FirstEnergy Corp. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. This combined filing covers FirstEnergy Corp. (FE) and its subsidiary FirstEnergy Solutions Corp. (FES). Amounts below are in millions of dollars unless stated otherwise.
Business context
FirstEnergy operates regulated electric distribution and transmission businesses and competitive generation and energy-supply businesses, reported as Regulated Distribution, Regulated Transmission and Competitive Energy Services (CES). Management’s strategy is to exit competitive operations and focus on a more fully regulated business profile. The system serves over six million customers; competitive generation remained a material source of financial and liquidity risk.
Key financial results
| FE consolidated | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3,714 | $3,917 | $10,575 | $11,187 |
| Operating income | $884 | $861 | $2,002 | $662 |
| Net income (loss) | $396 | $380 | $775 | $(381) |
| Basic EPS | $0.89 | $0.89 | $1.75 | $(0.90) |
| Diluted EPS | $0.89 | $0.89 | $1.74 | $(0.90) |
- FE operating margin was approximately 23.8% in Q3 2017 versus 22.0% in Q3 2016; for the first nine months it was approximately 18.9% versus 5.9%. The year-to-date comparison chiefly reflects unusually large 2016 impairments and exit costs, not comparable revenue growth.
- Revenue fell 5% year over year in both Q3 and the first nine months. Lower CES sales and prices drove most of the decline; regulated transmission revenue grew as rate base and recoveries increased.
- FE cash from operations was $2,762 for the first nine months, compared with $2,592 in 2016. Investing cash use was $2,181, including $1,847 of property additions. Financing used $381; FE paid $478 in common dividends. Cash at September 30 was $399, up from $199 at year-end 2016.
- FE reported $1,076 of currently payable long-term debt, $500 of short-term borrowings and $21,089 of long-term debt and other long-term obligations. Short-term borrowings were down from $2,675 at year-end 2016, while long-term debt and other long-term obligations increased from $18,192. Current assets of $2,931 were below current liabilities of $4,255.
- FE reported $4,889 of total available liquidity, including cash and available revolving-credit capacity. Its common dividend was $0.72 per share for the quarter and $1.44 year to date.
FES separately: Nine-month revenue was $2,398 versus $3,401; net income was $15 versus a loss of $267; and operating cash flow was $458 versus $605. At September 30, FES had $2 of cash, $186 of affiliated short-term borrowings, $267 of current debt and $2,559 of long-term debt and other long-term obligations.
Material changes and drivers
- FE’s nine-month net result improved by $1,156 year over year, primarily because 2016 included an $800 goodwill impairment, a $647 impairment related to planned generating-unit exits, approximately $58 of coal-contract settlement and termination costs, and $159 of tax valuation allowances.
- In 2017, FE recorded $162 of impairment expense in its income statement. The filing describes charges associated with the revised competitive-asset sale and the MAIT transmission-rate settlement. Other operating expenses included a $164 pre-tax charge related to long-term coal transportation disputes.
- Regulated distribution benefited from new Ohio, Pennsylvania and New Jersey rates, while lower weather-related use and increased customer shopping reduced deliveries and generation sales. Nine-month distribution deliveries fell 3.3%.
- CES revenues weakened with lower contract volumes, lower prices and capacity revenues. Its customer base in Direct, Governmental Aggregation and Mass Market channels was approximately 842,000 at September 30, 2017, compared with 1.4 million a year earlier.
Outlook, risks and contingencies
- Management targeted implementation of an exit from competitive operations by mid-2018, but stated that options for the remaining CES portfolio were uncertain. Options included asset sales, plant deactivations, regulatory or legislative support, debt restructuring, or bankruptcy proceedings.
- FES had ratings of Caa1 at Moody’s, CCC- at S&P and C at Fitch; Moody’s and S&P had negative outlooks. The filing states that FES’s ability to continue as a going concern was substantially uncertain and raises substantial doubt about its ability to meet obligations over the next 12 months.
- Management expected FES operating cash flow to fund capital needs and repay money-pool borrowings through March 2018. However, FES faced $515 of debt maturities in 2018, plus $48 of interest and lease payments in December 2017 and $38 of interest payments in Q1 2018; refinancing was expected to be difficult. FES had access to a $500 secured FE credit line, all available at September 30.
- FE planned $4.2–$5.8 billion of transmission capital investment from 2017 through 2021 and at least $1.5 billion of equity funding through 2019, subject to market conditions. Management forecast transmission rate-base compound annual growth of 9% through 2021. No consolidated EPS or earnings guidance is provided in the filing.
- A revised agreement proposed an $825 cash sale of generating assets with 1,615 MW of combined capacity to an LS Power affiliate, subject to approvals and closing conditions. The proposed Pleasants sale to an FE utility for approximately $195 also remained subject to regulatory approval. The filing cautions that these transactions might not close; the LS Power transaction also involved a currently estimated approximately $100 make-whole premium on certain debt.
- A separate coal-transportation arbitration with BNSF and NS remained unresolved; the hearing was scheduled for June 2018. FE and FES had recorded a $55 estimated settlement charge, and management warned damages could be materially higher and could contribute to FES seeking bankruptcy protection. A related BNSF/CSX dispute was settled for $109, payable in three annual installments and guaranteed by FE. A separate coal-supply lawsuit had no estimable loss range.
- Other exposures include environmental compliance and remediation, possible Fort Martin water-treatment investment estimated at $150–$300, regulatory proceedings and potential collateral requirements. FE had approximately $131 of accrued environmental liabilities. A 10% increase in commodity prices was estimated to reduce net income by about $6 over the next 12 months.
Most important facts for investors to verify
- FES’s refinancing plans, near-term liquidity, money-pool support and progress on its strategic alternatives, given the going-concern uncertainty and 2018 maturities.
- Whether the LS Power and Pleasants asset sales receive required approvals, close on schedule and generate the expected proceeds after debt repayment and transaction-related costs.
- The outcome and potential cost of the BNSF/NS arbitration and other coal-contract litigation, including whether additional charges or guarantees affect FE or FES.
- Regulatory outcomes affecting distribution and transmission rates, including pending formula-rate matters and the Ohio ESP IV proceedings.
- Underlying regulated earnings and cash generation after separating rate changes and one-time items from weather, customer shopping, market prices and competitive-segment volatility.