Earnings Per Share Of Common Stock

9 Months Ended

Sep. 30, 2019

The convertible preferred stock issued in January 2018 (see Note 9, “Capitalization”) is considered participating securities since these shares participate in dividends on common stock on an “as-converted” basis. As a result, EPS of common stock is computed using the two-class method required for participating securities.

The two-class method uses an earnings allocation formula that treats participating securities as having rights to earnings that otherwise would have been available only to common stockholders. Under the two-class method, net income attributable to common stockholders is derived by subtracting the following from income from continuing operations:


•	preferred stock dividends,


•	deemed dividends for the amortization of the beneficial conversion feature recognized at issuance of the preferred stock (if any), and


•	an allocation of undistributed earnings between the common stock and the participating securities (convertible preferred stock) based on their respective rights to receive dividends.

Net losses are not allocated to the convertible preferred stock as they do not have a contractual obligation to share in the losses of FirstEnergy. FirstEnergy allocates undistributed earnings based upon income from continuing operations.

The preferred stock includes an embedded conversion option at a price that is below the fair value of the common stock on the commitment date. This beneficial conversion feature, which was approximately $296 million, represents the difference between the fair value per share of the common stock and the conversion price, multiplied by the number of common shares issuable upon conversion. The beneficial conversion feature was amortized as a deemed dividend over the period from the issue date to the first allowable conversion date (July 22, 2018) as a charge to OPIC, since FE is in an accumulated deficit position with no retained earnings to declare a dividend. As noted above, for EPS reporting purposes, this beneficial conversion feature was reflected in net income attributable to common stockholders as a deemed dividend and was fully amortized in 2018.

Basic EPS available to common stockholders is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Participating securities are excluded from basic weighted average ordinary shares outstanding. Diluted EPS available to common stockholders is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding, including all potentially dilutive common shares, if the effect of such common shares is dilutive.

Diluted EPS reflects the dilutive effect of potential common shares from share-based awards and convertible shares of preferred stock. The dilutive effect of outstanding share-based awards is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of the award would be used to purchase common stock at the average market price for the period. The dilutive effect of the convertible preferred stock is computed using the if-converted method, which assumes conversion of the convertible preferred stock at the beginning of the period, giving income recognition for the add-back of the preferred stock dividends, amortization of beneficial conversion feature, and undistributed earnings allocated to preferred stockholders.

The following table reconciles basic and diluted EPS of common stock:



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
Reconciliation of Basic and Diluted EPS of Common Stock	2019		2018			2019			2018

(In millions, except per share amounts)
EPS of Common Stock
Income from continuing operations	$	389	$	399		$	1,085		$	888
Less: Preferred dividends	—		(19		)	(3		)	(61		)
Less: Amortization of beneficial conversion feature	—		(35		)	—			(296		)
Less: Undistributed earnings allocated to preferred stockholders⁽¹⁾	—		—			(4		)	—
Income from continuing operations available to common stockholders	389		345			1,078			531
Discontinued operations, net of tax	2		(857		)	(62		)	322
Less: Undistributed earnings allocated to preferred stockholders ⁽¹⁾	—		—			—			—
Income (loss) from discontinued operations available to common stockholders	2		(857		)	(62		)	322

Income (loss) available to common stockholders, basic	$	391	$	(512	)	$	1,016		$	853

Income allocated to preferred shareholders, preferred dilutive ⁽²⁾	—		N/A			7			N/A

Income (loss) available to common stockholders, dilutive	$	391	$	(512	)	$	1,023		$	853

Share Count information:
Weighted average number of basic shares outstanding	538		503			533			485
Assumed exercise of dilutive stock options and awards	2		2			2			2
Assumed conversion of preferred stock	2		—			6			—
Weighted average number of diluted shares outstanding	542		505			541			487

Income (loss) available to common stockholders, per common share:
Income from continuing operations, basic	$	0.72	$	0.68		$	2.02		$	1.10
Discontinued operations, basic	0.01		(1.70		)	(0.12		)	0.66
Income (loss) available to common stockholders, basic	$	0.73	$	(1.02	)	$	1.90		$	1.76

Income from continuing operations, diluted	$	0.72	$	0.68		$	2.00		$	1.09
Discontinued operations, diluted	—		(1.70		)	(0.11		)	0.66
Income (loss) available to common stockholders, diluted	$	0.72	$	(1.02	)	$	1.89		$	1.75


⁽¹⁾	Undistributed earnings were not allocated to participating securities for the three and nine months ended September 30, 2018, as well as the three months ended September 30, 2019, as income from continuing operations less dividends declared (common and preferred) and deemed dividends were a net loss.


⁽²⁾	The shares of common stock issuable upon conversion of the preferred shares (26 million shares) were not included for 2018 as their inclusion would be anti-dilutive to basic EPS from continuing operations.

For the three and nine months ended September 30, 2018, 1 million shares from stock options and awards were excluded from the calculation of diluted shares outstanding, as their inclusion would be anti-dilutive to basic EPS from continuing operations. For the three and nine months ended September 30, 2019, no shares from stock options and awards were excluded from the calculation of diluted shares outstanding.