FirstEnergy Corp. 2015 Form 10-K Summary
Business context and reporting period. FirstEnergy is an electric utility holding company with regulated distribution and transmission operations and a competitive generation and retail-supply business (CES). Its ten utilities served approximately 6 million customers across six states. The filing covers the fiscal year ended December 31, 2015; it also reports quarterly results, including the fourth quarter. Figures below are for FirstEnergy Corp. unless identified as FES, its wholly owned competitive-energy subsidiary.
Key financial results
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Revenue | $15.026 billion | $15.049 billion | Down $23 million; regulated growth largely offset lower CES revenue |
| Operating income | $2.292 billion | $1.062 billion | Up $1.230 billion; operating margin was approximately 15.3%, versus 7.1% |
| Net income | $578 million | $299 million | Up $279 million |
| Diluted EPS | $1.37 | $0.71 | 2015 continuing-operations EPS was also $1.37 |
| Operating cash flow | $3.447 billion | $2.713 billion | Up $734 million |
| Cash and cash equivalents | $131 million | $85 million | At December 31 |
| Total assets | $52.187 billion | $51.648 billion | At December 31 |
| Equity | $12.422 billion | $12.422 billion | At December 31 |
| Long-term debt and other long-term obligations | $19.192 billion | $19.176 billion | Excludes current debt and short-term borrowings |
Cash used in investing activities was $3.122 billion, primarily for property additions and nuclear fuel. Financing activities used $279 million, including $607 million of common dividends. Property additions in the cash-flow statement were $2.704 billion; reported 2015 capital expenditures were $3.016 billion including pension/OPEB mark-to-market capital costs.
At year-end, FirstEnergy reported $1.166 billion of currently payable long-term debt and $1.708 billion of short-term borrowings. It had $4.1 billion of available liquidity under revolving facilities and cash as of January 31, 2016. The company paid $1.44 per share in declared dividends for 2015; the board declared a further $0.36 quarterly dividend in January 2016.
Material changes and segment performance
- Regulated Distribution net income rose to $618 million from $465 million, and Regulated Transmission net income rose to $298 million from $223 million. Rate increases, transmission investment and ATSI’s forward-looking formula rate contributed to improvement.
- CES moved from a $331 million loss in 2014 to $89 million of net income in 2015. Its revenue declined $905 million, reflecting a 31.5% reduction in contract-sale volumes as the business reduced weather-sensitive retail exposure. Higher capacity revenue and lower purchased-power and transmission costs helped results.
- Corporate/Other net loss increased to $427 million from $58 million, primarily reflecting a $362 million non-cash, pre-tax impairment of FirstEnergy’s Global Holding coal investment, as well as higher interest and other costs.
- Operating expenses fell $1.253 billion, including a $593 million decrease in the pension/OPEB mark-to-market adjustment. Fuel and purchased-power expenses also declined. Interest expense increased $59 million, and the effective tax rate on continuing operations rose to 35.3% from negative 24.6% in 2014.
- Fourth-quarter net loss was $226 million, or $0.53 per share, compared with a $306 million loss, or $0.73 per share, in fourth-quarter 2014. The filing attributes substantial quarterly earnings volatility to pension/OPEB mark-to-market accounting; the clear full-year result is net income of $578 million.
Outlook, risks and unusual items
- Management’s strategy emphasizes regulated investment and conservative management of CES. The Energizing the Future transmission plan targets $4.2 billion of investment from 2014–2017; $2.4 billion had been spent through 2015, with approximately $1 billion projected for 2016. The company identified at least $15 billion of additional longer-term transmission opportunities.
- 2016 capital plans for Regulated Distribution, CES and Corporate/Other remained dependent on the outcome of Ohio’s proposed ESP IV and board approval. ESP IV, pending at year-end, proposed an eight-year term and an eight-year FERC-jurisdictional power purchase agreement with FES covering Sammis, Davis-Besse and OVEC output. Approval and subsequent legal or regulatory challenges were material uncertainties.
- Management targeted cash savings of $58 million in 2015, $155 million in 2016 and $240 million annually by 2017. It also expected a minimum $381 million qualified-pension contribution for 2016; $160 million had been contributed by the filing date.
- Key risks include weak wholesale power and capacity prices, natural-gas competition, generation outages and PJM Capacity Performance penalties, rate-recovery and regulatory outcomes, and the company’s substantial coal exposure. Environmental rules and proceedings may require further costs or operational changes. The filing estimates MATS compliance capital costs of $345 million over 2012–2018, with $202 million spent through 2015; Fort Martin water-permit compliance could require $150–$300 million, subject to appeal.
- Material contingencies include arbitration over coal-transport contracts for deactivated plants, with potential losses not estimable; FES paid approximately $70 million in 2014 settlements for delivery shortfalls. The company also disclosed a $300 million guarantee of Global Holding debt, $126 million of accrued environmental liabilities, and possible further environmental remediation exposure.
- FirstEnergy reported approximately $4.0 billion of underfunding across pension and OPEB plans. Pension/OPEB asset returns were below the assumed return in 2015, increasing sensitivity to market performance and actuarial assumptions. The company reported that the independent auditor issued an unqualified opinion and management considered internal control over financial reporting effective.
Investor facts to verify
- Whether Ohio’s ESP IV and associated FES power purchase agreement received approval, and how FERC or court challenges affected the arrangement and planned investment.
- Whether cash savings, transmission spending and pension funding targets were achieved, and the resulting effect on leverage, liquidity and credit ratings.
- CES margins, capacity revenues, committed sales volumes and exposure to future PJM auction prices, outage penalties and commodity movements.
- Resolution and potential financial effects of coal-transport arbitration, Global Holding’s debt guarantee, and environmental and water-permit proceedings.
- Whether pension/OPEB assumptions, nuclear decommissioning trust values and environmental compliance estimates changed materially after year-end.