FirstEnergy Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. FirstEnergy serves about six million customers through regulated distribution and transmission businesses. The FES Debtors emerged from bankruptcy on February 27, 2020, completing FirstEnergy’s exit from competitive generation.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.522bn | $2.516bn | $5.231bn | $5.399bn |
| Operating income | $515m | $585m | $1.047bn | $1.214bn |
| Income from continuing operations | $307m | $341m | $331m | $696m |
| Net income | $309m | $312m | $383m | $632m |
| Common EPS | $0.57 | $0.58 | $0.71 | $1.17 |
Q2 operating margin was approximately 20.4%, down from 23.3%; first-half operating margin was approximately 20.0%, down from 22.5%. First-half revenue fell 3%, while transmission revenue rose $57m and regulated distribution revenue declined $219m. Lower generation sales, the end of Ohio’s DMR revenues, and reduced commercial and industrial usage weighed on distribution results.
First-half operating cash flow was $150m, versus $625m a year earlier. Investing used $1.406bn, including $1.292bn of property additions; financing provided $742m. Cash and cash equivalents were $116m at June 30, down from $627m at year-end; restricted cash was $49m. The company reported $3.637bn of available liquidity as of August 10, primarily revolving credit capacity.
At June 30, long-term debt and other long-term obligations were $21.980bn, versus $19.618bn at year-end; short-term borrowings were $115m, down from $1.000bn. First-half debt issuance totaled $3.175bn, with $1.082bn of repayments. Common dividends paid were $422m in the first half; the declared quarterly dividend was $0.39 per share. The filing does not provide a specific earnings guidance figure.
Material changes and unusual items
- First-half results included a $423m non-cash pension and OPEB mark-to-market expense after bankruptcy emergence triggered plan remeasurement. The company said no required pension contributions were expected through 2021.
- Operating cash flow reflected $978m of settlement and tax-sharing payments to the FES Debtors. FirstEnergy also issued debt to fund the payments and repay borrowings.
- Discontinued operations contributed $52m of first-half net income, compared with a $64m loss in the prior-year period; the 2020 result included tax and settlement effects associated with FES emergence.
- Customer disconnections for nonpayment were suspended during the pandemic. FirstEnergy recognized $43m of incremental uncollectible expense in Q2; approximately $27m was deferred for future recovery. The customer-receivables allowance rose to $87m from $46m at year-end.
- COVID-19 shifted load toward residential customers and away from commercial and industrial customers. Management reported no expected material disruption to service or the capital spending plan, while noting that the full effects remained uncertain.
Outlook, risks and contingencies
Management forecast more than $10bn of regulated distribution capital investment for 2018–2023, with approximately 4% rate-base compound annual growth, and more than $7bn of transmission investment, with approximately 10% rate-base growth over the same period. It cited more than $20bn of additional potential transmission investment beyond 2023. These are plans and expectations, not guaranteed outcomes.
On July 21, 2020, FirstEnergy received U.S. Attorney subpoenas connected to the investigation surrounding Ohio House Bill 6 and former Ohio House Speaker Larry Householder. The company said it was cooperating and conducting an internal investigation. Shareholder and customer lawsuits followed; the company recorded no contingency because a loss was not considered probable or reasonably estimable. The filing warns the investigation and litigation could materially affect reputation, financial condition, results and cash flows.
Credit outlooks weakened after quarter-end: S&P placed FirstEnergy and subsidiaries on negative CreditWatch, and Moody’s and Fitch revised FirstEnergy’s outlook to negative. Ohio legislation introduced after quarter-end proposed repealing provisions supporting nuclear generation and the distribution decoupling mechanism. Other uncertainties include regulatory rate proceedings, FERC transmission-rate matters, environmental compliance costs, TMI-2 transfer approvals, and potential additional pension funding. Management reported compliance with revolving-facility debt covenants at June 30.
FirstEnergy also cautioned that some 2019 and future shareholder distributions may be treated as return of capital for tax purposes, following the FES emergence-related tax loss.
Key facts for investors to verify
- Developments, scope and potential financial impact of the House Bill 6 investigation and related litigation.
- Whether regulators permit recovery of COVID-19 costs and uncollectible receivables, and how customer payment patterns evolve.
- Progress on the $185m JCP&L rate-increase request and the proposed Ohio legislative changes affecting decoupling and nuclear support.
- Debt, liquidity and credit-rating trends, including financing needs for planned capital investment and the potential for future equity issuance.
- Approval and completion status of the TMI-2 and Yards Creek transactions, plus related liabilities, proceeds and regulatory treatment.
- How the $423m pension mark-to-market charge, plan asset performance and year-end remeasurement affect earnings and funding needs.