation capacity and NUGs. Certain of the Utilities may also purchase power from PJM to supply power to their customers. Generally, these power sales from generation and purchases to serve load are netted hourly and reported gross as either revenues or purchased power on the statements of income based on whether the entity was a net seller or buyer each hour. Capacity revenues are recognized ratably over the PJM planning year at prices cleared in the annual BRA and incremental auctions. Capacity purchases and sales through PJM capacity auctions are reported within revenues on the Consolidated Statements of Income. Certain capacity


9



income (bonuses) and charges (penalties) related to the availability of units that have cleared in the auctions are unknown and not recorded in revenue until, and unless, they occur.

The Utilities’ distribution customers are metered on a cycle basis. An estimate of unbilled revenues is calculated to recognize electric service provided from the last meter reading through the end of the month. This estimate includes many factors, among which are historical customer usage, load profiles, estimated weather impacts, customer shopping activity and prices in effect for each class of customer. In each accounting period, the Utilities accrue the estimated unbilled amount as revenue and reverses the related prior period estimate. Customer payments vary by state but are generally due within 30 days.
 
ASC 606 excludes industry-specific accounting guidance for recognizing revenue from ARPs as these programs represent contracts between the utility and its regulators, as opposed to customers. Therefore, revenue from these programs are not within the scope of ASC 606 and regulated utilities are permitted to continue to recognize such revenues in accordance with existing practice but are presented separately from revenue arising from contracts with customers. FirstEnergy currently has ARPs in Ohio, primarily under rider DMR, and in New Jersey.

Regulated Transmission

The Regulated Transmission segment provides transmission infrastructure owned and operated by ATSI, TrAIL, MAIT and certain of FirstEnergy's utilities (JCP&L, MP, PE and WP) to transmit electricity from generation sources to distribution facilities. The segment's revenues are primarily derived from forward-looking formula rates at ATSI, TrAIL and MAIT, as well as stated transmission rates at certain of FirstEnergy’s utilities. As discussed in "Regulatory Matters - FERC Matters," below, MAIT filed a settlement with FERC on October 13, 2017, which settlement agreement is pending final order by FERC. Both the forward-looking formula and stated rates recover costs that the regulatory agencies determine are permitted to be recovered and provide a return on transmission capital investment. Under forward-looking formula rates, the revenue requirement is updated annually based on a projected rate base and projected costs, which is subject to an annual true-up based on actual costs. Revenue requirements under stated rates are calculated annually by multiplying the highest one-hour peak load in each respective transmission zone by the approved, stated rate in that zone. Revenues and cash receipts for the stand-ready obligation of providing transmission service are recognized ratably over time.

Effective January 1, 2018, JCP&L is subject to a FERC-approved settlement agreement that provides an annual revenue requirement of $155 million through December 31, 2019 which is recognized ratably as revenue over time. See Note 13 "Regulatory Matters - FERC Matters," for additional information.

The following table represents a disaggregation of revenue from contracts with regulated transmission customers for the three months ended March 31, 2018, by transmission owner:
 
 
For the Three Months Ended March 31, 2018
Revenues by Transmission Asset Owner
 
 
 
(In millions)
ATSI
 
$
159

TrAIL
 
62

MAIT
 
31

Other
 
71

Total Revenues
 
$
323

3. DISCONTINUED OPERATIONS

As of March 31, 2018, FES, FENOC, BSPC and a portion of AE Supply, representing substantially all of FirstEnergy’s operations that previously comprised the CES reportable operating segment, are presented as discontinued operations in FirstEnergy’s consolidated financial statements resulting from actions taken as part of the strategic review of exiting commodity-exposed generation, as discussed below. Prior period results have been reclassified to conform with such presentation as discontinued operations.

FES and FENOC Chapter 11 Filing

As discussed in Note 1, "Organization and Basis of Presentation," on March 31, 2018, FES and FENOC announced the FES Bankruptcy. FirstEnergy concluded that it no longer has a controlling interest in FES or FENOC, as the entities are subject to the control of the Bankruptcy Court and, accordingly, as of March 31, 2018, FES and FENOC were deconsolidated from FirstEnergy's consolidated financial statements, and will account for its investments in FES and FENOC with fair values of zero.
By eliminating a significant portion of its competitive generation fleet with the deconsolidation of FES and FENOC, FirstEnergy has concluded FES and FENOC meet the criteria for discontinued operations, as this represents a significant event in management’s strategic review to exit commodity-exposed generation and transition to a fully-regulated company.


10



FES Borrowings from FE
On March 9, 2018, FES borrowed $500 million from FE under the secured credit facility, dated as of December 6, 2016, among FES, as Borrower, FG and NG as guarantors, and FE, as lender, which fully utilized the committed line of credit available under the secured credit facility. Following deconsolidation of FES, FE fully reserved for the $500 million associated with the borrowings under the secured credit facility.

On March 16, 2018, FES and FENOC withdrew from the unregulated companies' money pool, which included FE, FES and FENOC. As of the date of the withdrawal, FES and FENOC owed FE approximately $4 million in unsecured borrowings in the aggregate under the money pool. In addition, as of March 31, 2018, AE Supply had a $102 million outstanding unsecured promissory note owed from FES. Following deconsolidation of FES and FENOC, FE fully reserved the $4 million associated with the outstanding unsecured borrowings under the unregulated companies' money pool and the $102 million associated with the AE Supply unsecured promissory note.
Services Agreement
FirstEnergy will continue to provide shared services support to FES and FENOC under existing shared services agreements (Services Agreements) through at least December 31, 2018. Under the Services Agreements, costs are directly billed or assigned at no more than cost. The remaining costs are for services that are provided on behalf of more than one company, or costs that cannot be precisely identified and are allocated using formulas provided for in the Services Agreements. Transactions under the Services Agreements are generally settled within 30 days. At this time, FirstEnergy expects to provide shared services support to FES and FENOC under the Services Agreements through at least 2018.
In addition, on March 16, 2018, FES, FENOC and FESC, entered into the FirstEnergy Solutions Money Pool Agreement in order for FESC to assist FES and FENOC with certain treasury support services under the shared service agreement. FESC is a party to the FirstEnergy Solutions Money Pool Agreement solely in the role as administrator of the money pool arrangement thereunder.
Benefit Obligations
FirstEnergy will retain certain obligations for FES and FENOC employees for services provided prior to emergence from bankruptcy. The retention of this obligation at March 31, 2018, resulted in a liability of $820 million (including EDCP, pension and OPEB) with a corresponding loss from discontinued operations. Net pension and OPEB costs earned by FES and FENOC employees during bankruptcy are expected to be billed under the Services Agreements, and will be reassessed as the bankruptcy proceedings progress.
Guarantees provided by FE
As discussed in Note 14, "Commitments, Guarantees and Contingencies," FE is the guarantor of the remaining payments due to CSX and BNSF in connection with the definitive settlement of a dispute regarding a transportation agreement. As of March 31, 2018, FE recorded an obligation for this guarantee in other current liabilities with a corresponding loss from discontinued operations. On April 6, 2018, FE paid the remaining $72 million owed under the settlement agreement as a result of the FES Bankruptcy. In addition, as of March 31, 2018, FE recorded a $58 million obligation for a sale-leaseback indemnity in other current liabilities with a corresponding loss from discontinued operations.
Purchase Power
FES at times provides power through affiliated company power sales to meet a portion of the Utilities' POLR and default service requirements and provide power to certain affiliates' facilities. As of March 31, 2018, the Utilities owed FES approximately $46 million related to these purchases. The terms and conditions of the agreements are generally consistent with industry practices and other third-party arrangements. For current and pre-disposal periods, the Utilities' expense associated with these transactions are recorded in continuing operations.
Tax Allocation Agreement
Until FES and FENOC emerge from bankruptcy, it is expected that FES and FENOC will remain parties to the intercompany income tax allocation agreement with FE and its other subsidiaries, which provides for the allocation of consolidated tax liabilities. Net tax benefits attributable to FE are generally reallocated to the subsidiaries of FirstEnergy that have taxable income. As of March 31, 2018, FE has a $94 million receivable from FES and FENOC, in the aggregate, related to the federal tax obligation.

For U.S. federal income taxes, FES and FENOC will continue to be consolidated in FirstEnergy’s tax return and taxable income will be determined based on the tax basis of underlying individual net assets. Deferred taxes previously recorded on the inside basis differences may not represent the actual tax consequence for the outside basis difference, causing a recharacterization of an existing consolidated-return net operating loss as a future worthless stock deduction (currently estimated at approximately $628 million). The estimated worthless stock deduction is contingent upon emergence and such amounts may be impacted by future events.

AE Supply and BSPC Asset Sales

FirstEnergy announced in January 2017 that AE Supply and AGC had entered into an asset purchase agreement with a subsidiary of LS Power, as amended and restated in August 2017, to sell four natural gas generating plants, AE Supply's interest in the Buchanan Generating facility and approximately 59% of AGC's interest in Bath County (1,615 MWs of combined capacity). On


11



December 13, 2017, AE Supply completed the sale of the natural gas generating plants, with net proceeds, subject to post-closing adjustments, of approximately $388 million. On December 28, 2017, FERC issued an order authorizing the sale of BU Energy’s Buchanan interests, and on March 1, 2018, AE Supply completed the sale of the Buchanan Generating Facility with net proceeds of approximately $20 million.

With the sale of the gas plants completed, upon the consummation of the sale of AGC's interest in the Bath County hydroelectric power station or the sale or deactivation of the Pleasants Power Station, AE Supply is obligated under the amended and restated purchase agreement and AE Supply's applicable debt agreements to satisfy and discharge approximately $305 million of currently outstanding senior notes, as well as its $142 million of pollution control notes and AGC's $100 million senior notes, which are expected to require the payment of "make-whole" premiums currently estimated to be approximately $90 million based on current interest rates.

On December 12, 2017, FERC issued an order authorizing the partial transfer of the related hydroelectric license for Bath County under Part I of the FPA. On February 16, 2018, FERC issued an order authorizing the redemption of AE Supply’s shares in AGC upon consummation of the Bath County transaction. On March 30, 2018, the VSCC issued an order approving, among other items, the sale of AGC's interests in the Bath County hydroelectric power station. The sale of AGC's interests in Bath County is expected to generate net proceeds of approximately $355 million and is anticipated to close in the second quarter of 2018, subject to various customary and other closing conditions. There can be no assurance that all closing conditions will be satisfied or that the remaining transaction will be consummated. Assets classified as discontinued operations as of March 31, 2018, representing AGC's interest in Bath County hydroelectric power station, include property, plant and equipment (net of accumulated provision for depreciation) of $353 million and materials and supplies inventory of $2 million.

Additionally, on March 9, 2018, BSPC and FG entered into an asset purchase agreement with Walleye Energy, LLC, for the sale of the Bay Shore Generating Facility, including the 136 MW Bay Shore Unit 1 and other retired coal-fired generating equipment owned by FG. The sale is subject to customary and other closing conditions, including regulatory approvals, various third-party consents and approval by the Bankruptcy Court in connection with the FES Bankruptcy. There can be no assurance that all regulatory approvals will be obtained and/or all closing conditions will be satisfied or that the transaction will be consummated. As a result of the asset purchase agreement, FirstEnergy recorded non-cash, pre-tax impairment charges of $14 million for the three month period ended March 31, 2018, and is included in Discontinued operations on the Consolidated Statements of Income.

Individually, the AE Supply and BSPC asset sales did not qualify for reporting as discontinued operations. However, the asset sales were part of management’s strategic review to exit commodity-exposed generation and, when considered with FES and FENOC’s bankruptcy filings on March 31, 2018, represent a collective elimination of substantially all of FirstEnergy’s competitive generation fleet and meet the criteria for discontinued operations.

Summarized Results of Discontinued Operations
Summarized results of discontinued operations for the three months ended March 31, 2018 and 2017, were as follows:
 
 
For the Three Months Ended March 31,
(In millions)
 
2018
 
2017
 
 
 
 
 
Revenues
 
$
622

 
$
689

Fuel
 
(116
)
 
(164
)
Purchased power
 
(53
)
 
(49
)
Other operating expenses
 
(347
)
 
(492
)
Provision for depreciation
 
(46
)
 
(25
)
General taxes
 
(18
)
 
(29
)
Other Income (Expense)
 
(60
)
 
(8
)
Loss from discontinued operations, before tax
 
(18
)
 
(78
)
Income tax expense (benefit)
 
29

 
(26
)
Loss from discontinued operations, net of tax
 
(47
)
 
(52
)
Gain on deconsolidation, net of tax
 
1,239

 

Income (loss) from discontinued operations
 
$
1,192

 
$
(52
)


12



The gain on deconsolidation that was recognized in the three months ended March 31, 2018, consisted of the following:
(In millions)
 
Removal of investment in FES and FENOC
$
2,193

Assumption of benefit obligations retained at FE (including Pension, OPEB and EDCP)
(820
)
Guarantees and credit support provided by FE
(139
)
Reserve on receivables and allocated Pension/OPEB mark-to-market
(914
)
Gain on deconsolidation of FES and FENOC, before tax
320

Income tax benefit including estimated worthless stock deduction
919

Gain on deconsolidation of FES and FENOC
$
1,239

The following table summarizes the major classes of assets and liabilities as discontinued operations as of March 31, 2018 and December 31, 2017:
(In millions)
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
Carrying amount of the major classes of assets included in discontinued operations:
 
 
 
 
Cash
 
$

 
$
1

Restricted cash
 

 
3

Receivables
 

 
202

Materials and supplies
 
2

 
201

Collateral
 

 
130

Other current assets
 

 
69

 Total current assets
 
2

 
606

 
 
 
 
 
Property, plant and equipment
 
353

 
1,057

Investments
 

 
1,875

Other non-current assets
 

 
356

 Total non-current assets
 
353

 
3,288

Total assets included in discontinued operations
 
$
355

 
$
3,894

 
 
 
 
 
Carrying amount of the major classes of liabilities included in discontinued operations:
 
 
 
 
Currently payable long-term debt
 
$

 
$
524

Accounts payable
 

 
200

Accrued taxes
 

 
38

Accrued compensation and benefits
 

 
79

Other current liabilities
 

 
132

        Total current liabilities
 

 
973

 
 
 
 
 
Long-term debt and other long-term obligations
 

 
2,299

Accumulated deferred income taxes (1)
 

 
(1,812
)
Asset retirement obligations
 

 
1,945

Deferred gain on sale and leaseback transaction
 

 
723

Other non-current liabilities
 

 
244

        Total noncurrent liabilities
 

 
3,399

Total liabilities included in discontinued operations
 
$

 
$
4,372


(1) Represents an increase in FirstEnergy's ADIT liability as an ADIT asset was removed upon deconsolidation of FES and FENOC.



13



FirstEnergy's Consolidated Statement of Cash Flows combines cash flows from discontinued operations with cash flows from continuing operations within each cash flow statement category. The following table summarizes the major classes of cash flow items as discontinued operations for the three months ended March 31, 2018 and 2017:
 
 
For the Three Months Ended March 31,
(In millions)
 
2018
 
2017
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Income (loss) from discontinued operations
 
$
1,192

 
$
(52
)
Depreciation and amortization, including nuclear fuel, regulatory assets, net, intangible assets and deferred debt-related costs
 
47

 
79

Unrealized (gain) loss on derivative transactions
 
(10
)
 
47

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 

Property additions
 
(15
)
 
(90
)
Nuclear fuel
 

 
(132
)
Sales of investment securities held in trusts
 
109

 
231

Purchases of investment securities held in trusts
 
(122
)
 
(245
)
4. EARNINGS PER SHARE OF COMMON STOCK

The convertible Preferred Stock issued in January 2018 (see Note 11, "Capitalization") is considered participating securities since these shares participate in dividends on Common Stock on an "as-converted" basis. As a result, Earnings per share on Common Stock is computed using the two-class method required for participating securities.

The two-class method uses an earnings allocation formula that treats participating securities as having rights to earnings that otherwise would have been available only to common stockholders. Under the two-class method, net income attributable to common stockholders is derived by subtracting the following from income from continuing operations:
preferred share dividends,
deemed dividends for the amortization of the beneficial conversion feature recognized at issuance of the Preferred Stock (if any), and
an allocation of undistributed earnings between the common shares and the participating securities (convertible Preferred Stock) based on their respective rights to receive dividends.

Net losses are not allocated to the convertible Preferred Stock as they do not have a contractual obligation to share in the losses of FirstEnergy. FirstEnergy allocates undistributed earnings based upon income from continuing operations.

The Preferred Stock includes an embedded conversion option at a price that is below the fair value of the Common Stock on the commitment date. This beneficial conversion feature, which was approximately $296 million, represents the difference between the fair value per share of the Common Stock and the conversion price, multiplied by the number of common shares issuable upon conversion. The beneficial conversion feature will be amortized as a deemed dividend over the period from the issue date to the first allowable conversion date (July 22, 2018) as a charge to OPIC, since FE is in an accumulated deficit position with no retained earnings to declare a dividend. As noted above, for EPS reporting purposes, this beneficial conversion feature will be reflected in net income attributable to common stockholders as a deemed dividend. The amount amortized in the first quarter of 2018 was approximately $113 million.

Basic EPS available to common stockholders is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Participating securities are excluded from basic weighted average ordinary shares outstanding. Diluted EPS available to common stockholders is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding, including all potentially dilutive common shares, if the effect of such common shares is dilutive.

Diluted EPS reflects the dilutive effect of potential common shares from share-based awards and convertible preferred shares. The dilutive effect of outstanding share based awards is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of the award would be used to purchase Common Stock at the average market price for the period. The dilutive effect of the convertible Preferred Stock is computed using the if-converted method, which assumes conversion of the convertible Preferred Stock at the beginning of the period, giving income recognition for the add-back of the preferred share dividends, amortization of beneficial conversion feature, and undistributed earnings allocated to preferred stockholders.



14



The following table reconciles basic and diluted EPS of common stock:
(In millions, except per share amounts)
 
For the Three Months Ended March 31,
Reconciliation of Basic and Diluted Earnings per Share of Common Stock
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock
 
 
 
 
Income from continuing operations
 
$
177

 
$
257

Less: Preferred dividends
 
(43
)
 

Less: Amortization of beneficial conversion feature
 
(113
)
 

Less: Undistributed earnings allocated to preferred stockholders (1)
 

 

Income from continuing operations available to common stockholders
 
21

 
257

Discontinued operations, net of tax
 
1,192

 
(52
)
Less: Undistributed earnings allocated to preferred stockholders (1)
 

 

Income (loss) from discontinued operations available to common stockholders
 
1,192

 
(52
)
 
 
 
 
 
Income available to common stockholders, basic and diluted
 
$
1,213

 
$
205

 
 
 
 
 
Share Count information:
 
 
 
 
Weighted average number of basic shares outstanding
 
476

 
443

Assumed exercise of dilutive stock options and awards
 
2

 
1

Assumed conversion of preferred stock
 

 

Weighted average number of diluted shares outstanding
 
478

 
444

 
 
 
 
 
Income available to common stockholders, per common share:
 
 
 
 
Income from continuing operations, basic
 
$
0.04

 
$
0.58

Discontinued operations, basic
 
2.51

 
(0.12
)
Income available to common stockholders, basic
 
$
2.55

 
$
0.46

 
 
 
 
 
Income from continuing operations, diluted
 
$
0.04

 
$
0.58

Discontinued operations, diluted
 
2.50

 
(0.12
)
Income available to common stockholders, diluted
 
$
2.54

 
$
0.46


(1) 
Undistributed earnings were not allocated to participating securities as income from continuing operations less dividends declared (common and preferred) and deemed dividends was a net loss.

For the three months ended March 31, 2018 and 2017, one million stock option and award shares were excluded from the calculation of diluted shares outstanding, as their inclusion would be antidilutive to basic EPS from continuing operations. Also, for the three months ended March 31, 2018, 59 million shares associated with the assumed conversion of Preferred Stock were excluded, as their inclusion would be antidilutive to basic EPS from continuing operations.
5. PENSION AND OTHER POSTEMPLOYMENT BENEFITS
The components of the consolidated net periodic costs (credits) for pension and OPEB (including amounts capitalized) were as follows:
Components of Net Periodic Benefit Costs (Credits)
 
Pension
OPEB
For the Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
Service costs
 
$
56

 
$
52

 
$
1

 
$
1

Interest costs
 
93

 
97

 
6

 
7

Expected return on plan assets
 
(144
)
 
(112
)
 
(8
)
 
(8
)
Amortization of prior service costs (credits)
 
2

 
2

 
(20
)
 
(20
)
Net periodic costs (credits)
 
$
7

 
$
39

 
$
(21
)
 
$
(20
)



15



Pension and OPEB obligations are allocated to FE's subsidiaries employing the plan participants. The net periodic pension and OPEB costs (credits), net of amounts capitalized, recognized in earnings by FirstEnergy were as follows:
Net Periodic Benefit Expense (Credit)
 
Pension
 
OPEB
For the Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
FirstEnergy
 
$
(14
)
 
$
32

 
$
(21
)
 
$
(15
)
Amounts in the tables above include FES' and FENOC's share of the net periodic pension and OPEB costs (credits) of $13 million and $(10) million, respectively, for the three months ended March 31, 2018, and FES' and FENOC's share of the net periodic pension and OPEB costs (credits) of $16 million and $(8) million, respectively, for the three months ended March 31, 2017. Such amounts are a component of Discontinued Operations in FirstEnergy's Consolidated Statements of Income.
Following adoption of ASU 2017-07, "Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" in 2018, service costs, net of capitalization, continue to be reported within Other operating expenses on the FirstEnergy Consolidated Statements of Income. Non-service costs are reported within Miscellaneous income within Other income (expense). Prior period amounts have been reclassified to conform with current year presentation. See Note 1, "Organization and Basis of Presentation," for additional information.

In January 2018, FirstEnergy satisfied its minimum required funding obligations of $500 million and addressed funding obligations for future years to its qualified pension plan with additional contributions of $750 million.



16



6. ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in AOCI, net of tax, in the three months ended March 31, 2018 and 2017, for FirstEnergy are included in the following tables:
 
 
Gains & Losses on Cash Flow Hedges
 
Unrealized Gains on AFS Securities
 
Defined Benefit Pension & OPEB Plans
 
Total
 
 
(In millions)
AOCI balance as of January 1, 2018
 
$
(22
)
 
$
67

 
$
97

 
$
142

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 
(97
)
 

 
(97
)
Amounts reclassified from AOCI
 
2

 
(1
)
 
(18
)
 
(17
)
Deconsolidation of FES and FENOC
 
13

 
(8
)
 

 
5

Other comprehensive income (loss)
 
15

 
(106
)
 
(18
)
 
(109
)
Income taxes (benefits) on other comprehensive income (loss)
 
8

 
(39
)
 
(22
)
 
(53
)
Other comprehensive income (loss), net of tax
 
7

 
(67
)
 
4

 
(56
)
 
 
 
 
 
 
 
 
 
AOCI Balance as of March 31, 2018
 
$
(15
)
 
$

 
$
101

 
$
86

 
 
 
 
 
 
 
 
 
AOCI balance as of January 1, 2017
 
$
(28
)
 
$
52

 
$
150

 
$
174

 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
 

 
32

 

 
32

Amounts reclassified from AOCI
 
3

 
(16
)
 
(18
)
 
(31
)
Other comprehensive income (loss)
 
3

 
16

 
(18
)
 
1

Income taxes (benefits) on other comprehensive income (loss)
 
1

 
5

 
(6
)
 

Other comprehensive income (loss), net of tax
 
2

 
11

 
(12
)
 
1

 
 
 
 
 
 
 
 
 
AOCI Balance as of March 31, 2017
 
$
(26
)
 
$
63

 
$
138

 
$
175

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The following amounts were reclassified from AOCI for FirstEnergy in the three months ended March 31, 2018 and 2017:
 
 
For the Three Months Ended March 31,
 
Affected Line Item in the Consolidated Statements of Income
Reclassifications from AOCI(2)
 
2018
 
2017
 
 
 
(In millions)
 
 
Gains & losses on cash flow hedges
 
 
 
 
 
 
Long-term debt
 
$
2

 
$
3

 
Interest expense
 
 
(1
)
 
(1
)
 
Income taxes
 
 
$
1

 
$
2

 
Net of tax
 
 
 
 
 
 
 
Unrealized gains on AFS securities
 
 
 
 
 
 
Realized gains on sales of securities
 
$
(1
)
 
$
(10
)
 
Discontinued Operations
 
 
 
 
 
 
 
Defined benefit pension and OPEB plans
 
 
 
 
 
 
Prior-service costs
 
$
(18
)
 
$
(18
)
 
(1) 
 
 
5

 
6

 
Income taxes
 
 
$
(13
)
 
$
(12
)
 
Net of tax
 
 
 
 
 
 
 
(1) These AOCI components are included in the computation of net periodic pension cost. See Note 5, "Pension and Other Postemployment Benefits," for additional details.
(2) Amounts in parenthesis represent credits to the Consolidated Statements of Income from AOCI.



17



7. INCOME TAXES
 
FirstEnergy’s interim effective tax rates reflect the estimated annual effective tax rates for 2018 and 2017. These tax rates are affected by estimated annual permanent items, such as AFUDC equity and other flow-through items, as well as discrete items that may occur in any given period, but are not consistent from period to period.

FirstEnergy’s effective tax rate for the three months ended March 31, 2018 and 2017, was 58.7% and 37.2%, respectively. The increase in effective tax rate is primarily due to the legal and financial separation of FES and FENOC from FirstEnergy. This separation officially eroded the ties between FES, FENOC and other FirstEnergy subsidiaries doing business in West Virginia. As such, FES and FENOC were removed from the West Virginia unitary group when calculating West Virginia state income taxes, resulting in a $126 million charge to income tax expense in continuing operations associated with the re-measurement in state deferred taxes. This increase was partially offset by the decrease in the corporate federal income tax rate from 35% to 21%, which became effective January 1, 2018.

At December 31, 2017, FirstEnergy recorded provisional income tax amounts in its accounting for certain effects of the provisions of the Tax Act as allowed under SEC Staff Accounting Bulletin 118 (SAB 118). In addition, SAB 118 allowed for a measurement period for companies to finalize the provisional amounts recorded as of December 31, 2017, not to exceed one year. As of March 31, 2018, FirstEnergy has not yet finalized its assessment of the provisional amounts and there were no significant adjustments recorded in the first quarter of 2018. FirstEnergy expects to complete its assessment and record any final adjustments to the provisional amounts by the fourth quarter of 2018, which could result in a material impact to FirstEnergy’s income tax provision or financial position.

FirstEnergy's assessment of accounting for the Tax Act are based upon management's current understanding of the Tax Act. However, it is expected that further guidance will be issued during 2018, which may result in adjustments that could have a material impact to FirstEnergy's future results of operations, cash flows, or financial position.

In March 2018, FirstEnergy recorded unrecognized tax benefits of $49 million which relates primarily to the tax benefit recognized for the investment in FES and FENOC. The tax impact is reflected in discontinued operations.

On October 18, 2017, the Supreme Court of Pennsylvania affirmed the Commonwealth Court’s holding that the state’s net loss carryover provision violated the Pennsylvania Uniformity Clause and was unconstitutional. However, the court also opined that the portion of the net loss carryover provision that created the violation may be severed from the statute, enabling the statute to operate as the legislature intended, and on October 30, 2017, the Pennsylvania Governor signed House Bill 542 into law, which, among other things, amended Pennsylvania’s limitation on net loss deductions to remove the flat-dollar limitation. On January 4, 2018, the court declined to further hear any arguments related to the matter and, as a result, FirstEnergy withdrew its protective refund claims from the Commonwealth of Pennsylvania on January 30, 2018. Upon doing so, FirstEnergy reversed a previously recorded unrecognized tax benefit of approximately $45 million in the first quarter of 2018, none of which impacted FirstEnergy’s effective tax rate.

As of March 31, 2018, it was reasonably possible that approximately $2 million of unrecognized tax benefits may be resolved within the next twelve months as a result of the statute of limitations expiring, none of which would affect FirstEnergy's effective tax rate.

In January 2018, the IRS completed its examination of FirstEnergy’s 2016 federal income tax return and issued a Full Acceptance Letter with no changes or adjustments to FirstEnergy’s taxable income.
8. VARIABLE INTEREST ENTITIES

FirstEnergy performs qualitative analyses based on control and economics to determine whether a variable interest classifies FirstEnergy as the primary beneficiary (a controlling financial interest) of a VIE. An enterprise has a controlling financial interest if it has both power and economic control, such that an entity has: (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. FirstEnergy consolidates a VIE when it is determined that it is the primary beneficiary.

In order to evaluate contracts for consolidation treatment and entities for which FirstEnergy has an interest, FirstEnergy aggregates variable interests into categories based on similar risk characteristics and significance.

Consolidated VIEs
VIEs in which FirstEnergy is the primary beneficiary consist of the following (included in FirstEnergy’s consolidated financial statements):
Ohio Securitization - In September 2012, the Ohio Companies created separate, wholly owned limited liability company SPEs which issued phase-in recovery bonds to securitize the recovery of certain all-electric customer heating discounts, fuel and purchased power regulatory assets. The phase-in recovery bonds are payable only from, and secured by, phase-in recovery property owned by the SPEs. The bondholder has no recourse to the general credit of FirstEnergy or any of


18



the Ohio Companies. Each of the Ohio Companies, as servicer of its respective SPE, manages and administers the phase-in recovery property including the billing, collection and remittance of usage-based charges payable by retail electric customers. In the aggregate, the Ohio Companies are entitled to annual servicing fees of $445 thousand that are recoverable through the usage-based charges. The SPEs are considered VIEs and each one is consolidated into its applicable utility. As of March 31, 2018 and December 31, 2017, $304 million and $315 million of the phase-in recovery bonds were outstanding, respectively.
JCP&L Securitization - In August 2006, JCP&L Transition Funding II sold transition bonds to securitize the recovery of deferred costs associated with JCP&L’s supply of BGS. JCP&L did not purchase and does not own any of the transition bonds, which are included as long-term debt on FirstEnergy’s and JCP&L’s Consolidated Balance Sheets. The transition bonds are the sole obligations of JCP&L Transition Funding II and are collateralized by its equity and assets, which consist primarily of bondable transition property. As of March 31, 2018 and December 31, 2017, $52 million and $56 million of the transition bonds were outstanding, respectively.
MP and PE Environmental Funding Companies - The entities issued bonds, the proceeds of which were used to construct environmental control facilities. The limited liability company SPEs own the irrevocable right to collect non-bypassable environmental control charges from all customers who receive electric delivery service in MP's and PE's West Virginia service territories. Principal and interest owed on the environmental control bonds is secured by, and payable solely from, the proceeds of the environmental control charges. Creditors of FirstEnergy, other than the limited liability company SPEs, have no recourse to any assets or revenues of the special purpose limited liability companies. As of March 31, 2018 and December 31, 2017, $371 million and $383 million of the environmental control bonds were outstanding, respectively.

Unconsolidated VIEs
FirstEnergy is not the primary beneficiary of the following VIEs:
Global Holding - FEV holds a 33-1/3% equity ownership in Global Holding, the holding company for a joint venture in the Signal Peak mining and coal transportation operations with coal sales in U.S. and international markets. FEV is not the primary beneficiary of the joint venture, as it does not have control over the significant activities affecting the joint venture's economic performance. FEV's ownership interest is subject to the equity method of accounting. In 2015, FirstEnergy fully impaired the value of its investment in Global Holding.
As discussed in Note 14, "Commitments, Guarantees and Contingencies," FE is the guarantor under Global Holding's term loan facility, which has an outstanding principal balance of $255 million. Failure by Global Holding to meet the terms and conditions under its term loan facility could require FE to be obligated under the provisions of its guarantee, resulting in consolidation of Global Holding by FE.
PATH WV - PATH, a proposed transmission line from West Virginia through Virginia into Maryland which PJM cancelled in 2012, is a series limited liability company that is comprised of multiple series, each of which has separate rights, powers and duties regarding specified property and the series profits and losses associated with such property. A subsidiary of FE owns 100% of the Allegheny Series (PATH-Allegheny) and 50% of the West Virginia Series (PATH-WV), which is a joint venture with a subsidiary of AEP. FirstEnergy is not the primary beneficiary of PATH-WV, as it does not have control over the significant activities affecting the economics of PATH-WV. FirstEnergy's ownership interest in PATH-WV is subject to the equity method of accounting. As of March 31, 2018, the carrying value of the equity method investment was $17 million.
Purchase Power Agreements - FirstEnergy evaluated its PPAs and determined that certain NUG entities at its Regulated Distribution segment may be VIEs to the extent that they own a plant that sells substantially all of its output to the applicable utilities and the contract price for power is correlated with the plant’s variable costs of production.
FirstEnergy maintains 12 long-term PPAs with NUG entities that were entered into pursuant to PURPA. FirstEnergy was not involved in the creation of, and has no equity or debt invested in, any of these entities. FirstEnergy has determined that for all but one of these NUG entities, it does not have a variable interest or the entities do not meet the criteria to be considered a VIE. FirstEnergy may hold a variable interest in the remaining one entity; however, it applied the scope exception that exempts enterprises unable to obtain the necessary information to evaluate entities.
Because FirstEnergy has no equity or debt interests in the NUG entities, its maximum exposure to loss relates primarily to the above-market costs incurred for power. FirstEnergy expects any above-market costs incurred at its Regulated Distribution segment to be recovered from customers. Purchased power costs related to the contract that may contain a variable interest during the three months ended March 31, 2018 and 2017, were $32 million and $28 million, respectively.
FES and FENOC - As a result of the Chapter 11 bankruptcy filing discussed in Note 3, "Discontinued Operations," FE evaluated its investments in FES and FENOC and determined they are VIEs. FE is not the primary beneficiary because it lacks a controlling interest in FES and FENOC, which are subject to the control of the Bankruptcy Court as of March 31, 2018. The carrying values of the equity investments in FES and FENOC were zero at March 31, 2018.


19



9. FAIR VALUE MEASUREMENTS

RECURRING FAIR VALUE MEASUREMENTS

Authoritative accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The three levels of the fair value hierarchy and a description of the valuation techniques are as follows:

Level 1
-
Quoted prices for identical instruments in active market
 
 
 
Level 2
-
Quoted prices for similar instruments in active market
 
-
Quoted prices for identical or similar instruments in markets that are not active
 
-
Model-derived valuations for which all significant inputs are observable market data

Models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.

Level 3
-
Valuation inputs are unobservable and significant to the fair value measurement

FirstEnergy produces a long-term power and capacity price forecast annually with periodic updates as market conditions change. When underlying prices are not observable, prices from the long-term price forecast, which has been reviewed and approved by FirstEnergy's Risk Policy Committee, are used to measure fair value.

FTRs are financial instruments that entitle the holder to a stream of revenues (or charges) based on the hourly day-ahead congestion price differences across transmission paths. FTRs are acquired by FirstEnergy in the annual, monthly and long-term PJM auctions and are initially recorded using the auction clearing price less cost. After initial recognition, FTRs' carrying values are periodically adjusted to fair value using a mark-to-model methodology, which approximates market. The primary inputs into the model, which are generally less observable than objective sources, are the most recent PJM auction clearing prices and the FTRs' remaining hours. The model calculates the fair value by multiplying the most recent auction clearing price by the remaining FTR hours less the prorated FTR cost. Generally, significant increases or decreases in inputs in isolation could result in a higher or lower fair value measurement. See Note 10, "Derivative Instruments," for additional information regarding FirstEnergy's FTRs.

NUG contracts represent PPAs with third-party non-utility generators that are transacted to satisfy certain obligations under PURPA. NUG contract carrying values are recorded at fair value and adjusted periodically using a mark-to-model methodology, which approximates market. The primary unobservable inputs into the model are regional power prices and generation MWH. Pricing for the NUG contracts is a combination of market prices for the current year and next two years based on observable data and internal models using historical trends and market data for the remaining years under contract. The internal models use forecasted energy purchase prices as an input when prices are not defined by the contract. Forecasted market prices are based on ICE quotes and management assumptions. Generation MWH reflects data provided by contractual arrangements and historical trends. The model calculates the fair value by multiplying the prices by the generation MWH. Generally, significant increases or decreases in inputs in isolation could result in a higher or lower fair value measurement.

FirstEnergy primarily applies the market approach for recurring fair value measurements using the best information available. Accordingly, FirstEnergy maximizes the use of observable inputs and minimizes the use of unobservable inputs. There were no changes in valuation methodologies used as of March 31, 2018, from those used as of December 31, 2017. The determination of the fair value measures takes into consideration various factors, including but not limited to, nonperformance risk, counterparty credit risk and the impact of credit enhancements (such as cash deposits, LOCs and priority interests). The impact of these forms of risk was not significant to the fair value measurements.



20



Transfers between levels are recognized at the end of the reporting period. There were no transfers between levels during the three months ended March 31, 2018. The following tables set forth the recurring assets and liabilities that are accounted for at fair value by level within the fair value hierarchy:

FirstEnergy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring Fair Value Measurements
March 31, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
(In millions)
Corporate debt securities
$

 
$
468

 
$

 
$
468

 
$

 
$
476

 
$

 
$
476

Derivative assets - FTRs

 

 
1

 
1

 

 

 
3

 
3

Equity securities(2)
288

 

 

 
288

 
297

 

 

 
297

Foreign government debt securities

 
24

 

 
24

 

 
23

 

 
23

U.S. government debt securities

 
28

 

 
28

 

 
21

 

 
21

U.S. state debt securities

 
245

 

 
245

 

 
247

 

 
247

Other(3)
248

 
30

 

 
278

 
588

 
38

 

 
626

Total assets
$
536

 
$
795

 
$
1

 
$
1,332

 
$
885

 
$
805

 
$
3

 
$
1,693

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities - commodity contracts
$

 
$

 
$

 
$

 
$

 
$
(4
)
 
$

 
$
(4
)
Derivative liabilities - NUG contracts(1)

 

 
(74
)
 
(74
)