FirstEnergy Corp. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014. The combined filing also reports FirstEnergy Solutions Corp. (FES), a wholly owned subsidiary; amounts below are for FirstEnergy consolidated unless otherwise stated. Financial statements are unaudited.
Financial results and key metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $4.189 billion | $3.723 billion |
| Operating income | $398 million | $648 million |
| Operating margin | 9.5% | 17.4% |
| Continuing-operations income | $122 million | $192 million |
| Net income | $208 million | $196 million |
| Diluted EPS | $0.49 | $0.47 |
| Operating cash flow | $(92) million | $50 million |
| Capital expenditures/property additions | $821 million | $826 million |
Net income included $86 million after tax from discontinued operations, principally the hydroelectric asset sale gain. Continuing-operations diluted EPS was $0.29, down from $0.46. Revenue includes excise-tax collections of $117 million in 2014 and $122 million in 2013.
At March 31, 2014, cash was $109 million; current assets were $4.577 billion and current liabilities $7.737 billion. Debt-related balance-sheet lines included $3.085 billion of short-term borrowings, $1.416 billion of currently payable long-term debt, and $16.804 billion of long-term debt and other long-term obligations. Available liquidity at April 30 was reported as $2.984 billion, including $2.910 billion of facility availability and $74 million of cash. The filing attributes the working-capital deficit largely to short-term borrowings and current debt maturities.
Material changes versus the prior period
- Revenue rose $466 million, but operating income fell $250 million. Purchased-power expense increased $509 million, including $436 million in Competitive Energy Services, amid extreme January weather, higher wholesale prices, greater customer demand and generation outages.
- Distribution deliveries increased 5.9%, with residential deliveries up 10.8%; management attributed the increase principally to colder weather. Heating degree days were 17% above the prior-year quarter.
- Regulated Distribution net income increased $4 million to $214 million; Regulated Transmission income was unchanged at $51 million. Competitive Energy Services reported a $38 million net loss, unchanged year over year.
- Q1 net income rose modestly despite lower continuing income, mainly because the hydro sale generated a $142 million pretax gain. The 11 hydroelectric facilities, totaling approximately 527 MW, were sold for about $394 million on February 12, 2014.
- Operating cash flow shifted to an outflow of $92 million from an inflow of $50 million, primarily reflecting higher cash collateral posted during January market disruption. FirstEnergy reported that approximately $275 million of collateral was returned to FES on April 16.
- FirstEnergy reduced its quarterly common dividend to $0.36 per share from $0.55, an indicated annual rate of $1.44 versus $2.20. The income statement’s $0.72 declared-per-share figure reflects two $0.36 declarations in the quarter, not the ongoing quarterly rate.
Outlook, management commentary and risks
- Management is shifting growth emphasis toward regulated businesses amid weak and unpredictable competitive power markets. Its “Energizing the Future” plan calls for $4.2 billion of transmission investment from 2014 through 2017; management identified at least $7 billion of longer-term transmission opportunities. Funding is expected from debt, equity issuances through plans and cash. No specific consolidated earnings guidance is provided in the supplied filing text.
- Management said existing liquidity sources are expected to meet anticipated obligations, while noting reliance on external financing and that planned financings depend on market conditions. On March 31, FirstEnergy extended revolving credit facilities to 2019 and fully drew a new $1 billion variable-rate term loan.
- FES’s competitive business faced higher purchased-power and PJM ancillary-service costs during January’s extreme weather. FirstEnergy estimated a 10% adverse commodity-price change would reduce net income by about $40 million over the next 12 months. FES had posted $544 million of collateral at quarter-end; the filing reports a $941 million potential full impact of credit-contingent collateral obligations under specified downgrade scenarios.
- Environmental exposure includes estimated MATS compliance costs of about $465 million. The Little Blue Run coal-ash impoundment closure plan was estimated at $234 million; a Pennsylvania permit issued after quarter-end requires closure within 12 years and bonding for 45 years of closure and post-closure activities. Additional water, coal-ash, climate and air-rule compliance costs could be material.
- Regulatory and legal matters include unresolved transmission cost-allocation and PJM market proceedings; potential environmental claims; and coal transportation contract disputes related to deactivated plants. FirstEnergy disclosed approximately $129 million of accrued environmental liabilities. A California refund proposal cited about $190 million, but the company said it could not predict the outcome or estimate a possible loss.
- JCP&L’s storm-cost settlement was approved, allowing recovery of $736 million of $744 million in 2011–2012 costs, with recovery mechanisms still to be determined for portions. After quarter-end, West Virginia utilities requested a $144 million total rate increase, including vegetation-management costs; a decision was expected in February 2015.
- Davis-Besse was in an outage for steam-generator replacement and other work, representing an approximately $600 million investment. Management reported that identified shield-building conditions were repaired and preliminary analysis indicated structural integrity remained intact; the outage and license renewal remain areas to monitor.
Most important facts for investors to verify
- Whether underlying earnings and margins recover from the sharp increase in purchased-power costs, separating recurring results from weather effects and the hydro-sale gain.
- Whether the planned transmission investment earns timely regulatory recovery and can be funded while maintaining liquidity, investment-grade metrics and the reduced dividend.
- Actual collateral needs and cash returned after the January 2014 PJM market disruption, including sensitivity to power prices and credit ratings.
- Final outcomes and recoverability in pending state rate cases, PJM/FERC proceedings, environmental compliance matters and coal transportation disputes.
- Progress, cost and operating implications of the Davis-Besse outage and the company’s environmental and coal-ash obligations.