FirstEnergy Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. FirstEnergy is a regulated electric utility holding company serving approximately six million customers across six states, with regulated distribution and transmission businesses.
Financial results
Amounts in millions, except per-share data. Comparisons are with the corresponding 2021 period.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $3,475 | $3,124 | $9,282 | $8,472 |
| Operating income | $505 | $631 | $1,511 | $1,502 |
| Income from continuing operations | $344 | $416 | $824 | $809 |
| Earnings attributable to FirstEnergy | $334 | $463 | $809 | $856 |
| Diluted EPS attributable to FirstEnergy | $0.58 | $0.85 | $1.41 | $1.57 |
| Cash from operating activities | Not separately presented | Not separately presented | $1,837 | $2,104 |
| Property additions | Not separately presented | Not separately presented | $1,788 | $1,768 |
- Revenue rose 11% in Q3 and 10% year to date. Higher retail generation prices and sales, driven partly by higher market prices and fewer customers shopping with alternative suppliers, contributed to growth; regulated transmission revenue also increased.
- Q3 operating income fell 20% as operating expenses increased 19%, outpacing revenue growth. Operating margin was approximately 14.5%, versus 20.2% a year earlier. Year-to-date operating income was nearly unchanged, with operating margin approximately 16.3%, versus 17.7%.
- Q3 earnings attributable to FirstEnergy fell 28%. Continuing-operations diluted EPS declined to $0.58 from $0.76; the prior-year quarter also included $47 million of discontinued-operations income. Year-to-date continuing-operations earnings attributable to FirstEnergy were $809 million in both periods; reported EPS was lower in 2022, partly reflecting more shares outstanding and the prior-year discontinued-operations gain.
- Operating cash flow declined $267 million year to date, mainly reflecting Ohio customer rate credits, higher costs and working-capital effects, partly offset by cash from regulated investments and supplier collateral. Cash used for investing was $2,003 million and cash used for financing was $1,068 million.
- Cash and cash equivalents were $251 million at September 30, down from $1,462 million at year-end 2021; restricted cash was $26 million. Current assets of $2,312 million were below current liabilities of $3,493 million. Management said cash flow and available liquidity were sufficient for current working-capital needs.
- Balance-sheet long-term debt and other long-term obligations were $20,905 million, with $353 million of long-term debt currently payable. FirstEnergy reported no short-term borrowings at quarter-end. The $4.5 billion revolving facilities had $4.496 billion available; including $207 million cash reported as of October 24, total stated liquidity then was $4.703 billion.
Material changes and notable items
- Q3 regulated distribution earnings fell $55 million year over year, primarily due to higher operating expenses, Ohio rate credits and higher pension and OPEB expenses. Transmission earnings fell $33 million, primarily due to FERC-audit-related customer refunds and nonrecoverable asset costs. Year-to-date distribution earnings declined $175 million; transmission earnings attributable to FirstEnergy declined $20 million, including the effect of the minority interest.
- The FERC audit resulted in approximately $45 million of expected wholesale transmission customer refunds, plus interest, and reclassification of approximately $195 million of transmission assets to operating expenses. Of the reclassified amount, $90 million was not expected to be recoverable and reduced earnings; the related rate-base reduction was approximately $160 million.
- FirstEnergy sold Brookfield a 19.9% interest in FirstEnergy Transmission for $2.375 billion; the transaction closed May 31, 2022. Net proceeds were approximately $2.348 billion. The sale created a noncontrolling interest in transmission earnings.
- FirstEnergy redeemed or repurchased substantial debt during the first nine months. Debt redemption costs were $155 million, mainly associated with premiums and related costs; interest expense declined to $788 million from $855 million.
- Year-to-date capital expenditures were $1.788 billion. Property additions were funded alongside operating cash flow, debt activity and the transmission minority-interest proceeds.
Outlook, risks and contingencies
- Management plans: FE Forward targets $380 million of annualized capital-expenditure efficiencies by 2023 and $250 million of working-capital improvements by 2023, with approximately $150 million of costs to achieve through 2023. The company plans substantial distribution and transmission investment and is pursuing another potential minority-stake sale. The filing does not provide a clear consolidated earnings or EPS forecast.
- Regulatory and customer-rate matters: Ohio’s approved stipulation includes $210 million of future customer rate reductions through 2025, including $80 million in 2022. In West Virginia, MP and PE requested a $183.8 million, or 12.2%, increase in annual ENEC rates beginning in 2023; a decision was expected by year-end 2022. Ohio HB 6-related regulatory matters were stayed for six months in August 2022.
- Investigations and litigation: The company remains subject to SEC and FERC investigations and HB 6-related litigation. FirstEnergy said a loss from the SEC investigation was probable but could not estimate an amount or range. It also considered losses probable in securities litigation but could not estimate them. It expected the loss in the FERC investigation to be no more than $5 million. These matters could materially affect reputation, results, liquidity and cash flows.
- Settlement and recovery: A shareholder derivative settlement received final approval in August, subject to a motion for reconsideration; it provides for an insurance-funded payment of $180 million less $36 million in court-ordered attorney fees after the judgment becomes final. A separate $56 million compensation-recovery demand against a former CEO had not been recognized and may not be collected.
- Debt, pensions and markets: Credit facilities impose leverage and interest-coverage covenants; the company was compliant at quarter-end. Moody’s downgraded CEI and TE by one notch in September. Pension and OPEB assets declined approximately 22.0% and 17.2%, respectively, in the first nine months; year-end mark-to-market effects were not estimable. Floating-rate exposure is unhedged.
- Other risks: Inflation, supply-chain delays, higher energy and materials costs, customer collections, environmental compliance, climate policy and potential recovery of retired-generation costs may affect results. FirstEnergy accrued approximately $103 million for environmental remediation liabilities. Management believed it was more likely than not to be subject to the IRA’s 15% corporate alternative minimum tax beginning in 2023, but said the amount remained uncertain pending Treasury guidance and expected no material incremental cash-tax impact under its current analysis.
- Leadership: John W. Somerhalder II became interim president and CEO on September 16, 2022, following Steven E. Strah’s retirement; the board began a search for a permanent CEO.
Investor verification points
- Track the outcomes and potential financial exposure from the SEC, FERC and HB 6-related investigations, audits and litigation, including whether the insurance-funded settlement becomes final.
- Verify the amount and timing of customer refunds and the FERC audit adjustments, and whether any additional costs or rate-base reductions arise.
- Monitor the West Virginia ENEC rate case and the collection of Ohio stipulation rate reductions.
- Reconcile liquidity figures by date, cash balances, debt maturities and covenant headroom; assess the effects of interest rates and credit ratings.
- Assess execution of FE Forward, capital spending, the proposed additional minority-stake sale and the eventual permanent CEO appointment.
- Monitor pension asset performance and year-end remeasurement, tax guidance on the alternative minimum tax, and environmental compliance costs.