Exhibit 99.1

Energy Harbor Corp. and Subsidiaries

Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

 

TABLE OF CONTENTS

 

		PAGE
FINANCIAL STATEMENTS
Independent Auditor’s Report			1
Consolidated Statements of Operations and Comprehensive Income (Loss)			3
Consolidated Balance Sheets			4
Consolidated Statements of Cash Flows			5
Consolidated Statements of Changes in Stockholders’ Equity			6
Notes to the Consolidated Financial Statements			7

 

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Stockholders of Energy Harbor Corp.

Opinion

We have audited the accompanying consolidated financial statements of Energy Harbor Corp. and subsidiaries (“the Company”), which comprise the consolidated balance sheets as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively “the financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.

UHY-US.com | An independent member of UHY International

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with generally accepted auditing standards, we:

 

•

Exercise professional judgment and maintain professional skepticism throughout the audit.

 

•

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

 

•

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.

 

•

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.

 

•

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

 

Sterling Heights, Michigan

March 6, 2023

 

ENERGY HARBOR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(amounts in millions)

 

		Year Ended December 31,
		2022				2021
STATEMENTS OF INCOME (LOSS)
Revenues		$	2,005			$	2,097
Operating costs
Fuel and purchased power			449				725
Depreciation and amortization			169				103
Other operating costs			1,195				1,148
Operating income			192				121
Other income / (expense)
Nuclear decommissioning trust results			(157	)			51
Other income / (expense)			(123	)			3
Interest expense			(34	)			(14	)
Income (loss) before taxes			(122	)			161
Income tax expense (benefit)			(15	)			17
Net income (loss)		($	107	)		$	144
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)		($	107	)		$	144
Other comprehensive income / (loss)
Pension prior service costs			10				12
Pension actuarial gain			11				4
Unrealized loss on investments			—				(35	)
Other comprehensive (loss)			21				(19	)
Income tax			—				—
Other comprehensive (loss), net of tax			21				(19	)
Comprehensive income (loss)		($	86	)		$	125

See notes to the Consolidated Financial Statements.

 

3

ENERGY HARBOR CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(amounts in millions)

 

		December 31,				December 31,
		2022				2021
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	816			$	1,063
Receivables, net			240				224
Materials and supplies inventory			297				264
Derivatives			614				292
Prepayments and other			58				125
			2,025				1,968
PROPERTY, PLANT AND EQUIPMENT, NET			1,229				1,404
NUCLEAR PLANT DECOMMISSIONING TRUST			1,808				1,966
DEFERRED CHARGES AND OTHER ASSETS
Derivatives			162				182
Other			39				22
			201				204
TOTAL ASSETS		$	5,263			$	5,542
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable			132				96
Derivatives			561				351
Other			211				241
			904				688
NONCURRENT LIABILITIES
Asset retirement obligations			1,910				2,306
Long term debt			431				433
Other noncurrent liabilities			281				319
			2,622				3,058
TOTAL LIABILITIES			3,526				3,746
STOCKHOLDERS’ EQUITY
Common stock, preferred stock and additional-paid-in-capital			2,026				1,999
Cost of shares held in treasury			(683	)			(683	)
Accumulated other comprehensive income (loss)			13				(8	)
Retained earnings			381				488
			1,737				1,796
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,263			$	5,542

See notes to the Consolidated Financial Statements.

 

4

ENERGY HARBOR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in millions)

 

		Year Ended December 31,
		2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		($	107	)		$	144
Adjustments to reconcile net income to cash from operating activities:
Depreciation, amortization and asset retirement obligation accretion			255				170
Loss / (gain) on sale of assets			121				—
Deferred income taxes			(15	)			17
Provision for bad debts			3				1
Unrealized loss / (gain) on derivative transactions			(66	)			20
Net results on nuclear decommissioning trust investments			157				(51	)
Changes in current assets and liabilities:
Receivables, net			(19	)			(73	)
Materials and supplies inventory			(33	)			(43	)
Prepayments and other current assets			12				(22	)
Accounts payable			36				28
Collateral			55				1
Other current liabilities and accruals			(79	)			105
Other deferred charges and assets			12				33
Cash provided from operating activities			332				330
CASH FLOWS FROM INVESTING ACTIVITIES
Capital proceeds			2				—
Capital expenditures			(93	)			(113	)
Disbursements from the sale of fossil assets			(312	)			—
Nuclear fuel purchases			(176	)			(107	)
Purchases of securities in nuclear decommissioning trust			(1,141	)			(616	)
Sale of securities in nuclear decommissioning trust			1,141				616
Cash used for investing activities			(579	)			(220	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of remarketed debt			561				146
Repayment of debt			(561	)			(146	)
Cash provided from financing activities			—				—
Net change in cash and cash equivalents			(247	)			110
Cash and cash equivalents at beginning of the period			1,063				953
Cash and cash equivalents at end of period		$	816			$	1,063
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION
Cash paid for:
Interest		$	21			$	19
Income taxes			—				—

See notes to the Consolidated Financial Statements.

 

5

ENERGY HARBOR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

For the Years Ended December 31, 2022 and 2021

(amounts in millions, except number of shares data)

 

																										Accumulated
		Preferred Stock								Common Stock																Other								Total
		Number of				Par				Number of				Par								Treasury				Comprehensive				Retained				Stockholders’
		Shares				Value				Shares				Value				APIC				Stock				Income (Loss)				Earnings				Equity
Balance at December 31, 2020			1,502				—				80,401,454			$	1			$	1,982			($	683	)		$	11			$	344			$	1,655
Net income			—				—				—				—				—				—				—				144				144
Effects related to pension obligations			—				—				—				—				—				—				16				—				16
Net unrealized loss on available-for-sale securities			—				—				—				—				—				—				(35	)			—				(35	)
Stock based compensation			485				—				323,780				—				16				—				—				—				16
Balance at December 31, 2021			1,987				—				80,725,234			$	1			$	1,998			($	683	)		($	8	)		$	488			$	1,796
Net loss			—				—				—				—				—				—				—				(107	)			(107	)
Effects related to pension obligations			—				—				—				—				—				—				21				—				21
Stock based compensation			485				—				974,127				—				28				—				—				—				28
Balance at December 31, 2022			2,472				—				81,699,361			$	1			$	2,026			($	683	)		$	13			$	381			$	1,738

See notes to the Consolidated Financial Statements.

 

6

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

1. Business, Basis of Presentation and Summary of Accounting Policies

Description of Business

Energy Harbor Corp. (and its consolidated subsidiaries, except as the context may otherwise require, “Energy Harbor,” “we,” “our,” “us,” “EH” or “the Company”) is a privately held energy producer and retailer, headquartered in Akron, Ohio. We serve nearly one million residential, commercial and industrial customers and operate a fleet of nuclear and fossil fuel generators in Ohio, Pennsylvania and West Virginia.

The Company conducts all of its wholesale generation business in the PJM Regional Transmission Organization (“RTO”), which includes Ohio, Pennsylvania and West Virginia, along with a number of other states, and conducts retail operations in those states as well as other states within PJM and the Midcontinent Independent System Operator, Inc. RTO (“MISO”). Through its subsidiaries, Energy Harbor participates in both the generation wholesale and retail markets by selling power and providing energy-related products in the PJM and MISO regions. Our retail business operates through Energy Harbor, LLC (“EH LLC”), which supplies electricity and natural gas to end-use customers through retail arrangements, including retail sales to customers primarily in Ohio, Pennsylvania, Illinois, Michigan, New Jersey and Maryland, and the provision of partial provider of last resort and default service for various utilities in Ohio, Pennsylvania and Maryland.

Exit of Fossil Business

On March 14, 2022, the Company announced its plan to become a 100% carbon free, energy infrastructure company in 2023 with the exit of the fossil business through a sale or deactivation of its fossil power stations as well as the divestiture of other non-core ancillary properties relating to its fossil business.

On May 31, 2022, the Company completed the sale of all the assets and liabilities associated with certain legacy fossil plants. As part of the transaction, the Company received a nominal amount of cash and the buyer assumed all of the asset retirement and environmental obligations associated with those plants. As a result of the completed transaction, the Company recognized a book gain of $55 in the second quarter in other income/(expense) in the statement of income.

In the fourth quarter of 2022, the Company entered into binding agreements to divest its Pleasants and Sammis power facilities and the Hollow Rock landfill (the “Facilities”), which includes the liabilities to deactivate and remediate the Facilities. The transactions each include a net lease of the respective Facility from the buyer to the Company from the closing date through May 31, 2023 (with a short-term extension option applicable to the Pleasants Power Facility), which allow the Company to operate the Facilities for the remainder of its coal supply agreement. The Company completed its sale and lease back of the Pleasants facility in the fourth quarter of 2022, and expects to complete the sale and leaseback of Sammis in the first quarter of 2023. Management determined the Company continues to control the assets at the Pleasants facility through the end of the lease, and as such, the assets are classified as held-and-used until the deactivation date. In accordance with US GAAP, the transaction was recorded as a financing transaction and assets were not derecognized in 2022. As a result of the completed sale and leaseback of the Pleasants facility, the Company recorded a loss of $28 in the fourth quarter in other income / (expense) in the statement of income.

 

 

7

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Additionally in the fourth quarter of 2022, the Company completed the sale to divest its Little Blue Run and Hatfield landfills, which includes the buyer assuming all liabilities to deactivate and remediate the landfills. As a result of the sale of these landfills, the Company recorded a loss of $149 in the fourth quarter in other income / (expense) in the statement of income.

With the executed sales and remaining binding agreement to sell Sammis and Hollow Rock, the Company has consummated, or has entered into binding agreements to consummate, the divestiture of its targeted legacy properties as part of its transition to a 100% carbon free company.

The Company assessed whether to report the Fossil business as a discontinued operation in the fourth quarter, separate from the results of continuing operations, in the consolidated financial statements. To be recognized as discontinued operations the business must meet the held-for-sale criterion. Given the facts and circumstances surrounding the sale and leaseback of Pleasants as of the end of the year, and anticipated sale and leaseback of Sammis in the first quarter of 2023, the completed sale of Pleasants was classified as a financing transaction as control was not obtained by the purchaser. As such, Management determined the assets fail to meet the held-for-sale criteria and instead are classified as held-and-used until deactivation, meaning the fossil business is not reported as a discontinued operation in 2022.

Basis of Presentation

The consolidated financial statements (the “financial statements”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All intercompany items and transactions have been eliminated in consolidation. All dollar amounts in the consolidated financial statements as well as tables in the notes thereto are stated in millions of U.S. dollars unless otherwise indicated.

Prior Period Financial Information

In the second quarter of 2022, the Company updated its financial statement presentation to reclassify a portion of settled derivative transactions from revenue to purchased power on the statement of income (loss) to better represent the economics of the transactions. Prior periods have been updated to conform to the current presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The reported results of operations are not necessarily indicative of results of operations for any future period. We have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash in banks, and temporary investments purchased with remaining maturities of three months or less. The Company maintains cash in bank accounts that may exceed the Federal Deposit Insurance Corporation (“FDIC”) limits and recognizes that this is a normal business risk.

 

8

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Credit Losses

Trade receivables are reported in the balance sheet net of an allowance for credit losses. The Company accrues an allowance for current expected credit losses based on estimates of uncollectible revenues by analyzing accounts receivable aging, historical collections and delinquencies, and other customer and economic factors, as appropriate.

The following table, which is presented in thousands versus millions, provides activity in the allowance for credit losses account for the twelve months ended December 31, 2022 and 2021.

 

 

		Year Ended December 31,
(In thousands)		2022				2021
Balance at beginning of period		$	1,381			$	1,968
Provision for credit losses			2,543				1,353
Write-offs			(2,358	)			(2,084	)
Recoveries			327				144
Balance at end of period		$	1,893			$	1,381

Materials and Supplies Inventory

Materials and supplies inventory includes fuel inventory and the distribution, transmission and generation plant materials, net of reserve for excess and obsolete inventory. Materials are generally charged to inventory at weighted average cost when purchased and expensed or capitalized, as appropriate, when used or installed. Fuel stock and natural gas in storage are generally reported at the lower of cost or market when purchased (calculated on a weighted average basis) or net realizable and recorded to fuel expense when consumed.

Nuclear Fuel

Nuclear fuel is capitalized and reported as a component of our property, plant and equipment in our consolidated balance sheets. Amortization of nuclear fuel is calculated on the units-of-production method and is reported as a component of fuel and purchased power costs in our consolidated statements of income and comprehensive income.

Property, Plant and Equipment

Property, plant and equipment reflects original cost, including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs incurred to place the assets in service. The costs of normal maintenance, repairs and minor replacements are expensed as incurred. Energy Harbor recognizes liabilities for planned major maintenance projects as they are incurred.

Depreciation of our property, plant and equipment (except for nuclear fuel) is calculated on a straight-line basis over the estimated lives based on management’s estimates of the assets’ economic useful lives.

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.

 

9

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Investments other than cash and cash equivalents include equity securities and available-for-sale (“AFS”) debt securities held within the Nuclear Decommissioning Trust (“NDT”). Energy Harbor has no debt securities held for trading purposes.

For AFS debt securities, unrealized gains are recognized in accumulated other comprehensive income (“AOCI”) and losses are recognized in AOCI to the extent there are sufficient unrealized gains to absorb the loss. Otherwise, unrealized losses on AFS debt securities are recognized in income.

Revenue Recognition

The Company accounts for revenues from contracts with customers under ASC 606, “Revenue from Contracts with Customers.” Other non-customer revenues are derived from byproducts and derivative financial instruments and are not revenues from contracts with customers; such revenues are accounted for under other applicable U.S. GAAP guidance.

Refer to Note 3, Revenues, for additional information.

Income Taxes

The Company records deferred income taxes for the tax effect of differences between book and tax bases of assets and liabilities, as well as differences relating to the timing of recognition of income and expenses. Deferred income taxes reflect the available net operating losses and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including past earnings history, expected future earnings, the character and jurisdiction of such earnings, reversing taxable temporary differences, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of its deferred tax assets, carryback and carryforward periods and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The Company assesses the realizability of deferred tax assets and records valuation allowances when it is more likely than not (a likelihood of more than 50 percent) that a deferred tax asset will not be realized.

The Company recognizes tax benefits for uncertain tax positions when it is concluded that the tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. The benefit, if any, is measured as the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. Tax positions failing to qualify for initial recognition are subsequently recognized when they meet the more likely than not standard, upon resolution through negotiation or litigation with the taxing authority or on expiration of the statute of limitations.

The effective tax rate for the years ended December 31, 2022 and 2021 was 12% and 10%, respectively. Refer to Note 8, Income Taxes, for additional information.

Derivative Financial Instruments and Mark-to-Market Accounting

Energy Harbor is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity, natural gas, coal, nuclear fuel and energy delivery. To manage the volatility

 

10

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

related to these exposures, Energy Harbor’s senior management has designed and implemented risk management programs and oversees compliance with corporate risk management policies and established risk management practice. The Company uses a variety of derivative instruments to manage commodity price risk. If the instrument meets the definition of a derivative under accounting standards related to derivative instruments and hedging activities, changes in the fair value of the derivative are recognized in net income as unrealized gains and losses. This recognition is referred to as mark-to-market accounting. Accounting standards related to derivative instruments and hedging activities allow for normal purchase or sale elections and hedge accounting designations, which generally eliminate or defer the requirement for mark-to-market recognition in net income and thus reduce the volatility of net income that can result from fluctuations in fair values. Normal purchases and sales are contracts that provide for physical delivery of quantities expected to be used or sold over a reasonable period in the normal course of business and are not subject to mark-to-market accounting if the normal purchase or sale election is made. Accounting standards also permit an entity to designate certain qualifying derivative contracts in a hedge accounting relationship, whereby changes in fair value are not recognized immediately in earnings. Energy Harbor does not have derivative instruments with hedge accounting designations.

Refer to Note 4, Fair Value Measurements, for additional information on the Company’s valuation techniques.

The fair values of our unsettled derivative instruments under mark-to-market accounting are reported in the consolidated balance sheets as derivative contractual assets or liabilities. We report derivative assets and liabilities in the consolidated balance sheet without taking into consideration netting arrangements we have with counterparties. When derivative instruments are settled and realized gains and losses are recorded, the previously recorded unrealized gains and losses and derivative assets and liabilities are reversed. Unrealized gains and losses arising from changes in the fair value of these derivative instruments, as well as realized gains and losses upon settlement of the instruments, are reported in the consolidated statements of income and comprehensive income in revenues, purchased power costs and other operating costs.

Refer to Note 9, Derivative Instruments, for additional information.

Fair Value Measurements

The carrying amount of cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value because of the short-term maturity of these instruments. Other balance sheet accounts are carried at fair value based on the fair value techniques associated with those instruments. 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 Energy Harbor and the difference between carrying value and fair value is not material.

See Note 4, Fair Value Measurements, for a further discussion of fair value of financial instruments.

 

11

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Asset Retirement Obligations

Energy Harbor recognizes an Asset Retirement Obligation (“ARO”) for the future decommissioning of its nuclear and fossil power plants and future remediation of other environmental liabilities associated with all of its long-lived assets. The ARO liability represents an estimate of the fair value of Energy Harbor’s current obligation related to decommissioning and the retirement or remediation of environmental liabilities of other assets. A fair value measurement inherently involves uncertainty in the amount and timing of settlement of the liability. Energy Harbor uses an expected cash flow approach to measure the fair value of the decommissioning and environmental remediation ARO, considering the expected timing of settlement of the ARO based on the expected economic useful life of the plants (including the likelihood that the facilities will be deactivated before the end of their estimated useful lives). The fair value of an ARO is recognized in the period in which it is incurred. Over time, the liability is accreted for the change in present value.

The cash outflows for all the Nuclear plants were updated in the fourth quarter of 2022 based on new decommissioning cost studies performed by a third-party engineering firm. Changes in the timing or estimated future cash flows result in an adjustment to the carrying amount of the ARO.

Upward revisions (that only include the incremental cash flows over the initial projections) are discounted using the credit-adjusted risk-free rate in effect at the time of the change in estimate and also consider the market risk premium that would be appropriate at that time. The incremental cash flows associated with upward revisions are considered new AROs (or a new layer) and would be measured at fair value under the guidance. The prior cash flows (layer) that are unchanged are not a new measurement.

Downward revisions in the amount of undiscounted estimated cash flows are discounted using the credit-adjusted risk-free rate that existed when the original liability was recognized. A downward revision does not take into account current market interest rates and credit spread and, therefore, is not a fair value measurement subject to the guidance in ASC 820.

As a result of the new decommissioning cost estimates, the Company reduced its ARO liability by approximately $218 in the fourth quarter of 2022.

Refer to Note 10, Asset Retirement Obligations, for additional information.

Pension

Beginning on the Emergence Date, Energy Harbor has provided defined pension benefits to certain of its bargaining unit employees. The Company made no contributions to the pension fund in 2022 or 2021.

Refer to Note 11, Pension, for additional information.

Stock-Based Compensation

Energy Harbor provides stock-based compensation in the form of restricted stock units and restricted stock grants to certain employees. The Company measures stock-based compensation cost based on the estimated fair value of the award on the grant date and recognizes the expense over the requisite service period, typically on a straight-line basis. The fair value of equity awards is recognized as expense in the same period and in the same manner as if Energy Harbor had paid cash for the goods or services. Forfeitures are recognized as they occur.

 

12

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Refer to Note 12, Stock-Based Compensation, for additional information.

Leases

The Company applies the guidance in ASC 842 to individual leases of assets. The Company determines whether an arrangement is a lease at contract inception by determining if the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration

The Company’s classes of assets include real estate and equipment. All leased assets have been classified as operating and finance lease arrangements.

Operating and Finance lease balances are included in lease right-of-use (“ROU”) assets (Operating and Finance), other current liabilities, and lease liabilities (Operating and Finance) in the Company’s consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any prepaid lease payments made, less lease incentives. The ROU asset is subject to testing for impairment if there is an indicator for impairment, as is the case for owned assets. The amortization of operating lease ROU assets and the accretion of operating lease liabilities are reported together as fixed lease expense. The fixed lease expense is recognized on a straight-line basis over the life of the lease.

The Company’s lease terms include the impact of options to extend or terminate the lease when it is reasonably certain that the options will be exercised or not exercised, as appropriate.

When the rate implicit in the lease is not readily determinable, a lessee that is not a public business entity is permitted to use a risk-free discount rate, instead of its incremental borrowing rate, as an accounting policy election by class of underlying asset. The risk-free rate is determined using a period comparable to that of lease term. Energy Harbor has elected to use risk-free rate (US Treasury rate) as an input to IBR rate.

The Company has elected the practical expedient within ASC 842 not to combine separate lease and non-lease components within lease transactions for all classes of assets. Additionally, the Company has elected the short-term lease exception for all classes of assets and does not apply the recognition requirements in ASC 842 for leases of 12 months or less and recognizes lease payments for short term leases as expense either straight-line over the lease term or as incurred, depending on whether the lease payments are fixed or variable.

Refer to Note 7, Leases, for additional information.

 

13

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Recently Issued Pronouncements

In February 2016, the FASB established ASC Topic 842 (“ASC 842”), Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. ASC 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU No. 2018-20, Narrow-Scope Improvements for Lessors; ASU No. 2019-01, Codification Improvements; ASU No. 2019-10, Leases (Topic 842): Effective Date. ASC 842 establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

ASC 842 is effective for the Company on January 1, 2022, with early adoption permitted. The Company elected to adopt ASC 842 on January 1, 2022, using the alternative transition method provided by ASC 842.

Under the alternative transition method, the effects of initially applying the new guidance are recognized as a cumulative-effect adjustment to retained earnings at the date of initial application, which is January 1, 2022, and prior periods are not restated.

As part of transitioning to ASC 842, the Company has elected to apply the package of transition practical expedients within the new guidance. As required by the new standard, these expedients have been elected as a package, and consistently applied across the Company’s lease portfolio. Given this election, the Company need not reassess:

 

•

whether any expired or existing contracts are or contain leases

 

•

the lease classification for any expired or existing leases

 

•

treatment of initial direct costs relating to any existing leases

As a result of adopting ASC 842 and election of the transition practical expedients, the Company recognized ROU assets and lease liabilities for those leases classified as operating leases under ASC 840 that continued to be classified as operating leases under ASC 842 at the date of initial application. Leases classified as capital under ASC 840 are classified as finance under ASC 842. As of the date of transition to ASC 842, the Company has only one capital lease under ASC 840.

In applying the alternative modified retrospective transition method, the Company measured lease liabilities at the present value of the sum of remaining minimum lease payments. Further, the Company has elected to exclude fixed executory costs as a part of minimum lease payments. The Company’s operating lease liabilities have been measured using the Company’s risk-free rates as of January 1, 2022 (the date of initial application). Additionally, the Company’s operating lease ROU assets have been measured as the initial measurement of applicable lease liabilities adjusted for any unamortized initial direct costs, prepaid/accrued rent, unamortized lease incentives, and any ASC 420 liabilities.

Adoption of ASC 842 effective beginning January 1, 2022, and application of the alternative modified retrospective transition method resulted in:

 

14

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

(1) assets increased by $11, primarily representing recognition of right-of-use assets for operating leases;

(2) liabilities increased by $11, primarily representing recognition of lease liabilities for operating leases;

Adoption of this standard did not have a material impact on the Company’s consolidated income statement, consolidated statement of changes in equity and consolidated statement of cash flows.

Refer Note 7, Leases, for additional information.

2. Capitalization

Equity

Common Stock

As of December 31, 2022, and 2021, there were 500 million shares of common stock authorized for issuance, each with a par value of $0.001 per share. There were 81,699,361 and 80,725,234 shares issued and outstanding as of December 31, 2022 and 2021, respectively. All shares of common stock have the same voting rights.

The Company has paid no dividends for the twelve months ended December 31, 2022 and 2021.

Preferred Stock

In connection with the emergence from bankruptcy, the Company issued to certain employees approximately 3,000 shares (in the aggregate) of Series A preferred stock and Series B preferred stock, each with a par value of $0.001 per share. Each share of preferred stock is subject to vesting based upon time and equity return thresholds and vested shares are redeemable and convertible under certain circumstances, with each vested share being currently convertible into 1,000 shares of Company common stock. As of December 31, 2022, and 2021, approximately 2,470 and 1,990 shares of such preferred stock were vested in accordance with their terms, respectively.

The Company has paid no dividends in the years ended December 31, 2022, and 2021.

Treasury Stock

The Board of Directors (the “Board”) of the Company previously authorized management to repurchase up to $800 of the Company’s outstanding common stock in a program that ended late 2020. As of December 31, 2022, and 2021, approximately 20.4 million shares had been repurchased at a total cost of $683 pursuant to the authorization.

Accumulated Other Comprehensive Income

As of December 31, 2022, and 2021, the effects related to pension obligations recognized in accumulated other comprehensive income were $13 and $(8), respectively. In the year ended December 31, 2022, we recognized $21 in other comprehensive income, including immediate recognition of $11 of unamortized prior service costs and $9 of net unrecognized gains / losses due to plan changes, in addition to the amortization of prior service costs. As of December 31, 2022, and 2021, the net unrealized gains in our NDT recorded in accumulated other comprehensive income were zero for both years. Tax effects are released from accumulated other comprehensive income using either the specific identification approach

 

15

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

or the portfolio approach based on the nature of the underlying item. The Company assesses the realizability of deferred tax assets and records valuation allowances related to unrealized gains and losses on available for sale securities held in the NDT and other deductible temporary differences when it is more likely than not that a deferred tax asset will not be realized. As of December 31, 2022, and 2021, based on the available evidence, the Company has effectively presented unrealized gains and losses on available for sale securities as net of tax in accumulated other comprehensive income.

Debt

As of December 31, 2022, and 2021, the Company had the following outstanding debt:

 

		Interest Rate				December 31, 2022				December 31, 2021
Energy Harbor Generation LLC (EHG) secured notes			3.375	%		$	100			$	100
			3.750	%			46				46
Energy Harbor Nuclear Generation LLC (EHNG) secured notes			4.750	%			285				—
			4.375	%			—				285
Total value of oustanding secured notes						$	431			$	431
Fresh start fair value adjustment							—				2
Total value on consolidated balance sheets						$	431			$	433

Interest on EHG and EHNG notes is paid semi-annually with the specific dates depending on the debt issuance.

The EHG and EHNG notes are secured by first mortgage bonds issued by EHG and EHNG, as applicable, which are in turn secured by a first lien security interest on substantially all of the applicable operating subsidiaries’ property, plant, and equipment used in the generation and production of electricity. Energy Harbor Corp., the holding company, has provided an unsecured guarantee of the secured notes. These secured notes are considered long-term in nature and are presented as long-term debt on the consolidated balance sheets. Maturity dates extend to 2047.

On April 1, 2021, EHG completed the mandatory repurchase of $46 million aggregate principal amount of its secured notes that had an annual interest rate of 4.25%. In connection with the repurchase, the bonds were converted from a five-year rate mode to a long-term rate mode ending on their maturity date of October 1, 2047 and the interest rate was set at 3.75%. Following the conversion to a long-term rate mode, the bonds were remarketed and sold to funds affiliated with a stockholder of the Company. Except for the reduction in the interest rate, terms of the bonds were not modified, including the maturity date.

On September 15, 2021, EHG completed the mandatory repurchase of $100 million aggregate principal amount of its secured notes that had an annual interest rate of 4.25%. In connection with the repurchase, the bonds were converted from a five-year rate mode to a long-term rate mode ending on their maturity date of August 1, 2029 and the interest rate was set at 3.375%. Following the conversion to a long-term rate mode, the bonds were remarketed and sold to funds affiliated with a stockholder of the Company. Except for the reduction in the interest rate, terms of the bonds were not modified, including the maturity date.

On May 2, 2022, EH Corp entered into a note a purchase agreement with respect to the issuance and sale of secured notes in the amount of $276 with an annual interest rate of 7%, original issue discount of 3% and a maturity date of May 2, 2023. This note and associated accrued interest were repaid in full on July 15, 2022.

 

16

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

On May 17, 2022, Energy Harbor Nuclear Generation LLC entered into purchase agreements with various funds affiliated with a stockholder of the Company with respect to the remarketing of $285 aggregate principal amount of its secured notes that had an annual interest rate of 4.375%. In connection with such agreements, the bonds were converted from a five-year rate mode to a long-term rate mode ending on their maturity date of June 1, 2033 (or in the case of one series of secured notes on July 1, 2033). Upon the closing of the remarketing of these secured notes, the interest rate for each series were set at 4.75%. Except for the modification in the interest rate and the mandatory repurchase date described above, the terms of the bonds were not modified, including the maturity date.

3. Revenues

The following table represents a disaggregation of revenue from contracts with customers by type of service for the twelve months ended December 31, 2022 and 2021:

 

		Year Ended December 31,
		2022				2021
Contract sales		$	1,997			$	1,692
Wholesale sales			778				554
Financially settled sales			(803	)			(184	)
Transmission sales			25				25
Total customer revenues			1,997				2,087
Other non-customer revenues			8				10
Total revenues		$	2,005			$	2,097

Energy Harbor primarily provides energy and energy related services, including the generation and sale of electricity through retail and wholesale competitive supply arrangements. Contract sales consist of competitive sales to large commercial and industrial customers, products delivered to electric distribution companies to provide to their end-use non-shopping customers, governmental aggregation sales, municipality sales, bilateral sales, mass market and sales to small commercial and industrial customers. Wholesale sales consist of generation and capacity sales solely to PJM Interconnection L.L.C. (“PJM”). Financially settled sales with third parties are sell side hedging transactions settled in the period. Transmission sales are derived from ancillary services, which help balance the transmission system. Other non-customer revenues are derived from byproducts and derivatives and are not revenues from contracts with customers and are accounted for under other applicable U.S. GAAP guidance.

Electricity revenues are recognized over time as power is delivered to the customer, and the customers consume the electricity immediately as delivery occurs. Capacity revenues resulting from plants standing ready to produce electricity are recognized ratably over the PJM planning year at prices cleared in the annual base residual auction and incremental auctions.

 

17

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

The power produced at our generation plants is sold into the PJM market and we may also purchase power from PJM and other regional transmission organizations (“RTOs”) to supplement power supplied to customers. Sales of energy into the PJM spot market (wholesale sales) are accounted for as we deliver energy into the market, at which point pricing and quantities are known. Generally, these power sales from generation and purchases to serve load are netted hourly and reported as either revenues or purchased power on the consolidated statements of income and comprehensive income, based on whether Energy Harbor was a net seller or buyer each hour. Capacity purchases and sales through PJM Reliability Pricing Model base residual auctions are reported within revenues on the consolidated statements of income and comprehensive income. Certain capacity income (bonuses) and charges (penalties) related to the availability of units that have cleared in auctions are unknown and not recorded in revenue until the over or under performance of the units occurs.

The majority of Energy Harbor’s contract sales are full requirements contracts in that the quantity of energy purchased is not stipulated in the contract but based on the needs of the customer. The volume variability within these types of contracts is resolved and accounted for as purchased power (netted with wholesale sales) that are triggered as the customer uses power. Energy Harbor may have contract sales that include energy as well as other services such as renewable energy requested by the customer, ancillary services and/or capacity. We have analyzed these contracts and determined, with the exception of energy sales that include renewable power, that these contracts do not have multiple performance obligations that are capable of being distinct within the context of the contract and therefore are not separable. Providing renewable power to customers occurs over time in conjunction with the delivery of electricity resulting in no difference in the timing of revenue recognition.

Energy Harbor follows the accrual method of accounting for revenues, recognizing revenue for electricity that has been delivered to customers but not yet billed through the end of the accounting period. The determination of electricity sales to individual customers is based on meter readings, which occur on a systematic basis throughout each month. At the end of each month, electricity delivered to customers since the last meter reading is estimated and a corresponding accrual for unbilled sales is recognized. The determination of unbilled sales and revenues requires management to make estimates regarding electricity available for retail load, demand by customer class, applicable billing demands, weather-related impacts, number of days unbilled and tariff rates in effect within each customer class. Customer payments are generally due within 30 days.

4. Fair Value Measurements

Certain assets and liabilities are required to be presented at fair value on the consolidated balance sheets. The Company uses several valuation techniques to measure the fair value of assets and liabilities required to be presented at fair value. We categorize our assets and liabilities recorded at fair value using the following fair value hierarchy:

Level 1 valuations use quoted prices for identical instruments in active markets.

Level 2 valuations use quoted prices for similar instruments in active markets and markets that are not active, as well as model-derived valuations using inputs from observable market data.

Level 3 valuations use unobservable inputs, which are only used to the extent observable inputs are unavailable. In these situations, little, if any, market activity for the asset or liability is available, requiring management to utilize the most relevant market information available as well as internally developed inputs and methods. As of December 31, 2022, and 2021, there were no assets or liabilities recorded at fair value using Level 3 valuation techniques.

 

18

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

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.

Energy Harbor primarily applies the market approach for recurring fair value measurements using the best information available. Accordingly, Energy Harbor maximizes the use of observable inputs and minimizes the use of unobservable inputs. 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, letter of credit 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 as of December 31, 2022 and 2021, respectively:

 

		December 31, 2022
		Level 1				Level 2				Level 3				Total
Assets
Nuclear decommissioning trusts:
Short-term cash investments		$	80				—				—			$	80
Equity securities (1)			560				—				—				560
Corporate debt securities			—			$	848				—				848
Foreign government debt securities			—				39				—				39
U.S. government debt securities			—				202				—				202
U.S. state debt securities			—				14				—				14
Mortgage-backed securities			—				14				—				14
Derivative assets – commodity contracts			—				776				—				776
Other (2)			764				—				—				764
Total assets			1,404				1,893				—				3,297
Liabilities
Derivative liabilities – commodity contracts			—				(722	)			—				(722	)
Total liabilities			—				(722	)			—				(722	)
Net assets (3)		$	1,404			$	1,171				—			$	2,575

 

(1)	NDT funds hold equity portfolios whose performance is benchmarked against the S&P 500 Low Volatility High Dividend Index, S&P 500 Index, MSCI World Index and MSCI AC World IMI Index.

(2)	Primarily consists of short-term cash investments.

(3)	Excludes $53 million of income tax receivable and ($2) million of other receivables, payables, and accrued income associated with financial instruments reflected within the fair value table.

 

19

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

		December 31, 2021
		Level 1				Level 2				Level 3				Total
Assets
Nuclear decommissioning trusts:
Short-term cash investments		$	318				—				—			$	318
Equity securities (1)			162				—				—				162
Corporate debt securities			—			$	1,194				—				1,194
Foreign government debt securities			—				61				—				61
U.S. government debt securities			—				177				—				177
U.S. state debt securities			—				19				—				19
Mortgage-backed securities			—				15				—				15
Derivative assets – commodity contracts			—				474				—				474
Other (2)			731				—				—				731
Total assets			1,211				1,940				—				3,151
Liabilities
Derivative liabilities – commodity contracts			—				(486	)			—				(486	)
Total liabilities			—				(486	)			—				(486	)
Net assets (3)		$	1,211			$	1,454				—			$	2,665

 

(1)	NDT funds hold equity portfolios whose performance is benchmarked against the Standard & Poor’s Rating Service (“S&P”) 500 Low Volatility High Dividend Index, S&P 500 Index, MSCI World Index and MSCI AC World IMI Index.

(2)	Primarily consists of short-term cash investments.

(3)	Excludes $17 of income tax receivable $2 of receivables, payables, taxes and accrued income associated with investments reflected within the fair value table

The following table summarizes the amortized cost basis, unrealized gains, unrealized losses and fair values of investments held in NDTs as of December 31, 2022 and 2021, respectively. For available-for-sale (“AFS”) debt securities, unrealized gains are recognized in AOCI and losses are recognized in AOCI to the extent there are sufficient unrealized gains to absorb the loss. Otherwise, unrealized losses on AFS debt securities are recognized in income:

 

		December 31, 2022
		Cost Basis				Unrealized Gains				Unrealized Losses				Fair Value
Equity securities		$	508			$	62			($	10	)		$	560
Debt securities		$	1,113			$	15			($	11	)		$	1,117
		December 31, 2021
		Cost Basis				Unrealized Gains				Unrealized Losses				Fair Value
Equity securities		$	72			$	90				—			$	162
Debt securities		$	1,421			$	49			($	4	)		$	1,466

 

20

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Proceeds from the sale of investments in equity and AFS debt securities, realized gains and losses on those sales, other-than-temporary-impairment (“OTTI”) and interest and dividend income for the twelve months ended December 31, 2022 and 2021 were as follows:

 

		Year Ended December 31,
		2022				2021
Sale proceeds		$	1,140			($	617	)
Realized gains		$	45			$	84
Realized losses		($	59	)		($	72	)
OTTI		($	166	)		($	15	)
Interest and dividend income		$	60			$	52

 

5.	Materials and Supplies Inventory

The following is a summary of materials and supplies inventory by classification as of:

 

		December 31, 2022				December 31, 2021
Plant materials and operating supplies		$	202			$	172
Renewable energy credits			68				50
Fossil fuels			25				41
Natural gas			2				1
Total materials and supplies inventory		$	297			$	264

 

6.	Property, Plant and Equipment

The following is a summary of property, plant and equipment by classification as of:

 

		December 31, 2022				December 31, 2021
Personal property		$	1,165			$	1,303
Nuclear fuel			514				338
Property, plant and equipment, gross			1,679				1,641
Accumulated depreciation & amortization			(450	)			(237	)
Property, plant and equipment, net		$	1,229			$	1,404

Depreciation and amortization expense included in the consolidated statements of income and comprehensive income for the year ended December 31, 2022 and 2021 was, $213 and $129, respectively.

 

21

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

7.

Leases

Reconciliation to statement of financial position

Supplemental statement of financial position information related to leases as of the year ended December 31, 2022 is as follows:

 

		December 31,
		2022
Right-of-use asset
Operating		$	9
Finance			1
Total right-of-use assets		$	10
Lease liability
Operating lease
Current		$	2
Non-current			8
Finance lease
Current			—
Non-current			—
Total lease liabilities		$	10

Lease cost and reconciliation to income statement

Lease costs incurred by lease type, and/or type of payment for the annual period ending December 31, 2022 are as follows:

 

Lease cost		December 31, 2022
Finance lease cost
Amortization of right-of-use assets		$	1
Interest on lease liabilities			—
Operating lease cost			2
Short-term lease cost			5
Total lease cost		$	8

 

22

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Other supplemental lease disclosures

Other supplemental quantitative disclosures as of the year ended December 31, 2022 are as follows:

 

		December 31,
		2022
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases		$	2
Right-of-use assets obtained in exchange for new finance lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities			11
Weighted-average remaining lease term:
Finance leases			4
Operating leases			8
Weighted-average discount rate:
Finance leases			6.7	%
Operating leases			0.4	%

Undiscounted lease commitments

Estimated undiscounted future lease payments under non-cancellable operating leases, along with a reconciliation of the undiscounted cash flows to operating liabilities, as of December 31, 2022 are as follows:

 

		Operating lease
		liabilities
Lease Maturity
2023		$	2
2024			1
2025			1
2026			1
2027			1
Thereafter			3
Total undiscounted future cash flows		$	9
Less: Imputed Interest			—
Present value of future cash flows		$	9
Presentation on statement of financial position
Current		$	1
Non-current		$	8

As of the reporting date, there are no such leases which have not yet commenced but create significant rights and obligations.

 

23

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

8.	Income Taxes

Energy Harbor 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. Deferred income tax liabilities related to temporary tax and accounting basis differences and deferred income tax assets related to 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.

The components of the provision for income taxes for the year ended December 31, 2022 and 2021 are as follows:

 

		Year Ended December 31,
		2022				2021
Current:
Federal			—				—
State		($	2	)			—
Deferred:
Federal			(13	)		$	17
State			—				—
Total tax expense		($	15	)		$	17

The provision for income taxes differs from the amount that would result from applying the federal statutory rate of 21% to income before income taxes primarily due to return-to-provision adjustment, state income taxes, net of federal impact and the federal income tax impact of the valuation allowances offsetting the other tax expenses generated during the year.

As of December 31, 2022, and 2021, the deferred tax liabilities are $7 and $19, respectively, and are recorded as other noncurrent liabilities on the consolidated balance sheet. The temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2022 and 2021 include basis differences in asset retirement obligations; nuclear decommissioning funds; non-deductible reserves and allowances; property plant and equipment and nuclear fuel, principally due to differences in depreciation; and net operating loss carryforwards.

The Company assesses the realizability of deferred tax assets and records valuation allowances when it is more likely than not (a likelihood of more than 50 percent) that a deferred tax asset will not be realized. As of December 31, 2022, and 2021, the Company has recorded valuation allowances over certain deferred tax assets equal to $455 and $455, respectively. This conclusion is based on a lack of sufficient periods of profitability following bankruptcy emergence and will be reassessed each year going forward. As a result, there is no change in valuation allowance as of December 31, 2022.

As of December 31, 2022, and 2021, the Company had US federal net operating losses (“NOLs”) equal to $557 and $164, respectively. $65 of the $557 expires between 2032 and 2037, and losses arising in taxable years beginning after December 31, 2020 have an indefinite carryforward period and are limited to 80% of the excess (if any) of the taxable income. As of December 31, 2022, and 2021, the Company had US state and local NOLs of $5,816 and $5,487, respectively, which will begin to expire in 2025.

 

24

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Energy Harbor 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. Energy Harbor includes net interest and penalties in the provision for income taxes. As of December 31, 2022, and 2021, the Company has recorded an uncertain tax liability of $2 and $2 associated with its state and local NOL carryforward, respectively. As of December 31, 2022, the Company does not anticipate any of the uncertain tax liability to reverse in the next twelve months. Energy Harbor’s recognition of net interest associated with unrecognized tax benefits in 2022 and 2021 was not material. The Company is not subject to examination by US Federal or various US State jurisdictions for years prior to 2019.

 

9.	Derivative Instruments

Energy Harbor is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity, natural gas, coal and energy delivery. To manage the volatility related to these exposures, Energy Harbor’s senior management has designed and implemented risk management programs and oversees compliance with corporate risk management policies and established risk management practice.

We engage in economic hedging activities to manage our exposure related to commodity price fluctuations through the use of financial and physical derivative contracts for commodities. These derivatives are accounted for in accordance with U.S. GAAP, which requires that we record all derivatives on the balance sheet at fair value with changes in fair value immediately recognized in earnings as unrealized gains or losses. U.S. GAAP permits an entity to designate qualifying derivative contracts as normal purchases and sales. If designated, those contracts are not recorded at fair value. U.S. GAAP also permits an entity to designate qualifying derivative contracts in a hedge accounting relationship. If a hedge accounting relationship is used, a significant portion of the changes in fair value is not immediately recognized in earnings. We have elected not to apply hedge accounting to our commodity contracts, and we have designated contracts as normal purchases and sales in only limited cases, such as our retail sales contracts.

Energy Harbor accounts for derivative instruments on its consolidated balance sheets at fair value unless they meet the normal purchases and normal sales criteria. Derivative instruments meeting the normal purchases and normal sales criteria are accounted for under the accrual method of accounting with their effects included in earnings at the time of contract performance.

The Company uses a variety of derivative instruments to manage commodity price risk. Unrealized gains and losses arising from changes in the fair value of these derivative instruments, as well as realized gains and losses upon settlement of the instruments, are reported in the consolidated statements of income and comprehensive income in revenues, purchased power costs and other operating costs. Energy Harbor has contractual derivative agreements through 2026.

Set forth below is a description of derivative instruments currently being used by the Company to manage commodity price risk.

 

25

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

•

Commodity Derivatives – Energy Harbor uses both physically and financially settled derivatives to manage its exposure to volatility in commodity prices. Commodity derivatives are used for risk management purposes to hedge exposures when it makes economic sense to do so, including circumstances where the hedging relationship does not qualify for hedge accounting. Commodity swaps and options are used to optimize Company profitability and balance expected sales with expected generation.

As of December 31, 2022, Energy Harbor posted $16 of collateral under these commodity derivative contracts, including $10 posted with clearing houses. Of the $16, there were no offsets to derivative liabilities under netting arrangements.

 

•

Financial Transmission Rights (FTRs) – Energy Harbor holds FTRs that generally represent an economic hedge of future congestion charges that will be incurred in connection with Energy Harbor’s load obligations. Energy Harbor acquires the majority of its FTRs in an annual auction through a self-scheduling process involving the use of auction revenue rights allocated to members of PJM that have load serving obligations.

The future obligations for the FTRs acquired at auction are reflected on the consolidated balance sheets and have not been designated as cash flow hedge instruments. Energy Harbor initially records these FTRs at the auction price less the obligation due to PJM, and subsequently adjusts the carrying value of remaining FTRs to their estimated fair value at the end of each accounting period prior to settlement. Changes in the fair value of FTRs held by Energy Harbor are included in other operating costs as unrealized gains or losses.

Energy Harbor records the fair value of derivative instruments on a gross basis. The following table summarizes the fair value and classification of derivative instruments on the consolidated balance sheets as of December 31, 2022 and 2021, respectively:

 

26

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

		December 31, 2022
		Derivative				Derivative
		Assets				Liabilities
Commodity contracts:
Current		$	614			$	561
Noncurrent (1)			162				161
Total		$	776			$	722

 

(1)	Noncurrent derivative liabilities are included in Other noncurrent liabilities on the consolidated balance sheets.

 

		December 31, 2021
		Derivative				Derivative
		Assets				Liabilities
Commodity contracts:
Current		$	292			$	351
Noncurrent (1)			182				135
Total		$	474			$	486

 

(1)	Noncurrent derivative liabilities are included in Other noncurrent liabilities on the consolidated balance sheets.

Energy Harbor enters into contracts with counterparties that allow for the offsetting of derivative assets and derivative liabilities under netting arrangements with the same counterparty. These contracts contain margining provisions that require the use of collateral to mitigate credit exposure between Energy Harbor and these counterparties. In situations where collateral is pledged to mitigate exposures related to derivative and non-derivative instruments with the same counterparty, Energy Harbor allocates the collateral based on the percentage of the net fair value of derivative instruments to the total fair value of the combined derivative and non-derivative instruments.

The following table summarizes the fair value of derivative assets and derivative liabilities on Energy Harbor’s balance sheet after taking into consideration the effect of netting arrangements and collateral on its financial position as of December 31, 2022 and 2021:

 

		December 31, 2022
		Gross				Offsetting				Cash Collateral				Net
		Amount				Instrument				(Held) Posted				Amounts
Commodity contracts:
Derivative assets		$	776			($	697	)			—			$	79
Derivative liabilities			(722	)			697				—				(25	)
Net amounts		$	54				—				—			$	54

 

27

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

		December 31, 2021
		Gross				Offsetting				Cash Collateral				Net
		Amount				Instrument				(Held) Posted				Amounts
Commodity contracts:
Derivative assets		$	474			($	451	)			—			$	23
Derivative liabilities			(486	)			451			$	26				(9	)
Net amounts		($	12	)			—			$	26			$	14

The following table summarizes the volumes associated with the Company’s outstanding derivative

transactions for the year ended December 31, 2022 and 2021:

 

		December 31, 2022
		Purchases				Sales				Net				Units
Electric contracts (1)			26				(26	)			—			MWH
Gas contracts (1)			99				(122	)			(23	)		MMBTU

 

(1)	Volumes in millions.

 

		December 31, 2021
		Purchases				Sales				Net				Units
Electric contracts (1)			39				(32	)			7			MWH
Gas contracts (1)			101				(193	)			(92	)		MMBTU

 

(1)	Volumes in millions.

The effect of derivative instruments on the Company’s statements of income and comprehensive income during the year ended December 31, 2022 and 2021 are summarized in the following table:

 

		Year Ended December 31
		2022												2021
		Commodity												Commodity
		Contracts				FTRs				Total				Contracts				FTRs				Total
Unrealized gain (loss):
Other operating expense		$	65				—			$	65			($	20	)			—			($	20	)
Realized gain (loss):
Revenues		($	802	)		$	3			($	799	)		($	184	)		$	1			($	183	)
Purchased power		$	575			($	16	)		$	559			$	159				—			$	159

 

10.	Asset Retirement Obligations

Energy Harbor has recognized applicable legal obligations for Asset Retirement Obligations (“AROs”) and the associated cost primarily for the decommissioning of the Beaver Valley, Davis-Besse and Perry nuclear generating facilities and closure of coal ash disposal sites, which aggregate to approximately $1,910 and $2,306 as of December 31, 2022 and 2021, respectively. In addition, the Company has recognized conditional AROs, primarily for asbestos remediation.

 

28

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Energy Harbor uses an expected cash flow approach to measure the fair value of the nuclear decommissioning, coal and environmental remediation AROs, considering the expected timing of settlement of the ARO based on the expected economic useful life of the plants. Over time, the liability is accreted for the change in present value. The ARO cash outflows for the Nuclear plants were updated in the fourth quarter of 2022 based on new decommissioning cost studies performed by a third-party engineering firm. Changes in the timing or estimated future cash flows result in an adjustment to the carrying amount of the ARO and are presented in the rollforward below as a remeasurement adjustment in the year ended December 31, 2022.

The following table summarizes the changes to these obligations, reported as AROs in noncurrent liabilities in our consolidated balance sheet, for the years ended December 31, 2022 and 2021, respectively:

 

		December 31, 2022				December 31, 2021
Asset retirement obligations at January 1		$	2,306			$	2,270
Accretion			42				43
Liabilities settled			(8	)			(7	)
Assumed by buyer in Fossil exit			(212	)			—
Remeasurement			(218	)			—
Asset retirement obligations at December 31		$	1,910			$	2,306

11. Pension

Energy Harbor provides a noncontributory qualified defined benefit pension plan that covers certain bargaining unit employees. The Energy Harbor Pension Plan for Collectively Bargained Employees (the “Pension Plan”) covers employees employed by the Company on or after February 27, 2020, who are covered by a collective bargaining agreement requiring participation in the Pension Plan. The Pension Plan is a qualified defined benefit pension plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (Code), and is subject to the provisions of ERISA. The Pension Plan provides benefits to participants under one of two formulas: (i) a Cash Balance Formula under which participants earn monthly contribution credits based on their compensation and a combination of their age and years of service, plus monthly interest credits or (ii) a Traditional Retirement Plan Formula based on years of service and average earnings dependent on the work location. Under the Cash Balance Formula, future increases in earnings will not apply to prior service costs. It is our policy to fund the Pension Plan assets to the extent required under existing federal regulations. Energy Harbor also has obligations to former or inactive employees after employment, but before retirement, for disability-related benefits.

During the years ended December 31, 2022, and 2021, we recorded changes in the funded status of our pension benefit obligation totaling $(7), and $(22), respectively.

Pension benefit costs are affected by employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plans and earnings on plan assets. Pension benefit costs may also be affected by changes in key assumptions, including anticipated rates of return on plan assets, the discount rates and health care trend rates used in determining the projected benefit obligations for pension costs. Energy Harbor uses a December 31 measurement date for its Pension Plan. The fair value of the plan assets represents the actual market value as of the measurement date.

 

29

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

As of December 31, 2022, the pension formulas for all union groups have been frozen through collective bargaining agreements. All employees covered under collective bargaining agreements are now earning future retirement benefits in the company’s defined contribution program.

Discount Rate - The effective discount rates were determined using the AON AA Above Median yield curve. This yield curve is represented by a series of annualized spot discount rates. For a given future payment stream, the yield curve methodology produces a single equivalent discount rate that may be used for accounting determinations. The single equivalent discount rates from the Aon AA Above Median yield curve were determined using the expected benefit payments from the plan.

Expected Return on Plan Assets - Energy Harbor’s assumed rate of return on pension plan assets considers historical market returns and economic forecasts for the types of investments held by the pension trust. The expected return on pension assets is based on input from investment consultants, including the trusts’ asset allocation targets and the historical performance of risk-based and fixed income securities.

Mortality Rates – We used the Pri-2012 combined healthy (amounts weighted, with separate rates for contingent survivors) projected generationally using scale MP-2021 (base year 2012), to determine the 2022 benefit cost and obligation as of December 31, 2022.

Net Periodic Benefit Costs - Service costs, interest on obligations, expected return on plan assets, amortization of prior service costs, and curtailment costs are reported within Other operating expenses on Energy Harbor’s consolidated statements of income and comprehensive income. Non-service costs are reported within Other Income (Expense) on Energy Harbor’s consolidated statements of income and comprehensive income. Net gain / (loss) and prior service costs are accumulated in other comprehensive income and have not yet been recognized as components of net periodic benefit costs.

 

30

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

Detailed Information Regarding Pension Plan

The following information is based on a December 31, 2022 and 2021 measurement dates:

 

		Year Ended December 31,
		2022				2021
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost:
Effective discount rate for benefit obligation			5.34	%			3.33	%
Effective rate for interest on benefit obligation			5.21	%			3.00	%
Effective rate for service cost			n/a				3.33	%
Effective rate for interest on service			n/a				3.00	%
Expected return on plan assets			7.05	%			5.01	%
Rate of compensation increases			Age-Graded				Age-Graded
Components of Net Periodic Benefit Cost:
Service cost		$	3			$	14
Interest cost			1				1
Expected return on plan assets			(1	)			(1	)
Amortization of prior service costs (credit)			—				2
Curtailment expense/(income)			2				—
Net periodic benefit cost (income)		$	5			$	16
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Net (gain) loss and prior service (cost) credit			(20	)			(17	)
Total recognized in net periodic benefit cost and other comprehensive income		($	15	)		($	1	)
Assumptions Used to Determine Benefit Obligations at Period End:
Discount rate			5.34	%			3.33	%
Rate of compensation increase			Age-Graded				Age-Graded
Cash balance weighted-average interest crediting rate			4.25	%			2.57	%

The changes in benefit obligation and plan assets, funded status and amounts recognized in the balance sheet and accumulated other comprehensive income, for the years ended December 31, 2022 and 2021 are as follows:

 

31

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

		Year Ended December 31,
		2022				2021
Change in Benefit Obligation:
Projected benefit obligation at beginning of period		$	41			$	43
Service cost			3				14
Interest cost			1				1
Actuarial (gain) / loss			(15	)			—
Actual benefits paid			(1	)			(2	)
Liability gain / loss due to curtailment			(7	)			(15	)
Projected benefit obligation at end of year		$	22			$	41
Change in Plan Assets:
Fair value of assets at beginning of period		$	19			$	15
Actual return on plan assets			(3	)			1
Employer contributions			—				5
Benefits paid			(1	)			(2	)
Fair value of assets at end of year		$	15			$	19
Funded Status:
Projected pension benefit obligation		($	22	)		($	41	)
Fair value of assets			15				19
Funded status at end of year		($	7	)		($	22	)
Amounts Recognized in the Consolided Balance Sheet Consist of:
Other noncurrent assets			—				—
Other noncurrent liabilities			(7	)			(22	)
Net asset / (liability)		($	7	)		($	22	)
Amounts Recognized in Accumulated Other Comprehensive Income (AOCI) Consist of:
Prior service cost (credit)			—			$	10
Net actuarial (gain)/ loss		($	13	)			(2	)
Total in AOCI		($	13	)		$	8

The following tables set forth pension financial assets that are accounted for at fair value by level within the fair value hierarchy at December 31, 2022 and 2021, respectively. For investments reported at Net Asset Value (“NAV”) where there is no readily determinable fair value, a practical expedient is available that allows the NAV to approximate fair value. Investments that use NAV as a practical expedient are excluded from the requirement to be categorized within the fair value hierarchy tables. Instead, these investments are reported outside of the fair value hierarchy tables to assist in the reconciliation of investment balances reported in the tables to the consolidated balance sheets. Energy Harbor has elected the NAV practical expedient for multi-strategy funds and real estate funds held within the pension plan.

See Note 4, Fair Value Measurements, for a description of each level of the fair value hierarchy.

 

32

ENERGY HARBOR CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions)

 

		December 31, 2022																Asset
		Level 1				Level 2				Level 3				Total				Allocation
Cash and short-term securities		$	1				—				—			$	1				5	%
Public equity			6				—				—				6				42	%
Fixed income			—				6				—				6				39	%
Total		$	7			$	6				—			$	13				85	%
Multi-strategy and real estate funds (1)															2				15	%
Total Investments														$	15				100	%

(1) Net Asset Value used as practical expedient to approximate fair value.

 

		December 31, 2021																Asset
		Level 1				Level 2				Level 3				Total				Allocation
Cash and short-term securities		$	2				—				—			$	2				9	%
Public equity			8				—				—				8				43	%
Fixed income			—				7				—				7				37	%
Total		$	10			$	7				—			$	17				88	%
Multi-strategy and real estate funds (1)															2				12	%
Total Investments														$	19				100	%

 

(1)	Net Asset Value used as practical expedient to approximate fair value.

Energy Harbor follows a total return investment approach using a mix of equities, fixed income and other available investments while taking into account the pension plan liabilities to optimize the long-term return on plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. Equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalization funds. Other assets such as real estate funds are used to enhance long-term returns while improving portfolio diversification. Investment risk is measured and monitored on a continuing basis through periodic investment portfolio reviews, annual liability measurements and periodic asset/liability studies.

 

33