FirstEnergy Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. FirstEnergy serves more than six million customers through regulated distribution and transmission businesses. Following the March 2018 Chapter 11 filings by FES and FENOC, FirstEnergy deconsolidated those businesses and reports substantially all competitive generation as discontinued operations. Comparatives were reclassified.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3.064 billion | $2.910 billion | $8.551 billion | $8.247 billion |
| Operating income | $710 million | $733 million | $1.990 billion | $1.923 billion |
| Income from continuing operations | $387 million | $301 million | $840 million | $772 million |
| Net income (loss) | $(458) million | $396 million | $1.210 billion | $775 million |
| Net income (loss) attributable to common stockholders | $(512) million | $396 million | $853 million | $775 million |
| Basic EPS | $(1.02) | $0.89 | $1.76 | $1.75 |
Margins: Q3 operating margin was approximately 23.2%, versus 25.2% a year earlier. Nine-month operating margin was approximately 23.3%, essentially unchanged from 2017. Q3 continuing-operations income rose 29%, while operating income declined 3%.
Cash flow and investment: Nine-month operating cash flow was $558 million, down from $2.762 billion. The cash-flow statement combines continuing and discontinued operations. The decrease reflected, among other factors, the absence of FES cash flows after deconsolidation and a $1.25 billion pension contribution. Investing cash outflow was $2.237 billion, including $1.942 billion of property additions; financing cash inflow was $1.523 billion.
Debt and liquidity: At September 30, cash and cash equivalents were $436 million, restricted cash $51 million, short-term borrowings $1.700 billion, current long-term debt $1.128 billion, and long-term debt and other long-term obligations $16.608 billion. Current assets of $2.596 billion were below current liabilities of $5.800 billion. On October 19, FirstEnergy amended revolving facilities to $3.5 billion in aggregate commitments; reported available liquidity was $4.084 billion including $594 million of cash. It also drew $1.75 billion of term loans to reduce short-term debt. These are post-quarter-end events.
Other measures: Common dividends declared were $0.72 per share for Q3 and $1.44 for the first nine months, unchanged year over year. FirstEnergy issued approximately $2.5 billion of equity in January 2018: $1.616 billion of convertible preferred stock and $850 million of common stock. It contributed $1.25 billion to its qualified pension plan. Pension assets had returned approximately 0.5% through September, versus a 7.5% annual expected return.
Material changes and unusual items
- Q3 discontinued operations recorded a loss of $845 million, including an $834 million after-tax loss on disposal of FES and FENOC. FirstEnergy recorded a $1.2 billion pre-tax charge in discontinued operations for its estimated commitments under the bankruptcy settlement. For the nine months, discontinued operations reported income of $370 million, including a $405 million net-of-tax disposal gain recognized earlier in the year.
- The settlement, approved by the Bankruptcy Court in September, includes a $225 million cash payment, issuance of up to $628 million principal amount of FirstEnergy notes, releases and waivers of claims, employee-benefit commitments, shared-service credits capped at $112.5 million, and transfer of the Pleasants Power Station. Final consummation remains conditional on approval of acceptable reorganization plans.
- Revenue increased 5% in Q3 and 4% for the first nine months. Management attributed regulated distribution growth partly to higher weather-related usage and approved rate increases. Q3 operating income fell as operating expenses increased faster than revenue, including higher purchased-power costs, operating costs and depreciation.
- FirstEnergy recorded a $72 million pre-tax benefit in Q2 after the Ohio Supreme Court reversed a prior renewable-energy-credit liability. A FERC transmission-cost settlement produced $115 million of pre-tax benefits across Q2 and Q3. The Tax Act reduced Q3 continuing-operations effective tax rate to 25.6% from 40.2%; the nine-month rate was 37.5% versus 38.5%, including a $126 million state deferred-tax charge related to FES/FENOC separation.
- FirstEnergy increased its McElroy’s Run environmental asset retirement obligation by approximately $43 million in Q3. Environmental remediation liabilities accrued were approximately $115 million.
Outlook, risks and contingencies
- Management’s strategy is to become a fully regulated utility, emphasizing regulated distribution and transmission investment. The stated plan includes $5.7–$6.7 billion of distribution capital investment through 2021, with approximately 5% rate-base growth, and $4.0–$4.8 billion of transmission investment from 2018–2021, with approximately 11% rate-base growth. FirstEnergy also identified roughly $20 billion of potential transmission investment beyond 2021. These are plans and expectations, not assurances.
- No numerical earnings-per-share guidance is provided in the supplied filing text. Management expects FE Tomorrow cost savings to support growth targets, but notes that benefits, timing and costs are uncertain. Nearly 500 employees accepted a voluntary enhanced retirement package, with most expected to leave by year-end 2018.
- Key uncertainties include completion of the FES bankruptcy settlement and potential remaining claims or guarantees; regulatory approval and timely recovery of distribution and transmission investment; outcomes of PJM/FERC market and rate proceedings; environmental compliance and remediation costs; pension and trust-fund market performance; access to financing and credit-rating changes; severe weather, operational reliability, cybersecurity, and demand and commodity-market changes.
- FirstEnergy reported approximately $1.724 billion of guarantees and other assurances at September 30, 2018, including exposure related to FES/FENOC, asset sales and a guaranteed Global Holding loan. Potential collateral exposure under specified contractual and surety arrangements was reported at $362 million. These amounts are contingent exposures, not necessarily expected cash payments.
Most important facts for investors to verify
- Whether the FES reorganization conditions are satisfied and the settlement closes on the disclosed terms, including the ultimate cash, note, employee-benefit and environmental obligations.
- How post-bankruptcy separation, lower operating cash flow, the pension contribution and short-term borrowing affect liquidity, leverage and financing needs.
- Whether planned capital spending and projected rate-base growth receive regulatory approval and are recovered in rates as expected.
- Potential pension mark-to-market adjustments, environmental closure/remediation costs, and the adequacy and recoverability of related regulatory assets.
- Post-quarter-end credit-facility amendments and term loans, including their use, maturities, borrowing costs and covenant headroom.