FirstEnergy Corp. 10-Q Summary — Second Quarter 2015
Reporting period: Quarter and six months ended June 30, 2015; filed July 30, 2015. The combined filing reports FirstEnergy Corp. (FE) and its wholly owned competitive-energy subsidiary, FirstEnergy Solutions Corp. (FES). FE operates regulated distribution and transmission businesses and competitive generation and retail-energy operations, serving approximately six million customers.
Financial performance and position
| FE consolidated (millions, except per-share data) | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $3,465 | $3,496 | $7,362 | $7,678 |
| Operating income | $554 | $292 | $1,148 | $683 |
| Net income | $187 | $64 | $409 | $272 |
| Diluted EPS | $0.44 | $0.15 | $0.97 | $0.65 |
| Operating margin, approximately | 16.0% | 8.4% | 15.6% | 8.9% |
- Cash flow: Six-month operating cash flow was $990 million, versus $622 million; capital expenditures/property additions were $1.486 billion. Investing cash outflow was $1.693 billion and financing cash inflow was $712 million.
- Debt and liquidity: At June 30, FE reported $2.908 billion of short-term borrowings, $1.292 billion of currently payable long-term debt, and $18.570 billion of long-term debt and other long-term obligations. Cash was $94 million. Available liquidity under $6.0 billion of revolving facilities plus cash was reported at $3.136 billion. Working capital was negative by approximately $2.676 billion, largely because of current debt and borrowings.
- Equity and dividends: FE common equity was $12.530 billion. Dividends declared were $0.72 per share for the first half; none were declared in Q2. The filing notes the prior dividend reduction and estimates it preserves about $320 million annually.
- FES standalone: Revenue was $1.119 billion in Q2, down from $1.452 billion; FES recorded a $21 million net loss, compared with an $87 million loss. For the first half, revenue was $2.496 billion versus $3.281 billion and net loss was $24 million versus $74 million. FES operating cash flow was $343 million versus $83 million.
Material changes versus the prior comparable period
- FE revenue fell 1% in Q2 and 4% for the first half, mainly because CES reduced contract sales volumes as it repositioned its portfolio. CES revenue decreased $297 million in Q2 and $633 million for the first half.
- Despite lower revenue, FE operating income and earnings rose substantially. CES results improved by $107 million in Q2 and $136 million for the first half, helped by higher capacity revenue, lower operating costs, and the absence of 2014 extreme-weather-related power costs. Regulated transmission earnings also improved, by $26 million and $47 million, respectively, as ATSI moved to a forward-looking formula rate. Regulated distribution earnings were slightly lower.
- FE operating expenses decreased $293 million in Q2 and $781 million in the first half, largely reflecting lower CES purchased-power, fuel, transmission and retail-related costs. Interest expense increased $20 million in Q2 and $34 million in the first half; investment income also declined.
- 2014 comparisons include $86 million of FE after-tax income from discontinued operations in the first half, including the gain on the sale of hydroelectric facilities. No discontinued-operations income was reported in the first half of 2015.
Outlook, management commentary and key risks
- Investment and savings plans: FE forecast approximately $2.9 billion of 2015 capital expenditures, including a $4.2 billion “Energizing the Future” transmission plan for 2014–2017; regulated transmission capital spending was forecast at $970 million for 2015. Management cited at least $15 billion of longer-term transmission investment opportunities. The completed cash-flow improvement plan targets savings of $58 million in 2015, $155 million in 2016 and $240 million annually by 2017. Management expects existing liquidity sources to meet anticipated needs but expects to use external financing as well as operating cash.
- Competitive business: CES is reducing weather-sensitive and lower-margin sales exposure, seeking more certain revenues and hedging generation. FE reported CES committed sales of 72 million MWh for 2015, 53 million for 2016 and 31 million for 2017. FES described a future annual contract-sales target of 65–75 million MWh. These plans remain exposed to power, capacity, fuel and market-rule changes; no consolidated earnings-per-share guidance is provided in the supplied filing text.
- Regulatory matters: Ohio’s proposed ESP IV, including a proposed 15-year arrangement for output from Sammis, Davis-Besse and FE’s share of OVEC, remained pending; hearings were scheduled to begin August 31, 2015. Pennsylvania rate settlements approved in April provide about $293 million in annual revenue increases but also about $88 million in annual operating costs. A Pennsylvania operations-audit implementation plan was estimated to cost $200–$230 million. The proposed transfer of certain utility transmission assets to MAIT awaited approvals. ATSI’s proposed rate settlement, including lower ROE levels beginning July 2015 and 2016, also awaited FERC approval.
- Environmental and operating exposures: Estimated MATS compliance capital costs were $370 million through 2018, of which $167 million had been spent by June 30. The Bruce Mansfield water-treatment upgrade was expected to require about $117 million of 2015 capital spending; the Little Blue Run ash impoundment must stop receiving disposal by December 31, 2016. Fort Martin water-permit compliance could require $150–$300 million of initial capital investment. The company reported $134 million of accrued environmental liabilities, while some additional exposures could not be estimated.
- Contingencies and credit: FE reported approximately $3.9 billion of guarantees and other assurances and up to $558 million of additional collateral obligations under specified credit events. A downgrade or adverse market movements could increase collateral needs. FE’s senior unsecured ratings included S&P BB+ and Moody’s Baa3. Other uncertainties include unresolved coal-supply disputes, California power-market claims for which loss could not be estimated, PJM/FERC transmission-cost and market proceedings, and environmental regulations. The Davis-Besse shield-building cracking was described as maintaining structural integrity; the NRC cited a non-cited violation and continued its review.
- Unusual items: FES recorded a $16 million transportation-equipment impairment in Q2. FE recognized a $24 million pretax charge in Q1 in connection with extending its guarantee of Global Holding’s $300 million term loan. FES recorded a $12 million pretax gain in Q2 from settlement of fuel-contract litigation.
Important facts for investors to verify
- Whether CES can sustain improved earnings while reducing sales volumes, and how capacity-market outcomes and wholesale prices affect margins.
- FE’s refinancing needs, working-capital deficit, available revolving-facility capacity, credit ratings and potential collateral calls.
- Final regulatory outcomes for Ohio ESP IV, ATSI rates/ROE and the proposed MAIT asset transfer, including effects on rates and cost recovery.
- Actual costs and timing of environmental compliance, coal-contract resolutions and Bruce Mansfield ash-disposal alternatives.
- Whether planned capital investment and cost savings are achieved without impairing liquidity, service reliability or shareholder distributions.