FirstEnergy Corp. 2018 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2018. FirstEnergy is an electric utility holding company serving approximately 6.1 million customers across six states, with regulated distribution and transmission as its continuing reportable segments. In 2018, the company deconsolidated FirstEnergy Solutions (FES) and FirstEnergy Nuclear Operating Company (FENOC) following their Chapter 11 filings and advanced its strategy to exit commodity-exposed generation. Their results are presented as discontinued operations.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $11.261 billion | $10.928 billion |
| Operating income | $2.502 billion | $2.428 billion |
| Income (loss) from continuing operations | $1.022 billion | $(289) million |
| Net income (loss) attributable to common stockholders | $981 million; $1.99 per share | $(1.724) billion; $(3.88) per share |
| Cash from operating activities | $1.410 billion | $3.808 billion |
| Capital expenditures, cash-flow presentation | $2.675 billion | $2.587 billion |
- Regulated Distribution net income was $1.242 billion, up $326 million; Regulated Transmission net income was $397 million, up $61 million. Higher weather-related usage, approved rates, a $72 million Ohio renewable-credit liability reversal, and the PJM transmission settlement contributed to results.
- Operating cash flow fell $2.398 billion, reflecting the absence of FES cash flows after deconsolidation, pension contributions of $1.25 billion, storm-cost deferrals and other payments. Cash used in investing was $3.018 billion; financing provided $1.394 billion.
- At year-end, cash and cash equivalents were $367 million, restricted cash $62 million, total assets $40.063 billion, equity $6.814 billion and long-term debt and other long-term obligations $17.751 billion. Short-term borrowings were $1.25 billion and currently payable long-term debt was $503 million. The filing attributes the working-capital deficit in part to debt classified as current.
- As of February 18, 2019, reported available liquidity was $3.646 billion, including $3.490 billion of revolving-credit availability and $156 million of cash. Scheduled long-term debt repayments were $489 million in 2019.
- Income tax expense was $490 million versus $1.715 billion in 2017; the prior-year amount included substantial Tax Act deferred-tax remeasurement effects. Reported 2018 net income also reflects discontinued operations and a $435 million after-tax gain on disposal; it should not be read as recurring utility earnings.
Material changes versus the prior comparable period
- Revenue rose 3.0%, while operating income increased $74 million. Continuing-operations income improved by $1.311 billion, largely because 2017 included a large tax remeasurement charge.
- Common-stockholder results swung from a $1.724 billion loss in 2017 to $981 million of income in 2018. Discontinued operations were income of $326 million in 2018 versus a $1.435 billion loss in 2017; the periods include major disposal, impairment and tax-related effects.
- Operating cash flow declined 63%, despite higher continuing-segment income. FirstEnergy issued $2.5 billion of equity in January 2018—$1.62 billion of mandatorily convertible preferred equity and $850 million of common equity—and used proceeds in part to reduce holding-company debt and fund its pension plan.
- Distribution deliveries increased 4.2%, with management citing unusually high cooling- and heating-related usage. Storm restoration costs also increased; most were deferred for future customer recovery.
Outlook, commentary, risks and unusual items
- Management’s 2018–2021 “Unlocking the Future” plan targets average annual rate-base growth of 5% in regulated distribution and 11% in formula-rate transmission. These are growth targets, not specific earnings-per-share guidance; the filing does not provide a clear numerical 2019 EPS outlook.
- Capital expenditures are forecast at approximately $2.885–$2.985 billion for 2019, $2.790–$2.990 billion for 2020 and $2.810–$3.010 billion for 2021. The plan includes up to $4.8 billion of transmission investment in 2018–2021 and $6.2–$6.7 billion of distribution investment over that period. Recovery depends on regulatory approvals and rate mechanisms.
- The FES settlement includes a $225 million cash payment, up to $628 million of FE notes, releases and waived claims, employee-benefit commitments, shared-service credits and transfer of the Pleasants Power Station. FirstEnergy recorded $877 million of pretax charges related to the bankruptcy; settlement and transfer conditions, including final bankruptcy-court approvals, remained outstanding at filing. FE also reserved for certain FES receivables and provided or committed to guarantees.
- Other notable items include a $115 million pretax benefit from a PJM transmission-cost settlement, a $72 million Ohio REC-related earnings benefit, and a $43 million increase in the McElroy’s Run asset retirement obligation. The TMI-2 decommissioning obligation increased approximately $172 million, offset by a regulatory asset.
- Key risks include regulatory rate and cost-recovery decisions, pending Ohio Rider DMR and grid-modernization proceedings, the FES restructuring and environmental guarantees, coal-ash and water-compliance costs, pension and market exposure, weather-driven demand and storm costs, and cybersecurity and reliability events. Environmental remediation liabilities accrued were approximately $121 million; the filing says additional exposure cannot be reasonably estimated.
- FirstEnergy declared $1.82 per common share in dividends for 2018 and announced a quarterly dividend increase from $0.36 to $0.38, payable in March 2019. Future dividends remain subject to Board approval and business conditions. Preferred-stock conversion will dilute common shareholders; 209,822 preferred shares remained outstanding at January 31, 2019.
Important facts for investors to verify
- Track final FES reorganization and settlement approvals, Pleasants transfer completion, and actual cash, note, tax and guarantee obligations.
- Separate recurring regulated earnings from discontinued-operation gains, tax effects and the $115 million and $72 million benefits; assess sustainability of segment performance.
- Review operating cash generation against the capital program, debt maturities, pension funding and dividend commitments; note that reported liquidity includes undrawn revolving facilities.
- Monitor outcomes of Ohio Rider DMR extension and grid-modernization proceedings, Maryland rate case, and other regulatory decisions affecting cost recovery.
- Assess environmental and retirement-cost estimates, potential collateral or guarantee calls, and common-share dilution from preferred conversion.
The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2018.