FirstEnergy Corp. — FY 2017 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2017; it is not a standalone fourth-quarter filing. FirstEnergy operates regulated electric distribution and transmission businesses alongside Competitive Energy Services (CES), principally through FirstEnergy Solutions Corp. (FES). Its utilities served about 6.1 million customers across six states. The company said its strategy is to transition toward a fully regulated utility profile.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $14.017 billion | $14.562 billion |
| Operating income (loss) | $172 million | $(8.262) billion |
| Net income (loss) | $(1.724) billion | $(6.177) billion |
| Diluted EPS | $(3.88) | $(14.49) |
| Operating cash flow | $3.808 billion | $3.383 billion |
| Capital expenditures | $2.752 billion | $2.835 billion |
| Cash and cash equivalents at year-end | $589 million | $199 million |
| Total assets | $42.257 billion | $43.148 billion |
| Equity | $3.925 billion | $6.241 billion |
FY 2017 operating margin was approximately 1.2% and net margin approximately negative 12.3%, calculated from reported revenue and operating income/net loss. FirstEnergy declared $1.44 per common share in dividends, unchanged from 2016.
- Cash flow and liquidity: Operating cash flow increased $425 million year over year. Cash used in investing activities was $2.716 billion and cash used in financing activities was $702 million. At January 31, 2018, FirstEnergy reported $4.740 billion of available revolving credit and $358 million of cash, or $5.098 billion total liquidity.
- Debt: At December 31, 2017, long-term debt and other long-term obligations were $21.115 billion; $1.082 billion of long-term debt was current and short-term borrowings were $300 million. FirstEnergy had $6.8 billion of standalone holding-company long-term debt. FES reported $2.299 billion of long-term debt and other obligations, plus $524 million currently payable long-term debt.
- Segments: Regulated Distribution earned $916 million and Regulated Transmission $336 million; CES recorded a $2.641 billion loss. FirstEnergy’s net loss included a $2.406 billion impairment and related charges and a $1.193 billion noncash income-tax charge from the Tax Act.
Material changes versus comparable periods
- Revenue fell $545 million, or about 4%, principally because CES revenue declined $1.020 billion amid lower contract sales, capacity prices and gains on settled contracts. Increases in regulated transmission and distribution revenue partly offset the decline.
- The net loss narrowed from $6.177 billion in 2016, largely because 2016 included $10.665 billion of impairments, versus $2.406 billion in 2017. The 2017 charge included a $2.045 billion FES nuclear-asset impairment, $193 million related to the LS Power asset sale, $120 million for Pleasants, and $41 million related to transmission-rate settlements.
- Regulated Distribution earnings rose $265 million, reflecting new rates and the absence of a 2016 regulatory charge. Operating cash flow improved, including because 2017 had no comparable $382 million cash pension contribution reported for 2016.
- CES contract-sales volumes and customer base contracted: FirstEnergy reported 65.1 million MWh in total CES sales, down 4.4%, and its Direct, Governmental Aggregation and Mass Market customer base declined to about 900,000 from 1.1 million.
Outlook, management commentary and key risks
- FES going concern: Management and the auditor identified substantial doubt about FES’s ability to continue as a going concern. FES had $515 million of 2018 debt maturities, including a $100 million payment due April 2, 2018, which management said was unlikely to be refinanced based on its ratings and cash-flow outlook. FES had access to a $500 million secured FE facility, but that support does not remove the stated uncertainty. FES’s auditor issued an unqualified opinion with a going-concern explanatory paragraph.
- Portfolio exit and transactions: FirstEnergy completed the sale of four AE Supply gas plants in December 2017 for approximately $388 million net proceeds. The remaining Buchanan and Bath County interests were expected to produce $375 million net proceeds and close in the first half of 2018, subject to approvals and conditions. The Pleasants sale to MP was terminated after FERC denied authorization; AE Supply announced an intention to sell or deactivate the plant by January 1, 2019.
- Capital and equity: FirstEnergy forecast 2018 capital spending of $2.6–$2.9 billion, excluding CES. On January 22, 2018, it announced a $2.5 billion equity investment: $1.62 billion of mandatorily convertible preferred stock and $850 million of common stock. Proceeds were intended to repay $1.45 billion of holding-company debt, contribute $750 million to the pension plan and support general purposes. Preferred shares may convert beginning July 2018 and are generally scheduled for mandatory conversion in July 2019, subject to terms.
- Regulated growth: Management projected regulated distribution rate-base growth of about 5% and transmission rate-base growth of about 11% through 2021. The company planned $4.0–$4.8 billion of transmission investment from 2018–2021; execution and recovery depend on regulatory approvals and rate treatment.
- Tax Act: The enacted federal tax-rate reduction to 21% produced a noncash $1.193 billion charge in 2017. The regulated businesses recorded $2.3 billion of excess deferred taxes as a regulatory liability where customer refunds are expected. The amounts and timing of customer rate adjustments remained subject to regulatory proceedings; final tax accounting adjustments could still be material.
- Contingencies and unusual events: A separate coal-transport arbitration remained scheduled for June 2018; FirstEnergy/FES recorded a $116 million charge and warned an adverse outcome could materially worsen FES’s position. A separate coal-supply dispute had a February 2018 agreement in principle involving a $93 million payment by AE Supply. The January 10, 2018 Bruce Mansfield fire damaged equipment serving Units 1 and 2; the extent and financial effect were not yet estimable, though the affected property was insured. Environmental compliance, including potential Fort Martin water-treatment investment estimated at $150–$300 million, remains a risk.
Most important facts for investors to verify
- Whether FES refinanced, repaid or restructured its 2018 maturities, and whether it continued as a going concern without bankruptcy protection.
- Completion, proceeds and debt-retirement consequences of the remaining LS Power transactions, and the final outcome for Pleasants.
- Final customer-rate treatment of the Tax Act deferred-tax benefits and any material revisions to the provisional tax accounting.
- Final cost, insurance recovery and operating consequences of the Bruce Mansfield fire, and outcomes of the coal transportation and coal-supply disputes.
- Whether regulated capital plans and projected rate-base growth were achieved, and whether regulators approved the related recovery and transmission-rate settlements.
- How the 2018 equity issuance, preferred-stock conversion and pension contribution affected leverage, dilution, liquidity and the common dividend.