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Leases

9 Months Ended

Sep. 30, 2019

LEASES

FirstEnergy primarily leases vehicles as well as building space, office equipment, and other property and equipment under cancelable and non-cancelable leases. FirstEnergy does not have any material leases in which it is the lessor.

FirstEnergy adopted ASU 2016-02, “Leases (Topic 842)” on January 1, 2019, and elected a number of transitional practical expedients provided within the standard. These included a “package of three” expedients that must be taken together and allowed entities to: (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases. In addition, FirstEnergy elected the option to apply the requirements of the standard in the period of adoption (January 1, 2019) with no restatement of prior periods. Adoption of the standard on January 1, 2019, did not result in a material cumulative effect adjustment upon adoption. FirstEnergy did not evaluate land easements under the new guidance as they were not previously accounted for as leases. FirstEnergy also elected not to separate lease components from non-lease components as non-lease components were not material.

Leases with an initial term of 12 months or less are recognized as lease expense on a straight-line basis over the lease term and not recorded on the balance sheet. Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 40 years, and certain leases include options to terminate. The exercise of lease renewal options is at FirstEnergy’s sole discretion. Renewal options are included within the lease liability if they are reasonably certain based on various factors relative to the contract. Certain leases also include options to purchase the leased property. The depreciable life of leased assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. FirstEnergy’s lease agreements do not contain any material restrictive covenants.

For vehicles leased under master lease agreements, the lessor is guaranteed a residual value up to a stated percentage of the equipment cost at the end of the lease term. As of September 30, 2019, the maximum potential loss for these lease agreements at the end of the lease term is approximately $15 million.

Finance leases for assets used in regulated operations are recognized in FirstEnergy’s Consolidated Statements of Income (Loss) such that amortization of the right-of-use asset and interest on lease liabilities equals the expense allowed for ratemaking purposes. Finance leases for regulated and non-regulated operations are accounted for as if the assets were owned and financed, with associated expense recognized in Interest expense and Provision for depreciation on FirstEnergy’s Consolidated Statements of Income (Loss), while all operating lease expenses are recognized in Other operating expense. The components of lease expense were as follows:



	For the Three Months Ended September 30, 2019
(In millions)	Vehicles		Buildings		Other		Total
Operating lease costs ⁽¹⁾	$	5	$	3	$	3	$	11

Finance lease costs:
Amortization of right-of-use assets	4		—		—		4
Interest on lease liabilities	—		—		—		—
Total finance lease cost	4		—		—		4
Total lease cost	$	9	$	3	$	3	$	15

⁽¹⁾ Includes $2 million of short-term lease costs.



	For the Nine Months Ended September 30, 2019
(In millions)	Vehicles		Buildings		Other		Total
Operating lease costs ⁽¹⁾	$	20	$	6	$	9	$	35

Finance lease costs:
Amortization of right-of-use assets	12		—		1		13
Interest on lease liabilities	2		2		—		4
Total finance lease cost	14		2		1		17
Total lease cost	$	34	$	8	$	10	$	52

⁽¹⁾ Includes $8 million of short-term lease costs.

Supplemental cash flow information related to leases was as follows:



(In millions)	For the Three Months Ended September 30, 2019		For the Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	4	$	19
Operating cash flows from finance leases	1		4
Finance cash flows from finance leases	12		21

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	47	$	73
Finance leases	—		2

Lease terms and discount rates were as follows:



	As of September 30, 2019
Weighted-average remaining lease terms (years)
Operating leases	8.39
Finance leases	4.66

Weighted-average discount rate ⁽¹⁾
Operating leases	4.76	%
Finance leases	3.45	%

⁽¹⁾When an implicit rate is not readily determinable, an incremental borrowing rate is utilized, determining the present value of lease payments. The rate is determined based on expected term and information available at the commencement date.

Supplemental balance sheet information related to leases was as follows:



(In millions)	Financial Statement Line Item	As of September 30, 2019

Assets
Operating lease assets, net of accumulated amortization of $17 million	Deferred charges and other assets	$	200
Finance lease assets, net of accumulated amortization of $91 million	Property, plant and equipment	76
Total leased assets		$	276

Liabilities
Current:
Operating	Other current liabilities	$	34
Finance	Currently payable long-term debt	16

Noncurrent:
Operating	Other noncurrent liabilities	212
Finance	Long-term debt and other long-term obligations	47
Total leased liabilities		$	309

Maturities of lease liabilities as of September 30, 2019, were as follows:



(In millions)	Operating Leases			Finance Leases			Total
2019	$	8		$	12		$	20
2020	42			19			61
2021	40			17			57
2022	39			15			54
2023	35			8			43
2024	30			4			34
Thereafter	108			12			120
Total lease payments ⁽¹⁾	302			87			389
Less imputed interest	(56		)	(24		)	(80		)
Total net present value	$	246		$	63		$	309

⁽¹⁾Operating lease payments for certain leases are offset by sublease receipts of $13 million over 13 years.

As of September 30, 2019, additional operating leases agreements, primarily for vehicles, that have not yet commenced are $15 million. These leases are expected to commence within the next 18 months with lease terms of 3 to 10 years.

The future minimum capital lease payments as of December 31, 2018, as reported in the Annual Report on Form 10-K for the year ended December 31, 2018 under ASC 840 ”Leases” are as follows:



Capital Leases
	(In millions)
2019	$	24
2020	19
2021	16
2022	13
2023	8
Years thereafter	16
Total minimum lease payments	96
Interest portion	(23		)
Present value of net minimum lease payments	73
Less current portion	18
Noncurrent portion	$	55

The future minimum operating lease payments as of December 31, 2018, as reported in the Annual Report on Form 10-K for the year ended December 31, 2018 under ASC 840 ”Leases” are as follows:



Operating Leases
	(In millions)
2019	$	34
2020	36
2021	34
2022	30
2023	28
Years thereafter	127
Total minimum lease payments	$	289

Leases