FirstEnergy Corp. 10-Q Summary — Quarter Ended June 30, 2017
Business context: FirstEnergy operates regulated electric distribution and transmission businesses and competitive generation and energy-supply operations (CES). The combined filing also reports FirstEnergy Solutions Corp. (FES) separately. FirstEnergy serves approximately 6 million customers across six states. Management’s stated strategy is to exit competitive operations and focus on a fully regulated utility business.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3.309 billion | $3.401 billion | $6.861 billion | $7.270 billion |
| Operating income (loss) | $544 million | $(975) million | $1.118 billion | $(199) million |
| Net income (loss) | $174 million | $(1.089) billion | $379 million | $(761) million |
| Diluted EPS | $0.39 | $(2.56) | $0.85 | $(1.79) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.482 billion | $1.472 billion |
- Revenue mix: Q2 regulated distribution revenue was $2.262 billion, regulated transmission $327 million, and unregulated businesses $720 million. For the six months, those amounts were $4.752 billion, $640 million, and $1.469 billion, respectively.
- Cash flow and investment: First-half investing cash outflow was $1.511 billion, principally property additions of $1.254 billion. Financing cash outflow was $56 million. Cash declined to $114 million at June 30 from $199 million at year-end 2016.
- Debt and liquidity: At June 30, current long-term debt payable was $2.015 billion, short-term borrowings $225 million, and long-term debt and other long-term obligations $20.582 billion. FirstEnergy reported $4.879 billion of available liquidity, including cash and available revolving credit capacity. It issued $3 billion of senior notes in June and reported $150 million borrowed under its revolving facility.
- Dividends: First-half dividends declared were $0.72 per share, unchanged from the prior-year period; no dividend was declared in Q2.
- FES financial condition: FES reported first-half revenue of $1.655 billion and a net loss of $61 million, versus revenue of $2.301 billion and a $307 million net loss in 2016. First-half operating cash flow was $295 million, down from $557 million.
Changes versus the prior comparable period
- FirstEnergy’s Q2 and first-half earnings improved substantially, mainly because 2016 included large CES impairments and plant-exit charges. FirstEnergy recorded a $131 million non-cash impairment in Q2 2017; comparable 2016 impairment charges were $1.447 billion.
- Revenue fell 3% in Q2 and 6% in the first half. CES revenue declined $252 million in Q2 and $625 million in the first half, reflecting lower capacity prices and contract sales. Regulated distribution and transmission revenues increased, supported by approved rate increases and higher transmission rate base.
- First-half operating expenses also included a $164 million pre-tax charge associated with coal transportation contract disputes. Lower fuel, purchased-power, and depreciation costs partly offset other expense pressures.
- Distribution deliveries declined 0.7% in Q2 and 1.1% in the first half, mainly due to lower weather-related residential and commercial usage. Industrial deliveries increased.
Outlook, risks, contingencies, and unusual items
- Regulated-business outlook: Management projected 4%–6% compounded annual earnings growth from 2016 to 2019 for regulated transmission and distribution, rising to 7%–9% including Ohio’s distribution modernization rider. Transmission rate base was expected to grow about 9% annually through 2021. Planned transmission capital investment was $4.2–$5.8 billion for 2017–2021; distribution capital expenditures were projected at about $1.3 billion annually for 2017–2019. Management planned $500 million of equity issuance annually from 2017 through 2019.
- Competitive-business exit and asset sales: FirstEnergy targeted implementing its exit from competitive operations by mid-2018. A proposed sale of 1,572 MW of gas and hydro assets for an announced $925 million remained under negotiation after the parties’ termination right became available; FirstEnergy targeted a revised transaction closing in the second half of 2017, subject to approvals and other conditions. MP also agreed to acquire the 1,300 MW Pleasants station for approximately $195 million, subject to approvals.
- FES going-concern risk: Management stated that substantial doubt existed about FES’s ability to meet obligations over the next 12 months. FES had $515 million of debt maturing beginning in Q2 2018, which management said could be difficult to refinance. FES had access to a $500 million secured FE credit line, all available at quarter-end, and management expected operating cash flow to fund capital expenditures and nuclear fuel purchases through March 2018. Restructuring, additional asset sales or deactivations, or bankruptcy protection for FES and likely FENOC were identified as possible outcomes if viable alternatives and refinancing were not achieved.
- Credit and market exposure: FES had deeply speculative-grade ratings and negative outlooks from the cited agencies. Weak wholesale power and capacity markets, falling contract sales, collateral demands, and greater spot-market exposure could pressure results and liquidity. Management forecast CES contract sales of 40–45 million MWh in 2017 and 35–40 million MWh in 2018, compared with 53 million MWh in 2016.
- Legal and environmental matters: FG agreed to a $109 million settlement with BNSF and CSX, payable in three annual installments and guaranteed by FirstEnergy; the first installment was paid in May 2017. A separate BNSF/NS dispute remained pending, with an arbitration hearing scheduled for June 2018; an adverse outcome could be materially higher than the recorded estimate and could further threaten FES’s financial condition. A coal-supply lawsuit and several regulatory and environmental proceedings also remained unresolved.
- Other exposures: FirstEnergy disclosed $3.3 billion of guarantees and other assurances and estimated $420 million of potential collateral-related exposure under specified contractual scenarios. Environmental remediation liabilities accrued were approximately $131 million. The Fort Martin permit could require $150–$300 million of initial capital investment, with the outcome of related proceedings uncertain.
Most important facts for investors to verify
- Whether the proposed generation asset sales close, on what revised terms, and whether proceeds meaningfully improve CES liquidity and debt capacity.
- FES’s refinancing plan for its $515 million 2018 maturities, access to FE support, and any developments affecting the stated going-concern uncertainty.
- The scope and potential cost of the unresolved BNSF/NS and coal-supply disputes, and whether recorded charges adequately reflect probable outcomes.
- Whether projected regulated earnings growth and transmission investment plans remain supportable given regulatory approvals, rate proceedings, capital-market access, and funding needs.
- How weak power and capacity prices, customer shopping, collateral requirements, and increased spot-market exposure affect CES cash flow and credit ratings.