FirstEnergy Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. FirstEnergy operates regulated electric distribution and transmission businesses serving approximately six million customers. Results are presented with FES and FENOC, among other competitive-generation operations, as discontinued operations following their 2018 bankruptcy filings and FirstEnergy’s strategy to exit commodity-exposed generation.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2.516bn | $2.625bn | $5.399bn | $5.487bn |
| Operating income | $585m | $700m | $1.214bn | $1.280bn |
| Operating margin | 23.3% | 26.7% | 22.5% | 23.3% |
| Continuing-operations income | $341m | $308m | $696m | $489m |
| Net income | $312m | $299m | $632m | $1.668bn |
| EPS from continuing operations | $0.63 | $0.30 | $1.29 | $0.39 |
| EPS attributable to common stockholders | $0.58 | $0.28 | $1.17 | $2.86 |
At June 30, cash and cash equivalents were $422m, restricted cash $52m, and current assets $2.386bn versus current liabilities of $3.983bn (a $1.597bn working-capital deficit). Short-term borrowings were $1.250bn; current maturities of long-term debt were $381m; long-term debt and other long-term obligations were $19.053bn. Stockholders’ equity was $7.269bn.
For the first six months, operating cash flow was $625m, compared with cash used of $288m in 2018; investing outflow was $1.336bn and financing inflow was $756m. Property additions were $1.228bn. FirstEnergy made a $500m voluntary pension contribution in February and expects no required pension contributions through 2021. As of July 22, available liquidity was reported at $3.769bn, including $3.491bn of revolving-credit availability and $278m cash.
Changes versus the prior comparable period
- Q2 revenue declined 4% and operating income fell 16%; continuing-operations income rose 11%, aided in part by lower taxes and interest expense.
- Distribution results were pressured by lower weather-related usage and rate reductions associated with the Tax Act. Q2 distribution deliveries fell 5.5%; cooling degree days were 28% below 2018.
- Transmission revenue increased $31m in Q2 and $64m in the six-month period, primarily reflecting higher rate base and recovery of incremental costs at ATSI and MAIT.
- Six-month net income declined 62%, principally because 2018 included a $1.239bn after-tax gain on disposal/deconsolidation related to FES and FENOC. Continuing-operations income increased 42%.
- Operating cash flow improved year over year, chiefly because pension contributions were $750m lower and transmission revenues increased; working-capital timing and the absence of FES operating cash partly offset the improvement.
Outlook, commentary, risks and unusual items
- Management’s strategy is to become a fully regulated utility, targeting stable earnings and cash flows through distribution and transmission investment. Planned 2018–2021 capital investment is $6.2–$6.7bn for distribution and up to $4.8bn for transmission; the company cites more than $20bn of potential incremental transmission opportunities beyond 2021. No specific consolidated EPS guidance is provided in the supplied filing text.
- FirstEnergy expects its existing liquidity and operating cash flows to meet working-capital needs, while continuing to rely on debt markets for capital spending and refinancing. It did not anticipate additional equity issuance through at least 2021, apart from regular employee and stock-investment plans.
- The FES bankruptcy settlement remains subject to reorganization and other conditions. After the court rejected proposed nonconsensual third-party releases, FirstEnergy waived that condition; the debtors paid approximately $60m in Q2 to resolve certain pension and service charges totaling $87m. FirstEnergy recognized a $27m pretax charge in Q1. The settlement also entails cash, note, employee-benefit, tax, and environmental-liability commitments.
- Ohio’s Supreme Court ruled in June 2019 that Rider DMR was unlawful and directed its removal. FirstEnergy sought reconsideration; collections were approved subject to refund while that motion was pending. A separate Ohio customer appeal asserted a potential $42m refund claim. These matters create regulatory and potential refund exposure.
- Other regulatory uncertainty includes a Pennsylvania court ruling requiring changes to DSIC calculations to include ADIT and state income taxes, as well as pending FERC matters that could affect transmission rates and returns.
- FirstEnergy reported approximately $1.669bn of guarantees and other assurances. Environmental liabilities accrued were approximately $119m; further exposure at additional sites could not be estimated. A nonbinding term sheet contemplated transferring TMI-2, its decommissioning trusts, and related liabilities of approximately $900m to EnergySolutions; definitive agreement, regulatory approval, and closing were uncertain.
- Other significant risks identified include the FES bankruptcy outcome, retained environmental obligations and coal-ash remediation, changing regulation and environmental requirements, weather and demand, pension-asset performance, capital-market access and credit ratings, cyber risks, and litigation. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms of the FES reorganization and settlement, including FirstEnergy’s cash, note, tax, pension, and retained-liability obligations.
- Outcome of the Ohio Rider DMR reconsideration and appeals, including whether past collections or the asserted $42m refund become payable.
- Effects of the Pennsylvania DSIC ruling and any resulting tariff or revenue changes.
- Execution, funding, and regulatory recovery of the stated 2018–2021 capital plans, alongside debt issuance and credit-metric targets.
- Whether the proposed TMI-2 transfer is finalized and approved, and how decommissioning trusts and liabilities are allocated.
- Cash generation and liquidity after capital spending, dividends, debt maturities, and environmental or bankruptcy-related payments; also monitor distribution volumes and weather normalization.