10-QPeriod: Q2 FY2017

FIRSTENERGY CORP Quarterly Report for Q2 Ended Jun 30, 2017

Filed July 27, 2017For Securities:FE

Summary

FirstEnergy Corp. (FE) reported a net income of $174 million, or $0.39 per diluted share, for the second quarter of 2017, a significant improvement from a net loss of $1,089 million, or ($2.56) per diluted share, in the same quarter of 2016. This turnaround was largely driven by a substantial decrease in asset impairment and plant exit costs compared to the prior year, which included significant goodwill and asset impairments totaling $1.45 billion in Q2 2016. While revenues saw a slight decrease of $92 million to $3.31 billion, primarily due to lower performance in the Competitive Energy Services (CES) segment, the regulated distribution and transmission segments showed revenue growth. Management continues to focus on transitioning to a fully regulated utility model, with a strategic review of its competitive operations aimed at exiting by mid-2018. However, challenges remain within the CES segment, including ongoing negotiations for asset sales and potential financial difficulties at FirstEnergy Solutions Corp. (FES), raising concerns about its ability to continue as a going concern over the next twelve months.

Financial Highlights

45 data points
Beta

Revenue

$2.56B

Net Income

$174.00M

6.8% Net Margin

EPS (Diluted)

$0.39

Total Assets

$43.33B

Cash & Equivalents

$114.00M

Free Cash Flow

$697.00M

Financial Statements
Beta
Revenue$2.56B
Operating Expenses$2.05B
Operating Income$574.00M
Interest Expense$248.00M
Net Income$174.00M
EPS (Basic)$0.39
EPS (Diluted)$0.39
Shares Outstanding (Basic)444.00M
Shares Outstanding (Diluted)445.00M

Key Highlights

  • 1FirstEnergy reported a net income of $174 million ($0.39/share) for Q2 2017, a substantial improvement from a net loss of $1,089 million ($2.56/share) in Q2 2016.
  • 2The significant year-over-year improvement was primarily due to a large reduction in asset impairment charges, with $131 million recognized in Q2 2017 versus $1.45 billion in Q2 2016.
  • 3Total revenues decreased by 3% to $3.31 billion in Q2 2017, mainly driven by a $252 million decline in the Competitive Energy Services (CES) segment.
  • 4The company is actively pursuing its strategy to become a fully regulated utility, targeting an exit from competitive operations by mid-2018.
  • 5FirstEnergy Solutions Corp. (FES) faces significant challenges due to its credit rating and the weak wholesale pricing environment, leading to substantial doubt about its ability to meet obligations over the next twelve months, potentially requiring bankruptcy protection.
  • 6Investments in the Regulated Transmission segment are planned to be substantial, with capital expenditures of $4.2 to $5.8 billion from 2017 to 2021 under the 'Energizing the Future' plan.
  • 7Regulated Distribution segment revenues increased due to rate increases in Ohio, Pennsylvania, and New Jersey, and regulatory riders supporting investments.

Frequently Asked Questions

The primary driver for the significant improvement in net income was the substantial reduction in asset impairment charges. In Q2 2016, the company recorded $1.45 billion in asset impairment and plant exit costs, including goodwill and specific plant impairments. In Q2 2017, these charges were reduced to $131 million, mainly related to ongoing negotiations for asset sales.

FirstEnergy's strategic direction is to transition into a fully regulated utility, aiming to exit its competitive operations by mid-2018. However, the CES segment is facing weak energy and capacity market prices, which have challenged its ability to hedge generation and maintain its credit quality. This has led to significant concerns about the financial stability of FirstEnergy Solutions Corp. (FES), a key part of CES, with substantial doubt raised about its ability to continue as a going concern over the next twelve months and the potential for bankruptcy protection.

The regulated segments, Distribution and Transmission, are performing well. Regulated Distribution revenues increased due to rate adjustments and regulatory riders in Ohio, Pennsylvania, and New Jersey. The Regulated Transmission segment is a key focus for investment, with the 'Energizing the Future' plan projecting $4.2 to $5.8 billion in capital expenditures from 2017 to 2021 to upgrade the transmission system.

FES is facing significant financial challenges. Its credit rating is low, and the weak wholesale pricing environment is impacting its operations. FES has $515 million in debt maturing in 2018, which may be difficult to refinance. The company's ability to meet its obligations is in doubt, and it may need to restructure debt or seek bankruptcy protection. The parent company, FirstEnergy, has provided credit facilities to FES, but any material adverse developments at FES could impact FirstEnergy's financial condition.