FirstEnergy Corp. (FE) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. FirstEnergy is a regulated electric utility holding company serving approximately six million customers across the Midwest and Mid-Atlantic, with regulated distribution and transmission businesses. Amounts below are in millions of dollars except per-share data and where noted.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2,818 | $2,622 | $5,807 | $5,348 |
| Operating income | $447 | $312 | $1,006 | $871 |
| Net income | $192 | $58 | $480 | $393 |
| Earnings attributable to FE | $187 | $58 | $475 | $393 |
| Diluted EPS | $0.33 | $0.11 | $0.83 | $0.72 |
| Operating cash flow | — | — | $1,283 | $1,347 |
Revenue rose 7% in Q2 and 9% in the first half. Calculated operating margins were approximately 15.9% versus 11.9% for Q2, and 17.3% versus 16.3% for the first half. Calculated net margins were approximately 6.8% versus 2.2% for Q2 and 8.3% versus 7.3% for the first half.
As of June 30, cash and cash equivalents were $478 million, restricted cash $54 million, and current liabilities $3.37 billion. Long-term debt and other long-term obligations were $20.76 billion; currently payable long-term debt was $353 million. The filing reports no short-term borrowings outstanding at June 30. Available liquidity was reported as $4.54 billion as of July 25, including $4.35 billion of available revolving-credit capacity and $196 million of cash and cash equivalents. The company was in compliance with its credit-facility covenants.
First-half investing cash outflow was $1.28 billion, principally reflecting $1.15 billion of property additions. Financing cash outflow was $981 million. First-half common dividend payments were $445 million; dividends declared were $0.39 per share in March. No explicit EPS guidance is stated in the filing text provided.
Changes and drivers
- Q2 earnings attributable to FE increased $129 million year over year. The comparison benefited substantially from the absence of the $230 million DPA penalty recorded in Q2 2021 and higher investment income; Q2 2022 also included $118 million of debt-redemption costs.
- First-half earnings attributable to FE rose $82 million. The absence of the prior-year DPA penalty and higher investment income were partly offset by $156 million of debt-redemption costs and weaker Regulated Distribution earnings.
- Q2 revenue growth reflected higher retail and wholesale generation revenue and higher transmission revenue. Generation revenue increases were driven in part by higher prices; higher fuel and purchased-power expenses largely reflect higher costs and volumes, with many power-supply costs recovered or deferred through regulatory mechanisms.
- Regulated Distribution net income fell $72 million in Q2 and $120 million in the first half, primarily from higher operating expenses, Ohio customer rate credits under the Ohio Stipulation, and higher pension and OPEB expenses. Regulated Transmission net income increased $12 million in Q2 and $28 million in the first half, mainly from a higher rate base.
- First-half operating cash flow declined $64 million. Management cited Ohio rate refunds and credits, higher expenses, and the absence of prior-year receivables-related working-capital improvement, partly offset by supplier collateral, investment-related cash generation, and accounts-payable improvements.
Outlook, material events and risks
- Transmission investment: Brookfield acquired a 19.9% interest in FirstEnergy Transmission on May 31, 2022, for $2.375 billion gross consideration. FirstEnergy reported $2.348 billion of net cash proceeds. Management says the transaction, together with a prior $1.0 billion common-stock investment, supports the balance sheet, investment plans and equity needs through at least 2025.
- Investment and efficiency plans: FirstEnergy describes approximately $17 billion of planned distribution and transmission investment for 2021–2025. Its FE Forward initiative targets $380 million in annualized capital-expenditure efficiencies by 2023, $250 million of working-capital improvements by 2023, and approximately $150 million of costs to achieve through 2023. These are targets, not reported results.
- Ohio customer credits: The Ohio Stipulation provides $210 million of future rate reductions for 2022–2025, including $80 million in 2022. The filing also describes a $96 million refund related to prior SEET cases. These customer benefits affect distribution revenue and cash flows.
- HB 6 investigations and litigation: FirstEnergy remains subject to SEC and FERC investigations and multiple related lawsuits. The company says losses are probable in connection with the SEC and FERC investigations and certain securities litigation but cannot estimate a loss range. A proposed shareholder-derivative settlement includes governance measures and a $180 million insurance-funded payment, subject to court approval and attorney fees. The company’s $56 million compensation-recovery demand against a former CEO has not been recognized as an asset.
- Regulatory and environmental exposure: A FERC audit may lead to wholesale-customer refunds or write-offs of capitalized costs; amounts are not estimable. Environmental compliance requirements, coal-plant operating-life decisions, and possible rule changes could require additional investment or affect recovery of plant costs. Approximately $103 million of environmental remediation liabilities were accrued, including about $65 million expected to be recovered through New Jersey rates.
- Operating and market risks: Management reported inflationary pressure, supplier labor and material constraints, and longer lead times, but did not then expect material service disruption or impact on the capital plan. Pension and OPEB assets declined approximately 15.1% and 13.9%, respectively, during the first half; management could not estimate the year-end mark-to-market adjustment. FirstEnergy said it did not currently expect required pension contributions under its assumptions, but asset declines could change funding needs.
- Climate targets: The company targets a 30% reduction in direct operational greenhouse-gas emissions by 2030 from 2019 levels and carbon neutrality by 2050. It notes that regulation, coal-plant retirement decisions, and recovery of related costs could materially affect results. Fitch upgraded applicable ratings one notch and revised the outlook to stable on July 22, 2022.
Important facts for investors to verify
- Progress, potential financial exposure, and possible customer-rate effects from the SEC, FERC and Ohio proceedings related to HB 6; confirm the status and approval of the $180 million insurance-funded derivative settlement.
- Whether elevated costs, Ohio customer credits, and other regulatory adjustments continue to pressure Regulated Distribution earnings and operating cash flow.
- Execution of the FE Forward savings and working-capital targets, planned capital spending, and the timing and recoverability of major grid-modernization investments.
- Debt maturities, refinancing costs, cash levels, revolving-credit availability, covenant headroom, and any effect of interest rates or credit-rating changes on financing costs.
- Updates on FERC audit exposure, environmental compliance spending, coal-plant plans, and pension-asset performance and funding assumptions.