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INCOME TAXES | 6 Months Ended
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Jun. 30, 2023
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES FirstEnergy’s interim effective tax rates reflect the estimated annual effective tax rates for 2023 and 2022. These tax rates are affected by estimated annual permanent items, such as AFUDC equity and other flow-through items, as well as certain discrete items. The following tables reconcile the effective tax rate to the federal income tax statutory rate for the three and six months ended June 30, 2023 and 2022:
|  | For the Three Months |  | For the Six Months
|  | Ended June 30, |  | Ended June 30,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
|  | (In millions)
Income before income taxes |  | $ | 328 |  |  | $ | 241 |  |  | $ | 728 |  |  | $ | 612 |
Federal income tax expense at statutory rate (21%) |  | $ | 69 |  |  | $ | 51 |  |  | $ | 153 |  |  | $ | 129 |
Increases (reductions) in tax expense resulting from: |  |  |  |  |  |  |  |
State income taxes, net of federal tax benefit |  | 19 |  |  | 17 |  |  | 43 |  |  | 44 |
AFUDC equity and other flow-through |  | (4) |  |  | (7) |  |  | (9) |  |  | (14) |
Excess deferred tax amortization due to the Tax Act |  | (16) |  |  | (15) |  |  | (32) |  |  | (31) |
Valuation allowances |  | — |  |  | — |  |  | — |  |  | 34 |
Remeasurement of state deferred taxes |  | — |  |  | — |  |  | — |  |  | (26) |
Other, net |  | 6 |  |  | 3 |  |  | 9 |  |  | (4) |
Total income taxes |  | $ | 74 |  |  | $ | 49 |  |  | $ | 164 |  |  | $ | 132 |
Effective income tax rate |  | 22.6 | % |  | 20.3 | % |  | 22.5 | % |  | 21.6 | %
During the six months ended June 30, 2023, there was no change to FirstEnergy’s reserve for uncertain tax positions. As of June 30, 2023, it remains reasonably possible that approximately $25 million of unrecognized tax benefits may be resolved in the next twelve months as a result of settlements with taxing authorities or the statute of limitations expiring, of which $24 million would ultimately affect FirstEnergy’s effective tax rate. On March 29, 2023, the West Virginia Governor signed into law House Bill 3286, which allows corporate taxpayers a reduction to pre-apportionment federal taxable income with the amount necessary to offset the increase in the net deferred tax liability (or decrease in the net deferred tax asset) caused by West Virginia’s apportionment law change enacted in 2021. Beginning with the 2033 tax year, qualifying taxpayers can subtract one-tenth of the amount each year for ten years. Taxpayers intending to claim this subtraction will have to file a statement with the West Virginia tax commissioner by July 1, 2024, specifying the total amount of subtraction to be claimed. Accordingly, FirstEnergy recorded a state deferred tax asset of approximately $9 million in the first quarter of 2023, which has been fully reserved due to current estimates and assumptions of future taxable income apportioned to West Virginia. 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 in 2023. Accordingly, FirstEnergy made a first quarter estimated payment of AMT of approximately $49 million in April 2023. In June 2023, the U.S. Treasury issued additional guidance that eliminated the requirement of corporations to include AMT in quarterly estimated tax payments, pending further guidance on the application and administration of AMT. As a result of this guidance, current forecast of AMT obligation and the amount of AMT already paid in April 2023, FirstEnergy does not expect to make any additional AMT payments in 2023. Until final U.S. Treasury guidance is issued, the amount of AMT FirstEnergy pays 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 FirstEnergy’s future cash flows and impact financial condition.

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