FirstEnergy Corp. (NYSE: FE) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed April 27, 2023. FirstEnergy is a regulated electric utility holding company with distribution, transmission and limited generation operations serving approximately six million customers.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $3.231 billion | $2.989 billion | +$242 million, 8% |
| Operating income | $551 million | $559 million | -$8 million |
| Net income | $310 million | $288 million | +$22 million |
| Earnings attributable to FirstEnergy | $292 million | $288 million | +$4 million, 1% |
| Diluted EPS | $0.51 | $0.50 | +$0.01 |
| Operating margin | 17.1% | 18.7% | Down 1.6 percentage points |
Revenue growth was led by higher retail generation revenue, principally from higher prices and lower customer shopping in Ohio and New Jersey. Purchased-power expense rose $249 million, contributing to lower operating income. Net income benefited from equity-method investment earnings of $56 million, versus $12 million a year earlier; Global Holding contributed $54 million of pretax equity earnings. FirstEnergy’s earnings-per-share figures were broadly stable despite higher net income.
- Segments: Regulated Distribution earnings attributable to FE were $236 million, down $29 million; Regulated Transmission earnings were $114 million, down $11 million; Corporate/Other loss narrowed to $58 million from $102 million, largely on higher investment earnings and lower prior-year debt redemption costs.
- Cash flow: Operating activities used $112 million, versus $355 million provided in Q1 2022. The company cited payment timing for purchased-power payables and a $144 million net return of collateral to generation suppliers. Investing activities used $716 million, including $649 million in capital investments. Financing provided $828 million, including $950 million of new long-term debt and $450 million of net short-term borrowing. Dividends paid were $223 million.
- Balance sheet and debt: At March 31, cash and cash equivalents were $177 million and restricted cash was $29 million. Long-term debt and other long-term obligations were $22.124 billion; current long-term debt payable was $52 million and short-term borrowings were $550 million. Total liabilities were $35.748 billion and total assets $46.479 billion.
- Liquidity: As of April 24, 2023, reported available liquidity was $3.921 billion, comprising $3.791 billion of undrawn revolving credit and $130 million of cash. The $4.5 billion facilities mature in October 2026. Borrowers were in compliance with applicable credit covenants at March 31.
- Other: FirstEnergy declared a $0.39-per-share quarterly dividend. The effective income tax rate was 22.5%, compared with 22.4%.
Material changes and business developments
- On February 2, 2023, FirstEnergy agreed to sell Brookfield an additional 30% interest in FirstEnergy Transmission (FET) for $3.5 billion: expected consideration includes a $1.75 billion promissory note and $1.75 billion cash. Brookfield’s ownership would rise from 19.9% to 49.9%; FirstEnergy would retain 50.1% and continue consolidating FET. Closing is expected by early 2024, subject to regulatory and other approvals.
- FirstEnergy filed to consolidate its Pennsylvania utilities into a single regulated entity, subject to approvals, with completion also expected by early 2024.
- Capital investments increased to $649 million from $539 million, particularly reflecting higher transmission investment. The company describes a 2021–2025 investment plan of more than $9 billion for distribution and approximately $8 billion for transmission.
- Q1 operating cash flow weakened materially year over year, while short-term borrowings increased to $550 million from $100 million at year-end 2022.
Outlook, risks and unusual items
- The filing does not provide a clear consolidated full-year earnings or EPS guidance figure in the supplied text. Management expects existing liquidity sources to be sufficient for anticipated obligations and says it does not currently expect supply-chain disruption to materially affect its capital spending plan, while warning that prolonged disruption could harm results, cash flow or financial condition.
- Pending rate cases seek annual distribution-revenue increases of approximately $185 million for JCP&L in New Jersey and $44 million for PE in Maryland. These are requests, not approved increases. Ohio’s proposed ESP V would cover June 2024 through May 2032.
- FirstEnergy expects it is more likely than not to be subject to the Inflation Reduction Act’s corporate alternative minimum tax in 2023; it made an estimated payment of approximately $49 million in April. The final tax and regulatory effects remain uncertain.
- HB 6-related government inquiries, regulatory proceedings and lawsuits remain significant risks. The company says a loss in the SEC investigation is probable but cannot estimate an amount. It also considers losses probable in securities litigation but cannot reasonably estimate a loss range; a securities class action was certified in March 2023, and FirstEnergy appealed. The Ohio Attorney General’s civil case was allowed to proceed after a stay was lifted in March 2023.
- FirstEnergy paid a $3.86 million FERC penalty in January 2023, including an admission concerning FERC’s duty-of-candor rule. Its three-year federal Deferred Prosecution Agreement remains in effect; the $230 million DPA penalty was paid in 2021. A previously approved shareholder derivative settlement includes an expected insurance payment to FE of $180 million less $36 million in plaintiffs’ attorneys’ fees, but final resolution remains subject to proceedings.
- Environmental liabilities accrued were approximately $97 million. Future environmental rules, including proposed coal-plant wastewater requirements, could require additional spending. The company also identifies potential impacts from coal-plant operating and retirement decisions in West Virginia.
- FirstEnergy targets carbon neutrality by 2050 and a 30% reduction in Scope 1 greenhouse-gas emissions by 2030 from 2019 levels. West Virginia legislation requires prior approval to decommission MP generating facilities, which may affect those plans and asset recovery.
- After quarter-end, on April 27, 2023, credit-facility amendments addressed the proposed FET sale and Pennsylvania consolidation and transitioned the benchmark rate from LIBOR to SOFR. A new CEO was announced for June 1, 2023.
Key facts for investors to verify
- Progress and final approvals for the $3.5 billion FET transaction and Pennsylvania utility consolidation, including the timing and cash-versus-note consideration.
- Whether operating cash flow recovers and short-term borrowing levels remain manageable as capital investment and debt service continue.
- Outcomes of the SEC investigation, securities and other HB 6 litigation, Ohio regulatory proceedings, and the timing and collectability of any insurance settlement proceeds.
- Regulatory decisions on the New Jersey and Maryland rate cases, Ohio ESP V, West Virginia power-supply recovery, and proposed Pleasants Power Station arrangements.
- The ultimate 2023 alternative minimum tax obligation and any related regulatory recovery or customer-rate treatment.
- Actual capital spending, supply-chain cost trends, environmental compliance requirements, and recovery of costs associated with regulated generation assets.