FirstEnergy Corp. 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019. FirstEnergy is a regulated electric utility holding company operating distribution and transmission businesses across six states, serving approximately 6.1 million customers. Its strategy is to exit commodity-exposed generation and focus on regulated distribution and transmission. Most former competitive-generation operations are reported as discontinued operations following the 2018 FES bankruptcy and related asset dispositions.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $11.035 billion | $11.261 billion |
| Operating income | $2.510 billion | $2.502 billion |
| Income from continuing operations | $904 million | $1.022 billion |
| Net income attributable to common shareholders | $908 million | $981 million |
| Diluted EPS, continuing operations | $1.67 | $1.33 |
| Diluted EPS, total | $1.68 | $1.99 |
| Cash provided by operating activities | $2.467 billion | $1.410 billion |
| Cash used for investing activities | $2.873 billion | $3.018 billion |
| Cash and cash equivalents at year-end | $627 million | $367 million |
| Long-term debt and other long-term obligations | $19.618 billion | $17.751 billion |
| Stockholders’ equity | $6.975 billion | $6.814 billion |
Operating margin was approximately 22.7% in 2019 versus 22.2% in 2018; continuing-operations net margin was approximately 8.2% versus 9.1%. These are calculated from reported figures. Cash from operations less cash property additions of $2.665 billion was approximately negative $198 million; this simple measure is not a company-reported free-cash-flow metric. Separately, reported segment capital expenditures were $2.992 billion.
Year-end short-term borrowings were $1.0 billion, down from $1.25 billion. The company reported $3.5 billion of revolving commitments and $3.496 billion available under them as of January 31, 2020; the liquidity table also reported $465 million of cash and total available liquidity of $3.961 billion on that date. FirstEnergy reported compliance with credit-facility debt-to-capitalization covenants.
Material changes versus 2018
- Revenue declined 2.0%, mainly as regulated distribution revenues fell; regulated transmission revenue increased $173 million to $1.526 billion.
- Continuing-operations income fell $118 million. Regulated Distribution income declined $166 million to $1.076 billion, while Regulated Transmission income increased $50 million to $447 million.
- Distribution results were affected by the Ohio Supreme Court’s decision ending Rider DMR collections, lower weather-related usage and lower generation prices. Distribution deliveries fell 2.7%.
- Net income attributable to common shareholders decreased despite higher continuing-operations diluted EPS. Total diluted EPS fell primarily because discontinued-operations income was much lower than in 2018.
- Pension and OPEB mark-to-market expense increased to $674 million from $144 million, materially weighing on earnings. Cash from operations improved by $1.057 billion, including because pension contributions fell by $750 million year over year.
- Long-term debt and other long-term obligations increased by $1.867 billion. The 2018 $2.5 billion equity financing had been fully converted to common shares by August 2019; no preferred shares remained at year-end.
Outlook, management commentary, risks and unusual items
- Investment plan: Forecast capital expenditures are approximately $2.990 billion for 2020 and $3.010–$3.260 billion annually for 2021–2023. Management projects regulated distribution rate-base growth of about 4% and transmission rate-base growth of about 10% annually from 2018 through 2023. It cites more than $20 billion of potential additional transmission investment beyond the current plan; realization depends on approvals, recovery and financing.
- Financing and dividends: Management expects existing liquidity to meet anticipated needs, subject to market access and operating conditions. It did not anticipate additional equity issuance through 2021 and expected up to $600 million annually in 2022 and 2023, subject to conditions. The Board announced a 3% increase in the quarterly dividend to $0.39 per share payable March 1, 2020; future dividends remain discretionary.
- FES bankruptcy settlement: The amended settlement calls for $853 million of cash payments upon emergence, waivers of claims, employee-benefit obligations and tax-related payments, among other terms. The company listed $853 million of settlement payments and $100 million of intercompany tax-allocation obligations as 2020 contractual obligations, assuming emergence in 2020. Emergence and settlement remained subject to conditions and regulatory matters; failure to complete could expose FirstEnergy to claims and additional costs. Pleasants Power Station transferred on January 30, 2020.
- Pension sensitivity: FirstEnergy made a voluntary $500 million pension contribution in February 2019 and expected no required contributions through 2021. It estimated a possible after-tax mark-to-market loss of up to $400 million following FES emergence and pension-plan remeasurement.
- Contingencies: Guarantees and other assurances had maximum potential exposure of approximately $1.646 billion. Environmental liabilities accrued were approximately $109 million, with additional exposure not reasonably estimable. The proposed transfer of retired TMI-2, associated trusts and approximately $900 million of related liabilities remained subject to regulatory approvals and closing conditions.
- Key operating risks: Rate recovery and regulatory decisions, FERC transmission returns and incentives, environmental and coal-ash compliance costs, severe weather, pension-asset and discount-rate changes, cybersecurity, financing costs and credit ratings could affect results and liquidity. The company disclosed an EPA settlement proposal of nearly $1.3 million concerning alleged boron exceedances at two landfills; the outcome was uncertain.
- The filing provides capital and rate-base outlooks but no clear consolidated earnings or EPS guidance for 2020.
Important facts for investors to verify
- Whether FES emerges on the expected timetable and whether the full settlement and tax-allocation cash obligations are completed as described.
- Whether planned distribution and transmission investments receive regulatory approval and timely cost recovery, including outcomes affecting transmission returns and Rider DMR-related appeals.
- The actual pension remeasurement charge after FES emergence and the effect of market returns and discount rates on benefit obligations.
- Whether FirstEnergy sustains adequate liquidity and investment-grade credit metrics while funding capital expenditures, debt maturities, settlement payments and dividends.
- Regulatory approvals and closing progress for the TMI-2 transfer, and the company’s retained environmental and guarantee exposure.
- The company reported effective internal control over financial reporting; its auditor issued an unqualified opinion and identified recoverability of regulatory assets without specific recovery orders as a critical audit matter.