FirstEnergy Corp. (FE) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. FirstEnergy is a regulated electric utility holding company with distribution and transmission operations serving approximately six million customers. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $3,487 | $3,475 | $9,724 | $9,282 |
| Operating income | $666 | $505 | $1,698 | $1,511 |
| Earnings attributable to FE from continuing operations | $421 | $334 | $948 | $809 |
| Diluted EPS, continuing operations | $0.73 | $0.58 | $1.65 | $1.41 |
| Net cash from operating activities | Not separately reported for the quarter | $429 | $1,837 |
Q3 operating margin was approximately 19.1% versus 14.5%; nine-month operating margin was approximately 17.5% versus 16.3%, calculated as operating income divided by revenue. Total diluted EPS, including discontinued operations, was $0.69 for Q3 and $1.61 for the nine-month period; the 2023 amounts include a $0.04-per-share discontinued-operations loss.
At September 30, cash and cash equivalents were $118, restricted cash $26, and total assets $47,471. Current liabilities were $4,796, including $1,302 of currently payable long-term debt and $270 of short-term borrowings. Long-term debt and other long-term obligations were $22,882. The filing reports long-term debt carrying value of $24,254 in its fair-value disclosure, on a stated basis excluding finance leases and certain unamortized items. Total liabilities were $36,526 and equity $10,945.
Changes and key drivers
- Revenue rose 0.3% in Q3 and 4.8% for the first nine months. Higher regulated distribution and retail generation revenues were partly offset by lower wholesale generation revenue. Weather reduced customer usage; nine-month actual distribution deliveries declined 3.9%, while weather-adjusted deliveries increased 0.9%.
- Q3 continuing earnings attributable to FE increased $87, or 26%, year over year. Lower operating expenses and income-tax expense helped; higher interest expense and weaker pension/OPEB credits were offsets. The quarter also benefited from a $65 tax benefit, net of a reserve, related to state taxes and valuation allowance changes.
- Nine-month continuing earnings increased $139, or 17%. Regulated Transmission earnings rose $96, while Regulated Distribution earnings fell $140; Corporate/Other losses narrowed by $183. Comparisons include significant prior-year FERC audit charges and customer-refund reserves in transmission, as well as changes in pension credits, interest, taxes and other items.
- Operating cash flow fell to $429 from $1,837, primarily reflecting a $750 voluntary pension contribution, supplier collateral returns, higher payments for energy purchases, and timing of transmission collections. Capital investments were $2,266 versus $1,852; investing cash outflow totaled $2,473. Financing provided $1,982, including $3,150 of new long-term debt, partly offset by debt repayments and $670 of dividends paid.
Outlook, management commentary and risks
- Management expects 2023 capital investment of $3.7 billion, $300 million above the original plan, and plans $3.9 billion in 2024 and $4.1 billion in 2025—about $12 billion over three years. Planned investment is primarily in regulated transmission and distribution.
- FirstEnergy expects the $3.5 billion sale of an additional 30% FET interest to Brookfield to close in early 2024, subject to remaining approvals and CFIUS review. Brookfield’s interest would rise to 49.9%; FirstEnergy would retain 50.1% and continue consolidating FET.
- As of October 23, 2023, reported available liquidity was $5.287 billion, including $5.181 billion of revolving credit availability and $106 million cash. FirstEnergy said existing liquidity sources should meet anticipated obligations. It reported compliance with credit-facility covenants at September 30. Higher interest rates have increased borrowing costs; floating-rate debt is not hedged.
- FirstEnergy made a $750 pension contribution in May and does not currently expect required pension contributions through 2027, based on stated assumptions; voluntary contributions remain possible. It recorded a $59 non-cash pension mark-to-market gain in Q2. The 2023 year-end mark-to-market result is uncertain.
- Regulatory matters include rate proceedings and proposed investments across several states. West Virginia utilities requested a $167.5 rate increase for 2024 through the ENEC process; JCP&L’s updated New Jersey base-rate request seeks approximately $192 annually. Pennsylvania consolidation and the FET sale remain subject to approvals.
- Material legal and regulatory uncertainty remains around HB 6. The three-year DPA requires continued cooperation and compliance measures; FirstEnergy has paid the $230 penalty. The SEC investigation and securities litigation remain unresolved; management says a loss is probable in the SEC investigation and certain securities cases but cannot estimate a loss range. The company is also cooperating with a newly disclosed Ohio investigation. Outcomes could materially affect reputation, earnings, liquidity and cash flows.
- Other risks include potential environmental compliance costs, changing emissions rules, supply-chain constraints, inflation, severe weather, cybersecurity, customer demand and access to capital. The company’s climate goals include carbon neutrality by 2050 and a 30% Scope 1 emissions reduction by 2030 from 2019 levels; West Virginia law requires prior approval to decommission MP generation facilities.
- The Board raised the quarterly dividend to $0.41 per share, payable December 1, 2023. Management expects employee retirement and separation actions to produce savings; related 2023 costs included PEER and involuntary-separation benefits.
Important facts for investors to verify
- Track operating cash flow and capital spending against the elevated investment plan, including the funding needs created by the pension contribution and debt maturities.
- Confirm completion terms, timing, regulatory approvals and cash-versus-promissory-note mix for the proposed FET sale, and assess its tax and financing effects.
- Monitor the SEC, HB 6-related investigations and litigation for new accruals, estimated exposures or rate-regulatory consequences; several potential losses remain unquantified.
- Check outcomes of major rate cases and environmental proceedings, and whether regulatory recovery keeps pace with fuel, storm, pension and infrastructure costs.
- Assess debt levels, refinancing costs, liquidity and covenant headroom as interest rates and credit ratings change. The filing does not provide a clear consolidated net-debt or working-capital-deficit amount in the excerpted data.