FirstEnergy Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in millions of dollars, except per-share data. FirstEnergy serves more than six million customers through regulated distribution and transmission businesses and is pursuing a transition to a predominantly regulated utility. FES and FENOC entered Chapter 11 on March 31, 2018; FirstEnergy deconsolidated them and reports their results, along with specified generation assets, as discontinued operations. Prior-period comparisons were reclassified, and the change in consolidated scope limits comparability.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,704 | $2,624 | $5,680 | $5,479 |
| Operating income | $687 | $574 | $1,284 | $1,202 |
| Income from continuing operations | $267 | $219 | $444 | $476 |
| Net income | $299 | $174 | $1,668 | $379 |
| Net income attributable to common stockholders | $134 | $174 | $1,364 | $379 |
| Basic EPS, continuing operations | $0.22 | $0.49 | $0.29 | $1.07 |
| Basic EPS, total | $0.28 | $0.39 | $2.86 | $0.86 |
- Revenue rose 3% in Q2 and 4% for the half year. Operating margins were approximately 25.4% and 22.6%, respectively, versus 21.9% in each comparable 2017 period.
- Continuing income improved in Q2 but declined 7% for the half year. The six-month net income increase chiefly reflects a $1.239 billion after-tax gain on deconsolidation, not recurring operating performance. Q2 common earnings were reduced by preferred-stock dividends and amortization of a beneficial conversion feature.
- Operating cash flow was negative $288 for the first half, versus positive $1,482 in 2017. The period included $1.25 billion of pension contributions; cash generation also reflects the absence of FES operating cash after deconsolidation. Investing cash outflow was $1,565, including $1,307 of property additions.
- At June 30, cash and cash equivalents were $256 and restricted cash was $68. Reported short-term borrowings were $1,664; current maturities of long-term debt were $1,132; and long-term debt and other long-term obligations were $16,461. These balance-sheet categories total approximately $19.3 billion, but include differing types of obligations.
- Available external liquidity was reported as $3,326 under revolving facilities; including $256 cash, stated total liquidity was $3,582. Short-term borrowings increased from $300 at year-end 2017. FirstEnergy reported compliance with its facility covenants.
- Common dividends declared were $0.72 per share in the first half and none in Q2. Common dividends paid during the half were $343.
Material changes and unusual items
- FirstEnergy raised approximately $2.5 billion in January through $850 million of common stock and $1.616 billion of mandatorily convertible preferred stock. Proceeds supported debt reduction, a $750 million pension contribution and general purposes. Preferred holders began exercising conversion rights in July; up to 58.96 million common shares may be issued upon conversion, subject to the stated terms.
- Q2 operating results benefited from a $72 million pretax reversal of a reserve related to Ohio renewable-energy-credit purchases and a $77 million pretax PJM transmission-cost settlement benefit. The latter-period allocation impact remained uncertain.
- Operating expenses include substantial storm-related and efficiency costs deferred for future regulatory recovery. First-half storm restoration costs were approximately $201 million; management said deferrals meant no material current-period earnings impact.
- The Tax Act reduced the federal corporate tax rate, but separation of FES/FENOC from the West Virginia unitary tax group caused a $126 million continuing-operations tax charge in the first half. The company was still assessing certain Tax Act amounts and expected to finalize provisional accounting by Q4 2018.
- FirstEnergy recorded approximately $89 million of make-whole premiums associated with debt redemptions. In Q2, higher interest expense also reflected holding-company debt issued in 2017.
Outlook, management commentary and risks
- Management expects regulated distribution rate-base growth of about 5% through 2021, supported by a $5.7–$6.7 billion capital plan. Regulated transmission rate-base growth is expected to be about 11%, with $4.0–$4.8 billion of investment planned for 2018–2021. These are plans and expectations, not guarantees.
- Management identified more than $20 billion of potential transmission investment beyond 2021. Recovery depends on regulatory approval, project execution, financing availability and other factors.
- On July 31, 2018, after quarter-end, FirstEnergy announced an updated agreement in principle in the FES/FENOC bankruptcy. Principal terms include a $225 million cash payment, a note of up to $628 million, transfer of Pleasants Power Station, specified employee-benefit support and up to $112.5 million of shared-service cost credits. Definitive agreements, board and Bankruptcy Court approvals, and other conditions remained outstanding; no assurance was given that the settlement would be completed.
- FirstEnergy’s FE Tomorrow program is intended to align its organization with regulated operations and reduce costs. Nearly 500 employees accepted voluntary enhanced retirement packages, with most expected to depart by year-end 2018. Savings and implementation outcomes are uncertain.
- Key exposures include bankruptcy-related claims and guarantees, rate and cost-recovery proceedings, credit ratings and market access, pension-asset performance, severe weather, environmental compliance and remediation, and regulatory changes affecting PJM markets. Environmental remediation liabilities accrued were approximately $116 million. Aggregate guarantees and other assurances were approximately $1.7 billion; potential collateral exposure under specified scenarios was $352 million.
Important facts for investors to verify
- Whether the FES/FENOC settlement becomes definitive and receives required approvals, and the ultimate cash, note, pension, guarantee and Pleasants-related obligations.
- How much of reported earnings is recurring: particularly the deconsolidation gain, Ohio REC reserve reversal, PJM settlement benefit and tax-related charges.
- Whether regulated capital spending is completed on schedule and recovered in rates, and whether stated rate-base growth expectations are achieved.
- Cash generation, borrowing levels, available facility capacity, credit ratings and refinancing needs after the large pension contribution and bankruptcy-related exposures.
- Potential dilution and dividend implications as preferred shares convert, and the outcome of significant rate, PJM market and environmental proceedings.