FirstEnergy Corp. (NYSE: FE) — Q2 2021 Form 10-Q
Business context and period: Quarterly report for the three and six months ended June 30, 2021. FirstEnergy is a regulated electric utility holding company serving approximately six million customers across six states, with regulated distribution and transmission operations. Financial statements are unaudited.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.622 billion | $2.522 billion | $5.348 billion | $5.231 billion |
| Operating income | $312 million | $515 million | $871 million | $1.047 billion |
| Net income | $58 million | $309 million | $393 million | $383 million |
| Diluted EPS | $0.11 | $0.57 | $0.72 | $0.71 |
| Cash from operations | Not separately stated | Not separately stated | $1.347 billion | $150 million |
| Cash used for investing | Not separately stated | Not separately stated | $1.174 billion | $1.406 billion |
Q2 operating margin was approximately 11.9%, versus 20.4% a year earlier; the six-month margin was approximately 16.3%, versus 20.0%. These percentages are calculated from reported revenue and operating income.
At June 30, 2021, cash and cash equivalents were $1.254 billion, restricted cash $58 million, short-term borrowings $500 million, current long-term debt payable $733 million, and long-term debt and other long-term obligations $23.025 billion. Stockholders’ equity was $7.430 billion. FirstEnergy reported a working-capital deficit but did not provide a clear amount in the supplied text. It said cash from operations and available liquidity were expected to cover current working-capital needs.
Six-month financing cash flow was a $662 million use, including $424 million of common dividends paid; property additions were $1.226 billion. Cash, cash equivalents and restricted cash declined by $489 million during the six months. The company reported $3.956 billion of available liquidity as of July 21, 2021, including $3.496 billion of revolving-facility availability and $460 million of cash and cash equivalents.
Material changes versus comparable periods
- Q2 revenue rose 4%, but operating income fell 39% and net income fell 81%. The principal unusual item was a $230 million Deferred Prosecution Agreement (DPA) penalty recorded as expense; higher interest expense and income tax expense also weighed on results.
- Six-month revenue rose 2% and net income increased 3%, despite a 17% decline in operating income. The comparison benefited from the absence of a $423 million pension and OPEB mark-to-market loss recorded in 2020 and from higher 2021 operating cash flow, partly because 2020 included a $978 million settlement and tax-sharing payment to the FES Debtors.
- Distribution and transmission revenue increased, supported by higher demand, investment-related riders and transmission rate-base growth. Results also reflected higher transmission and other costs, and reduced Ohio revenue from discontinued decoupling and lost-distribution-revenue recovery.
- The $109 million Yards Creek sale gain was offset by regulatory-asset amortization and had no earnings impact.
Outlook, management commentary and risks
- DPA and investigations: On July 21, 2021, after quarter-end, FirstEnergy entered a three-year DPA concerning the HB 6 investigation. It agreed to pay $230 million within 60 days, cooperate with authorities, disclose specified political payments and continue compliance remediation. The penalty is not recoverable from customers and will not be deducted for tax purposes. The criminal information is to be dismissed after full compliance. SEC and FERC investigations remain ongoing; management considers losses probable but says it cannot reasonably estimate a loss or range. Related litigation and regulatory proceedings could materially affect reputation, rates, results, liquidity and cash flows.
- Controls and governance: Management concluded disclosure controls were ineffective at June 30 because of a material weakness in the control environment and tone at the top. The company said the weakness had not caused a material misstatement, and remediation was ongoing; it is not considered remediated until implemented and tested. The filing describes executive departures, leadership and board changes, and compliance enhancements.
- Financing and capital: July 21 amendments to revolving credit agreements waived or modified certain provisions related to the DPA, allowing access to liquidity. The facilities total $3.5 billion and mature in December 2022. FirstEnergy reported compliance with financial covenants at June 30. It did not anticipate issuing additional equity in 2021, but expected, subject to conditions, up to $600 million annually in 2022 and 2023. It has reduced capital plans and is considering expense and financing changes amid ongoing uncertainty.
- Operating plans: FE Forward is projected to produce approximately $300 million in annualized capital-expenditure efficiencies by 2024 and approximately $250 million in working-capital improvements by 2022, with estimated costs to achieve of $150 million through 2023. FirstEnergy no longer provides a long-term earnings growth rate pending greater clarity on Ohio regulation and investigations.
- Regulatory and other risks: Ohio proceedings include audits, political-spending reviews and earnings/rate matters; the company says potential outcomes are uncertain. It planned customer refunds of approximately $27 million for Ohio decoupling collections, with refunds directed to begin in August 2021. Environmental compliance, climate policy, severe weather, COVID-19, customer arrears, credit ratings, interest rates and access to capital are additional risks. FirstEnergy targets carbon neutrality by 2050 and a 30% reduction in directly controlled greenhouse-gas emissions by 2030 from 2019 levels.
Most important facts for investors to verify
- Cash payment and continuing obligations under the DPA, and progress and outcomes of SEC, FERC and related state investigations and litigation.
- Whether the material weakness is remediated and controls operate effectively after testing.
- Ohio regulatory decisions, customer refunds, audits and any resulting rate or earnings effects.
- Available liquidity, covenant compliance, credit ratings and the effect of potential additional legal costs on financing and capital plans.
- Delivery of FE Forward’s projected efficiencies and working-capital improvements, and the sustainability of earnings excluding the DPA penalty and other unusual items.