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TAXES | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
TAXES | TAXES FirstEnergy records income taxes in accordance with the liability method of accounting. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts recognized for tax purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. Deferred income tax liabilities related to temporary tax and accounting basis differences and tax credit carryforward items are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Deferred tax assets are recognized based on income tax rates expected to be in effect when they are settled. FE and its subsidiaries are party to an intercompany income tax allocation agreement that provides for the allocation of consolidated tax liabilities. Prior to 2022, net tax benefits attributable to FE, excluding any tax benefits derived from certain interest expense, were generally reallocated to the subsidiaries of FE that have taxable income. Effective January 1, 2022, the intercompany income tax allocation agreement was amended and revised whereas FE no longer reallocates such tax benefits to the FE subsidiaries. On August 16, 2022, President Biden signed into law the IRA of 2022, which, among other things, imposes a new 15% corporate AMT based on AFSI applicable to corporations with a three-year average AFSI over $1 billion. The AMT is effective for the 2023 tax year and, if applicable, corporations must pay the greater of the regular corporate income tax or the AMT. Although NOL carryforwards created through the regular corporate income tax system cannot be used to reduce the AMT, financial statement net operating losses can be used to reduce AFSI and the amount of AMT owed. The IRA of 2022 as enacted requires the U.S. Treasury to provide regulations and other guidance necessary to administer the AMT, including further defining allowable adjustments to determine AFSI, which directly impacts the amount of AMT to be paid. Based on interim guidance issued by the U.S. Treasury in late December 2022, FirstEnergy continues to believe that it is more likely than not it will be subject to the AMT beginning 2023. Until final U.S. Treasury guidance is issued, the amount of AMT FirstEnergy would pay could be significantly different than current estimates or it may not be a payer at all. The regulatory treatment of the impacts of this legislation will also be subject to the discretion of the FERC and state public utility commissions. Any adverse development in this legislation, including guidance from the U.S. Treasury and/ or the IRS or unfavorable regulatory treatment, could reduce future cash flows and impact financial condition. As discussed above, FirstEnergy expects to close on the sale of an additional 30% interest in FET in 2024, at which time FirstEnergy expects to realize an approximate $7.1 billion tax gain from the combined sale of 49.9% of the membership interests of FET, approximately $3.5 billion of which is attributable to the sale of 30% and the remainder being gain deferred from the sale of 19.9% in 2022, including consideration received and recapture of negative tax basis in FET. Upon closing in 2024, FET will be deconsolidated from FirstEnergy’s consolidated federal income tax group, however, FET will continue to be consolidated in FirstEnergy’s GAAP financial statements. As of December 31, 2022, FirstEnergy had approximately $7.1 billion of federal NOL carryforwards, all of which it expects to utilize by the end of 2024 to mostly offset taxable income and the tax gains associated with the combined 49.9% sales in FET. As a result of the expected additional sale in FET, FirstEnergy recognized a charge to income tax expense in the fourth quarter of 2022 of approximately $752 million, representing the deferred tax liability associated with the deferred tax gain on the 19.9% sale closed in May 2022. Additionally, FirstEnergy recognized a $54 million benefit to income tax expense in the fourth quarter of 2022 associated with reversal of certain valuation allowances on state income tax NOL carryforwards that are now expected to be utilized as a result of the tax gain associated with the transaction. See Note 1, "Organization, Basis of Presentation and Significant Accounting Policies", for further discussion of the additional minority interest sale in FET. On July 8, 2022, Pennsylvania’s Governor signed into law Pennsylvania House Bill 1342, which reduces Pennsylvania’s corporate net income tax rate from 9.99% to 8.99% beginning January 1, 2023, and an additional 0.5% annually through 2031, when it reaches 4.99%. As of December 31, 2022, FirstEnergy recorded a $230 million net decrease to FirstEnergy’s ADIT liabilities, with a corresponding increase in regulatory liabilities of $236 million, which are expected to be settled through future customer rates, and a $6 million increase in income tax expense. The decrease in the Pennsylvania income tax rate is not expected to have a material impact to FirstEnergy’s future financial statements. During 2022, FirstEnergy recognized an income statement benefit of approximately $38 million from remeasurement of a valuation allowance previously recorded on business interest expense carryforwards from the 2018 and 2019 tax years. The business interest expense could not be deducted previously due to certain limitations imposed on interest expense from non-utility operations under section 163(j) of the Tax Act. As provided by the Tax Act, the nondeductible interest expense can be carried forward, indefinitely, and deducted against income from non-utility operations. Due primarily to the realized and expected future earnings from FEV’s equity ownership in Global Holding, FirstEnergy expects to utilize a portion of the interest expense carryforward on its consolidated federal income tax return.
|  | For the Years Ended December 31,
INCOME TAXES(1) |  | 2022 |  | 2021 |  | 2020
|  | (In millions)
Currently payable (receivable)- |  |  |  |  |  |
Federal (2) |  | $ | — |  |  | $ | 2 |  |  | $ | (14) |
State |  | 11 |  |  | 21 |  |  | 21 |
|  | 11 |  |  | 23 |  |  | 7 |
Deferred, net- |  |  |  |  |  |
Federal(3) |  | 946 |  |  | 174 |  |  | 171 |
State(4) |  | 47 |  |  | 127 |  |  | (38) |
|  | 993 |  |  | 301 |  |  | 133 |
Investment tax credit amortization |  | (4) |  |  | (4) |  |  | (14) |
Total income taxes |  | $ | 1,000 |  |  | $ | 320 |  |  | $ | 126 |
(1) Income Taxes on Income from Continuing Operations. (2) Excludes $2 million of federal tax benefit associated with discontinued operations for the years ended December 31, 2021. (3) Excludes $46 million and $66 million of federal tax benefits associated with discontinued operations for the years ended December 31, 2021 and 2020, respectively. (4) Excludes $1 million of state tax expense associated with discontinued operations for the year ended December 31, 2020. FirstEnergy tax rates are affected by 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. The following tables provide a reconciliation of federal income tax expense (benefit) at the federal statutory rate to the total income taxes (benefits) for the years ended December 31, 2022, 2021 and 2020:
| For the Years Ended December 31,
| 2022 |  | 2021 |  | 2020
| (In millions)
Income from Continuing Operations, before income taxes | $ | 1,439 |  |  | $ | 1,559 |  |  | $ | 1,129 |
Federal income tax expense at statutory rate (21%) | $ | 302 |  |  | $ | 327 |  |  | $ | 237 |
Increases (reductions) in taxes resulting from- |  |  |  |  |
State and municipal income taxes, net of federal tax benefit | 56 |  |  | 122 |  |  | 75 |
AFUDC equity and other flow-through | (26) |  |  | (29) |  |  | (38) |
Amortization of investment tax credits | (4) |  |  | (4) |  |  | (14) |
Deferred gain on 19.9% FET minority interest sale | 752 |  |  | — |  |  | — |
Federal tax credits claimed | (3) |  |  | (34) |  |  | — |
Nondeductible DPA monetary penalty | — |  |  | 52 |  |  | — |
Excess deferred tax amortization due to the Tax Act | (51) |  |  | (54) |  |  | (56) |
TMI-2 reversal of tax regulatory liabilities | — |  |  | — |  |  | (40) |
Uncertain tax positions | 2 |  |  | (82) |  |  | (1) |
Valuation allowances | (47) |  |  | 17 |  |  | (49) |
Other, net | 19 |  |  | 5 |  |  | 12 |
Total income taxes | $ | 1,000 |  |  | $ | 320 |  |  | $ | 126 |
Effective income tax rate | 69.5 | % |  | 20.5 | % |  | 11.2 | %
Accumulated deferred income taxes as of December 31, 2022 and 2021, are as follows:
|  | As of December 31,
|  | 2022 |  | 2021
|  | (In millions)
Property basis differences |  | $ | 5,528 |  |  | $ | 5,670 |
Pension and OPEB |  | (496) |  |  | (570) |
AROs |  | (22) |  |  | (21) |
Regulatory asset/liability |  | 432 |  |  | 322 |
Deferred compensation |  | (149) |  |  | (155) |
Deferred gain on 19.9% FET minority interest sale |  | 752 |  |  | — |
Loss carryforwards and tax credits |  | (2,073) |  |  | (2,040) |
Valuation reserve |  | 440 |  |  | 484 |
All other |  | (210) |  |  | (253) |
Net deferred income tax liability |  | $ | 4,202 |  |  | $ | 3,437 |
FirstEnergy has recorded as deferred income tax assets the effect of federal NOLs and tax credits that will more likely than not be realized through future operations and through the reversal of existing temporary differences. As of December 31, 2022, FirstEnergy's loss carryforwards primarily consisted of $7.1 billion ($1.5 billion, net of tax) of federal NOL carryforwards, $5 billion ($1 billion, net of tax) which have no expiration and the remainder that will begin to expire in 2031, and federal general business tax credits of $51 million that begin to expire in 2030. As discussed above, FirstEnergy expects to utilize all the federal NOL carryforwards by the end of 2024 to mostly offset taxable income and the tax gain recognized from the combined sale of the 49.9% equity interest in FET. The table below summarizes pre-tax NOL carryforwards and their respective anticipated expirations for state and local income tax purposes of approximately $12.6 billion ($568 million, net of tax) for FirstEnergy, of which approximately $3.9 billion ($199 million, net of tax) is expected to be utilized based on current estimates and assumptions. The ultimate utilization of these NOLs may be impacted by statutory limitations on the use of NOLs imposed by state and local tax jurisdictions, changes in statutory tax rates, and changes in business which, among other things, impact both future profitability and the manner in which future taxable income is apportioned to various state and local tax jurisdictions.
Expiration Period |  | State |  | Local
|  | (In millions)
2023-2027 |  | $ | 2,479 |  |  | $ | 4,317 |
2028-2032 |  | 1,603 |  |  | — |
2033-2037 |  | 876 |  |  | — |
2038-2042 |  | 935 |  |  | — |
Indefinite |  | 2,351 |  |  | — |
|  | $ | 8,244 |  |  | $ | 4,317 |
The following table summarizes the changes in valuation allowances on federal, state and local DTAs related to disallowed interest and certain employee remuneration, in addition to state and local NOLs discussed above for the years ended December 31, 2022, 2021 and 2020:
(In millions) |  | 2022 |  | 2021 |  | 2020
Beginning of year balance |  | $ | 484 |  |  | $ | 496 |  |  | $ | 441 |
Charged to income |  | (44) |  |  | (12) |  |  | 55 |
Charged to other accounts |  | — |  |  | — |  |  | — |
Write-offs |  | — |  |  | — |  |  | — |
End of year balance |  | $ | 440 |  |  | $ | 484 |  |  | $ | 496 |
FirstEnergy accounts for uncertainty in income taxes recognized in its financial statements. A recognition threshold and measurement attribute are utilized for financial statement recognition and measurement of tax positions taken or expected to be taken on the tax return. If ultimately recognized in future years, approximately $41 million of unrecognized income tax benefits would impact the effective tax rate. As of December 31, 2022, it is reasonably possible that approximately $25 million of unrecognized tax benefits may be resolved during 2023 as a result of settlements with taxing authorities or the statute of limitations expiring, of which $24 million would ultimately affect FirstEnergy's effective tax rate. The following table summarizes the changes in unrecognized tax positions for the years ended December 31, 2022, 2021 and 2020:
|  | (In millions)
Balance, January 1, 2020 |  | $ | 164 |
Current year increases |  | 7 |
Prior year decreases |  | (28) |
Effectively settled with taxing authorities |  | (2) |
Decrease for lapse in statute |  | (2) |
Balance, December 31, 2020 |  | $ | 139 |
Current year increases |  | 15 |
Prior year decreases |  | (8) |
Effectively settled with taxing authorities |  | (97) |
Decrease for lapse in statute |  | (2) |
Balance, December 31, 2021 |  | $ | 47 |
Prior years increases |  | 2 |
Decrease for lapse in statute |  | (7) |
Balance, December 31, 2022 |  | $ | 42 |
FirstEnergy recognizes interest expense or income and penalties related to uncertain tax positions in income taxes by applying the applicable statutory interest rate to the difference between the tax position recognized and the amount previously taken, or expected to be taken, on the tax return. FirstEnergy includes net interest and penalties in the provision for income taxes. FirstEnergy's recognition of net interest associated with unrecognized tax benefits in 2022, 2021 and 2020, was not material. For the years ended December 31, 2022 and 2021, the cumulative net interest payable recorded by FirstEnergy was not material. IRS review of FirstEnergy’s federal income tax returns is complete through the 2020 tax year with no pending adjustments. FirstEnergy’s tax returns for some state jurisdictions are open from tax years 2009 to 2020. General Taxes General tax expense for the years ended December 31, 2022, 2021 and 2020, recognized in continuing operations is summarized as follows:
|  | For the Years Ended December 31,
|  | 2022 |  | 2021 |  | 2020
|  | (In millions)
kWh excise |  | $ | 191 |  |  | $ | 189 |  |  | $ | 183 |
State gross receipts |  | 219 |  |  | 190 |  |  | 182 |
Real and personal property |  | 596 |  |  | 571 |  |  | 541 |
Social security and unemployment |  | 105 |  |  | 103 |  |  | 112 |
Other |  | 18 |  |  | 20 |  |  | 28 |
Total general taxes |  | $ | 1,129 |  |  | $ | 1,073 |  |  | $ | 1,046 |

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