FirstEnergy Corp. (FE) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 1, 2015. The combined filing also reports FirstEnergy Solutions Corp. (FES), a wholly owned subsidiary. FE operates regulated distribution and transmission businesses and competitive energy services (CES).
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| FE revenue | $3.897 billion | $4.182 billion |
| Operating income | $594 million | $391 million |
| Continuing-operations income | $222 million | $122 million |
| Net income | $222 million | $208 million |
| Diluted EPS | $0.53 | $0.49 |
| Operating cash flow | $193 million | $(92) million |
| Cash and cash equivalents at March 31 | $90 million | $109 million at March 31, 2014 |
- Revenue declined 6.8%, while operating income rose 51.9%. Calculated operating margin increased to approximately 15.2% from 9.4%.
- Operating expenses fell $488 million, led by lower CES fuel, purchased-power and transmission costs. Interest expense increased to $279 million from $265 million. FE’s continuing-operations effective tax rate rose to 39.3% from 28.2%.
- Investing cash outflow was $748 million, including $668 million of property additions; financing provided $560 million. FE contributed $143 million to its qualified pension plan.
- At March 31, FE reported $19.130 billion of long-term debt and other long-term obligations, $787 million of currently payable long-term debt, and $2.559 billion of short-term borrowings. Short-term borrowings increased from $1.799 billion at year-end 2014. Current assets of $4.011 billion were below current liabilities of $6.262 billion.
- Available liquidity was reported as $3.444 billion, comprising $3.396 billion of available revolving-credit capacity and $48 million of cash. FE declared a $0.72-per-share dividend, unchanged year over year.
Material changes and business performance
- CES revenue decreased $336 million as FE reduced sales in selected channels to limit weather-sensitive exposure and manage risk. CES operating results improved substantially from the prior-year period, which was affected by extreme January 2014 market conditions and unplanned outages. FE attributed $115 million of the increase in continuing-operations income to CES.
- Regulated Transmission income increased $21 million, primarily reflecting ATSI’s shift to forward-looking transmission rates based on estimated current-year costs, subject to true-up and refund proceedings.
- Regulated Distribution income decreased $6 million, reflecting higher operating and maintenance and depreciation costs, partly offset by increased distribution-service revenue.
- Q1 2014 net income included $86 million of after-tax discontinued-operations income from hydroelectric facilities sold in February 2014. The prior-year sale also contributed $394 million of investing cash proceeds; there were no comparable discontinued-operation earnings in Q1 2015.
- FES separately reported revenue of $1.377 billion versus $1.829 billion and a continuing-operations loss of $3 million versus a $103 million loss. Its Q1 2014 net income of $13 million included $116 million from discontinued operations.
Outlook, management commentary and key risks
- FE expected 2015 capital expenditures of approximately $2.9 billion. The Energizing the Future transmission program calls for $4.2 billion of investment from 2014 through 2017; 2015 Regulated Transmission capital expenditures were forecast at approximately $970 million.
- A cash-flow improvement plan targeted savings of $50 million in 2015, $150 million in 2016 and $200 million annually by 2017, split approximately evenly between operating and maintenance and capital expenditures. These are management targets, not guarantees.
- CES targeted annual contract sales of approximately 65–75 million MWh. At March 31, committed sales were 70 million MWh for 2015, 45 million for 2016 and 23 million for 2017. For April–December 2015, expected generation and committed purchases were approximately 116% of committed sales, assuming normal weather.
- The proposed Ohio ESP IV, including a proposed 15-year power-purchase arrangement for certain generation, remained subject to PUCO review; the evidentiary hearing was scheduled to begin June 15, 2015. The filing does not establish approval or the eventual financial effect.
- After quarter-end, Pennsylvania rate settlements were approved, providing approximately $292.8 million in annual revenue increases and approximately $87.7 million in additional annual operating expenses, effective May 3, 2015. New Jersey orders resulted in an approximately $34 million annual revenue reduction for JCP&L, effective April 1, 2015.
- Environmental obligations include expected MATS compliance capital costs of approximately $370 million through 2018, of which $145 million had been spent by March 31, 2015. Fort Martin water-discharge compliance could require $150–$300 million of initial capital investment; the outcome and ultimate cost were uncertain. Environmental remediation liabilities accrued were approximately $125 million.
- Other exposures include unresolved PJM/FERC transmission-rate and market-design proceedings; coal supply and transportation disputes related to deactivated plants; potential collateral requirements of up to $711 million under specified credit events; and environmental, nuclear and other litigation. FirstEnergy also disclosed a potential California claims amount of approximately $190 million but said it could not estimate loss or outcome.
- FE guaranteed a $300 million Global Holding loan through 2020; extending that guarantee in Q1 resulted in a $24 million pre-tax charge. The recorded guarantee obligation was $54 million at March 31.
Most important facts for investors to verify
- Whether FE’s operating-income improvement is repeatable, given the prior-year weather and market comparison and CES’s lower sales volumes.
- Progress against the cash-savings targets, capital-spending plan and expected funding mix, including reliance on debt and potential equity issuance.
- Outcomes and rate impacts of the Ohio ESP IV, ATSI formula-rate and return-on-equity proceedings, and other material state and FERC cases.
- Actual environmental compliance and deactivation-related costs, including Fort Martin, coal-contract disputes and Bruce Mansfield ash-disposal plans.
- Short-term borrowing levels, liquidity availability, rating changes and resulting collateral requirements; the filing reports $2.559 billion of short-term borrowings and $3.444 billion of available liquidity at quarter-end.