FirstEnergy Corp. 2016 Second-Quarter 10-Q Summary
Reporting period: Three and six months ended June 30, 2016; comparative periods are 2015. The combined filing also reports FirstEnergy Solutions Corp. (FES), a wholly owned subsidiary. FirstEnergy serves approximately six million customers across six states and operates regulated distribution and transmission businesses alongside competitive generation.
Financial performance
| Metric | Q2 2016 | First half 2016 |
|---|---|---|
| Revenue | $3.401 billion, down 2% year over year | $7.270 billion, down 1% |
| Operating income (loss) | $(975) million | $(199) million |
| Net income (loss) | $(1.089) billion; $(2.56) per share | $(761) million; $(1.79) per share |
| Operating cash flow | Not separately stated in the excerpt | $1.460 billion, versus $990 million |
| Cash and cash equivalents | $199 million at June 30, versus $131 million at December 31, 2015 | |
| Debt and borrowings | $2.925 billion short-term borrowings; $1.327 billion currently payable long-term debt; $18.348 billion long-term debt and other long-term obligations | |
| Capital expenditures | $1.489 billion in the first half; 2016 forecast of $2.950 billion |
- The reported losses were dominated by $1.447 billion of non-cash CES impairments: $800 million of goodwill and $647 million related to planned plant exits. FirstEnergy also recorded approximately $58 million of pre-tax coal-contract settlement and termination costs and $159 million of state and local net operating loss valuation allowances.
- First-half operating cash flow improved by $470 million year over year. Investing activities used $1.767 billion, principally for property additions and nuclear fuel; financing activities provided $375 million, including $1.225 billion of net short-term borrowing.
- Current assets of $3.076 billion were substantially below current liabilities of $6.759 billion, a working-capital deficit of approximately $3.683 billion. Available liquidity, including cash and undrawn revolving capacity, was reported as $3.267 billion.
- FirstEnergy declared $0.72 per share in dividends for the first half; none was declared in Q2. First-half dividend payments were $305 million.
Changes versus the prior period
- FirstEnergy shifted from Q2 2015 net income of $187 million to a Q2 2016 net loss of $1.089 billion; first-half results shifted from $409 million of net income to a $761 million net loss, primarily because of impairment and related charges.
- CES revenue fell $80 million in Q2 and $211 million in the first half, largely as the business reduced contract sales and aligned sales with generation. Lower sales were partly offset by higher wholesale and capacity revenue.
- Regulated Distribution revenue declined $39 million in Q2 and $80 million in the first half, reflecting lower deliveries, customer shopping and weaker usage, partly offset by rate increases. Regulated Transmission revenue rose $32 million in the first half, mainly from higher rate base and recovery of incremental costs.
- First-half operating cash flow increased, while cash used in investing rose to $1.767 billion from $1.693 billion. Short-term borrowings increased from $1.708 billion at year-end 2015.
Outlook, management commentary and key risks
- Management’s strategy is to emphasize regulated distribution and transmission investment and reduce exposure to competitive markets over time. The 2016 capital spending forecast is $2.95 billion, including $1.05 billion for the Energizing the Future transmission plan.
- Management expected CES, including FES, to be cash-flow positive annually from 2016 through 2018 and cover anticipated capital expenditures, but said it did not intend to inject additional equity to support CES/FES credit ratings. These are forward-looking expectations, not guarantees.
- CES expected annual generation of 70–75 million MWh and planned to hedge 75%–85% of output from 2017 onward. Supply for July–December 2016 was described as fully hedged against committed sales, assuming normal weather. Depressed wholesale energy and capacity prices could further weaken results and prompt additional plant sales or deactivations.
- FirstEnergy committed to exit or sell Bay Shore Unit 1 by October 2020 and deactivate Sammis Units 1–4 by May 2020, subject to PJM review. The combined 856 MW of capacity is associated with the $647 million impairment.
- The Ohio Companies’ ESP IV power purchase agreement with FES was suspended after FERC prohibited transactions pending authorization. The Ohio rider proposals and related proceedings remained unresolved; management warned that adverse outcomes could materially affect FirstEnergy’s and FES’s results, financial condition and credit ratings.
- As of June 30, FirstEnergy had $6.0 billion of revolving credit commitments, with $3.068 billion available. FE’s ratings included S&P BB+ and Moody’s Baa3 for senior unsecured debt. On July 22, 2016, S&P placed FES, AE Supply and AGC on CreditWatch with negative implications. A downgrade could increase collateral needs; disclosed contingent collateral exposure was up to $379 million under specified rating scenarios.
- Other material exposures include $3.526 billion of guarantees and other assurances; disputed coal transportation obligations with unestimated potential losses; approximately $78.8 million of ATSI transmission charges whose recovery remains unresolved; and potential Fort Martin water-compliance capital costs estimated at $150–$300 million. Environmental liabilities accrued were approximately $124 million, including $89 million expected to be recovered through a New Jersey customer charge.
- FirstEnergy’s minimum 2016 qualified-pension funding obligation was $381 million; $245 million had been contributed through July. Further contributions, potentially using cash, up to $500 million of equity, or a combination, were anticipated.
Important facts for investors to verify
- Whether the Ohio ESP IV, modified Rider RRS or an alternative distribution rider receives regulatory approval, and whether FERC permits the associated arrangements.
- CES/FES liquidity, credit ratings, collateral requirements and ability to meet debt and pension-funding needs without parent equity support.
- Whether the announced plant exits proceed on schedule, receive PJM approval and lead to further impairments or deactivations.
- Actual 2016 operating cash flow, capital expenditures and generation-market results compared with management’s expectations.
- Developments in coal transportation arbitrations, environmental proceedings, transmission cost-recovery cases and the proposed MAIT asset transfer.