FirstEnergy Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited consolidated results compared with Q1 2023. FirstEnergy is an electric utility holding company with regulated distribution and transmission operations and regulated generation. It serves more than 6 million customers across the Midwest and Mid-Atlantic. Pennsylvania utility subsidiaries were consolidated into FE PA on January 1, 2024; 2023 segment results were recast to the new reporting structure.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $3.287 billion | $3.231 billion |
| Operating income | $612 million | $551 million |
| Net income | $267 million | $310 million |
| Earnings attributable to FirstEnergy | $253 million; $0.44 per diluted share | $292 million; $0.51 per diluted share |
| Operating margin | 18.6% | 17.1% |
| Operating cash flow | $(40) million | $(112) million |
| Capital investments | $790 million | $649 million |
Revenue rose 1.7% and operating income increased, but earnings attributable to FirstEnergy fell 13%. The effective income tax rate rose to 33.6% from 22.5%; higher interest expense and lower equity-method earnings also weighed on results. Management cited lower weather-adjusted customer usage, higher vegetation management and other operating costs, and discrete tax charges. Offsetting items included regulated rate-base investment, recent rate-case settlements, and a $60 million pre-tax benefit from West Virginia regulatory approval to recover certain retired-generation costs.
At March 31, cash and cash equivalents were $888 million, restricted cash was $27 million, and current liabilities exceeded current assets. Long-term debt and other long-term obligations totaled $24.265 billion, with $250 million of short-term borrowings. Cash flow from operations was negative, while investing activities used $870 million and financing activities provided $1.646 billion. Financing included $2.3 billion cash proceeds from the FET interest sale.
As of April 22, the company reported $4.616 billion of available revolving-credit liquidity and $110 million of cash, or $4.726 billion total; this liquidity snapshot is later than the quarter-end balance sheet. FirstEnergy stated that available liquidity and operating cash flows are expected to meet anticipated needs. Credit facilities were in covenant compliance at quarter-end; FE’s interest coverage ratio was 4.21 against a 2.50 minimum.
Material changes and notable items
- FET transaction: On March 25, FirstEnergy sold Brookfield an additional 30% interest in FirstEnergy Transmission for $3.5 billion, taking Brookfield’s ownership to 49.9% and FE’s to 50.1%. Consideration included $2.3 billion cash and two promissory notes totaling $1.2 billion; both notes were expected to be repaid in 2024. FE continues to consolidate FET. The transaction increased noncontrolling interest and contributed to higher equity.
- Unusual operating charge: JCP&L recorded a $53 million pre-tax charge after a rate-case settlement disallowed recovery of certain corporate support costs identified in the FERC audit.
- Taxes and sale-related accounting: FirstEnergy reported an approximate $7.3 billion tax gain associated with the combined sale of 49.9% of FET interests and recapture of negative tax basis. It recognized a $46 million net tax charge in Q1 and reduced additional paid-in capital by approximately $797 million for tax associated with the additional sale. The filing says federal NOL carryforwards are expected to offset most of the tax gain, subject to utilization limitations.
- Debt and post-quarter payments: Quarter-end current long-term debt included $463 million of FE notes redeemed April 15, with an approximately $80 million make-whole premium. JCP&L redeemed $500 million of notes April 1 and MP redeemed $400 million of bonds April 15.
- Operating structure and investment: The company expects approximately $26 billion of system-wide capital investment from 2024 through 2028 under Energize365. Moody’s upgraded FE’s corporate credit ratings to Baa3 on March 28; S&P upgraded FE and several subsidiaries one notch on April 23.
Outlook, regulation, and risks
- FirstEnergy did not provide a specific earnings or EPS forecast in the supplied filing text. It expects to fund its investment program with internal cash flows and utility debt, subject to market conditions. The board declared a quarterly dividend of $0.425 per share payable June 1, 2024, following a $0.015 increase.
- FE PA filed a rate case on April 2 seeking approximately $502 million in net annual distribution revenue increases; a decision is expected in December 2024, with proposed rates effective January 2025. JCP&L’s approved $85 million annual base-rate increase is scheduled to affect customers beginning June 1, 2024. Ohio ESP V remains pending.
- FirstEnergy expects its Deferred Prosecution Agreement obligations to be completed around July 2024, after which the criminal information is expected to be dismissed, subject to full compliance and court proceedings. The SEC investigation remains unresolved; FE says a loss is probable but cannot estimate an amount or range. It also considers a loss reasonably possible from the OOCIC investigation, but says any associated payment is not expected to be material. Securities litigation is also described as probable to result in loss, with no estimable range. These matters could adversely affect reputation, results, liquidity, or cash flows.
- Several Ohio regulatory audits and HB 6-related proceedings resumed in 2024; an auditor’s report on political and charitable spending was due August 28, 2024. Outcomes remain uncertain. The filing also describes ongoing review of recovery of costs identified in the FERC audit.
- Management identifies supply-chain delays, inflation and labor availability as risks; it does not currently expect material disruption to its capital plan, but prolonged issues could affect results and cash flow. Other risks include weather and climate-related physical damage, regulatory and environmental requirements, interest rates and access to capital markets, pension asset performance, credit ratings, and litigation or government investigations.
- FirstEnergy targets carbon neutrality for Scope 1 emissions by 2050 and identifies 2035 and 2040 as the expected end-of-useful-life dates for the Fort Martin and Harrison coal plants. EPA rules finalized April 25, 2024 could require additional spending or operational changes; the company was assessing their impact. The SEC’s climate-disclosure rules were stayed in April 2024 pending legal challenges.
Most important facts for investors to verify
- Progress and final accounting for the FET sale, including repayment of the $1.2 billion promissory notes and any related tax or cash-flow effects.
- Resolution and potential financial exposure from the SEC, OOCIC, shareholder securities litigation, Ohio regulatory audits, and the DPA’s completion.
- Results and timing of major rate proceedings, particularly FE PA’s $502 million request, Ohio ESP V, and recovery of FERC-audit-related costs.
- Funding needs, liquidity after the disclosed debt redemptions, and the impact of higher interest rates on debt costs and covenants.
- Whether capital spending, operating cash flow, and regulatory cost recovery support the $26 billion 2024–2028 investment plan and dividend policy.