FirstEnergy Corp. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports on wholly owned competitive subsidiary FirstEnergy Solutions Corp. (FES). FirstEnergy operates regulated electric distribution and transmission businesses alongside competitive generation and energy sales.
Business context and results
FirstEnergy serves approximately 6 million customers across six states and controls nearly 17,000 MW of regulated and competitive generation capacity. Management’s strategy is to transition toward a fully regulated utility, emphasizing transmission and distribution investment while reviewing an exit from competitive generation.
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $14.562 billion | $15.026 billion |
| Operating income (loss) | $(8.262) billion | $2.292 billion |
| Net income (loss) | $(6.177) billion | $578 million |
| Basic and diluted EPS | $(14.49) | $1.37 |
| Net cash from operations | $3.371 billion | $3.447 billion |
| Cash and cash equivalents at year-end | $199 million | $131 million |
Revenue declined 3%, primarily because competitive energy services (CES) revenue fell $835 million as contracted sales volumes and capacity revenue decreased. Regulated distribution and transmission revenue increased $47 million and $97 million, respectively. Segment net income was $651 million for regulated distribution and $331 million for regulated transmission; CES reported a $6.919 billion net loss.
Impairments and material changes
FirstEnergy recorded $10.665 billion of non-cash asset impairment charges in 2016, principally reflecting its plan to exit competitive operations by mid-2018 and the weak outlook for wholesale energy and capacity markets. This included a $9.218 billion fourth-quarter impairment of CES assets, an $800 million second-quarter CES goodwill impairment, and $647 million related to planned Bay Shore Unit 1 and W.H. Sammis unit deactivations. These charges drove the shift from 2015 profit to a substantial 2016 loss; operating cash flow remained positive.
Other year-over-year factors included lower fuel and purchased-power costs, but higher other operating expenses and interest expense. Pension and OPEB mark-to-market expense fell to $147 million from $242 million. The company contributed $882 million to its qualified pension plan, including $500 million in FirstEnergy common stock.
Cash flow, debt and liquidity
- Cash used for investing activities was $3.281 billion, including $2.835 billion of property additions and $232 million of nuclear fuel purchases. Cash used for financing activities was $22 million; dividends paid were $611 million.
- At year-end, FirstEnergy reported $18.192 billion of long-term debt and other long-term obligations, $1.685 billion of currently payable long-term debt, and $2.675 billion of short-term borrowings. Total equity was $6.241 billion, down from $12.422 billion in 2015.
- As of January 31, 2017, FirstEnergy and its regulated/transmission borrowers reported $2.649 billion of available liquidity, including $2.341 billion of undrawn revolving credit and $308 million of cash. FirstEnergy also planned $500 million of equity issuance annually in 2017–2019, subject to market conditions.
- FirstEnergy’s 2017 and 2018 capital expenditure forecasts were approximately $2.785 billion and $2.685 billion. The transmission investment plan targets $4.2–$5.8 billion of investment from 2017 through 2021.
FES financial condition
FES reported 2016 revenue of $4.398 billion, a net loss of $5.455 billion, and operating cash flow of $785 million, versus $5.005 billion, net income of $82 million, and operating cash flow of $1.151 billion in 2015. Its loss included $8.622 billion of non-cash asset impairments. FES had approximately $3.0 billion of long-term debt and $130 million of 2017 subsidiary debt maturities, followed by $515 million in 2018.
Management and the auditor disclosed substantial doubt about FES’s ability to continue as a going concern, based on weak market conditions, its debt and liquidity needs, and refinancing risk. FES had a new $500 million secured credit facility from FirstEnergy and $2 million of cash available as of January 31, 2017. Its unsecured ratings were Caa1 at Moody’s, CCC+ at S&P, and C at Fitch. The financial statements contain no adjustments for the possible outcome of the going-concern uncertainty.
Outlook, actions and key risks
- Management targeted implementation of a competitive-operations exit by mid-2018. Alternatives for remaining generation included asset sales, deactivations, regulatory or legislative solutions, debt restructuring, and potentially bankruptcy protection for FES and possibly FENOC.
- In January 2017, AE Supply and AGC agreed to sell 1,572 MW of gas and hydro assets for approximately $925 million, subject to approvals and other conditions. Closing was expected in the third quarter of 2017; satisfying approximately $305 million of AE Supply notes could require an estimated $100 million make-whole payment. AE Supply also offered the 1,300 MW Pleasants plant for approximately $195 million in a utility capacity solicitation.
- Management forecast regulated-business compounded annual earnings growth of 4%–6% from 2016 to 2019, or 7%–9% including Ohio’s distribution modernization rider. This is a forecast, not a guarantee; Ohio rider recovery remained subject to regulatory and appeal proceedings.
- Competitive contract sales were expected to decline from about 53 million MWh in 2016 to 40–45 million MWh in 2017 and 35–40 million MWh in 2018, increasing exposure to wholesale spot-market volatility.
- Material uncertainties include refinancing FES maturities, additional collateral demands, coal transportation arbitrations and related litigation, environmental compliance costs, and regulatory decisions affecting rates and transmission cost recovery. The filing says potential losses in several disputes cannot be estimated.
FirstEnergy’s board declared $1.44 per share of dividends for 2016; future dividends remain subject to board review. The independent auditor issued an unqualified opinion on FirstEnergy’s financial statements and found internal control over financial reporting effective. The auditor’s FES opinion also highlighted the going-concern uncertainty.
Important facts for investors to verify
- Progress, approvals, net proceeds and use of proceeds from the proposed $925 million asset sale, including the make-whole cost and any effect on FES liquidity.
- FES refinancing outcomes for 2017–2019 maturities, access to the parent credit facility, collateral requirements, and any restructuring or bankruptcy developments.
- Whether Ohio’s distribution modernization rider and other rate cases remain effective, and the status of appeals and FERC formula-rate proceedings.
- Results of the coal transportation arbitrations and other material environmental or regulatory proceedings; several exposures are not quantifiable in the filing.
- Actual impairment-related cash consequences, future generation strategy, and whether projected regulated earnings growth and capital funding plans are achieved.