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Fair Value Measurements

6 Months Ended

Jun. 30, 2022

RECURRING FAIR VALUE MEASUREMENTS

Authoritative accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to Level 1 measurements and the lowest priority to Level 3 measurements. The three levels of the fair value hierarchy and a description of the valuation techniques are as follows:


Level 1	-	Quoted prices for identical instruments in active market.

Level 2	-	Quoted prices for similar instruments in active market.
	-	Quoted prices for identical or similar instruments in markets that are not active.
	-	Model-derived valuations for which all significant inputs are observable market data.

Models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.


Level 3			-			Valuation inputs are unobservable and significant to the fair value measurement.

FirstEnergy produces a long-term power and capacity price forecast annually with periodic updates as market conditions change. When underlying prices are not observable, prices from the long-term price forecast are used to measure fair value.

FTRs are financial instruments that entitle the holder to a stream of revenues (or charges) based on the hourly day-ahead congestion price differences across transmission paths. FTRs are acquired by FirstEnergy in the annual, monthly and long-term PJM auctions and are initially recorded using the auction clearing price less cost. After initial recognition, FTRs’ carrying values are periodically adjusted to fair value using a mark-to-model methodology, which approximates market. The primary inputs into the model, which are generally less observable than objective sources, are the most recent PJM auction clearing prices and the FTRs’ remaining hours. The model calculates the fair value by multiplying the most recent auction clearing price by the remaining FTR hours less the prorated FTR cost. Significant increases or decreases in inputs in isolation may have resulted in a higher or lower fair value measurement.

FirstEnergy primarily applies the market approach for recurring fair value measurements using the best information available. Accordingly, FirstEnergy maximizes the use of observable inputs and minimizes the use of unobservable inputs. There were no changes in valuation methodologies used as of June 30, 2022, from those used as of December 31, 2021. The determination of the fair value measures takes into consideration various factors, including but not limited to, nonperformance risk, counterparty credit risk and the impact of credit enhancements (such as cash deposits, LOCs and priority interests). The impact of these forms of risk was not significant to the fair value measurements.

The following tables set forth the recurring assets and liabilities that are accounted for at fair value by level within the fair value hierarchy:


	June 30, 2022								December 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets	(In millions)


Derivative assets FTRs(1)	$	—	$	—	$	12	$	12	$	—	$	—	$	9	$	9

Equity securities	2		—		—		2		2		—		—		2


U.S. state debt securities	—		263		—		263		—		273		—		273
Cash, cash equivalents and restricted cash(2)	532		—		—		532		1,511		—		—		1,511
Other(3)	—		38		—		38		—		42		—		42
Total assets	$	534	$	301	$	12	$	847	$	1,513	$	315	$	9	$	1,837

Liabilities

Derivative liabilities FTRs(1)	$	—	$	—	$	(5)	$	(5)	$	—	$	—	$	(1)	$	(1)


Total liabilities	$	—	$	—	$	(5)	$	(5)	$	—	$	—	$	(1)	$	(1)

Net assets	$	534	$	301	$	7	$	842	$	1,513	$	315	$	8	$	1,836

(1)Contracts are subject to regulatory accounting treatment and changes in market values do not impact earnings.

(2)Restricted cash of $54 million and $49 million as of June 30, 2022 and December 31, 2021, respectively, primarily relates to cash collected from MP, PE and the Ohio Companies’ customers that is specifically used to service debt of their respective securitization or funding companies.

(3)Primarily consists of short-term investments.

Level 3 Quantitative Information

The following table provides quantitative information for FTRs contracts that are classified as Level 3 in the fair value hierarchy for the period ended June 30, 2022:

Fair Value, Net (In millions)

Valuation
Technique

Significant Input

Range

Weighted Average

Units

FTRs

Model

RTO auction clearing prices

1.40

5.80

$2.90

Dollars/MWH

INVESTMENTS

All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets at cost, which approximates their fair market value. Investments other than cash and cash equivalents include equity securities, AFS debt securities and other investments. FirstEnergy has no debt securities held for trading purposes.

Generally, unrealized gains and losses on equity securities are recognized in income whereas unrealized gains and losses on AFS debt securities are recognized in AOCI. However, the spent nuclear fuel disposal trusts of JCP&L are subject to regulatory accounting with all gains and losses on equity and AFS debt securities offset against regulatory assets.

Spent Nuclear Fuel Disposal Trusts

JCP&L holds debt securities within the spent nuclear fuel disposal trust, which are classified as AFS securities, recognized at fair market value. The trust is intended for funding spent nuclear fuel disposal fees to the United States Department of Energy associated with the previously owned Oyster Creek and TMI-1 nuclear power plants.

The following table summarizes the amortized cost basis, unrealized gains, unrealized losses and fair values of investments held in spent nuclear fuel disposal trusts as of June 30, 2022, and December 31, 2021:


	June 30, 2022(1)								December 31, 2021(2)
	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value		Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
	(In millions)

Debt securities	$	289	$	—	$	(26)	$	263	$	280	$	2	$	(9)	$	273

(1) Excludes short-term cash investments of $6 million.

(2) Excludes short-term cash investments of $11 million.

Proceeds from the sale of investments in AFS debt securities, realized gains and losses on those sales and interest and dividend income for the three and six months ended June 30, 2022 and 2021, were as follows:














	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
	(In millions)
Sale proceeds	$	10	$	8	$	16	$	13
Realized gains	1		—		1		—
Realized losses	(1)		(1)		(2)		(1)

Interest and dividend income	3		2		6		5

Other Investments

Other investments include employee benefit trusts, which are primarily invested in corporate-owned life insurance policies and equity method investments. Other investments were $357 million and $371 million as of June 30, 2022, and December 31, 2021, respectively, and are excluded from the amounts reported above.

For the three months ended June 30, 2022 and 2021, pre-tax income (expense) related to corporate-owned life insurance policies were $(16) million and $6 million, respectively, and $(22) million and $8 million for the six months ended June 30, 2022 and 2021, respectively. Corporate-owned life insurance policies are valued using the cash surrender value and any changes in value during the period are recognized as income or expense.

FEV holds a 33-1/3% equity ownership in Global Holding, the holding company for a joint venture in the Signal Peak mining and coal transportation operations with coal sales primarily focused on international markets. FEV is not the primary beneficiary of the joint venture. FEV's ownership interest is subject to the equity method of accounting. As of June 30, 2022 and December 31, 2021, the carrying value of the equity method investment was $65 million and $59 million, respectively. FEV’s pre-tax equity earnings in Global Holding are included in Corporate/Other for segment reporting and within Miscellaneous income, net on the Consolidated Statements of Income, and were $64 million and $4 million for the three months ended June 30, 2022 and 2021, respectively, and $76 million and $4 million for the six months ended June 30, 2022 and 2021, respectively. During the second quarter of 2022, FEV received cash dividends from Global Holding totaling $70 million, which were classified with Cash from Operating Activities on the Consolidated Statements of Cash Flow.

LONG-TERM DEBT AND OTHER LONG-TERM OBLIGATIONS

All borrowings with initial maturities of less than one year are defined as short-term financial instruments under GAAP and are reported as Short-term borrowings on the Consolidated Balance Sheets at cost. Since these borrowings are short-term in nature, FirstEnergy believes that their costs approximate their fair market value. The following table provides the approximate fair value and related carrying amounts of long-term debt, which excludes finance lease obligations and net unamortized debt issuance costs, unamortized fair value adjustments, premiums and discounts as of June 30, 2022 and December 31, 2021:


	June 30, 2022		December 31, 2021
	(In millions)
Carrying value	$	21,201	$	23,946
Fair value	$	20,048	$	27,043

The fair values of long-term debt and other long-term obligations reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective period. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to those of FirstEnergy. FirstEnergy classified short-term borrowings, long-term debt and other long-term obligations as Level 2 in the fair value hierarchy as of June 30, 2022, and December 31, 2021.

In December 2021, FE provided notice of redemption for all remaining $850 million of its 2023 Notes, which was completed on January 20, 2022, with a make-whole premium of approximately $38 million ($30 million after-tax).

On January 27, 2022, TE instructed its indenture trustee to provide notice of partial redemption for $25 million of TE’s 2.65% Senior Secured Notes, due 2028, for partial redemption which occurred on February 11, 2022.

On February 11, 2022, CEI instructed its indenture trustee to provide notice of redemption for all remaining $150 million of CEI’s 2.77% Senior Notes, Series A, due 2034, for redemption which occurred on March 14, 2022.

On April 15, 2022, WP redeemed $100 million of its 3.34% FMBs that became due.

On April 22, 2022, Penn agreed to sell $150 million of new 3.79% FMBs due December 1, 2032. The sales are expected to settle on November 29, 2022. Proceeds are expected to be used to repay short-term borrowings.

On May 23, 2022, notice of redemption was provided for all remaining $500 million of FE's 2.85% Notes, due July 15, 2022, which was completed on June 22, 2022.

On May 25, 2022, FE commenced an offer to purchase for cash a portion of its 2031 Notes and 2047 Notes, which had $1.5 billion and $1 billion principal amounts outstanding, respectively. Approximately $715 million principal amount of FE’s 2031 Notes and $284 million principal amount of FE’s 2047 Notes were redeemed on June 15, 2022 for approximately $1.1 billion, including a tender premium of approximately $101 million ($80 million after-tax). In addition, FE recognized approximately $7 million ($5 million after-tax) of deferred cash flow hedge losses and $10 million ($8 million after-tax) in other unamortized debt costs and fees associated with the FE debt redemptions.

On June 30, 2022, Penn redeemed $100 million of its 6.09% FMBs that became due.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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