FirstEnergy Corp. Form 10-Q Summary
Reporting period: Three months ended March 31, 2013. The combined filing covers FirstEnergy Corp. and its wholly owned subsidiary FirstEnergy Solutions Corp. (FES). Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and financial results
FirstEnergy operates regulated electric distribution and transmission businesses and competitive generation and electricity-supply businesses across several U.S. states. Its competitive energy business controls approximately 18,000 MW of capacity. Management reported continuing weak demand and low regional power and capacity prices.
| FirstEnergy consolidated | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $3,729 | $3,990 | Down $261 (6.5%) |
| Operating income | $654 | $746 | Down $92 |
| Net income | $196 | $306 | Down $110 (36%) |
| Diluted EPS | $0.47 | $0.73 | Down $0.26 |
| Operating margin | 17.5% | 18.7% | Down 1.2 percentage points |
| Net margin | 5.3% | 7.7% | Down 2.4 percentage points |
| Cash from operating activities | $50 | $(413) | Improved $463 |
| Cash used for investing | $(927) | $(534) | Outflow increased $393 |
Regulated Distribution net income increased to $210 million from $159 million, while Regulated Transmission fell to $51 million from $58 million. Competitive Energy Services swung to a $38 million loss from $141 million of income, principally reflecting weaker wholesale sales, higher operating expenses and the debt-redemption loss.
FirstEnergy declared a quarterly dividend of $0.55 per share, unchanged year over year. Cash and cash equivalents were $67 million at March 31, down from $172 million at year-end 2012. Current assets were $3.5 billion versus current liabilities of $7.1 billion; management attributed the working-capital deficit largely to current debt maturities and short-term borrowings.
At March 31, FirstEnergy reported $2.296 billion of currently payable long-term debt, $2.150 billion of short-term borrowings and $15.814 billion of long-term debt and other long-term obligations. It issued $1.5 billion of parent senior notes and $300 million of ME notes during the quarter. Gross debt redemptions and repayments included $956 million of long-term debt; debt tender offers generated a $119 million loss, including premiums and related expenses. Credit-facility availability was reported at $3.036 billion, plus $44 million cash, as of April 30, 2013.
FES results
FES revenue increased to $1.530 billion from $1.516 billion, but operating income declined to $100 million from $222 million and net income fell to $2 million from $122 million. Its net income included a $73 million debt-redemption loss. FES used $195 million in operating cash, compared with $178 million in the prior-year quarter, and had $702 million of short-term borrowings from affiliated companies at quarter-end. Its reported cash balance was $3 million.
Material changes and management outlook
- Consolidated revenue declined, mainly from lower utility generation sales and reduced competitive wholesale revenue. FirstEnergy said distribution deliveries rose 2.6%, primarily because heating degree days were 30% above the prior year; it also described longer-term sales as flat to lower across its service territory since 2007.
- Competitive Energy Services revenue fell $157 million. Direct and governmental aggregation sales grew, but wholesale revenue declined $219 million, including lower gains on settled contracts and lower capacity revenue. The segment’s net income declined $179 million year over year.
- Management said 99% of its 2013 target physical sales of 104 million MWh were economically hedged. It slowed forward sales to retain exposure to possible future power-price improvement. The filing estimates a 10% adverse commodity-price change would reduce net income by about $8 million over the next 12 months.
- Operating cash flow improved from the prior-year period, when FirstEnergy made a $600 million pension-trust contribution. Q1 2013 cash generation remained modest, with working capital and other items using $760 million. Property additions were $826 million, up from $517 million.
- Management’s 2013 financial plan aims to reduce competitive-segment debt by approximately $1.5 billion and strengthen credit metrics. Planned actions include a net 1,476 MW generation transfer between AE Supply and MP, a proposed sale of approximately 1,240 MW of unregulated hydro assets, refinancing and reduced short-term borrowing, Ohio securitization proceeds, and a modest equity issuance expected late in 2013. Completion, timing and proceeds are not assured. The filing provides no specific EPS or revenue guidance.
Risks, contingencies and unusual items
- Debt and credit: Moody’s changed the outlooks on FirstEnergy and JCP&L to negative in February 2013. A credit downgrade could raise financing costs and trigger additional collateral requirements; the company disclosed up to $823 million of credit-contingent contractual collateral obligations under specified rating scenarios. FirstEnergy also provided a $350 million guarantee for a Global Holding loan.
- Environmental obligations: The proposed Little Blue Run impoundment closure plan is estimated to cost $234 million, including post-closure costs; disposal under the existing permit must cease by December 31, 2016. Estimated future MATS compliance costs are approximately $925 million. Fort Martin water-discharge compliance could require initial capital investment exceeding $150 million. These estimates and other environmental costs depend on regulatory outcomes.
- Other environmental and legal exposure: FirstEnergy accrued approximately $124 million for environmental remediation liabilities. Potential coal-transportation penalties were estimated at about $60 million, subject to the company’s force-majeure position. Several air, water, transmission-cost and other proceedings remain unresolved; management said certain possible losses cannot be estimated.
- Regulatory recovery: JCP&L’s rate filing was updated to request recovery of $603 million in Hurricane Sandy restoration costs; the overall requested revenue increase was approximately $112 million. Prudence and recovery are subject to regulatory review. ME and PN continue seeking recovery of approximately $254 million in disputed Pennsylvania transmission-loss costs.
- Generation and reliability: Perry remained in NRC oversight Column 3, with follow-up inspection and possible escalation dependent on corrective-action results. The scheduled Perry refueling outage began March 18, 2013. FERC provided an annual license for the Yards Creek hydro project while long-term relicensing proceeds.
- Other unusual items and changes: FirstEnergy recorded the $119 million debt-redemption loss. Asset-retirement obligations rose by $168 million during the quarter, primarily because of revised Little Blue Run closure cost estimates. FirstEnergy also disclosed $1.2 billion in present-value sale-and-leaseback operating lease commitments, net of trust investments.
Important facts for investors to verify
- Whether FirstEnergy executes the planned generation transfer, hydro-asset sale, debt reduction and late-2013 equity issuance, and the resulting impact on competitive-segment leverage and credit ratings.
- Whether operating cash flow can support the capital program, dividends and debt maturities, given low cash balances, the working-capital deficit and substantial investment outlays.
- Regulatory decisions on JCP&L storm-cost recovery, disputed Pennsylvania transmission costs and other rate matters, including the timing and recoverability of deferred costs.
- Final Little Blue Run closure costs and the scale and timing of MATS, water, coal-residual and other environmental compliance spending.
- Whether competitive power and capacity prices, wholesale margins, customer growth, and the company’s hedge position develop as management expects.
- Progress on Perry NRC corrective actions and the outcome of significant environmental, transmission-allocation, coal-supply and other legal proceedings.