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INCOME TAXES | 3 Months Ended
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Mar. 31, 2024
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES FirstEnergy’s interim effective tax rates reflect the estimated annual effective tax rates for 2024 and 2023. 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 months ended March 31, 2024 and 2023:
|  |  |  | For the Three Months Ended March 31,
|  |  |  |  |  | 2024 |  | 2023
|  |  |  |  |  | (In millions)
Income before income taxes |  |  |  |  |  | $ | 402 |  |  | $ | 400 |
Federal income tax expense at statutory rate (21%) |  |  |  |  |  | $ | 84 |  |  | $ | 84 |
Increases (reductions) in tax expense resulting from: |  |  |  |  |  |  |  |
State and municipal income taxes, net of federal tax benefit |  |  |  |  |  | 23 |  |  | 14 |
AFUDC equity and other flow-through |  |  |  |  |  | (7) |  |  | (5) |
Deferred taxes related to sale of equity interest in FET, net |  |  |  |  |  | 7 |  |  | — |
Excess deferred tax amortization due to the Tax Act |  |  |  |  |  | (13) |  |  | (16) |
Valuation allowances |  |  |  |  |  | 39 |  |  | 9 |
Other, net |  |  |  |  |  | 2 |  |  | 4 |
Total income taxes |  |  |  |  |  | $ | 135 |  |  | $ | 90 |
Effective income tax rate |  |  |  |  |  | 33.6 | % |  | 22.5 | %
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 during 2022 and 2023, FirstEnergy continues to believe that it is more likely than not it will be subject to the AMT beginning with 2023. Accordingly, FirstEnergy made a first quarter estimated payment of AMT of approximately $49 million in April 2023, however, made no additional payments in 2023 based on various factors, including additional guidance from the U.S. Treasury that eliminated the requirement of corporations to include AMT in quarterly estimated tax payments. 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 may also be subject to regulation by FERC and/or applicable state regulatory authorities. Any adverse development in this legislation, including guidance from the U.S. Treasury and/or the IRS or unfavorable regulatory treatment, could negatively impact FirstEnergy’s cash flows, results of operations and financial condition. As discussed above, on March 25, 2024, FirstEnergy closed on the sale of an additional 30% interest in FET, realizing an approximate $7.3 billion tax gain from the combined sale of 49.9% of the membership interests in FET for the consideration received and recapture of negative tax basis in FET. In the first quarter of 2024, FirstEnergy recognized a net tax charge of approximately $46 million, comprised of updates to estimated deferred tax liability for the deferred gain from the 19.9% sale of FET in May 2022, deferred tax liability related to its ongoing investment in FET, and valuation allowance associated with the expected utilization of certain state NOL carryforwards impacted by the sale and the PA Consolidation. During the first quarter of 2024, FirstEnergy also recognized a reduction to OPIC of approximately $797 million for federal and state income tax associated with the tax gain from closing on the 30% interest sale. As of December 31, 2023, FirstEnergy had approximately $8.1 billion of gross federal NOL carryforwards which will be used to offset a majority of the tax gain from the FET Equity Interest Sale and expected taxable income in 2024, however due to certain limitations on utilization enacted in the Tax Act, a portion of the NOL will carry into 2025 and possibly beyond. As a result of the additional 30% sale, FET and its subsidiaries deconsolidated from FirstEnergy’s consolidated federal income tax group and now constitute their own consolidated federal income tax group subject to their own income tax allocation agreement.

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