10-QPeriod: Q3 FY2016

FIRSTENERGY CORP Quarterly Report for Q3 Ended Sep 30, 2016

Filed November 4, 2016For Securities:FE

Summary

FirstEnergy Corp. (FE) reported a net loss of $381 million, or $(0.90) per diluted share, for the nine months ended September 30, 2016, a significant decrease from the $804 million net income, or $1.90 per diluted share, reported in the same period of 2015. This decline was primarily driven by substantial asset impairment charges totaling $1.45 billion, including an $800 million goodwill impairment in the Competitive Energy Services (CES) segment and $647 million in impairments related to the planned exit of certain generation stations. The company is actively pursuing a strategic review of its competitive operations with the goal of becoming a fully regulated utility, exploring alternatives such as legislative restructuring, asset sales, and potential deactivations, which may lead to further impairments. Despite the net loss for the year-to-date period, the third quarter of 2016 showed a net income of $380 million, or $0.89 per diluted share, which was a slight decrease from the third quarter of 2015. The Regulated Distribution and Transmission segments showed improved performance, while the CES segment experienced lower earnings due to decreased contract sales and lower capacity revenues. The company continues to focus on its "Energizing the Future" transmission plan, with significant capital expenditures planned for its regulated businesses.

Financial Highlights

45 data points
Beta

Revenue

$3.92B

Net Income

$380.00M

9.7% Net Margin

EPS (Diluted)

$0.89

Total Assets

$51.96B

Cash & Equivalents

$551.00M

Free Cash Flow

$1.12B

Financial Statements
Beta
Revenue$3.92B
Operating Expenses$3.06B
Operating Income$861.00M
Interest Expense$286.00M
Net Income$380.00M
EPS (Basic)$0.89
EPS (Diluted)$0.89
Shares Outstanding (Basic)425.00M
Shares Outstanding (Diluted)427.00M

Key Highlights

  • 1FirstEnergy reported a net loss of $381 million for the first nine months of 2016, compared to a net income of $804 million in the prior year period.
  • 2Significant asset impairment charges of $1.45 billion, primarily related to goodwill in the CES segment and planned generation asset exits, heavily impacted the nine-month results.
  • 3The company is undergoing a strategic review of its Competitive Energy Services (CES) segment with the aim of transitioning to a fully regulated utility model.
  • 4Third quarter 2016 net income was $380 million ($0.89/share), slightly down from $395 million ($0.93/share) in Q3 2015.
  • 5Regulated Distribution and Transmission segments showed improved year-over-year performance.
  • 6The CES segment continues to face challenges from depressed wholesale energy and capacity markets, with potential for further financial distress, including debt restructuring or bankruptcy filings.
  • 7Capital expenditures are planned to focus on regulated transmission and distribution segments, with a significant reduction in capital spending for CES.

Frequently Asked Questions

The primary driver for the decrease was substantial asset impairment charges totaling $1.45 billion. This included an $800 million goodwill impairment in the Competitive Energy Services (CES) segment and $647 million in impairments related to the planned exit of certain generation stations. Additionally, coal contract settlement and termination costs, along with valuation allowances against state and local NOL carryforwards, contributed to the decline.

FirstEnergy is strategically reviewing its competitive operations with the goal of becoming a fully regulated utility. This involves exploring alternatives such as selling gas and hydroelectric units, legislative efforts to convert generation to a regulated or regulated-like construct, offering generation for specific needs, or finding solutions for nuclear generation that recognize environmental benefits. Management anticipates these options could lead to material asset impairments.

The CES segment, including FES, faces several significant financial risks. These include potential requests for additional collateral or accelerated payments (up to $355 million) due to credit rating downgrades, adverse outcomes in coal transportation contract disputes, and the inability to refinance significant debt maturities in 2017 and 2018. Failure to address these could lead to debt restructuring, increased borrowings, asset sales, plant deactivations, or even bankruptcy filings for FES and FENOC.

In the third quarter of 2016, FirstEnergy's Regulated Distribution and Transmission segments showed improved performance with higher net income compared to the same period in 2015. However, the Competitive Energy Services (CES) segment experienced lower earnings primarily due to decreased contract sales volumes and lower capacity revenues, partially offsetting the gains in the regulated segments.