8-KEarnings & ResultsFinancial EventsRegulation FD+2

FIRSTENERGY CORP 8-K Report, Financial Results (Jul 22, 2016)

Filed July 22, 2016For Securities:FE

Summary

FirstEnergy Corp. (FE) has filed an 8-K detailing significant financial events impacting its second quarter of 2016. The company announced a substantial pre-tax non-cash impairment charge of approximately $800 million related to the goodwill of its Competitive Energy Services (CES) segment. This impairment is driven by challenging market conditions, particularly low capacity prices observed in the PJM Base Residual Auction and updated long-term price forecasts. In addition to the goodwill impairment, FirstEnergy is recognizing approximately $647 million in pre-tax asset impairment/plant exit costs. This includes the planned exit of Bay Shore Unit 1 (136 MW) by October 1, 2020, and W.H. Sammis Units 1-4 (720 MW) by May 31, 2020, due to ongoing difficult market conditions. The company also expects to record a $159 million valuation allowance against state and local net operating loss carryforwards that management believes are unlikely to be realized, along with $58 million in settlement and termination costs for coal contracts related to retired units. Importantly, the company states these charges will not result in a default under any of its credit facilities or debt covenants.

Key Highlights

  • 1Recognition of an $800 million pre-tax non-cash goodwill impairment charge for the Competitive Energy Services (CES) segment.
  • 2Planned exit of Bay Shore Unit 1 (136 MW) and W.H. Sammis Units 1-4 (720 MW) due to challenging market conditions.
  • 3Pre-tax asset impairment and plant exit costs totaling approximately $647 million, with $517 million allocated to FirstEnergy Solutions Corp. (FES).
  • 4Expected $159 million valuation allowance against state and local net operating loss (NOL) carryforwards that are not expected to be realized.
  • 5An additional $58 million charge for settlement and termination costs on coal contracts associated with retired generating units.
  • 6The company explicitly states that these charges will not cause a default under its credit facilities or debt covenants.

Frequently Asked Questions

The primary drivers for the impairment charges are challenging market conditions, specifically low capacity prices in the PJM market and updated long-term forecasts for capacity and energy prices. These factors, along with the decision to exit certain generating units, led to the need for significant write-downs.

The planned operational exits involve Bay Shore Unit 1 (136 MW) and W.H. Sammis Units 1-4 (720 MW). The goodwill impairment primarily affects the Competitive Energy Services (CES) segment.

FirstEnergy has stated that the combined impact of the goodwill impairment, valuation allowances, and coal contract settlement/termination costs, along with the asset impairment, will not cause the company or FES to be in default under any of their respective credit facilities or other debt covenants.

This valuation allowance is against state and local net operating loss (NOL) carryforwards that FirstEnergy's management believes, more likely than not, will not be realized. This reflects a re-evaluation of the company's ability to utilize these tax assets in the future.