FirstEnergy Corp. (FE) — 2019 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 4, 2019. FirstEnergy operates regulated electric distribution and transmission businesses, serving approximately six million customers. Results are presented with most competitive-generation operations as discontinued operations following the 2018 FES/FENOC bankruptcy and exit strategy.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2.963 billion | $3.064 billion | $8.362 billion | $8.551 billion |
| Operating income | $681 million | $710 million | $1.895 billion | $1.990 billion |
| Income from continuing operations | $389 million | $399 million | $1.085 billion | $888 million |
| Net income (loss) | $391 million | $(458) million | $1.023 billion | $1.210 billion |
| Diluted EPS | $0.72 | $(1.02) | $1.89 | $1.75 |
Operating margin was approximately 23.0% in Q3 2019 versus 23.2% a year earlier, and 22.7% for the first nine months versus 23.3%. Q3 revenue declined about 3%, while nine-month revenue fell about 2%. Nine-month operating cash flow was $1.737 billion, compared with $558 million; investing cash outflow was $2.081 billion and financing cash inflow was $665 million. Property additions were $1.912 billion.
At September 30, cash and cash equivalents were $716 million (up from $367 million at year-end 2018), with $34 million of restricted cash. Short-term borrowings were $1.0 billion, currently payable long-term debt was $381 million, and long-term debt and other long-term obligations were $19.422 billion. Stockholders’ equity was $7.272 billion. As of October 31, available liquidity was reported at $4.237 billion, including $3.494 billion of revolving-credit availability and $743 million cash.
Changes and drivers
- Q3 continuing-operations income declined $10 million year over year. Distribution results were pressured by the loss of Ohio Rider DMR collections and lower weather-related usage; transmission income improved with higher rate base at ATSI and MAIT.
- For the first nine months, continuing-operations income increased $197 million, helped by lower income taxes and lower corporate/other costs, including the absence of a 2018 state tax charge and debt make-whole costs. Distribution net income declined $158 million, while transmission net income increased $31 million.
- Reported net income comparisons are distorted by discontinued-operation and bankruptcy-related items: Q3 2018 included an $834 million after-tax loss on deconsolidation of FES/FENOC, while nine-month 2018 included a $405 million after-tax gain on disposal.
- FirstEnergy issued $2.1 billion of long-term debt and repaid $784 million during the first nine months. The $500 million voluntary pension contribution made in February leaves no required contributions expected through 2021, according to management.
Outlook, risks and contingencies
- Management’s strategy is to operate as a fully regulated utility. It forecast $6.2–$6.7 billion of distribution capital investment and up to $4.8 billion of transmission investment for 2018–2021, with expected rate-base growth of about 5% and 11%, respectively. It also identified more than $20 billion of potential transmission investment beyond 2021. No specific earnings guidance is stated in the provided filing text.
- Management said existing liquidity should be sufficient and did not anticipate additional equity issuance through at least 2021, excluding routine stock and employee plans. Financing remains subject to market conditions and credit ratings.
- The Ohio Supreme Court invalidated Rider DMR; collections ceased, and approximately $28 million of customer refunds were implemented October 1, 2019. A separate appeal seeks an additional $42 million refund related to 2017 earnings treatment.
- After quarter-end, the bankruptcy court confirmed the FES Debtors’ reorganization plan on October 16, 2019. Appeals were filed, and emergence remained conditional on approvals including FERC and NRC. The settlement includes cash, a note, employee obligations, and potential environmental guarantees; consummation is not assured.
- Environmental liabilities accrued were approximately $119 million. FirstEnergy also disclosed approximately $1.6 billion of guarantees and assurances. The planned transfer of TMI-2, its trusts, and related liabilities of about $900 million remained subject to regulatory approval and closing conditions.
- Other material exposures include regulatory and environmental rule changes, litigation, pension asset and discount-rate movements, and credit/collateral requirements. Management estimated a potential after-tax pension/OPEB mark-to-market loss of approximately $400 million to $1 billion under stated discount-rate assumptions.
Investor verification points
- Track FES bankruptcy appeals, required regulatory approvals, settlement payments and the Pleasants transfer conditions.
- Confirm the financial and refund effects of Rider DMR and the separate Ohio earnings appeal.
- Monitor capital spending, rate-base growth, regulatory recovery and financing costs against management’s plans.
- Assess debt maturities, liquidity, credit ratings, pension exposure and guarantee obligations.
- Review the outcome and financial treatment of the TMI-2 transfer and environmental remediation obligations.