FirstEnergy Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. FirstEnergy is a regulated electric utility holding company operating distribution and transmission businesses across the Midwest and Mid-Atlantic, serving about six million customers. Results are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3.124B | $3.022B | $8.472B | $8.253B |
| Operating income | $631M | $721M | $1.502B | $1.768B |
| Income from continuing operations | $416M | $460M | $809M | $791M |
| Net income | $463M | $454M | $856M | $837M |
| Diluted EPS | $0.85 | $0.84 | $1.57 | $1.54 |
| Operating margin | 20.2% | 23.9% | 17.7% | 21.4% |
Operating margins are calculated as operating income divided by revenue. Q3 net income included a $47M discontinued-operations tax benefit; continuing-operations income declined year over year. Nine-month net income also included that $47M benefit.
- Cash flow: Operating cash flow was $2.104B for the first nine months, versus $851M in 2020. Investing cash outflow was $1.811B, including $1.768B of property additions; financing cash outflow was $1.410B. Cash, cash equivalents and restricted cash totaled $684M at September 30.
- Liquidity: Cash and cash equivalents were $577M, down from $1.734B at year-end 2020; restricted cash was $107M. FirstEnergy reported no short-term borrowings at September 30, versus $2.2B at December 31, 2020. Subsequent to quarter-end, it established $4.5B of revolving credit facilities; reported available liquidity as of October 25 was $5.053B, including $557M cash.
- Debt and equity: The balance sheet reported $22.503B of long-term debt and other long-term obligations and $1.230B of currently payable long-term debt. Total stockholders’ equity was $7.479B. The company paid $636M in common dividends in the first nine months.
Material changes versus prior period
- Nine-month revenue rose 3%, but operating income fell 15%, with the $230M Deferred Prosecution Agreement penalty a major expense. The penalty was recognized in Q2 and paid in Q3; it is not recoverable from customers or tax deductible.
- Q3 operating income decreased $90M despite revenue growth. The company cited higher purchased-power costs and regulatory-asset amortization, plus a $21M pre-tax charge tied to a proposed ATSI transmission-rate settlement. The filing also reports a $27M reduction of a reserve previously recorded in 2010, partly offsetting the ATSI charge across segments.
- Nine-month operating cash flow increased substantially, primarily because 2020 included a $978M settlement and tax-sharing payment to the FES Debtors. Higher collections and rate recovery also contributed; the 2021 DPA payment partially offset the increase.
- The 2020 comparison included a $423M pension and OPEB mark-to-market expense, absent in 2021. The 2021 Yards Creek sale generated a $109M gain, offset by regulatory expense and therefore with no earnings impact.
- Revenue increased with higher distribution deliveries and generation sales. FirstEnergy reported nine-month distribution deliveries up 2.8% and higher transmission revenue; Ohio decoupling refunds and the decision not to seek certain lost-distribution revenue were offsets.
Outlook, commentary and risks
- Management emphasized a fully regulated business strategy, but withdrew its long-term earnings growth rate until Ohio regulatory matters and government investigations are clearer. It anticipates needing equity and is exploring a minority sale of FET; timing and amounts remain uncertain.
- Capital plans included up to $6.6B of distribution investment and $5.15B of transmission investment for 2020–2023. Management said it had reduced capital plans and was considering operating-cost and financing changes to preserve flexibility amid legal and regulatory uncertainty.
- FE Forward targets approximately $300M of annualized capital-expenditure efficiencies by 2024, approximately $250M of working-capital improvements by 2022, and about $150M of costs to achieve through 2023. These are management targets, not guaranteed results.
- FirstEnergy’s DPA obligations include cooperation with federal authorities, compliance-program remediation and quarterly disclosure of specified political-related payments during the three-year term. The criminal information is to be dismissed after full compliance.
- SEC and FERC investigations remain open. FirstEnergy stated losses from each investigation are probable but cannot yet be reasonably estimated. Related shareholder, customer and government litigation and Ohio regulatory proceedings could materially affect reputation, results, liquidity and cash flows; other listed lawsuits were not accrued because loss was not considered probable or estimable.
- Ohio proceedings include review of political and charitable spending, audits of rider and vendor transactions, and earnings/rate-plan matters. An audit report recommended approximately $6.6M in customer refunds for certain transactions; further review was pending. Other potential refunds or liabilities were not clearly estimable in the filing.
- Environmental exposure includes approximately $101M of accrued remediation liabilities. Future environmental rules, climate policies, coal-plant retirement decisions and cost recovery could require material expenditures or affect operations.
- COVID-19 effects remain uncertain, including customer arrears and ongoing expenses; management did not expect material supply-chain disruption or impact to its capital-spending plan at the time of filing.
- Management stated that the previously disclosed material weakness in internal control over financial reporting had been remediated by September 30, 2021. It also reported disclosure controls were effective.
Most important facts for investors to verify
- Progress, terms and financial consequences of the SEC and FERC investigations, DPA compliance, and related litigation.
- Outcomes of Ohio PUCO audits and proceedings, including any customer refunds, rate disallowances or changes to recovery mechanisms.
- Whether proposed FET minority-sale or other equity plans proceed, and how financing choices affect leverage, liquidity and shareholder dilution.
- Delivery of FE Forward savings and capital-efficiency targets, alongside planned investment and any further capital-plan reductions.
- Credit ratings, covenant compliance and refinancing access; the $4.5B facilities were entered into after quarter-end and have financial covenants.
- Whether environmental, climate, pension and customer-arrears developments create costs beyond amounts accrued or currently estimated.