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.

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 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	)

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.

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		)