FirstEnergy Corp. 2013 Form 10-K Summary
Business context and reporting period
FirstEnergy filed an annual report for the fiscal year ended December 31, 2013. It operates regulated electric distribution and transmission businesses and competitive generation and retail energy businesses across six states. The combined filing also reports separately on wholly owned FirstEnergy Solutions Corp. (FES). In 2013, FirstEnergy emphasized shifting toward regulated operations, particularly transmission, amid weak power prices and flat demand.
Financial results and position
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $14.917 billion | $15.273 billion |
| Operating income | $1.607 billion | $2.152 billion |
| Income from continuing operations | $375 million | $755 million |
| Earnings available to FirstEnergy | $392 million; $0.94 diluted EPS | $770 million; $1.84 diluted EPS |
| Cash from operations | $2.662 billion | $2.320 billion |
| Property additions | $2.638 billion | $2.678 billion |
| Total assets | $50.424 billion | $50.494 billion |
| Equity | $12.695 billion | $13.093 billion |
| Long-term debt and other long-term obligations | $15.831 billion | $15.179 billion |
| Short-term borrowings | $3.404 billion | $1.969 billion |
Operating margin was approximately 10.8% in 2013 versus 14.1% in 2012; net margin was approximately 2.6% versus 5.0%. Cash and cash equivalents were $218 million at year-end. Available liquidity was reported at $2.761 billion as of January 31, 2014, including $2.713 billion of revolving-facility availability and $48 million of cash. The company reported compliance with credit-facility debt-to-capital covenants at year-end.
Segment results: Regulated Distribution earned $501 million (down from $540 million), Regulated Transmission earned $214 million (down from $226 million), and Competitive Energy Services recorded a $220 million loss (versus $215 million income). FES separately reported 2013 net income of $60 million, down from $187 million, and operating cash flow of $78 million, down from $821 million.
Material changes versus the prior comparable period
- Revenue declined 2.3%, while earnings available to FirstEnergy fell about 49%. Management cited depressed power and capacity prices, competitive-segment losses, plant deactivations, regulatory charges and asset impairment.
- Competitive Energy Services’ results deteriorated sharply, including a $473 million pre-tax impairment in the second quarter related primarily to deactivation of Hatfield’s Ferry and Mitchell.
- Cash from operations increased by $342 million, primarily because the $600 million pension contribution made in 2012 was not repeated in 2013; 2013 cash flow also reflected storm-restoration payments and working-capital movements.
- Year-end short-term borrowings increased by $1.435 billion. The company issued and refinanced debt, repurchased or redeemed higher-cost obligations, and contributed $1.5 billion of equity to FES.
- In the fourth quarter, FirstEnergy recorded a $322 million pre-tax impairment tied to the Harrison generation transfer, a roughly $51 million regulatory charge related to Ohio renewable-energy certificates, and $67 million of estimated coal-transportation liquidated damages. It also recorded a $256 million pension and OPEB mark-to-market credit for the year. Fourth-quarter net income was $142 million, compared with a $148 million loss in fourth-quarter 2012.
Outlook, management commentary and risks
- Management forecast approximately $3.3 billion of 2014 capital spending, excluding nuclear fuel, and $238 million for nuclear fuel. It expected about $4.2 billion of transmission investment over 2014–2017, initially focused on ATSI and TrAIL.
- Management projected 0.6% overall load growth in 2014 and expected 2014 distribution sales of 148.8 million MWh, compared with 147.9 million MWh in 2013. Its stated 2014 assumptions included a 35%–35.5% effective tax rate, lower competitive commodity margin, two planned nuclear refueling outages, and higher financing costs.
- The board cut the quarterly common dividend in January 2014 from $0.55 to $0.36 per share, reducing the indicated annual rate from $2.20 to $1.44. Management estimated the reduction would preserve about $320 million of cash annually.
- Management’s strategy targets more than 80% of earnings from regulated distribution and transmission. It cited sustained low wholesale prices and excess regional generation supply as pressure on competitive earnings; outcomes depend on successful rate recovery and execution of the transmission plan.
- Major risks include regulatory and rate-case outcomes, transmission cost allocation, commodity and capacity prices, weather and storm recovery, fuel and coal-transportation commitments, environmental compliance, nuclear operations, pension and OPEB assumptions, credit ratings, liquidity and collateral requirements. MATS compliance was estimated at $465 million; the Little Blue Run closure plan was estimated at $234 million, with a $163 million increase to its asset-retirement obligation in 2013. Fort Martin water-permit compliance could require $150 million–$300 million of initial investment.
- Material proceedings included JCP&L’s base-rate case and storm-cost recovery, appeals over Pennsylvania transmission-loss recovery and Ohio renewable-certificate costs, and the West Virginia appeal of the Harrison/Pleasants generation transfer. A February 2014 storm-cost stipulation would permit recovery of $736 million of JCP&L’s $744 million claimed costs, subject to NJBPU approval.
- The Davis-Besse shield-building cracking and a concrete deficiency identified during its 2014 outage were assessed by management as not impairing the building’s design functions; repairs were planned, and management did not expect the deficiency to extend the outage. The Davis-Besse license renewal decision remained subject to spent-fuel environmental proceedings.
Important facts for investors to verify
- Reconcile the substantial decline in annual earnings with the underlying segment results and separately identified impairments, regulatory charges, debt-redemption costs and pension/OPEB mark-to-market effects.
- Review the balance-sheet and cash-flow effects of higher short-term borrowings, 2014 debt maturities, planned capital spending and the company’s stated liquidity availability.
- Track regulatory decisions affecting JCP&L rates and storm costs, the Ohio certificate charge and appeal, Pennsylvania transmission-loss recovery, and the West Virginia generation-transfer appeal.
- Assess whether low power and capacity prices, plant deactivations and coal-transportation obligations continue to pressure Competitive Energy Services and FES cash generation.
- Monitor the cost, schedule and rate recovery of transmission investments, environmental compliance and Little Blue Run closure obligations, as well as nuclear outage and license matters.
- Confirm the effect of the dividend reduction and financing plans on credit metrics, collateral requirements and future access to capital markets. FirstEnergy’s financial statements received an unqualified audit opinion, and management reported effective internal control over financial reporting.