FIRSTENERGY CORP quarterly report, Q3 FY2020

FirstEnergy Corp. (FE) — 2020 Q3 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020; filed November 19, 2020. FirstEnergy operates regulated electric distribution and transmission businesses, serving approximately six million customers across six states. Figures are in millions of dollars except per-share amounts.

Financial performance and position

Metric	Q3 2020	Q3 2019	First nine months 2020	First nine months 2019
Revenue	$3,022	$2,963	$8,253	$8,362
Operating income	$721	$681	$1,768	$1,895
Income from continuing operations	$460	$389	$791	$1,085
Net income attributable to common stockholders	$454	$391	$837	$1,016
Diluted EPS	$0.84	$0.72	$1.54	$1.89
Cash from operating activities	—	$851	$1,737

Q3 revenue rose 2% and net income increased 16% year over year. Nine-month revenue fell 1% and net income attributable to common shareholders fell 18%.
Q3 operating expenses were $2,301, including a $91 regulatory-asset deferral benefit, versus $2,282 of expenses and $43 of net regulatory-asset amortization expense a year earlier. Nine-month operating expenses were $6,485 versus $6,467.
Nine-month results included a $423 non-cash pension and OPEB mark-to-market expense, triggered by the FES bankruptcy emergence and plan remeasurement. The filing reports no such adjustment in 2019. The 2020 nine-month effective tax rate on continuing operations was 13.4%, versus 20.6%, partly reflecting tax benefits associated with the FES deconsolidation.
Cash from operations declined by $886 year over year, primarily reflecting $978 of settlement and tax-sharing payments to FES Debtors, higher customer receivables amid COVID-19 and higher storm costs. The prior-year period included a $500 pension contribution.
Cash and cash equivalents were $260 at September 30, 2020, plus $36 of restricted cash, compared with $627 and $52, respectively, at year-end 2019. Current assets of $2,162 were below current liabilities of $3,077.
Long-term debt and other long-term obligations were $22,203; current long-term debt was $77 and short-term borrowings were $300. Short-term borrowings were $1,000 at year-end 2019. Nine-month financing included $3,425 of long-term debt issuance, $1,110 of repayments and $634 of common dividends paid.
Property additions were $1,979 for the first nine months. The company reported $3.5 billion of revolving-credit commitments and, as of November 19, $3.246 billion of available facility liquidity; the filing also reported $286 of cash as of November 18.

Comparative changes and operating drivers

Q3 Regulated Distribution net income increased $43, primarily from lower pension and OPEB non-service expense and stronger residential sales; Regulated Transmission net income increased $2, supported by higher rate base at ATSI and MAIT.
COVID-19 shifted demand toward residential customers while commercial and industrial usage weakened. Q3 distribution deliveries declined 1.7% overall; nine-month deliveries fell 4.2%. Residential deliveries rose 5.1% in Q3 and 1.8% year to date, while commercial and industrial deliveries fell.
Nine-month Regulated Distribution net income declined $157, reflecting the pension mark-to-market expense, lower weather-related usage and the absence of Ohio DMR revenue that ended in 2019; higher riders, residential sales and lower pension non-service costs partly offset the decline.
Transmission revenue increased $95 in the first nine months, mainly from higher rate base and recovery of operating costs. Total company revenue was affected by lower retail and wholesale generation sales and lower “Other” revenue.

Outlook, risks and unusual items

HB 6 investigations and governance: The U.S. Attorney’s Office and SEC opened investigations and issued subpoenas; related shareholder, customer and government litigation is pending. The company said outcomes could materially affect its financial condition, results, liquidity and cash flows, but recorded no loss contingency because a loss was not considered probable or estimable. An internal board investigation found former senior executives violated company policies and code of conduct. The filing describes an approximately $4 payment made in early 2019 related to terminating a purported consulting agreement with an entity associated with an Ohio official; the purpose of the payments had not been determined.
Material weakness: FirstEnergy concluded disclosure controls were ineffective at September 30 because senior management failed to establish an appropriate compliance tone and enforce policies. The weakness did not cause a reported financial-statement misstatement, but could have allowed one. Remediation was underway, with no expected completion timetable stated.
Credit and liquidity: S&P and Fitch downgraded ratings on October 30, placing pressure on credit terms. November 17 amendments to revolving facilities modified or waived certain provisions to restore compliance, reduced FE’s facility sublimit to $1.5 billion and increased certain borrowing pricing tiers. The company reported compliance with financial-ratio covenants at September 30. It may need further waivers; adverse developments could restrict borrowing or accelerate debt.
COVID-19: Incremental uncollectible expense was $63 for the first nine months, including $20 in Q3; approximately $40 year to date was not then being collected through rates and was deferred for potential recovery. Customer arrears and write-offs may rise as collection and disconnection moratoria end. Management said it did not then expect material service-delivery or capital-plan disruption, while warning that longer-lasting impacts remained uncertain.
Regulatory exposure: Ohio HB 6 repeal could affect the decoupling mechanism. At September 30, approximately $100 of uncollected decoupling revenue was recorded as a regulatory asset; the company estimated a $37 pretax net impact for the first nine months absent the mechanism. Rate recovery for COVID-19, storm and other regulatory assets is subject to applicable regulatory processes.
Other contingencies: TMI-2 transfer and decommissioning remained subject to regulatory approvals; related trusts were $881 and associated liabilities were approximately $900. Environmental liabilities accrued were approximately $104. Guarantees and other assurances totaled approximately $1.7 billion.
Plans and estimates: The company cited planned 2018–2023 capital investment exceeding $10 billion in distribution and $7 billion in transmission, with expected rate-base growth of approximately 4% and 10%, respectively. These plans may change: management said it was considering capital and operating-cost reductions and changes to equity issuance plans in response to potential investigation-related fines. FirstEnergy anticipated no equity issuance need through 2021 and up to $600 annually in 2022–2023, subject to conditions. It estimated a possible after-tax Q4 pension/OPEB mark-to-market adjustment from a $330 loss to a $40 gain under stated assumptions.
Climate commitments include carbon neutrality by 2050 and a 30% reduction in directly controlled greenhouse-gas emissions by 2030 from 2019 levels. The company noted potential environmental rules and compliance costs could be material.

Investor verification priorities

Track the scope and outcome of the HB 6-related government investigations, SEC inquiry, lawsuits and regulatory proceedings, including any fines, rate impacts or settlements.
Monitor remediation of the material weakness, internal-investigation findings and subsequent disclosure-control assessments.
Verify compliance with amended credit-facility terms, rating developments, liquidity availability and any need for additional covenant waivers.
Assess recovery of COVID-19, storm and Ohio decoupling regulatory assets, and the consequences of any HB 6 repeal.
Reconcile ongoing cash generation and debt needs against capital investment, dividends and potential legal or pension cash requirements.
Follow approvals and closing conditions for the TMI-2 and Yards Creek transactions, and potential environmental and decommissioning obligations.