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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, as well as FES and FENOC, are party to an intercompany income tax allocation agreement that provides for the allocation of consolidated tax liabilities. Net tax benefits attributable to FE, excluding any tax benefits derived from interest expense associated with acquisition indebtedness from the merger with GPU, are reallocated to the subsidiaries of FE that have taxable income. That allocation is accounted for as a capital contribution to the company receiving the tax benefit. FES and FENOC are expected to remain parties to the intercompany tax allocation agreement until their emergence from bankruptcy, which is when they will no longer be part of FirstEnergy's consolidated tax group. On December 22, 2017, the President signed into law the Tax Act, which included significant changes to the Internal Revenue Code of 1986 (as amended, the Code). The more significant changes that impacted FirstEnergy were as follows:
At December 31, 2017, FirstEnergy completed its assessment of the accounting for certain effects of the provisions in the Tax Act, and as allowed under SEC Staff Accounting Bulletin 118 (SAB 118), recorded provisional income tax amounts related to depreciation for which the impacts of the Tax Act could not be finalized, but for which a reasonable estimate could be determined. Under the Tax Act, qualified property acquired and placed into service after September 27, 2017, would be eligible for full expensing for all taxpayers other than regulated utilities. On August 3, 2018, the IRS released proposed regulations clarifying the immediate expensing of qualified property, specifically addressing that regulated utility property acquired after September 27, 2017, and placed into service by December 31, 2017, qualifies for full expensing. While not final as of December 31, 2018, corporate taxpayers may rely on the proposed regulations for tax years ending after September 27, 2017. As of December 31, 2018, FirstEnergy has now completed its accounting for all of the enactment-date income tax effects of the Tax Act, resulting in an immaterial adjustment to the provisional income tax amounts recorded at December 31, 2017. The Tax Act also amended Section 163(j) of the Code, limiting interest expense deductions for corporations, with exemption for certain regulated utilities. On November 26, 2018, the IRS issued proposed regulations implementing Section 163(j), including its application of the rules to consolidated groups with both regulated utility and non-regulated members. Based on its interpretation of these proposed regulations, FirstEnergy has estimated the amount of deductible interest for its consolidated group in 2018 and has recorded a deferred tax asset on the nondeductible portion as it is carried forward with an indefinite life. The deferred tax asset related to the indefinite lived carryforward of nondeductible interest has a full valuation allowance ($60 million) recorded against it as future profitability from sources other than regulated utility businesses is required for utilization. Of this tax effected nondeductible interest, $27 million has been reflected as an uncertain tax position. All tax expense related to nondeductible interest in 2018 has been recorded in discontinued operations as it is entirely attributed to the anticipated inclusion of entities reported in discontinued operations in FirstEnergy's consolidated federal tax return.
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, 2018, 2017 and 2016:
Excluding the impact of the remeasurement of FES's and FENOC's deferred taxes in 2017 resulting from the Tax Act, FirstEnergy’s effective tax rate on continuing operations was 43.3%. Although FES' and FENOC's operations are presented in discontinued operations, the 2017 remeasurement of deferred taxes remain in continuing operations in accordance with accounting standards for the impact of tax rate changes. Compared to FirstEnergy's effective tax rate on continuing operations in 2018 of 32.4%, the decrease from 2017 is primarily due to the decrease in the corporate federal income tax rate from 35% to 21%. Additionally, in 2018, FirstEnergy’s regulated distribution and transmission subsidiaries began amortizing the net regulatory liability associated with excess deferred taxes, resulting in an income tax benefit that reduced the effective tax rate. The income tax benefit is offset by a corresponding reduction in revenues, resulting from rate orders implemented by various regulatory commissions (see Note 16 "Regulatory Matters," for additional detail). These decreases were partially offset by the impact of the legal and financial separation of FES and FENOC from FirstEnergy in the first quarter of 2018 that officially eroded the ties between FES, FENOC and other FE subsidiaries doing business in West Virginia. As such, FES and FENOC were removed from the West Virginia unitary group when calculating West Virginia state income taxes, resulting in a $126 million charge to income tax expense in continuing operations associated with the remeasurement in state deferred taxes. See Note 3, "Discontinued Operations" for other tax matters relating to the FES Bankruptcy that were recognized in discontinued operations. Accumulated deferred income taxes as of December 31, 2018 and 2017, are as follows:
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, 2018, FirstEnergy's loss carryforwards and AMT credits consisted of $2.4 billion ($493 million, net of tax) of Federal NOL carryforwards that will begin to expire in 2031 and Federal AMT credits of $18 million that have an indefinite carryforward period. The table below summarizes pre-tax NOL carryforwards for state and local income tax purposes of approximately $7.6 billion ($365 million, net of tax) for FirstEnergy, of which approximately $2.1 billion ($100 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. In addition to the valuation allowances on state and local NOLs, FirstEnergy has recorded a reserve against certain state and local property related DTAs (approximately $59 million, net of tax) and a reserve against the estimated nondeductible portion of interest expense, discussed above.
FirstEnergy accounts for uncertainty in income taxes recognized in its financial statements. A recognition threshold and measurement attribute is utilized for financial statement recognition and measurement of tax positions taken or expected to be taken on the tax return. As of December 31, 2018 and 2017, FirstEnergy's total unrecognized income tax benefits were approximately $158 million and $80 million, respectively. The change in unrecognized income tax benefits from the prior year is primarily attributable to a reserve of approximately $27 million for the estimated nondeductible interest under Section 163(j) and $88 million for reserves on the estimated worthless stock deduction. See Note 3, Discontinued Operations, for further discussion. If ultimately recognized in future years, approximately $142 million of unrecognized income tax benefits would impact the effective tax rate. On October 18, 2017, the Supreme Court of Pennsylvania affirmed the Commonwealth Court’s holding that the state’s net loss carryover provision violated the Pennsylvania Uniformity Clause and was unconstitutional. However, the court also opined that the portion of the net loss carryover provision that created the violation may be severed from the statute, enabling the statute to operate as the legislature intended, and on October 30, 2017, the Pennsylvania Governor signed House Bill 542 into law which, among other things, amended Pennsylvania’s limitation on net loss deductions to remove the flat-dollar limitation. On January 4, 2018, the Pennsylvania Supreme Court denied to further hear any arguments related to the matter and, as a result, FirstEnergy withdrew its protective refund claims from the state of Pennsylvania on January 30, 2018. Upon doing so, FirstEnergy reversed a previously recorded unrecognized tax benefit of approximately $45 million in the first quarter of 2018, none of which impacted FirstEnergy’s effective tax rate. As of December 31, 2018, it is reasonably possible that approximately $6 million of unrecognized tax benefits may be resolved during 2019 as a result of settlements with taxing authorities or the statute of limitations expiring, of which $2 million would affect FirstEnergy's effective tax rate. The following table summarizes the changes in unrecognized tax positions for the years ended 2018, 2017 and 2016:
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's recognition of net interest associated with unrecognized tax benefits in 2018, 2017 and 2016, was not material. For the years ended December 31, 2018 and 2017, the cumulative net interest payable recorded by FirstEnergy was not material. FirstEnergy has tax returns that are under review at the audit or appeals level by the IRS and state taxing authorities. FirstEnergy's tax returns for all state jurisdictions are open from 2009-2017. In January 2018, the IRS completed its examination of FirstEnergy's 2016 federal income tax return and issued a Full Acceptance Letter with no changes or adjustments to FirstEnergy's taxable income. Tax year 2017 is currently under review by the IRS. General Taxes General tax expense for the years ended December 31, 2018, 2017 and 2016, recognized in continuing operations is summarized as follows:
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