Capitalization

6 Months Ended

Jun. 30, 2019

Stockholders’ Equity

The changes in stockholders’ equity for the three and six months ended June 30, 2019 and 2018 for FirstEnergy are included in the following tables:



	Series A Convertible Preferred Stock					Common Stock			OPIC			AOCI			Accumulated Deficit			Total Stockholders’ Equity
(In millions)	Shares		Amount			Shares	Amount		OPIC			AOCI			Accumulated Deficit			Total Stockholders’ Equity
Balance, January 1, 2019	0.7		$	71		512	$	51	$	11,530		$	41		$	(4,879	)	$	6,814
Net income															320			320
Other comprehensive loss, net of tax												(5		)				(5		)
Stock-based compensation									7									7
Stock Investment Plan and certain share-based benefit plans						1			1									1
Cash dividends declared on common stock									(202		)							(202		)
Cash dividends declared on preferred stock									(3		)							(3		)
Conversion of Series A Convertible Preferred Stock	(0.5	)	(50		)	18	2		48									—
Balance, March 31, 2019	0.2		$	21		531	$	53	$	11,381		$	36		$	(4,559	)	$	6,932
Net income															$	312		$	312
Other comprehensive loss, net of tax												(5		)				(5		)
Stock-based compensation									9									9
Stock Investment Plan and certain share-based benefit plans						1			21									21
Balance, June 30, 2019	0.2		$	21		532	$	53	$	11,411		$	31		$	(4,247	)	$	7,269



	Series A Convertible Preferred Stock			Common Stock			OPIC			AOCI			Accumulated Deficit			Total Stockholders’ Equity
(In millions)	Shares	Amount		Shares	Amount		OPIC			AOCI			Accumulated Deficit			Total Stockholders’ Equity
Balance, January 1, 2018	—	$	—	445	$	44	$	10,001		$	142		$	(6,262	)	$	3,925
Net income													1,369			1,369
Other comprehensive loss, net of tax										(56		)				(56		)
Stock-based compensation							19									19
Stock Investment Plan and certain share-based benefit plans				2	1		5									6
Cash dividends declared on common stock							(343		)							(343		)
Cash dividends declared on preferred stock							(42		)							(42		)
Stock issuance ⁽¹⁾	1.6	162		30	3		2,297									2,462
Impact of adopting new accounting pronouncements ⁽²⁾													35			35
Balance, March 31, 2018	1.6	$	162	477	$	48	$	11,937		$	86		$	(4,858	)	$	7,375
Net income													$	299		$	299
Other comprehensive loss, net of tax										(13		)				(13		)
Stock-based compensation							19									19
Stock Investment Plan and certain share-based benefit plans				1			19									19
Balance, June 30, 2018	1.6	$	162	478	$	48	$	11,975		$	73		$	(4,559	)	$	7,699

⁽¹⁾The preferred stock included an embedded conversion option at a price that was below the fair value of the common stock on the commitment date. This beneficial conversion feature (BCF), which was approximately $296 million, was recorded to OPIC as well as the amortization of the BCF (deemed dividend of $261 million for the six months ended June 30, 2018) through the period from the issue date to the first allowable conversion

date (July 22, 2018). There is no net impact to OPIC for the three and six months ended June 30, 2018. Please see below for additional information on the issuance.

⁽²⁾ FirstEnergy adopted ASU 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” standard on January 1, 2018, and subsequently recorded a cumulative effect adjustment to retained earnings of $57 million representing unrealized gains on equity securities with FES NDTs that were previously recorded to AOCI. In addition, FirstEnergy adopted ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” and upon adoption, recorded a $22 million cumulative effect adjustment for stranded tax effects, such as pension and OPEB prior service costs and losses on derivative hedges, to retained earnings on January 1, 2018. These amounts are offset in other comprehensive loss and do not have an impact on total stockholders’ equity.

Dividends declared for each share of common stock and as-converted share of preferred stock was $0.38 and $0.72 during the first quarter of 2019 and 2018, respectively. There were no dividends declared during the second quarter of 2019 or 2018.

Preferred Stock

On January 22, 2018, FirstEnergy entered into agreements for the private placement of its equity securities representing an approximately $2.5 billion investment in FE. FE entered into a Preferred Stock Purchase Agreement (the Preferred SPA) for the private placement of 1,616,000 shares of mandatorily convertible preferred stock, designated as the Series A Convertible Preferred Stock, par value $100 per share, representing an investment of nearly $1.62 billion ($162 million of mandatorily convertible preferred stock and $1.46 billion of OPIC). FE also entered into a Common Stock Purchase Agreement for the private placement of 30,120,482 shares of FE’s common stock, par value $0.10 per share, representing an investment of $850 million ($3 million of Common Stock and $847 million of OPIC).

The preferred stock participates in dividends on the common stock on an as-converted basis based on the number of shares of common stock a holder of preferred stock would receive if its shares of preferred stock were converted on the dividend record date at the conversion price in effect at that time. Such dividends are paid at the same time that the dividends on common stock are paid.

Subject to certain exceptions noted below, all shares of preferred stock outstanding on July 22, 2019, were automatically converted. Further, the preferred stock will automatically convert to common stock upon certain events of bankruptcy or liquidation of FE. FE may elect to convert the preferred stock if, at any time, fewer than 323,200 shares of preferred stock are outstanding. However, no shares of preferred stock will be converted prior to January 22, 2020, if such conversion will cause a converting holder to be deemed to beneficially own, together with its affiliates whose holdings would be aggregated with such holder for purposes of Section 13(d) under the Exchange Act, more than 4.9% of the then-outstanding common stock. Furthermore, in no event shall FE issue more than 58,964,222 shares of common stock (the Share Cap) in the aggregate upon conversion of the convertible preferred stock. From and after the time at which the aggregate number of shares of common stock issued upon conversion of the preferred stock equals the Share Cap, each holder electing to convert convertible preferred stock will be entitled to receive a cash payment equal to the market value of the common stock such holder does not receive upon conversion.

The preferred stock includes an embedded conversion option at a price that is below the fair value of the common stock on the commitment date. This beneficial conversion feature, which was approximately $296 million, represents the difference between the fair value per share of the common stock and the conversion price, multiplied by the number of common shares issuable upon conversion. The beneficial conversion feature was amortized as a deemed dividend over the period from the issue date to the first allowable conversion date (July 22, 2018) as a charge to OPIC, since FE is in an accumulated deficit position with no retained earnings to declare a dividend. As noted above, for EPS reporting purposes, this beneficial conversion feature will be reflected in net income attributable to common stockholders as a deemed dividend. The amount amortized for the six months ended June 30, 2018, was $261 million. The BCF was fully amortized as of December 31, 2018.

The preferred stockholders have limited class voting rights related to the creation of additional securities that are senior or equal with the preferred stock, as well as certain reclassifications and amendments that would affect the rights of the preferred stockholders. The preferred stockholders also have the right to approve issuances of securities convertible or exchangeable for common stock, subject to certain exceptions for compensation arrangements and bona fide dividend reinvestment or share purchase plans.

Each share of preferred stock is convertible at the holder’s option into a number of shares of common stock equal to the $1,000 liquidation preference, divided by the conversion price then in effect. As of June 30, 2019, the conversion price in effect was $27.42 per share. The conversion price is subject to anti-dilution adjustments and adjustments for subdivisions and combinations of the common stock, as well as dividends on the common stock paid in common stock and for certain equity issuances below the conversion price then in effect.

During 2018, 911,411 shares of preferred stock were converted into 33,238,910 shares of common stock at the option of the preferred stockholders. Also at the option of the preferred stockholders, 494,767 shares of preferred stock were converted into 18,044,018 shares of common stock in January 2019, resulting in 209,822 shares of preferred stock outstanding and yet to be converted as of June 30, 2019. On July 22, 2019, 28,302 shares of preferred stock automatically converted into 1,032,165 shares of common stock, and 181,520 shares of preferred stock remained unconverted as the holder reached the 4.9% cap as outlined in the terms of the preferred stock. All remaining outstanding shares of preferred stock will be automatically converted on January 22, 2020.