FirstEnergy Corp. — Q2 2023 Form 10-Q
Business context and period. FirstEnergy is a regulated electric utility holding company with distribution and transmission operations serving approximately six million customers across the Midwest and Mid-Atlantic. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods. Financial amounts are in millions of dollars unless noted.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3,006 | $2,818 | $6,237 | $5,807 |
| Operating income | $481 | $447 | $1,032 | $1,006 |
| Net income attributable to FirstEnergy | $235 | $187 | $527 | $475 |
| Basic and diluted EPS | $0.41 | $0.33 | $0.92 | $0.83 |
| Operating cash flow | Not separately reported for the quarter in the provided text | $(213) | $1,283 | |
| Capital investments | Not separately reported for the quarter in the provided text | $1,418 | $1,186 |
Q2 revenue rose 7% and FirstEnergy-attributable earnings rose 26%; for the first half, revenue rose 7% and attributable earnings rose 11%. Approximate operating margin was 16.0% in Q2 2023 versus 15.9% in Q2 2022, and 16.5% for the first half versus 17.3% a year earlier. First-half operating cash flow turned negative, largely reflecting a $750 million pension contribution, payment timing for purchased power, and $190 million of net collateral returned to generation suppliers.
Revenue growth reflected higher retail generation prices and transmission revenue. Earnings also benefited from lower debt-redemption expense than in Q2 2022 and a $59 million non-cash pension mark-to-market gain. These benefits were partly offset by lower weather-related customer usage, higher interest expense, employee-separation costs, and lower pension and OPEB credits excluding the mark-to-market adjustment. Regulated Distribution earnings attributable to FirstEnergy fell $25 million in Q2 and $54 million for the first half; Regulated Transmission earnings rose $11 million in Q2 and were unchanged for the first half.
Financial position and liquidity
- At June 30, 2023, cash and cash equivalents were $171 million, restricted cash was $43 million, and total assets were $47.1 billion.
- Long-term debt and other long-term obligations were $22.7 billion, with $1.0 billion of long-term debt currently payable and $350 million of short-term borrowings. Total reported liabilities were $36.1 billion. The filing reports long-term debt carrying value of $23.7 billion, excluding finance leases and specified unamortized items.
- FirstEnergy issued $1.5 billion of 4.00% convertible notes due 2026 and issued $1.1 billion of other long-term debt in the first half; it also repaid $515 million of long-term debt and repurchased $194 million principal amount of 7.375% notes at a premium.
- Its six revolving credit facilities provide $4.5 billion of aggregate commitments. Available liquidity, including cash, was reported as $3.97 billion as of July 31, 2023. Borrowers were in compliance with applicable credit-facility covenants at June 30.
- Common dividends paid in the first half totaled $447 million. The company contributed $750 million voluntarily to its qualified pension plan and said it does not currently expect a required pension contribution through 2027, subject to assumptions.
Outlook, material developments, and risks
- Transmission investment sale: FirstEnergy agreed to sell Brookfield an additional 30% interest in FirstEnergy Transmission for $3.5 billion—half expected as cash and half as a promissory note. Brookfield’s ownership would rise to 49.9%, with FirstEnergy retaining 50.1% and continuing to consolidate FET. Closing is expected by early 2024, subject to regulatory and CFIUS approvals.
- Regulatory proceedings: FirstEnergy expects the Pennsylvania utility consolidation to close by early 2024, subject to approvals. Significant distribution-rate cases are pending in Maryland, New Jersey, and West Virginia; requested increases are not guaranteed. Ohio’s proposed ESP V and grid-modernization plans also require approval.
- Warrior Run PPA: Maryland regulators approved termination of the PPA for a $357 million fee payable through 2029. The company recorded an offsetting regulatory asset because the cost is expected to be recovered through the existing surcharge; management says the arrangement is expected to save customers money.
- Legal and investigation exposure: The SEC investigation remains ongoing; FirstEnergy says a loss is probable but cannot estimate an amount or range. The securities class action and certain related stockholder cases also carry probable but unestimable losses. A new Ohio investigative subpoena was received in June 2023. Outcomes could materially affect reputation, results, liquidity, and cash flows. The DPA-related $230 million penalty was paid in 2021; a separate $3.86 million FERC penalty was paid in January 2023.
- Operating and policy risks: Supply-chain delays, labor and material constraints, inflation, higher interest rates, weather, customer demand, cyber risks, and access to capital could affect costs, investment, or liquidity. Environmental rules and potential emissions requirements may require additional spending or changes to coal-plant operations. FirstEnergy’s climate goals include carbon neutrality by 2050 and a 30% reduction in Scope 1 emissions by 2030 from 2019 levels.
- Tax and pension uncertainty: FirstEnergy made a $49 million estimated payment toward the new corporate alternative minimum tax but said it expects no additional 2023 payments under interim Treasury guidance; final liability remains uncertain. Future pension mark-to-market results are also uncertain.
- Management and cost actions: A new CEO began in June 2023. A voluntary retirement program accepted about 450 employees, with about 90 additional involuntary separations; management expects savings to support growth plans. Facility changes beginning in 2024 could result in future impairment or other charges.
Important facts for investors to verify
- Progress and final approvals for the Brookfield FET transaction and Pennsylvania consolidation, including closing timing and the form of consideration.
- Updates on SEC, shareholder, and other HB 6-related investigations and litigation, including any estimate or accrual for potential losses.
- Regulatory decisions on rate cases and proposed recovery mechanisms, and whether requested increases are approved, modified, or delayed.
- Cash generation and financing needs after the large pension contribution, elevated capital spending, debt issuance, and rising borrowing costs.
- Final tax guidance and the effect of environmental requirements on coal-plant investment, operations, and recoverability of costs.