FirstEnergy Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. FirstEnergy serves more than six million customers through regulated distribution and transmission businesses. On March 31, it deconsolidated FES and FENOC following their Chapter 11 filings; their results, along with specified generation assets, are presented as discontinued operations.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $2.976 billion | $2.855 billion | +$121 million (4%) |
| Operating income | $597 million | $628 million | -$31 million (5%) |
| Income from continuing operations | $177 million | $257 million | -$80 million (31%) |
| Net income | $1.369 billion | $205 million | Includes a major deconsolidation gain |
| Net income attributable to common stockholders | $1.213 billion | $205 million | Basic EPS $2.55 vs. $0.46 |
The $1.239 billion after-tax gain on deconsolidation drove reported net income; it is not a measure of recurring operating performance. Continuing-operations basic EPS was $0.04, down from $0.58. Operating margin, calculated as operating income divided by revenue, was approximately 20.1%, versus 22.0%.
- Cash flow: Operating activities used $880 million, compared with $785 million provided in Q1 2017, primarily reflecting $1.25 billion of pension contributions. Investing activities used $1.143 billion, including $583 million of property additions and a $500 million note receivable from an affiliate. Financing activities provided $1.679 billion, including equity proceeds and net short-term borrowing.
- Liquidity: Cash and cash equivalents were $248 million at quarter-end, with $51 million restricted cash. Available external liquidity was reported at $4.038 billion, including $3.790 billion of undrawn revolving facilities and cash.
- Debt and capitalization: Balance-sheet long-term debt and other long-term obligations were $16.740 billion; $1.157 billion of long-term debt was currently payable and short-term borrowings were $1.200 billion. FirstEnergy issued approximately $2.466 billion of common and preferred equity and repaid $1.45 billion of term loans. Stockholders’ equity was $7.375 billion, up from $3.925 billion at year-end.
- Dividends: Common dividends declared were $0.72 per share, unchanged year over year. Preferred shares participate in common dividends on an as-converted basis.
Material changes and management commentary
- Revenue rose 4%, supported by regulated rate increases and higher weather-related usage; distribution deliveries increased 5%, with heating degree days 17.5% above the prior-year quarter.
- Operating income fell despite higher revenue. Other operating expenses increased $305 million, including higher storm restoration costs; $184 million of storm costs were deferred for future recovery and had no material current-period earnings impact. Regulatory deferrals also reduced reported expense versus the prior year.
- Income taxes increased to $252 million from $152 million. The effective tax rate was 58.7% versus 37.2%, including a $126 million charge associated with the separation of FES and FENOC from the West Virginia unitary tax group. The company said its Tax Act assessment remained provisional and expected to be completed by Q4 2018.
- Management’s strategy is to exit commodity-exposed generation and focus on regulated operations. The company cited projected distribution capital investment of $5.7–$6.7 billion through 2021, with approximately 5% rate-base growth, and transmission investment of $4.0–$4.8 billion in 2018–2021, with approximately 11% rate-base growth. It identified more than $20 billion of potential additional transmission opportunities. No specific earnings guidance was provided in the supplied filing text.
Bankruptcy, outlook, risks and contingencies
- FES and FENOC filed Chapter 11 petitions on March 31. FirstEnergy concluded it no longer controlled them, deconsolidated them, and valued its investments at zero. It recorded an $820 million liability for retained employee benefit obligations and reserved for specified affiliate receivables and loans.
- On April 20, FirstEnergy announced a conditional agreement in principle with creditor groups. Terms include a $225 million cash payment, a possible note of up to $628 million, assumption of certain employee-related obligations, transfer of Pleasants Power Station to FES, and releases of claims. Definitive agreements, board and Bankruptcy Court approvals, and other conditions remained outstanding; actual outcomes could differ materially.
- FirstEnergy reported approximately $1.9 billion of guarantees and other assurances. Key exposures include guarantees related to FES/FENOC, a $555 million guarantee associated with generation-asset sales, and a $255 million Global Holding loan guarantee. The company paid the remaining $72 million of the CSX/BNSF settlement on April 6.
- The FES bankruptcy triggered defaults or repayment provisions under approximately $3.6 billion of debt documents of the filing entities; FirstEnergy stated enforcement was subject to the Chapter 11 stay. Potential creditor claims against non-debtor affiliates and the treatment of intercompany loans and guarantees remain significant uncertainties.
- Other exposures include regulatory rate and tax proceedings, unresolved FERC transmission matters, environmental compliance and remediation, and pension and nuclear decommissioning trust investment risk. Environmental remediation liabilities accrued were approximately $125 million; possible additional liabilities could not be estimated clearly. Fort Martin water-discharge requirements could require $150–$300 million of capital investment, subject to pending proceedings.
- Management said existing liquidity sources were expected to be sufficient for anticipated obligations, but access to financing, credit ratings, regulatory cost recovery, bankruptcy outcomes and capital-market conditions could affect liquidity and investment plans. Pension assets returned approximately negative 1.4% through March 31, versus a 7.5% annual expected return.
Most important facts for investors to verify
- Progress and final terms of the FES/FENOC bankruptcy settlement, including FirstEnergy’s cash, note, benefit and guarantee obligations.
- Whether the reported net income and EPS are being assessed separately from the one-time deconsolidation gain and discontinued operations.
- Liquidity after pension funding, debt maturities, short-term borrowing, and any payments or claims arising from the bankruptcy.
- Regulatory outcomes affecting rates, Tax Act customer refunds, transmission recovery and planned capital investment.
- Completion and proceeds of the Bath County sale, and the disposition or shutdown of Pleasants Power Station.