FirstEnergy Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. FirstEnergy operates regulated electric distribution and transmission businesses serving approximately six million customers. The quarter includes the February 27 emergence of the FES Debtors from bankruptcy and their deconsolidation as discontinued operations.
Financial performance
Amounts in millions of dollars, except per-share data.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $2,709 | $2,883 |
| Operating income | $532 | $629 |
| Income from continuing operations | $24 | $355 |
| Discontinued operations, net of tax | $50 | $(35) |
| Net income attributable to common stockholders | $74 | $315 |
| Diluted EPS | $0.14 | $0.59 |
| Net cash used in operating activities | $(560) | $(182) |
| Property additions | $616 | $554 |
- Revenue fell 6%; operating income declined 15%. Distribution revenue decreased $215 million, including lower retail and wholesale generation sales and the loss of Ohio Rider DMR revenue. Transmission revenue increased $45 million.
- Operating expenses fell $77 million, but operating income still declined. Continuing-operations income was heavily affected by a $423 million non-cash pension and OPEB mark-to-market charge following the FES emergence and plan remeasurement.
- Cash from operations was negative primarily because FirstEnergy paid $853 million under the FES settlement and $125 million in tax-sharing payments. Financing activities provided $725 million; investing activities used $659 million.
- At March 31, cash and cash equivalents were $152 million, restricted cash $33 million, short-term borrowings $750 million, currently payable long-term debt $381 million, and long-term debt and other long-term obligations $20.821 billion. Stockholders’ equity was $6.814 billion.
- FirstEnergy paid $211 million in common dividends; the quarterly dividend declared was $0.39 per share.
Liquidity, investment and outlook
- As of April 20, FirstEnergy reported $3.533 billion of available liquidity, including revolving credit availability and cash. Management stated that liquidity was expected to remain at that level for the following 12 months and that cash from operations and available liquidity should meet working-capital needs.
- Management reported no required pension contributions through 2021. It estimated 2020 pre-tax net periodic benefit cost of approximately $246 million, including the first-quarter mark-to-market adjustment.
- The capital plan forecasts more than $10 billion of distribution investment and more than $7 billion of transmission investment for 2018–2023. Expected rate-base compound annual growth rates for those segments are approximately 4% and 10%, respectively. No specific earnings guidance for 2020 is provided in the filing text.
- Management said COVID-19 had not caused service disruptions and was not then expected to materially affect the capital plan. It acknowledged uncertainty around demand, customer payment capacity, employee and vendor availability, markets, and the pandemic’s duration. The company had suspended power shutoffs beginning March 13 and waived certain late charges.
Material changes, risks and contingencies
- FES bankruptcy exit: Emergence completed FirstEnergy’s strategy to exit competitive generation. The filing records a $50 million gain on disposal in discontinued operations, substantially reflecting tax and pension-related items; it reports no material effect on first-quarter net income from the settlement payments. FirstEnergy retained certain obligations and guarantees.
- COVID-19 and demand: First-quarter distribution deliveries were down 7.8%, primarily due to milder weather; industrial usage also reflected lower steel, mining and automotive activity. Management cautioned that the effects of COVID-19 on customer demand, collections, operations and financing remained uncertain.
- Regulatory and rate matters: JCP&L requested a $186.9 million annual distribution-rate increase; the regulator suspended the proposed rates. JCP&L’s new transmission formula rates are subject to refund pending further proceedings. Ohio’s decoupling mechanism took effect February 1, 2020; the Rider DMR was discontinued, and a separate appeal sought a claimed $42 million customer refund.
- Asset transactions: The proposed transfer of TMI-2, its decommissioning trusts and related liabilities remains subject to regulatory approvals and closing conditions. The balance sheet classified $875 million of related trust assets and $700 million of asset-retirement obligations as held for sale. JCP&L also agreed to sell its 50% interest in Yards Creek for a base price of $155 million, subject to approvals and other conditions.
- Environmental and legal exposure: FirstEnergy had accrued approximately $109 million for environmental remediation, including $70 million associated with New Jersey former manufactured-gas sites. The filing notes potential further liabilities that cannot currently be estimated, environmental-rule compliance costs, and ongoing regulatory and legal proceedings.
- Debt and market risks: FirstEnergy’s revolving facilities total $3.5 billion and include debt-to-capitalization covenants; the company reported compliance at quarter-end. A $750 million LIBOR-based term loan was outstanding at March 31 and due in September 2020. The filing also identifies potential financing, credit-rating and LIBOR-transition risks.
Investor verification priorities
- Track COVID-19 impacts on electricity demand, receivable collections, costs, liquidity and the company’s ability to sustain its investment plan and dividend.
- Verify the timing and terms of the remaining short-term debt refinancing and monitor leverage, credit ratings and covenant headroom.
- Follow regulatory decisions on JCP&L’s rate case and transmission rates, the Ohio refund appeal, and recovery of pandemic-related costs.
- Confirm whether the TMI-2 transfer and Yards Creek sale receive required approvals, and assess any retained liabilities or proceeds treatment.
- Assess the recurring earnings and cash-flow profile after the FES exit, separating the pension mark-to-market charge and disposal gain from ongoing operations.