FirstEnergy Corp. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The combined filing also reports FirstEnergy Solutions Corp. (FES), Ohio Edison Company (OE) and Jersey Central Power & Light Company (JCP&L). Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and reporting period
FirstEnergy is an electric utility and energy holding company with regulated distribution and transmission operations and competitive generation and energy sales. It served approximately 6 million customers across six states. Its 2011 merger with Allegheny affects comparisons: FirstEnergy’s six-month 2011 results include only four months of Allegheny results, versus six months in 2012. In Q2 2012, the company completed integration of Allegheny’s IT and financial systems and revised its segment reporting.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $3,869 | $4,060 | $7,947 | $7,636 |
| Operating income | $557 | $521 | $1,303 | $871 |
| Net income | $188 | $193 | $494 | $240 |
| Earnings available to FirstEnergy | $187 | $203 | $493 | $255 |
| Diluted EPS | $0.45 | $0.48 | $1.18 | $0.67 |
| Operating cash flow | Not presented by quarter | $62 | $1,031 |
Revenue declined 5% year over year in Q2, while earnings available to FirstEnergy fell 8%. For the six-month period, revenue rose 4% and earnings available rose 93%; the comparison is affected by the additional two months of Allegheny results in 2012 and merger-related items in 2011. Calculated operating margins were approximately 14.4% for Q2 2012 versus 12.8% in Q2 2011, and 16.4% for the first half of 2012 versus 11.4% in the first half of 2011.
- Segment earnings, six months: Regulated Distribution $318 (up $51); Regulated Transmission $112 (up $32); Competitive Energy Services $166 (up $130); other and reconciling items $(103).
- Cash flow and investment: Operating cash flow was $62, down from $1,031. The company attributed the decline largely to a $600 voluntary pension contribution, weaker working capital and lower noncash adjustments. Property additions were $1,001; cash used for investing was $1,001.
- Liquidity: Cash was $94 at June 30, down from $202 at year-end 2011. Available liquidity was approximately $3.641 billion, including $3.578 billion under credit facilities and $63 of cash. Current assets of $3.608 billion were below current liabilities of $6.082 billion, principally reflecting debt classified as currently payable.
- Borrowings and equity returns: The balance sheet reported $1.890 billion of short-term borrowings, $1.577 billion of currently payable long-term debt and $15.159 billion of long-term debt and other long-term obligations. FirstEnergy declared $0.55 per share in dividends during the first half and paid $460 in common-stock dividends.
Material changes and management commentary
- Q2 earnings declined despite higher operating income; management cited lower regulated distribution revenue and earnings, as well as reduced competitive-energy earnings compared with the prior-year quarter. Customer migration to alternative suppliers continued to reduce utility generation sales.
- For the first half, improved results included Allegheny contributions, lower merger-related costs, and improved Competitive Energy Services results. Management also cited milder weather as a drag on regulated distribution results.
- FirstEnergy entered $1.6 billion of forward-starting interest-rate swaps, expiring December 2013, to hedge planned debt issuances and refinancing; the portfolio’s weighted-average 10-year fixed rate was 2.315%. It also amended credit facilities, extending their termination to May 2017 and reducing pricing. A new $1 billion FET facility was drawn in full.
- Management estimated remaining-2012 property additions and capital-lease requirements at approximately $1.4 billion, including $201 million for nuclear fuel. No specific consolidated earnings or EPS guidance is provided in the filing text.
Outlook, risks, contingencies and unusual items
- Storm costs: A late-June derecho caused outages. Estimated costs to be incurred in Q3 were expected to exceed $130 million, approximately 70% capital-related. Some maintenance costs were expected to be deferred for recovery; MP and PE needed regulatory approval to defer their costs.
- Generation retirements and environmental compliance: FirstEnergy planned to deactivate nine coal-fired plants totaling 3,349 MW by September 1, 2012, subject to reliability arrangements. Management estimated future MATS compliance costs at $975 million. Severance expense related to deactivations was $17 million for the first half. Some units were retained under reliability-must-run arrangements.
- Regulatory developments: Ohio regulators approved a two-year extension of the Ohio Companies’ electric security plan through May 31, 2016, maintaining frozen base distribution rates and existing riders. New Jersey regulators ordered JCP&L to file a base-rate case by November 1, 2012; the outcome is uncertain.
- Environmental and legal exposure: Environmental remediation liabilities accrued were approximately $122 million, including $86 million for JCP&L. FirstEnergy disclosed numerous pending air, water, waste, nuclear and transmission matters, some with potentially material but unestimable outcomes. A proposed Pennsylvania consent decree concerning the Little Blue Run coal-combustion residuals impoundment included monitoring, studies, a closure plan and an $0.8 million penalty.
- Other significant exposures: Guarantees and other assurances totaled approximately $4.1 billion, substantially related to consolidated subsidiaries. Credit downgrades could trigger additional collateral requirements of up to $804 million under disclosed provisions. The company also identified disputed transmission-cost allocations, including potential Michigan Thumb project costs estimated by MISO at about $15 million in annual revenue requirements for ATSI upon project completion.
- Operational and market risks: Key uncertainties include power and fuel prices, weather and demand, regulatory cost recovery, environmental rules, plant availability, pension and nuclear decommissioning funding, and access to capital markets. FirstEnergy estimated that an adverse 10% commodity-price change would reduce net income by approximately $2 million over the next 12 months, based on positions at June 30.
Important facts for investors to verify
- How much of the first-half earnings improvement reflects recurring operations versus Allegheny’s additional consolidation period and other comparison effects.
- Whether operating cash flow recovers after the $600 million pension contribution and working-capital outflows, and how the planned $1.4 billion of remaining-2012 capital requirements will be funded.
- The outcome and customer-rate implications of JCP&L’s required base-rate filing, Pennsylvania transmission-cost recovery disputes and other significant regulatory proceedings.
- Actual deactivation timing, reliability-must-run costs, and the realized capital and operating costs of environmental compliance compared with the $975 million MATS estimate.
- Whether storm restoration costs are approved for deferral and recovered from customers, particularly for MP and PE.
- Debt refinancing and liquidity needs, including the treatment of currently payable debt, the August 2012 PCRB repurchase, and any rating-related collateral demands.