FirstEnergy Corp. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 5, 2013. The combined filing covers FirstEnergy Corp. (FE) and its wholly owned competitive-energy subsidiary, FirstEnergy Solutions Corp. (FES). Financial figures below are in millions of dollars unless stated otherwise.
Business context and reporting period
FirstEnergy operates regulated electric distribution and transmission businesses and a competitive generation and retail-supply business. Its utilities serve about six million customers across six states. Management described weak regional demand and excess generation supply as continuing to pressure wholesale power and capacity prices. Results for the interim period are unaudited.
Key financial metrics
| FE consolidated | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $4,036 | $4,052 | $11,270 | $11,780 |
| Operating income | $512 | $902 | $1,206 | $2,191 |
| Net income | $218 | $425 | $250 | $919 |
| Basic EPS | $0.52 | $1.02 | $0.60 | $2.20 |
| Operating margin | 12.7% | 22.3% | 10.7% | 18.6% |
| Cash from operations | — | $1,671 | $1,276 |
FE’s Q3 revenue was nearly flat, but net income fell about 49%. Nine-month revenue declined about 4%, while net income fell about 73%. Nine-month operating cash flow increased $395 million, principally because 2012 included a $600 million pension contribution that was not repeated in 2013. Property additions were $1,960 million; operating cash flow less property additions was approximately negative $289 million. Dividends paid were $690 million, and dividends declared were $1.65 per share for the nine-month period.
At September 30, FE had cash of $222 million, current assets of $3,559 million and current liabilities of $7,955 million. Short-term borrowings were $3,404 million; currently payable long-term debt was $1,889 million; and long-term debt and other long-term obligations were $15,291 million. These categories total approximately $20.6 billion of debt and debt-like obligations. Total equity was $12,547 million. Available liquidity reported as of October 31 was $2,957 million, including $2,838 million of available facility capacity and $119 million of cash.
FES reported nine-month revenue of $4,655 million, operating income of $121 million and a net loss of $29 million, compared with net income of $222 million in the prior-year period. FES received a $1.5 billion equity contribution from FE during the second quarter and repaid $1,179 million of long-term debt during the nine months.
Material changes and unusual items
- FE recorded a $473 million pre-tax impairment in the first half after deciding to deactivate the Hatfield’s Ferry and Mitchell coal plants. The plants were deactivated October 9, 2013; related nine-month severance expense was about $7 million.
- FE recorded a $254 million pre-tax regulatory-asset impairment in Q3 after a federal district court dismissed a case seeking recovery of marginal transmission-loss costs in Pennsylvania. The utilities appealed.
- Debt redemptions and repurchases produced a $132 million loss on debt redemptions for FE for the nine months; FES recorded $103 million of such losses. These included premiums and related costs.
- Amortization of regulatory assets rose to $443 million for the nine months from $198 million, largely reflecting the Pennsylvania impairment and other regulatory-cost amortization.
- Competitive Energy Services reported a nine-month net loss of $300 million, versus $295 million of income in 2012. Management cited lower wholesale prices, reduced wholesale capacity revenue and settled-contract gains, plant impairment, and higher mark-to-market expense.
- FE’s Ohio utilities issued $445 million of phase-in recovery bonds at a weighted-average coupon of 2.48%, primarily to refinance $410 million of taxable debt carrying a 5.71% weighted-average coupon, plus make-whole premiums.
Outlook, management commentary and risks
- No consolidated earnings-per-share guidance is stated in the provided filing text. Management estimated a 2013 effective tax rate of approximately 37%.
- Management expects weak power and capacity markets to persist and said the May 2013 PJM capacity auction cleared at lower-than-expected prices. FE adjusted competitive hedging and retail-sales priorities, and announced capital reductions of about $1 billion, primarily over the next four years.
- FE plans a four-year, $2.8 billion Transmission Reliability Excellence Plan beginning in 2014, in addition to a forecast $1.8 billion baseline capital program over the same period. Planned incremental spending is about $500 million in 2014, $700 million in 2015 and $800 million annually in 2016 and 2017; management expects to fund it with debt and equity.
- FE expected a proposed sale of 11 hydroelectric projects, totaling about 527 MW, for approximately $400 million to close in Q4 2013, subject to approvals and other conditions. The assets were classified as held for sale at September 30.
- After quarter-end, the Harrison/Pleasants generation transfer closed on October 9. FE disclosed a fourth-quarter $330 million pre-tax impairment at MP and a $23 million regulatory liability for customer refunds; these are not Q3 results.
- Environmental and regulatory exposure includes an estimated $465 million of MATS compliance costs and a proposed $234 million Little Blue Run closure plan. The Pennsylvania DEP identified deficiencies in that plan. FE accrued $124 million for environmental remediation liabilities; possible additional exposure was not estimable in the filing.
- Outstanding guarantees and other assurances totaled about $4.4 billion. A qualifying credit downgrade could trigger up to $903 million of additional collateral or accelerated-payment obligations, as estimated at September 30. Commodity-price sensitivity indicated a 10% adverse price move could reduce net income by about $27 million over the next 12 months.
- Other significant uncertainties include the outcome of rate and cost-recovery proceedings, FERC disputes over transmission cost allocation, coal-transportation commitments and environmental litigation. Management stated that certain potential losses cannot presently be estimated.
Most important facts for investors to verify
- Whether the $254 million Pennsylvania regulatory-asset impairment is ultimately recoverable on appeal, and the outcome of JCP&L’s rate case and storm-cost recovery proceedings.
- Competitive Energy Services’ earnings, hedging position and exposure to continued low power and capacity prices.
- Liquidity and covenant compliance after the October 31 credit-facility amendments, including the exclusion of specified non-cash charges from leverage calculations.
- Completion and proceeds of the proposed hydro sale, and the financial effects of the completed Harrison/Pleasants transfer.
- Final environmental requirements and costs for MATS, Little Blue Run closure, water-discharge rules and coal-combustion residuals.
- Potential collateral calls, guarantee exposure and outcomes of material regulatory, environmental and legal proceedings.