FirstEnergy Corp. — Q1 2021 Form 10-Q
Business context and reporting period. FirstEnergy is a regulated electric utility holding company operating distribution and transmission businesses across six states, serving approximately six million customers. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $2.726 billion | $2.709 billion |
| Operating income | $559 million | $532 million |
| Income from continuing operations | $335 million | $24 million |
| Net income | $335 million | $74 million |
| Diluted EPS | $0.62 | $0.14 |
| Cash from operating activities | $533 million | $(560) million |
| Property additions | $604 million | $616 million |
- Revenue increased 1%; operating income rose 5%. Calculated operating margin was approximately 20.5%, versus 19.6% in Q1 2020.
- Net income increased $261 million. The prior-year period included a $423 million non-cash pension and OPEB mark-to-market loss and $50 million of discontinued-operations income related to the FES bankruptcy emergence. The 2021 result also benefited from higher residential sales and weather-related demand.
- Operating cash flow improved by $1.093 billion, principally because Q1 2020 included $978 million of settlement and tax-sharing payments to the FES Debtors, alongside improved collections and revenues.
- Cash and cash equivalents were $1.281 billion at March 31, down from $1.734 billion at year-end; restricted cash was $45 million. Current liabilities exceeded current assets. Management said cash and available liquidity should cover near-term working-capital needs.
- At March 31, short-term borrowings were $1.450 billion, currently payable long-term debt was $539 million, and long-term debt and other long-term obligations were $22.204 billion. As of April 19, reported available liquidity was $3.649 billion, including $2.046 billion of revolver availability and $1.603 billion of cash and equivalents. Borrowers were in compliance with credit-facility leverage covenants at quarter-end.
- The company declared a common dividend of $0.39 per share in March.
Material changes and unusual items
- Q1 2021 included a $109 million gain on the Yards Creek sale, offset by regulatory-asset amortization; FirstEnergy reported no earnings impact from the transaction.
- Ohio decoupling riders were set to zero in February. FirstEnergy announced refunds of approximately $27 million, plus interest, for amounts previously collected. Ohio regulatory changes also include HB 128, effective June 29, 2021, which repeals parts of HB 6.
- FirstEnergy completed a $500 million FET senior-note issuance in March, using proceeds to repay revolver borrowings. Subsequent to quarter-end, MP issued $200 million of bonds.
Outlook, risks and contingencies
- Investigations and litigation: The U.S. Attorney’s Office investigation concerning HB 6 is ongoing, and discussions about a possible resolution, including a deferred prosecution agreement, had begun. Management said a loss from resolving that investigation was probable but could not reasonably estimate an amount or range; no contingency was recorded. Related shareholder, customer, Ohio regulatory, SEC and FERC matters could materially affect reputation, operations, liquidity or financial results.
- Regulatory and control risks: Ohio audits and proceedings include reviews of rider collections, political and charitable spending, corporate separation and earnings. The company disclosed a material weakness in internal control over financial reporting and concluded disclosure controls were ineffective at March 31, 2021. Management reported no material misstatement and is pursuing remediation.
- Capital and earnings outlook: FirstEnergy discontinued providing a long-term earnings growth rate pending greater clarity on Ohio regulatory matters and investigations. It said it did not anticipate needing equity in 2021, while expecting, subject to conditions, up to $600 million annually in 2022 and 2023. Capital plans may be adjusted to preserve flexibility for potential investigation-related payments or regulatory actions.
- Efficiency initiative: FE Forward targets approximately $300 million in annualized capital-expenditure efficiencies by 2024 and approximately $250 million in working-capital improvements by 2022; estimated costs to achieve through 2023 are $150 million. Management expects operating expenses to remain flat while absorbing approximately $100 million of projected increases.
- Investment and climate plans: Planned capital investment includes up to $6.6 billion in regulated distribution and $5.15 billion in transmission from 2020 to 2023. The company targets carbon neutrality by 2050 and a 30% reduction in direct operational greenhouse-gas emissions by 2030, based on 2019 levels.
- Other uncertainties: COVID-19 effects on customer arrears and demand, environmental compliance costs, credit ratings and financing access, pension assets, and evolving transmission-rate proceedings remain risks. The filing states that the ultimate impact of these matters is uncertain.
Important facts for investors to verify
- Progress and potential financial terms of the U.S. Attorney’s Office investigation resolution, and developments in related SEC, FERC, shareholder and customer matters.
- Status and effectiveness of remediation for the material weakness, and results of Ohio audits and regulatory proceedings, including any refunds or rate impacts.
- Available liquidity, debt maturities, credit ratings and covenant compliance, especially if investigation-related costs or regulatory actions arise.
- Whether FE Forward efficiencies, planned capital investment and proposed equity financing remain achievable on the stated timelines.
- Customer arrears, pandemic-related costs, and the recovery of regulatory assets and environmental obligations.