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INCOME TAXES | 9 Months Ended
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Sep. 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 nine months ended September 30, 2023 and 2022:
|  | For the Three Months |  | For the Nine Months
|  | Ended September 30, |  | Ended September 30,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
|  | (In millions)
Income before income taxes (continuing operations) |  | $ | 470 |  |  | $ | 449 |  |  | $ | 1,198 |  |  | $ | 1,061 |
Federal income tax expense at statutory rate (21%) |  | $ | 99 |  |  | $ | 94 |  |  | $ | 252 |  |  | $ | 223 |
Increases (reductions) in tax expense resulting from: |  |  |  |  |  |  |  |
State income taxes, net of federal tax benefit |  | 25 |  |  | 25 |  |  | 49 |  |  | 68 |
AFUDC equity and other flow-through |  | (15) |  |  | (8) |  |  | (25) |  |  | (23) |
Excess deferred tax amortization due to the Tax Act |  | 2 |  |  | (15) |  |  | (30) |  |  | (46) |
Federal tax credits claimed |  | (2) |  |  | (3) |  |  | (2) |  |  | (3) |
Valuation allowances |  | (122) |  |  | (8) |  |  | (113) |  |  | 26 |
Remeasurement of state deferred taxes due to law changes |  | — |  |  | 4 |  |  | — |  |  | (22) |
Uncertain tax positions |  | 50 |  |  | 2 |  |  | 50 |  |  | 2 |
Other, net |  | (8) |  |  | 14 |  |  | 12 |  |  | 12 |
Total income taxes (continuing operations) |  | $ | 29 |  |  | $ | 105 |  |  | $ | 193 |  |  | $ | 237 |
Effective income tax rate (continuing operations) |  | 6.0 | % |  | 23.4 | % |  | 16.1 | % |  | 22.3 | %
During the three months ended September 30, 2023, FirstEnergy recognized a tax benefit of approximately $65 million, net of a reserve for uncertain tax positions, from the reduction of state income taxes and partial release of a valuation allowance for the expected utilization of state net operating losses based on an assessment of regulated business operations and a change in the composition of a state tax return filing group. During the three months ended September 30, 2023, FirstEnergy increased the reserve for uncertain tax positions by approximately $64 million, before federal tax, due to the assessment of regulated business operations discussed above, and a settlement of a separate state income tax dispute with a taxing authority, the combined effect of which increased FirstEnergy’s effective tax rate by approximately $50 million. 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 was fully reserved. In conjunction with the assessment of regulated business operations discussed above, FirstEnergy removed the $9 million reserve and reduced the state deferred tax asset to approximately $4 million, and recorded a corresponding $4 million regulatory liability associated with the amount expected to be refunded to customers in future rates. 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. In September 2023, the U.S. Treasury issued additional guidance clarifying certain aspects of ASFI, which FirstEnergy is currently assessing but does not believe will have a material impact on its position. Therefore, as a result of guidance issued to date, 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 regulations are 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.As discussed above, FirstEnergy expects to close on the sale of an additional 30% interest in FET in 2024. 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 initial 19.9% sale of FET that closed in May 2022, such deferred gain consisting of consideration received on the sale and the recapture of estimated negative tax basis in FET impacted by taxable income and loss among other factors. During the three months ended September 30, 2023, FirstEnergy filed its 2022 consolidated federal income tax return, resulting in an immaterial change to the deferred tax liability previously recognized. However, the ultimate tax gain related to the sale of ownership interests in FET is subject to change based on the final computation of the negative tax basis described above in conjunction with the closing of the additional 30% sale in 2024.

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