FirstEnergy Corp. 2014 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014. FirstEnergy operates regulated electric distribution and transmission businesses and a competitive generation and energy-supply business (CES). Its utilities serve about 6.0 million customers across six states. The filing also includes separate financial statements for wholly owned FirstEnergy Solutions Corp. (FES).
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $15.049 billion | $14.892 billion |
| Operating income | $1.062 billion | $1.582 billion |
| Income from continuing operations | $213 million | $375 million |
| Net income / earnings available to FirstEnergy | $299 million | $392 million |
| Diluted EPS | $0.71 | $0.94 |
| Cash from operating activities | $2.713 billion | $2.662 billion |
| Cash and cash equivalents at year-end | $85 million | $218 million |
| Long-term debt and other long-term obligations | $19.176 billion | $15.831 billion |
| Short-term borrowings | $1.799 billion | $3.404 billion |
| Total equity | $12.422 billion | $12.695 billion |
| Capital expenditures, excluding pension/OPEB mark-to-market capital costs | $3.298 billion | Not clearly stated on the same basis |
FirstEnergy’s 2014 operating margin was approximately 7.1%, compared with approximately 10.6% in 2013, based on reported operating income and revenue. The 2014 effective tax rate on continuing operations was negative 24.6%, reflecting tax benefits and other items despite pre-tax income of $171 million.
At January 31, 2015, FirstEnergy reported $3.962 billion of available liquidity under its revolving facilities and cash. The facilities have $6.0 billion of commitments and mature in March 2019. The company reported $4.2 billion of stand-alone holding-company long-term debt; 28% was variable-rate. Credit ratings for FirstEnergy’s senior unsecured debt were BB+ from S&P and Fitch and Baa3 from Moody’s.
Material changes versus the prior comparable period
- Revenue increased $157 million, or about 1%, but net income fell $93 million and diluted EPS declined $0.23.
- Operating expenses rose $677 million. A $1.091 billion year-over-year adverse swing in pension and OPEB mark-to-market expense was a major factor; the 2014 charge was $835 million versus a $256 million credit in 2013.
- Purchased power expense increased $753 million, notably following January 2014 extreme cold, higher market prices, generating-unit outages and plant transfers/deactivations. Fuel expense fell $216 million.
- 2013 included $795 million of long-lived asset impairments and $539 million of net regulatory-asset amortization; these items were substantially lower or absent in 2014.
- CES reported a $337 million net loss, versus a $220 million loss in 2013. CES reduced sales volumes 9.3% and exited or curtailed selected sales channels to reduce weather-sensitive and inadequately hedged load exposure.
- FirstEnergy sold hydroelectric assets in February 2014 for approximately $394 million and recorded an after-tax gain of about $78 million in discontinued operations.
- The annual common dividend was reduced from $2.20 per share in 2012 to $1.65 in 2013 and $1.44 in 2014; the quarterly rate was reset to $0.36 in January 2014 and maintained in January 2015.
Outlook, management commentary, risks and unusual items
- Management’s strategy is to grow regulated transmission and distribution and reposition CES, targeting more than 80% of earnings from regulated businesses over time. It launched the $4.2 billion Energizing the Future transmission plan for 2014–2017 and identified approximately $15 billion of additional transmission opportunities beyond that period.
- 2015 capital expenditures were forecast at approximately $2.9 billion, including about $970 million for regulated transmission. Management expects to fund investment with operating cash, debt and equity issuances, and cash preserved by the dividend reduction; additional equity may be considered.
- Management forecast 2015 regulated-distribution sales of about 151 million MWh, versus 149.5 million MWh in 2014, and projected CES positive cash flow over 2015–2018. It did not provide a specific consolidated 2015 earnings or EPS forecast in the filing text.
- Management identified expected 2015 pressures including higher pension/OPEB expense, financing costs, depreciation and property taxes, and three planned nuclear refueling outages. It expected an effective tax rate of approximately 37%–38% for the operating segments and 36%–37% for Corporate/Other.
- FES’s separate 2014 results were materially weaker: revenue was $6.144 billion, continuing-operations loss was $360 million, net loss was $244 million, and operating cash flow was $571 million. FES had only $2 million of cash at year-end and received a $500 million equity contribution from FirstEnergy during 2014.
- Environmental exposure includes estimated MATS compliance capital costs of $370 million through 2018, with $133 million spent through 2014; potential Fort Martin water-treatment investment of $150–$300 million; and uncertainties around greenhouse-gas, wastewater and coal-combustion-residual rules. The Little Blue Run impoundment must stop accepting disposal by December 31, 2016.
- FirstEnergy accrued approximately $125 million for environmental remediation liabilities. Several regulatory and legal matters remain unresolved, including New Jersey storm-cost recovery timing, the JCP&L rate case, ATSI transmission-rate/return-on-equity proceedings, and coal-contract disputes. The filing does not provide estimable loss ranges for certain proceedings.
- Other notable exposures include $3.7 billion of underfunded pension and OPEB plans, approximately $2.3 billion in nuclear decommissioning trusts, up to $1.044 billion of potential additional collateral under specified credit-downgrade scenarios, and approximately $4.0 billion of guarantees and other assurances.
- FirstEnergy reported that its internal control over financial reporting was effective as of year-end; the auditor issued an unqualified opinion on FirstEnergy’s financial statements and internal controls. FES’s financial statements received an unqualified audit opinion, but its internal controls were not audited by the independent auditor.
Important facts for investors to verify
- Whether regulated rate cases and transmission-rate proceedings deliver timely recovery and returns sufficient to support the large capital program.
- Whether CES can stabilize earnings and cash generation after reducing contracted sales, and how PJM capacity-market reforms affect prices, obligations and penalties.
- The cash-flow and balance-sheet effect of increased debt, planned capital spending, pension/OPEB costs, and any additional equity issuance.
- Final recoverability and timing of JCP&L storm costs, and outcomes of the pending Ohio, Pennsylvania and New Jersey rate proceedings.
- Actual costs and operating consequences of MATS, CCR, water-discharge and greenhouse-gas requirements, including the Little Blue Run closure plan.
- Exposure to collateral calls, refinancing needs and credit-rating changes, including the distinction between parent and subsidiary liquidity and debt.
- Updates to nuclear decommissioning funding, Davis-Besse license renewal and shield-building review, and coal-supply/transportation litigation.