Business context and reporting period
FirstEnergy Corp. filed this unaudited Form 10-Q for the quarter ended March 31, 2019. It is principally an electric transmission and distribution holding company, serving more than six million customers through ten utilities. Its reportable businesses are Regulated Distribution and Regulated Transmission; the company is pursuing a transition to a fully regulated business and has presented most competitive-generation operations as discontinued operations following the 2018 FES/FENOC bankruptcy and related strategic actions.
Key financial results
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the three months ended March 31, 2018.
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $2,883 | $2,862 | Up $21, or 1% |
| Operating income | $629 | $580 | Up $49, or 8%; operating margin approximately 21.8%, versus 20.3% |
| Income from continuing operations | $355 | $181 | Up $174; continuing-operations EPS was $0.66 versus $0.05 |
| Net income attributable to common stockholders | $315 | $1,213 | EPS was $0.59 versus $2.55; prior year included a large FES/FENOC deconsolidation gain |
| Net cash from operating activities | $(182) | $(880) | Cash use improved by $698 |
| Property additions | $554 | $583 | Investing cash outflow was $630, versus $1,143 |
| Cash and cash equivalents at March 31 | $174 | $367 at Dec. 31, 2018 | Restricted cash was an additional $36 |
| Long-term debt and other long-term obligations | $18,814 | $17,751 at Dec. 31, 2018 | Also reported $1,300 of short-term borrowings and $206 of currently payable long-term debt |
Operating expenses declined $28 to $2,254. Lower purchased-power and other operating costs were partly offset by higher depreciation and a $153 million year-over-year swing in net amortization/deferral of regulatory assets. Continuing-operations income benefited from a lower effective tax rate: 20.8%, compared with 56.3% in Q1 2018, when a one-time $126 million state deferred-tax charge was recorded.
Operating cash use reflected, among other items, a $500 million voluntary pension contribution (versus $1.25 billion in Q1 2018), as well as working-capital movements. Financing activities provided $593 million, including $1.4 billion of long-term debt issuance and $628 million of repayments. Common dividends paid were $201 million. The company reported a $2.01 billion working-capital deficit at quarter-end, with short-term borrowings and other current liabilities contributing substantially.
Material changes and operating performance
- Regulated Distribution operating results increased $7 million. Distribution-service revenue rose modestly, while retail generation volume increased and wholesale generation revenue declined. Total electricity deliveries were nearly flat, down 0.2%.
- Regulated Transmission operating results increased $5 million. Revenue rose $33 million, primarily from higher rate base and recovery of incremental expenses at ATSI and MAIT; most related expense increases were recovered through formula rates.
- Revenue growth was led by transmission, up $33 million; total company revenue increased only 1% as other revenue declined.
- Q1 2018 reported net income included a $1.239 billion after-tax disposal gain related to FES/FENOC. Q1 2019 instead reported a $35 million loss from discontinued operations. Accordingly, total net income is not a like-for-like measure of continuing business performance.
- Common shares outstanding increased to 531.4 million at March 31 from 511.9 million at December 31, 2018, primarily reflecting preferred-stock conversions. Remaining preferred shares were expected to convert under the terms described in the filing.
Outlook, commentary, risks and unusual items
Management’s strategy is to grow regulated distribution and transmission investment and support more predictable earnings and cash flows. The company forecast $6.2–$6.7 billion of Regulated Distribution capital investment for 2018–2021, with approximately 5% rate-base growth over that period, and up to $4.8 billion of Regulated Transmission investment, with approximately 11% rate-base growth through 2021. It cited more than $20 billion of potential transmission investment opportunities beyond 2021. These are plans and expectations, not guarantees; no specific earnings or EPS guidance is provided in the supplied filing text.
- Liquidity and pension: Management said available liquidity and operating cash were expected to meet needs. As of April 19, 2019, the filing reported $3.491 billion of available revolving-credit capacity and $201 million of cash, for $3.692 billion total liquidity. A $500 million voluntary pension contribution was made in February; management expected no required pension contributions through 2021.
- FES bankruptcy settlement: The settlement includes a $225 million cash payment, a $628 million note to the FES Debtors subject to possible adjustment, employee-related obligations, shared-service arrangements and transfer of the Pleasants Power Station, among other terms. The Bankruptcy Court rejected a proposed plan disclosure statement on April 11, 2019. On April 18, FirstEnergy waived a settlement condition in exchange for releases and approximately $60 million cash to resolve $87 million of pension and service charges; the company recognized a $27 million pre-tax Q1 charge, $17 million in continuing operations. Completion of the revised plan and Pleasants transfer remained uncertain.
- Guarantees and environmental exposure: Outstanding guarantees and other assurances totaled approximately $1.7 billion. The filing also reported $121 million of accrued environmental liabilities, including $85 million for New Jersey former manufactured-gas-plant sites, and additional potential exposure that could not be reasonably estimated. FirstEnergy had guaranteed a Global Holding loan with $188 million outstanding, due March 2020.
- Regulatory and legal uncertainty: Key matters include Ohio Rider DMR extension and grid-modernization settlement approvals, transmission-rate and Tax Act proceedings, and possible changes to environmental rules. Failure to recover costs or obtain approvals, reliability-standard penalties, and environmental compliance or remediation costs could affect results and cash flows.
- Other risks: Management highlighted the FES bankruptcy and separation, access to capital and credit markets, ratings, regulatory decisions, weather and demand, pension and trust-asset values, decommissioning, litigation, cyber risks, environmental requirements and execution of the regulated-investment strategy. The filing said there were no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Track the FES reorganization’s revised plan, settlement conditions, cash and note consideration, and whether the Pleasants transfer closes.
- Distinguish continuing-operations EPS of $0.66 from total EPS of $0.59, and account for the unusual $1.239 billion prior-year disposal gain when comparing net income.
- Assess working-capital pressure and debt maturities against available credit capacity, planned capital spending, and future financing needs.
- Monitor regulatory approval and cost recovery for Ohio grid modernization and Rider DMR, New Jersey reliability investment, and transmission rates.
- Review environmental liabilities and guarantees, including CCR-related obligations, and the potential effect of regulatory or litigation outcomes that the company could not quantify.