FirstEnergy Corp. — 2020 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2020, filed February 18, 2021. FirstEnergy is a regulated electric utility serving approximately 6.2 million customers across six states, with regulated distribution and transmission as its reportable segments. The company completed its exit from competitive generation when the FES Debtors emerged from bankruptcy on February 27, 2020; those operations are reported as discontinued operations.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $10.790 billion | $11.035 billion |
| Operating income | $2.162 billion | $2.510 billion |
| Income from continuing operations | $1.003 billion | $904 million |
| Net income | $1.079 billion | $912 million |
| Diluted EPS, continuing operations | $1.85 | $1.67 |
| Diluted EPS, total | $1.99 | $1.68 |
| Cash from operating activities | $1.423 billion | $2.467 billion |
| Capital expenditures/property additions | $2.657 billion | $2.665 billion |
Operating margin was approximately 20.0% in 2020 versus 22.7% in 2019; net margin was approximately 10.0% versus 8.3%, respectively. These percentages are calculated from reported revenue and income.
At year-end, cash and cash equivalents were $1.734 billion, restricted cash was $67 million, short-term borrowings were $2.2 billion, and long-term debt and other long-term obligations were $22.131 billion. FirstEnergy reported $3.088 billion of total liquidity as of February 15, 2021, including $1.296 billion of available revolving credit and $1.792 billion of cash. The FET revolver had no remaining availability. Net working capital was in deficit, which management attributed mainly to payables, borrowings, interest, taxes, compensation and benefits.
Material changes versus 2019
- Revenue declined $245 million, primarily reflecting lower distribution-segment generation sales and reduced commercial and industrial usage, partly offset by higher transmission revenue.
- Operating income fell $348 million. Distribution net income declined $117 million, while transmission net income increased $17 million and Corporate/Other improved by $199 million.
- Cash from operations decreased $1.044 billion, principally because of $978 million in bankruptcy settlement and tax-sharing payments to the FES Debtors, higher customer receivables and storm costs. The prior-year comparison also included a $500 million pension contribution absent in 2020.
- Net income rose $167 million, helped by improved Corporate/Other results and discontinued-operations gains. Continuing-operations EPS increased; total net income also included $76 million from discontinued operations.
- Debt financing increased: FirstEnergy issued $3.425 billion of long-term debt and ended the year with $2.2 billion of short-term borrowings, versus $1.0 billion at year-end 2019.
Outlook, management commentary, risks and unusual items
- Ohio HB 6 investigations and controls: Federal and SEC investigations, litigation and regulatory reviews related to HB 6 remain unresolved. The company disclosed a roughly $4 million 2019 payment tied to ending a purported consulting agreement; its board concluded certain former senior executives violated company policies and the code of conduct. A material weakness in internal control over financial reporting was identified, and disclosure controls were deemed ineffective at year-end. Management is pursuing remediation. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control effectiveness.
- Financial exposure and credit: FirstEnergy recorded a fourth-quarter $108 million pre-tax charge ($84 million after tax) after agreeing to set Ohio decoupling riders to zero and forgo recovery of certain lost distribution revenue. The company has not recorded a contingency for the government investigations and related litigation because a loss was not considered probable or reasonably estimable. Credit downgrades led to amended credit facilities, higher pricing and $19 million of additional collateral posted during the fourth quarter. Further adverse rulings, fines, downgrades or covenant issues could affect liquidity, financing costs and investment plans.
- Investment plans: Forecast 2021 capital expenditures are up to $3.015 billion. FirstEnergy cited transmission and distribution investment opportunities, including more than $20 billion of potential transmission projects beyond 2023, but withdrew its long-term earnings-growth rate pending greater clarity on Ohio matters. It may reduce capital spending, operating costs or planned equity issuance if needed. Management did not provide a clear earnings or EPS forecast in the supplied filing text.
- Funding and dividends: The company did not anticipate needing new equity through 2021 and expected, subject to conditions, up to $600 million of annual equity issuance in 2022 and 2023. The 2020 common dividend was $1.56 per share; future dividends remain subject to board decisions and business conditions.
- COVID-19: Pandemic effects included higher customer arrears, uncollectible expense and operating costs, and lower commercial and industrial demand. FirstEnergy deferred some costs for possible future recovery, but recovery is subject to regulatory approval. Management said it did not then expect material supply-chain disruption or a material impact on its capital plan.
- Other notable items: The FES bankruptcy settlement and tax-sharing payments totaled $978 million in 2020. Pension and OPEB mark-to-market adjustments totaled $477 million, including a $423 million first-quarter remeasurement. The TMI-2 transfer closed in December 2020; the Yards Creek sale was expected to close in first-quarter 2021. FirstEnergy pledged carbon neutrality by 2050 and a 30% reduction in directly controlled greenhouse-gas emissions by 2030 from 2019 levels.
Important facts for investors to verify
- Updates on federal, SEC, FERC and Ohio investigations, associated lawsuits, potential penalties and the status of any recorded or unrecorded contingencies.
- Progress and independent validation of remediation of the material weakness, including whether disclosure controls and internal controls become effective.
- Ohio PUCO audit and rate-case outcomes, the treatment of HB 6-related charges, decoupling and DMR matters, and any effects on customer rates or earnings.
- Liquidity, covenant compliance, credit ratings, collateral requirements and the amount and cost of future borrowing—especially given the fully drawn FET revolver.
- Actual operating cash flow, customer arrears and recovery of deferred COVID-19 and storm costs; also monitor pension assumptions and funding needs.
- Delivery and regulatory recovery of planned capital investment, the Yards Creek sale completion, and whether the company restores formal long-term earnings guidance.