FirstEnergy Corp. — 2021 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2021, comparing primarily with 2020. FirstEnergy is a regulated electric utility holding company serving about 6.2 million customers across the Midwest and Mid-Atlantic. Its reportable businesses are Regulated Distribution and Regulated Transmission; it operates more than 24,000 transmission line miles and controls 3,580 MW of regulated generation capacity.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $11.132 billion | $10.790 billion |
| Operating income | $1.726 billion | $2.162 billion |
| Income from continuing operations | $1.239 billion | $1.003 billion |
| Net income | $1.283 billion | $1.079 billion |
| Diluted EPS | $2.35 | $1.99 |
| Cash from operating activities | $2.811 billion | $1.423 billion |
| Property additions | $2.445 billion | $2.657 billion |
| Cash and cash equivalents at year-end | $1.462 billion | $1.734 billion |
Revenue increased 3.2% and net income rose 18.9%, while operating income declined about 20%. Calculated operating margin fell to approximately 15.5% from 20.0%; net margin rose to approximately 11.5% from 10.0%. Continuing-operations diluted EPS was $2.27, versus $1.85. Operating cash flow improved substantially, principally because 2020 included a $978 million settlement and tax-sharing payment to the FES Debtors; the 2021 cash outflow included the $230 million DPA penalty.
At December 31, 2021, FirstEnergy had no short-term borrowings and approximately $23.9 billion of long-term debt carrying value (including currently payable debt); holding-company debt was approximately $7.9 billion. Interest expense was $1.141 billion. Current assets of $3.237 billion were below current liabilities of $4.416 billion, reflecting a working-capital deficit that management said it expected to meet with operating cash and available liquidity. The new revolving credit facilities total $4.5 billion, with $4.496 billion available at year-end; reported total liquidity as of February 14, 2022 was $5.075 billion, including cash. The company paid $849 million in common dividends in 2021; the quarterly dividend was $0.39 per share.
Material changes versus 2020
- Regulated Distribution income increased $329 million to $1.288 billion, supported by pension/OPEB mark-to-market movements, higher customer demand, investment-related riders and New Jersey rate changes. Higher purchased-power and fuel costs, Ohio customer refunds and other regulatory items partly offset the improvement.
- Regulated Transmission income decreased $56 million to $408 million, mainly due to an ATSI settlement charge, higher interest costs, formula-rate adjustments and lower TrAIL rate base.
- Corporate/Other net loss increased $69 million to $457 million, reflecting the DPA penalty, investigation-related costs and higher interest, partly offset by pension/OPEB mark-to-market changes and other income-tax benefits.
- The year included a $230 million DPA penalty, a $96 million Ohio customer-refund charge, a $61 million Pennsylvania tax-savings refund charge, and a $37.5 million reserve for certain customer class actions. A $109 million Yards Creek sale gain was offset by regulatory-asset amortization and had no net earnings impact.
- FirstEnergy issued $1.0 billion of common stock to a Blackstone affiliate and agreed to sell Brookfield a 19.9% interest in FirstEnergy Transmission for $2.375 billion, subject to regulatory and other approvals. The Brookfield transaction was expected to close in 2022.
Outlook, commentary, risks and contingencies
- Investment and efficiency plans: The company forecast capital investment of $3.35 billion in 2022, increasing to $3.625 billion in 2025. Its 2021–2025 plan totals approximately $17 billion. FE Forward targets $380 million of annualized capital-expenditure efficiencies by 2024 and $250 million of working-capital improvements by 2023, with approximately $150 million of implementation costs through 2023. These are targets, not guaranteed results.
- Regulatory outcomes: An Ohio stipulation provides for $96 million of refunds and $210 million in future customer rate reductions through 2025. Ohio base distribution rates are generally frozen through May 2024, when the companies plan to file their next rate case. Pennsylvania customers are also due additional tax-savings refunds; the timing and methodology were to be addressed in regulatory filings.
- HB 6 matters: The three-year DPA requires cooperation, compliance and ethics measures, and other undertakings; the $230 million penalty was paid in 2021 and will not be recovered from customers or deducted for tax purposes. SEC and FERC investigations remain ongoing. The company says losses related to these matters are probable but cannot reasonably estimate the amounts. Certain securities and customer lawsuits also carry probable losses; a $37.5 million reserve was recorded for specified customer actions.
- Other litigation: A February 2022 shareholder derivative settlement term sheet, subject to court approval, includes governance changes and a proposed $180 million insurance payment to FirstEnergy, less any court-ordered plaintiffs’ fees. The company’s reported 2021 results do not include this proposed receipt.
- Funding and credit: The company says existing liquidity should meet anticipated obligations, but relies on external financing to support its capital-intensive plans. FirstEnergy’s parent ratings remained below investment grade in the reported ratings table; further downgrades could increase financing costs or collateral requirements. Credit-facility covenants were met at year-end.
- Operational and external risks: COVID-19 effects, customer arrears, inflation and supply-chain delays were expected to continue into 2022. Other material exposures include weather, cybersecurity, regulatory cost recovery, environmental compliance and the future economics and recoverability of coal-generation assets.
- Energy transition: FirstEnergy targets a 30% reduction in Scope 1 greenhouse-gas emissions by 2030 from a 2019 baseline and carbon neutrality by 2050. It plans to transition away from regulated coal generation no later than 2050; possible retirement dates for Harrison and Fort Martin were discussed as 2040 and 2035, respectively, subject to stakeholder and regulatory processes. Recovery of remaining plant costs is uncertain.
- Controls and audit: Management and the auditor concluded internal control over financial reporting was effective at year-end. A material weakness concerning tone at the top, previously reported, was stated to have been remediated by September 30, 2021.
Important facts for investors to verify
- Progress and final proceeds from the $2.375 billion Brookfield transmission-interest transaction, including regulatory approvals and any conditions imposed.
- Developments, potential financial exposure and compliance status under the DPA, and outcomes of the SEC, FERC and state regulatory investigations and related litigation.
- Whether the forecast FE Forward efficiencies and working-capital improvements are achieved, and whether the multi-year capital plan is funded while maintaining credit metrics and dividend capacity.
- Final amounts, timing and rate treatment of Ohio and Pennsylvania customer refunds and future rate reductions.
- Whether future environmental requirements or coal-plant retirement decisions result in additional spending, impairment, depreciation changes or disallowed cost recovery.
- Changes in customer arrears, supply-chain costs, pension/OPEB assumptions and funding needs, and credit ratings or liquidity availability.