Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - FIRSTENERGY CORP | fe-03312016xex32.htm |
| EX-12 - EXHIBIT 12 - FIRSTENERGY CORP | fe-03312016xex12.htm |
| EX-31.2 - EXHIBIT 31.2 - FIRSTENERGY CORP | fe-03312016xex312.htm |
| EX-31.1 - EXHIBIT 31.1 - FIRSTENERGY CORP | fe-03312016xex311.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission | Registrant; State of Incorporation; | I.R.S. Employer | ||
File Number | Address; and Telephone Number | Identification No. | ||
333-21011 | FIRSTENERGY CORP. | 34-1843785 | ||
(An Ohio Corporation) | ||||
76 South Main Street | ||||
Akron, OH 44308 | ||||
Telephone (800)736-3402 | ||||
000-53742 | FIRSTENERGY SOLUTIONS CORP. | 31-1560186 | ||
(An Ohio Corporation) | ||||
c/o FirstEnergy Corp. | ||||
76 South Main Street | ||||
Akron, OH 44308 | ||||
Telephone (800)736-3402 | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o | FirstEnergy Corp. and FirstEnergy Solutions Corp. | |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o | FirstEnergy Corp. and FirstEnergy Solutions Corp. | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ | FirstEnergy Corp. |
Accelerated Filer o | N/A |
Non-accelerated Filer (Do not check if a smaller reporting company) þ | FirstEnergy Solutions Corp. |
Smaller Reporting Company o | N/A |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ | FirstEnergy Corp. and FirstEnergy Solutions Corp. | |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
OUTSTANDING | |||
CLASS | AS OF MARCH 31, 2016 | ||
FirstEnergy Corp., $0.10 par value | 424,712,431 | ||
FirstEnergy Solutions Corp., no par value | 7 | ||
FirstEnergy Corp. is the sole holder of FirstEnergy Solutions Corp. common stock.
This combined Form 10-Q is separately filed by FirstEnergy Corp. and FirstEnergy Solutions Corp. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to the other registrant, except that information relating to FirstEnergy Solutions Corp. is also attributed to FirstEnergy Corp.
FirstEnergy Web Site and Other Social Media Sites and Applications
Each of the registrants’ Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also made available free of charge on or through the "Investors" page of FirstEnergy’s web site at www.firstenergycorp.com.
These SEC filings are posted on the web site as soon as reasonably practicable after they are electronically filed with the SEC. Additionally, the registrants routinely post additional important information including press releases, investor presentations and notices of upcoming events, under the "Investors" section of FirstEnergy’s web site and recognize FirstEnergy’s web site as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under SEC Regulation FD. Investors may be notified of postings to the web site by signing up for email alerts and RSS feeds on the "Investors" page of FirstEnergy's web site or through push alerts from FirstEnergy Investor Relations apps for Apple Inc.'s iPad® and iPhone® devices, which can be installed for free at the Apple® online store. FirstEnergy also uses Twitter® and Facebook® as additional channels of distribution to reach public investors and as a supplemental means of disclosing material non-public information for complying with its disclosure obligations under SEC Regulation FD. Information contained on FirstEnergy’s web site, Twitter® handle or Facebook® page, and any corresponding applications of those sites, shall not be deemed incorporated into, or to be part of, this report.
OMISSION OF CERTAIN INFORMATION
FirstEnergy Solutions Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) to Form 10-Q.
Forward-Looking Statements: This Form 10-Q includes forward-looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements include declarations regarding management's intents, beliefs and current expectations. These statements typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” "forecast," "target," "will," "intend," “believe,” "project," “estimate," "plan" and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, which may include the following:
• | The speed and nature of increased competition in the electric utility industry, in general, and the retail sales market in particular. |
• | The ability to experience growth in the Regulated Distribution and Regulated Transmission segments and to successfully implement our sales strategy for the CES segment. |
• | The accomplishment of our regulatory and operational goals in connection with our transmission investment plan, including, but not limited to, the proposed transmission asset transfer to MAIT, and the effectiveness of our strategy to reflect a more regulated business profile. |
• | Changes in assumptions regarding economic conditions within our territories, assessment of the reliability of our transmission system, or the availability of capital or other resources supporting identified transmission investment opportunities. |
• | The impact of the regulatory process on the pending matters at the federal level and in the various states in which we do business including, but not limited to, matters related to rates and the ESP IV in Ohio, specifically related to a complaint filed at FERC against FES and the Ohio Companies that request FERC review the ESP IV PPA under Section 205 of the FPA, and other future complaints or challenges that could impact the ESP IV and the ESP IV PPA. |
• | The impact of the federal regulatory process on FERC-regulated entities and transactions, in particular FERC regulation of wholesale energy and capacity markets, including PJM markets and FERC-jurisdictional wholesale transactions; FERC regulation of cost-of-service rates, including FERC Opinion No. 531's revised ROE methodology for FERC-jurisdictional wholesale generation and transmission utility service; and FERC’s compliance and enforcement activity, including compliance and enforcement activity related to NERC’s mandatory reliability standards. |
• | The uncertainties of various cost recovery and cost allocation issues resulting from ATSI's realignment into PJM. |
• | Economic or weather conditions affecting future sales and margins such as a polar vortex or other significant weather events, and all associated regulatory events or actions. |
• | Changing energy, capacity and commodity market prices including, but not limited to, coal, natural gas and oil prices, and their availability and impact on margins and asset valuations. |
• | The continued ability of our regulated utilities to recover their costs. |
• | Costs being higher than anticipated and the success of our policies to control costs and to mitigate low energy, capacity and market prices. |
• | Other legislative and regulatory changes, and revised environmental requirements, including, but not limited to, the effects of the EPA's CPP, CCR, CSAPR and MATS programs, including our estimated costs of compliance, CWA waste water effluent limitations for power plants, and CWA 316(b) water intake regulation. |
• | The uncertainty of the timing and amounts of the capital expenditures that may arise in connection with any litigation, including NSR litigation, or potential regulatory initiatives or rulemakings (including that such initiatives or rulemakings could result in our decision to deactivate or idle certain generating units). |
• | The uncertainties associated with the deactivation of certain older regulated and competitive fossil units, including the impact on vendor commitments and as it relates to the reliability of the transmission grid, the timing thereof. |
• | The impact of other future changes to the operational status or availability of our generating units and any capacity performance charges associated with unit unavailability. |
• | Adverse regulatory or legal decisions and outcomes with respect to our nuclear operations (including, but not limited to, the revocation or non-renewal of necessary licenses, approvals or operating permits by the NRC or as a result of the incident at Japan's Fukushima Daiichi Nuclear Plant). |
• | Issues arising from the indications of cracking in the shield building at Davis-Besse. |
• | The risks and uncertainties associated with litigation, arbitration, mediation and like proceedings, including, but not limited to, any such proceedings related to vendor commitments. |
• | The impact of labor disruptions by our unionized workforce. |
• | Replacement power costs being higher than anticipated or not fully hedged. |
• | The ability to comply with applicable state and federal reliability standards and energy efficiency and peak demand reduction mandates. |
• | Changes in customers' demand for power, including, but not limited to, changes resulting from the implementation of state and federal energy efficiency and peak demand reduction mandates. |
• | The ability to accomplish or realize anticipated benefits from strategic and financial goals, including, but not limited to, the ability to continue to reduce costs and to successfully execute our financial plans designed to improve our credit metrics and strengthen our balance sheet through, among other actions, our cash flow improvement plan and other proposed capital raising initiatives. |
• | Our ability to improve electric commodity margins and the impact of, among other factors, the increased cost of fuel and fuel transportation on such margins. |
• | Changing market conditions that could affect the measurement of certain liabilities and the value of assets held in our NDTs, pension trusts and other trust funds, and cause us and/or our subsidiaries to make additional contributions sooner, or in amounts that are larger than currently anticipated. |
• | The impact of changes to material accounting policies. |
• | The ability to access the public securities and other capital and credit markets in accordance with our financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us and our subsidiaries. |
• | Actions that may be taken by credit rating agencies that could negatively affect us and/or our subsidiaries' access to financing, increase the costs thereof, and increase requirements to post additional collateral to support outstanding commodity positions, LOCs and other financial guarantees. |
• | Changes in national and regional economic conditions affecting us, our subsidiaries and/or our major industrial and commercial customers, and other counterparties with which we do business, including fuel suppliers. |
• | The impact of any changes in tax laws or regulations or adverse tax audit results or rulings. |
• | Issues concerning the stability of domestic and foreign financial institutions and counterparties with which we do business. |
• | The risks associated with cyber-attacks and other disruptions to our information technology system that may compromise our generation, transmission and/or distribution services and data security breaches of sensitive data, intellectual property and proprietary or personally identifiable information regarding our business, employees, shareholders, customers, suppliers, business partners and other individuals in our data centers and on our networks. |
• | The risks and other factors discussed from time to time in our SEC filings, and other similar factors. |
Dividends declared from time to time on FE's common stock during any period may in the aggregate vary from prior periods due to circumstances considered by FE's Board of Directors at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and risks that are included in FirstEnergy's and FES' filings with the SEC, including but not limited to the most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor assess the impact of any such factor on FirstEnergy's business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. The registrants expressly disclaim any current intention to update, except as required by law, any forward-looking statements contained herein as a result of new information, future events or otherwise.
TABLE OF CONTENTS | |
Page | |
Part I. Financial Information | |
Item 1. Financial Statements | |
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) | |
Item 2. Management's Discussion and Analysis of Registrant and Subsidiaries | |
FirstEnergy Corp. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Management's Narrative Analysis of Results of Operations | |
Item 3. Defaults Upon Senior Securities | |
Item 4. Mine Safety Disclosures | |
Item 5. Other Information | |
i
GLOSSARY OF TERMS
The following abbreviations and acronyms are used in this report to identify FirstEnergy Corp. and its current and former subsidiaries:
AE | Allegheny Energy, Inc., a Maryland utility holding company that merged with a subsidiary of FirstEnergy on February 25, 2011. As of January 1, 2014, AE merged with and into FirstEnergy Corp. |
AESC | Allegheny Energy Service Corporation, a subsidiary of FirstEnergy Corp. |
AE Supply | Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary |
AGC | Allegheny Generating Company, a generation subsidiary of AE Supply and equity method investee of MP. |
ATSI | American Transmission Systems, Incorporated, formerly a direct subsidiary of FE that became a subsidiary of FET in April 2012, which owns and operates transmission facilities. |
CEI | The Cleveland Electric Illuminating Company, an Ohio electric utility operating subsidiary |
CES | Competitive Energy Services, a reportable operating segment of FirstEnergy |
FE | FirstEnergy Corp., a public utility holding company |
FENOC | FirstEnergy Nuclear Operating Company, which operates nuclear generating facilities |
FES | FirstEnergy Solutions Corp., which provides energy-related products and services |
FESC | FirstEnergy Service Company, which provides legal, financial and other corporate support services |
FET | FirstEnergy Transmission, LLC, formerly known as Allegheny Energy Transmission, LLC which is the parent of ATSI, TrAIL and MAIT, and has a joint venture in PATH. |
FEV | FirstEnergy Ventures Corp., which invests in certain unregulated enterprises and business ventures |
FG | FirstEnergy Generation, LLC, a wholly owned subsidiary of FES, which owns and operates non-nuclear generating facilities |
FirstEnergy | FirstEnergy Corp., together with its consolidated subsidiaries |
Global Holding | Global Mining Holding Company, LLC, a joint venture between FEV, WMB Marketing Ventures, LLC and Pinesdale LLC |
Global Rail | A subsidiary of Global Holding that owns coal transportation operations near Roundup, Montana |
JCP&L | Jersey Central Power & Light Company, a New Jersey electric utility operating subsidiary |
MAIT | Mid-Atlantic Interstate Transmission, LLC, a subsidiary of FET, formed to own and operate transmission facilities |
ME | Metropolitan Edison Company, a Pennsylvania electric utility operating subsidiary |
MP | Monongahela Power Company, a West Virginia electric utility operating subsidiary |
NG | FirstEnergy Nuclear Generation, LLC, a subsidiary of FES, which owns nuclear generating facilities |
OE | Ohio Edison Company, an Ohio electric utility operating subsidiary |
Ohio Companies | CEI, OE and TE |
PATH | Potomac-Appalachian Transmission Highline, LLC, a joint venture between FE and a subsidiary of AEP |
PATH-Allegheny | PATH Allegheny Transmission Company, LLC |
PATH-WV | PATH West Virginia Transmission Company, LLC |
PE | The Potomac Edison Company, a Maryland and West Virginia electric utility operating subsidiary |
Penn | Pennsylvania Power Company, a Pennsylvania electric utility operating subsidiary of OE |
Pennsylvania Companies | ME, PN, Penn and WP |
PN | Pennsylvania Electric Company, a Pennsylvania electric utility operating subsidiary |
PNBV | PNBV Capital Trust, a special purpose entity created by OE in 1996 |
Signal Peak | An indirect subsidiary of Global Holding that owns mining operations near Roundup, Montana |
TE | The Toledo Edison Company, an Ohio electric utility operating subsidiary |
TrAIL | Trans-Allegheny Interstate Line Company, a subsidiary of FET, which owns and operates transmission facilities |
Utilities | OE, CEI, TE, Penn, JCP&L, ME, PN, MP, PE and WP |
WP | West Penn Power Company, a Pennsylvania electric utility operating subsidiary |
The following abbreviations and acronyms are used to identify frequently used terms in this report: | |
AAA | American Arbitration Association |
AEP | American Electric Power Company, Inc. |
AFS | Available-for-sale |
AFUDC | Allowance for Funds Used During Construction |
ALJ | Administrative Law Judge |
AOCI | Accumulated Other Comprehensive Income |
Apple® | Apple®, iPad® and iPhone® are registered trademarks of Apple Inc. |
ARO | Asset Retirement Obligation |
ii
GLOSSARY OF TERMS, Continued | |
ARR | Auction Revenue Right |
ASU | Accounting Standards Update |
BGS | Basic Generation Service |
BNSF | BNSF Railway Company |
BRA | PJM RPM Base Residual Auction |
CAA | Clean Air Act |
CCR | Coal Combustion Residuals |
CDWR | California Department of Water Resources |
CERCLA | Comprehensive Environmental Response, Compensation, and Liability Act of 1980 |
CFR | Code of Federal Regulations |
CO2 | Carbon Dioxide |
CPP | EPA's Clean Power Plan |
CSAPR | Cross-State Air Pollution Rule |
CSX | CSX Transportation, Inc. |
CTA | Consolidated Tax Adjustment |
CWA | Clean Water Act |
DCR | Delivery Capital Recovery |
DR | Demand Response |
DSIC | Distribution System Improvement Charge |
DSP | Default Service Plan |
EDC | Electric Distribution Company |
EE&C | Energy Efficiency and Conservation |
EGS | Electric Generation Supplier |
ELPC | Environmental Law & Policy Center |
EmPOWER Maryland | EmPower Maryland Energy Efficiency Act |
ENEC | Expanded Net Energy Cost |
EPA | United States Environmental Protection Agency |
ERO | Electric Reliability Organization |
ESP | Electric Security Plan |
ESP IV PPA | Unit Power Agreement entered into on April 1, 2016 by and between the Ohio Companies and FES |
ESP IV PPA Facilities | 100% of the output of the W.H. Sammis plant, 100% of the output of the Davis-Besse Nuclear Power Station and FES' 4.85% entitlement in OVEC |
Facebook® | Facebook is a registered trademark of Facebook, Inc. |
FASB | Financial Accounting Standards Board |
FERC | Federal Energy Regulatory Commission |
Fitch | Fitch Ratings |
FMB | First Mortgage Bond |
FPA | Federal Power Act |
FTR | Financial Transmission Right |
GAAP | Accounting Principles Generally Accepted in the United States of America |
GHG | Greenhouse Gases |
GWH | Gigawatt-hour |
HCl | Hydrochloric Acid |
ICE | IntercontinentalExchange, Inc. |
IRS | Internal Revenue Service |
ISO | Independent System Operator |
kV | Kilovolt |
KWH | Kilowatt-hour |
LMP | Locational Marginal Price |
LOC | Letter of Credit |
LSE | Load Serving Entity |
LTIIPs | Long-Term Infrastructure Improvement Plans |
iii
GLOSSARY OF TERMS, Continued | |
MATS | Mercury and Air Toxics Standards |
MDPSC | Maryland Public Service Commission |
MISO | Midcontinent Independent System Operator, Inc. |
MLP | Master Limited Partnership |
mmBTU | One Million British Thermal Units |
Moody’s | Moody’s Investors Service, Inc. |
MOPR | Minimum Offer Price Rule |
MVP | Multi-Value Project |
MW | Megawatt |
MWH | Megawatt-hour |
NAAQS | National Ambient Air Quality Standards |
NDT | Nuclear Decommissioning Trust |
NERC | North American Electric Reliability Corporation |
Ninth Circuit | United States Court of Appeals for the Ninth Circuit |
NJBPU | New Jersey Board of Public Utilities |
NMB | Non-Market Based |
NOL | Net Operating Loss |
NOV | Notice of Violation |
NOx | Nitrogen Oxide |
NPDES | National Pollutant Discharge Elimination System |
NRC | Nuclear Regulatory Commission |
NSR | New Source Review |
NUG | Non-Utility Generation |
NYISO | New York Independent System Operator, Inc. |
NYPSC | New York State Public Service Commission |
OCC | Ohio Consumers' Counsel |
OPEB | Other Post-Employment Benefits |
OTTI | Other Than Temporary Impairments |
OVEC | Ohio Valley Electric Corporation |
PA DEP | Pennsylvania Department of Environmental Protection |
PCRB | Pollution Control Revenue Bond |
PJM | PJM Interconnection, L.L.C. |
PJM Region | The aggregate of the zones within PJM |
PJM Tariff | PJM Open Access Transmission Tariff |
PM | Particulate Matter |
POLR | Provider of Last Resort |
POR | Purchase of Receivables |
PPA | Purchase Power Agreement |
PPB | Parts Per Billion |
PPUC | Pennsylvania Public Utility Commission |
PSA | Power Supply Agreement |
PSD | Prevention of Significant Deterioration |
PUCO | Public Utilities Commission of Ohio |
PURPA | Public Utility Regulatory Policies Act of 1978 |
RCRA | Resource Conservation and Recovery Act |
REC | Renewable Energy Credit |
REIT | Real Estate Investment Trust |
RFC | ReliabilityFirst Corporation |
RFP | Request for Proposal |
RGGI | Regional Greenhouse Gas Initiative |
ROE | Return on Equity |
RPM | Reliability Pricing Model |
iv
GLOSSARY OF TERMS, Continued | |
RRS | Retail Rate Stability |
RSS | Rich Site Summary |
RTEP | Regional Transmission Expansion Plan |
RTO | Regional Transmission Organization |
S&P | Standard & Poor’s Ratings Service |
SB221 | Amended Substitute Senate Bill No. 221 |
SB310 | Substitute Senate Bill No. 310 |
SBC | Societal Benefits Charge |
SEC | United States Securities and Exchange Commission |
SEC Regulation FD | SEC Regulation Fair Disclosure |
Seventh Circuit | United States Court of Appeals for the Seventh Circuit |
SIP | State Implementation Plan(s) Under the Clean Air Act |
SO2 | Sulfur Dioxide |
SOS | Standard Offer Service |
SPE | Special Purpose Entity |
SREC | Solar Renewable Energy Credit |
SSO | Standard Service Offer |
TDS | Total Dissolved Solid |
Third Circuit | United States Court of Appeals for the Third Circuit |
TMI-2 | Three Mile Island Unit 2 |
TO | Transmission Owner |
TTS | Temporary Transaction Surcharge |
Twitter® | Twitter is a registered trademark of Twitter, Inc. |
U.S. Court of Appeals for the D.C. Circuit | United States Court of Appeals for the District of Columbia Circuit |
VIE | Variable Interest Entity |
VSCC | Virginia State Corporation Commission |
WVDEP | West Virginia Department of Environmental Protection |
WVPSC | Public Service Commission of West Virginia |
v
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended March 31 | |||||||||
(In millions, except per share amounts) | 2016 | 2015 | |||||||
REVENUES: | |||||||||
Regulated Distribution | $ | 2,521 | $ | 2,562 | |||||
Regulated Transmission | 275 | 238 | |||||||
Unregulated businesses | 1,073 | 1,097 | |||||||
Total revenues* | 3,869 | 3,897 | |||||||
OPERATING EXPENSES: | |||||||||
Fuel | 381 | 513 | |||||||
Purchased power | 1,124 | 1,113 | |||||||
Other operating expenses | 918 | 1,057 | |||||||
Provision for depreciation | 329 | 319 | |||||||
Amortization of regulatory assets, net | 61 | 32 | |||||||
General taxes | 280 | 269 | |||||||
Total operating expenses | 3,093 | 3,303 | |||||||
OPERATING INCOME | 776 | 594 | |||||||
OTHER INCOME (EXPENSE): | |||||||||
Investment income | 28 | 17 | |||||||
Interest expense | (288 | ) | (279 | ) | |||||
Capitalized financing costs | 25 | 34 | |||||||
Total other expense | (235 | ) | (228 | ) | |||||
INCOME BEFORE INCOME TAXES | 541 | 366 | |||||||
INCOME TAXES | 213 | 144 | |||||||
NET INCOME | $ | 328 | $ | 222 | |||||
EARNINGS PER SHARE OF COMMON STOCK: | |||||||||
Basic | $ | 0.78 | $ | 0.53 | |||||
Diluted | $ | 0.77 | $ | 0.53 | |||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | |||||||||
Basic | 424 | 421 | |||||||
Diluted | 426 | 423 | |||||||
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK | $ | 0.72 | $ | 0.72 | |||||
* Includes excise tax collections of $107 million and $115 million in the three months ended March 31, 2016 and 2015, respectively.
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.
1
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended March 31 | |||||||||
(In millions) | 2016 | 2015 | |||||||
NET INCOME | $ | 328 | $ | 222 | |||||
OTHER COMPREHENSIVE INCOME (LOSS): | |||||||||
Pension and OPEB prior service costs | (18 | ) | (31 | ) | |||||
Amortized losses on derivative hedges | 2 | 1 | |||||||
Change in unrealized gains on available-for-sale securities | 28 | 4 | |||||||
Other comprehensive income (loss) | 12 | (26 | ) | ||||||
Income taxes (benefits) on other comprehensive income (loss) | 4 | (10 | ) | ||||||
Other comprehensive income (loss), net of tax | 8 | (16 | ) | ||||||
COMPREHENSIVE INCOME | $ | 336 | $ | 206 | |||||
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.
2
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share amounts) | March 31, 2016 | December 31, 2015 | ||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 146 | $ | 131 | ||||
Receivables- | ||||||||
Customers, net of allowance for uncollectible accounts of $64 in 2016 and $69 in 2015 | 1,432 | 1,415 | ||||||
Other, net of allowance for uncollectible accounts of $5 in 2016 and 2015 | 162 | 180 | ||||||
Materials and supplies | 781 | 785 | ||||||
Prepaid taxes | 267 | 135 | ||||||
Derivatives | 207 | 157 | ||||||
Collateral | 80 | 70 | ||||||
Other | 155 | 167 | ||||||
3,230 | 3,040 | |||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
In service | 50,371 | 49,952 | ||||||
Less — Accumulated provision for depreciation | 15,421 | 15,160 | ||||||
34,950 | 34,792 | |||||||
Construction work in progress | 2,694 | 2,422 | ||||||
37,644 | 37,214 | |||||||
INVESTMENTS: | ||||||||
Nuclear plant decommissioning trusts | 2,360 | 2,282 | ||||||
Other | 526 | 506 | ||||||
2,886 | 2,788 | |||||||
DEFERRED CHARGES AND OTHER ASSETS: | ||||||||
Goodwill | 6,418 | 6,418 | ||||||
Regulatory assets | 1,279 | 1,348 | ||||||
Other | 1,238 | 1,286 | ||||||
8,935 | 9,052 | |||||||
$ | 52,695 | $ | 52,094 | |||||
LIABILITIES AND CAPITALIZATION | ||||||||
CURRENT LIABILITIES: | ||||||||
Currently payable long-term debt | $ | 1,355 | $ | 1,166 | ||||
Short-term borrowings | 2,125 | 1,708 | ||||||
Accounts payable | 1,000 | 1,075 | ||||||
Accrued taxes | 513 | 519 | ||||||
Accrued compensation and benefits | 309 | 334 | ||||||
Derivatives | 117 | 106 | ||||||
Other | 970 | 694 | ||||||
6,389 | 5,602 | |||||||
CAPITALIZATION: | ||||||||
Common stockholders’ equity- | ||||||||
Common stock, $0.10 par value, authorized 490,000,000 shares - 424,712,431 and 423,560,397 shares outstanding as of March 31, 2016 and December 31, 2015, respectively | 42 | 42 | ||||||
Other paid-in capital | 9,963 | 9,952 | ||||||
Accumulated other comprehensive income | 179 | 171 | ||||||
Retained earnings | 2,279 | 2,256 | ||||||
Total common stockholders’ equity | 12,463 | 12,421 | ||||||
Noncontrolling interest | 1 | 1 | ||||||
Total equity | 12,464 | 12,422 | ||||||
Long-term debt and other long-term obligations | 18,878 | 19,099 | ||||||
31,342 | 31,521 | |||||||
NONCURRENT LIABILITIES: | ||||||||
Accumulated deferred income taxes | 6,996 | 6,773 | ||||||
Retirement benefits | 4,135 | 4,245 | ||||||
Asset retirement obligations | 1,427 | 1,410 | ||||||
Deferred gain on sale and leaseback transaction | 782 | 791 | ||||||
Adverse power contract liability | 194 | 197 | ||||||
Other | 1,430 | 1,555 | ||||||
14,964 | 14,971 | |||||||
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 10) | ||||||||
$ | 52,695 | $ | 52,094 | |||||
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.
3
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31 | |||||||||
(In millions) | 2016 | 2015 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||
Net Income | $ | 328 | $ | 222 | |||||
Adjustments to reconcile net income to net cash from operating activities- | |||||||||
Depreciation and amortization, including nuclear fuel, regulatory assets, net, and customer intangible asset amortization | 455 | 425 | |||||||
Deferred purchased power and other costs | (10 | ) | (31 | ) | |||||
Deferred income taxes and investment tax credits, net | 206 | 127 | |||||||
Deferred costs on sale leaseback transaction, net | 12 | 12 | |||||||
Retirement benefits | 16 | (4 | ) | ||||||
Pension trust contributions | (160 | ) | (143 | ) | |||||
Commodity derivative transactions, net (Note 8) | (64 | ) | 2 | ||||||
Changes in current assets and liabilities- | |||||||||
Receivables | 1 | (97 | ) | ||||||
Materials and supplies | 4 | 30 | |||||||
Prepayments and other current assets | (82 | ) | (116 | ) | |||||
Accounts payable | 25 | (177 | ) | ||||||
Accrued taxes | (110 | ) | (80 | ) | |||||
Accrued interest | 47 | 44 | |||||||
Accrued compensation and benefits | (102 | ) | (80 | ) | |||||
Other current liabilities | 19 | 11 | |||||||
Cash collateral, net | (6 | ) | (15 | ) | |||||
Other | 59 | 63 | |||||||
Net cash provided from operating activities | 638 | 193 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||
New Financing- | |||||||||
Short-term borrowings, net | 425 | 760 | |||||||
Redemptions and Repayments- | |||||||||
Long-term debt | (31 | ) | (48 | ) | |||||
Common stock dividend payments | (152 | ) | (152 | ) | |||||
Net cash provided from financing activities | 242 | 560 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||
Property additions | (698 | ) | (668 | ) | |||||
Nuclear fuel | (149 | ) | (60 | ) | |||||
Sales of investment securities held in trusts | 465 | 371 | |||||||
Purchases of investment securities held in trusts | (488 | ) | (394 | ) | |||||
Cash investments | 30 | 21 | |||||||
Asset removal costs | (34 | ) | (28 | ) | |||||
Other | 9 | 10 | |||||||
Net cash used for investing activities | (865 | ) | (748 | ) | |||||
Net change in cash and cash equivalents | 15 | 5 | |||||||
Cash and cash equivalents at beginning of period | 131 | 85 | |||||||
Cash and cash equivalents at end of period | $ | 146 | $ | 90 | |||||
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.
4
FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For the Three Months Ended March 31 | ||||||||
(In millions) | 2016 | 2015 | ||||||
STATEMENTS OF INCOME (LOSS) | ||||||||
REVENUES: | ||||||||
Electric sales to non-affiliates | $ | 1,007 | $ | 1,075 | ||||
Electric sales to affiliates | 147 | 255 | ||||||
Other | 45 | 47 | ||||||
Total revenues | 1,199 | 1,377 | ||||||
OPERATING EXPENSES: | ||||||||
Fuel | 165 | 230 | ||||||
Purchased power from affiliates | 82 | 70 | ||||||
Purchased power from non-affiliates | 377 | 543 | ||||||
Other operating expenses | 240 | 413 | ||||||
Provision for depreciation | 83 | 80 | ||||||
General taxes | 26 | 29 | ||||||
Total operating expenses | 973 | 1,365 | ||||||
OPERATING INCOME | 226 | 12 | ||||||
OTHER INCOME (EXPENSE): | ||||||||
Investment income | 15 | 13 | ||||||
Interest expense — affiliates | (2 | ) | (2 | ) | ||||
Interest expense — other | (36 | ) | (37 | ) | ||||
Capitalized interest | 10 | 9 | ||||||
Total other expense | (13 | ) | (17 | ) | ||||
INCOME (LOSS) BEFORE INCOME TAXES (BENEFITS) | 213 | (5 | ) | |||||
INCOME TAXES (BENEFITS) | 82 | (2 | ) | |||||
NET INCOME (LOSS) | $ | 131 | $ | (3 | ) | |||
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | ||||||||
NET INCOME (LOSS) | $ | 131 | $ | (3 | ) | |||
OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||
Pension and OPEB prior service costs | (4 | ) | (4 | ) | ||||
Amortized gains on derivative hedges | — | (1 | ) | |||||
Change in unrealized gain on available-for-sale securities | 23 | 3 | ||||||
Other comprehensive income (loss) | 19 | (2 | ) | |||||
Income taxes (benefits) on other comprehensive income (loss) | 7 | (1 | ) | |||||
Other comprehensive income (loss), net of tax | 12 | (1 | ) | |||||
COMPREHENSIVE INCOME (LOSS) | $ | 143 | $ | (4 | ) | |||
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.
5
FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share amounts) | March 31, 2016 | December 31, 2015 | ||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 2 | $ | 2 | ||||
Receivables- | ||||||||
Customers, net of allowance for uncollectible accounts of $8 in 2016 and 2015 | 229 | 275 | ||||||
Affiliated companies | 447 | 451 | ||||||
Other, net of allowance for uncollectible accounts of $3 in 2016 and 2015 | 107 | 59 | ||||||
Notes receivable from affiliated companies | — | 11 | ||||||
Materials and supplies | 446 | 470 | ||||||
Derivatives | 207 | 154 | ||||||
Collateral | 80 | 70 | ||||||
Prepayments and other | 80 | 66 | ||||||
1,598 | 1,558 | |||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
In service | 14,376 | 14,311 | ||||||
Less — Accumulated provision for depreciation | 5,874 | 5,765 | ||||||
8,502 | 8,546 | |||||||
Construction work in progress | 1,273 | 1,157 | ||||||
9,775 | 9,703 | |||||||
INVESTMENTS: | ||||||||
Nuclear plant decommissioning trusts | 1,372 | 1,327 | ||||||
Other | 10 | 10 | ||||||
1,382 | 1,337 | |||||||
DEFERRED CHARGES AND OTHER ASSETS: | ||||||||
Customer intangibles | 57 | 61 | ||||||
Goodwill | 23 | 23 | ||||||
Property taxes | 30 | 40 | ||||||
Derivatives | 89 | 79 | ||||||
Other | 385 | 367 | ||||||
584 | 570 | |||||||
$ | 13,339 | $ | 13,168 | |||||
LIABILITIES AND CAPITALIZATION | ||||||||
CURRENT LIABILITIES: | ||||||||
Currently payable long-term debt | $ | 549 | $ | 512 | ||||
Short-term borrowings- | ||||||||
Affiliated companies | 49 | — | ||||||
Other | — | 8 | ||||||
Accounts payable- | ||||||||
Affiliated companies | 362 | 542 | ||||||
Other | 116 | 139 | ||||||
Accrued taxes | 71 | 76 | ||||||
Derivatives | 115 | 104 | ||||||
Other | 241 | 181 | ||||||
1,503 | 1,562 | |||||||
CAPITALIZATION: | ||||||||
Common stockholder's equity- | ||||||||
Common stock, without par value, authorized 750 shares - 7 shares outstanding as of March 31, 2016 and December 31, 2015 | 3,614 | 3,613 | ||||||
Accumulated other comprehensive income | 58 | 46 | ||||||
Retained earnings | 2,077 | 1,946 | ||||||
Total common stockholder's equity | 5,749 | 5,605 | ||||||
Long-term debt and other long-term obligations | 2,480 | 2,510 | ||||||
8,229 | 8,115 | |||||||
NONCURRENT LIABILITIES: | ||||||||
Deferred gain on sale and leaseback transaction | 782 | 791 | ||||||
Accumulated deferred income taxes | 722 | 600 | ||||||
Retirement benefits | 339 | 332 | ||||||
Asset retirement obligations | 838 | 831 | ||||||
Derivatives | 21 | 38 | ||||||
Other | 905 | 899 | ||||||
3,607 | 3,491 | |||||||
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 10) | ||||||||
$ | 13,339 | $ | 13,168 | |||||
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.
6
FIRSTENERGY SOLUTIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31 | |||||||||
(In millions) | 2016 | 2015 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||
Net income (loss) | $ | 131 | $ | (3 | ) | ||||
Adjustments to reconcile net income (loss) to net cash from operating activities- | |||||||||
Depreciation and amortization, including nuclear fuel and customer intangible asset amortization | 138 | 144 | |||||||
Deferred costs on sale and leaseback transaction, net | 12 | 12 | |||||||
Deferred income taxes and investment tax credits, net | 113 | 34 | |||||||
Investment impairments | 8 | 6 | |||||||
Commodity derivative transactions, net (Note 8) | (64 | ) | 1 | ||||||
Changes in current assets and liabilities- | |||||||||
Receivables | 2 | 1 | |||||||
Materials and supplies | 24 | 21 | |||||||
Prepayments and other current assets | (12 | ) | (18 | ) | |||||
Accounts payable | (103 | ) | (75 | ) | |||||
Accrued taxes | (15 | ) | (24 | ) | |||||
Accrued compensation and benefits | (11 | ) | (9 | ) | |||||
Other current liabilities | 18 | 8 | |||||||
Cash collateral, net | (10 | ) | 12 | ||||||
Other | (3 | ) | (5 | ) | |||||
Net cash provided from operating activities | 228 | 105 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||
New financing- | |||||||||
Short-term borrowings, net | 49 | 150 | |||||||
Redemptions and repayments- | |||||||||
Long-term debt | — | (17 | ) | ||||||
Other | (2 | ) | (2 | ) | |||||
Net cash provided from financing activities | 47 | 131 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||
Property additions | (143 | ) | (119 | ) | |||||
Nuclear fuel | (149 | ) | (60 | ) | |||||
Sales of investment securities held in trusts | 138 | 189 | |||||||
Purchases of investment securities held in trusts | (151 | ) | (202 | ) | |||||
Cash investments | 10 | — | |||||||
Loans to affiliated companies, net | 11 | (44 | ) | ||||||
Other | 9 | — | |||||||
Net cash used for investing activities | (275 | ) | (236 | ) | |||||
Net change in cash and cash equivalents | — | — | |||||||
Cash and cash equivalents at beginning of period | 2 | 2 | |||||||
Cash and cash equivalents at end of period | $ | 2 | $ | 2 | |||||
The accompanying Combined Notes to Consolidated Financial Statements are an integral part of these financial statements.
7
FIRSTENERGY CORP. AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note Number | Page Number | |
2 | Earnings Per Share of Common Stock | |
3 | ||
4 | Accumulated Other Comprehensive Income | |
5 | Income Taxes | |
6 | Variable Interest Entities | |
7 | Fair Value Measurements | |
8 | Derivative Instruments | |
9 | Regulatory Matters | |
10 | Commitments, Guarantees and Contingencies | |
11 | Supplemental Guarantor Information | |
12 | Segment Information | |
8
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Unless otherwise indicated, defined terms and abbreviations used herein have the meanings set forth in the accompanying Glossary of Terms.
FirstEnergy Corp. was organized under the laws of the State of Ohio in 1996. FE’s principal business is the holding, directly or indirectly, of all of the outstanding common stock of its principal subsidiaries: OE, CEI, TE, Penn (a wholly owned subsidiary of OE), JCP&L, ME, PN, FESC, FES and its principal subsidiaries (FG and NG), AE Supply, MP, PE, WP, FET and its principal subsidiaries (ATSI and TrAIL), and AESC. In addition, FE holds all of the outstanding common stock of other direct subsidiaries including: FirstEnergy Properties, Inc., FEV, FENOC, FELHC, Inc., GPU Nuclear, Inc., and Allegheny Ventures, Inc.
FirstEnergy and its subsidiaries are principally involved in the generation, transmission, and distribution of electricity. FirstEnergy’s ten utility operating companies comprise one of the nation’s largest investor-owned electric systems, based on serving six million customers in the Midwest and Mid-Atlantic regions. Its generation subsidiaries control nearly 17,000 MW of capacity from a diverse mix of non-emitting nuclear, scrubbed coal, natural gas, hydroelectric and other renewables. FirstEnergy’s transmission operations include approximately 24,000 miles of lines and two regional transmission operation centers.
These interim financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 2015. These Notes to the Consolidated Financial Statements are combined for FirstEnergy and FES.
FirstEnergy follows GAAP and complies with the related regulations, orders, policies and practices prescribed by the SEC, FERC, and, as applicable, the PUCO, the PPUC, the MDPSC, the NYPSC, the WVPSC, the VSCC and the NJBPU. The accompanying interim financial statements are unaudited, but reflect all adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair statement of the financial statements. The preparation of financial statements in conformity with GAAP requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The reported results of operations are not necessarily indicative of results of operations for any future period. FE and its subsidiaries have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
FE and its subsidiaries consolidate all majority-owned subsidiaries over which they exercise control and, when applicable, entities for which they have a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation as appropriate. FE and its subsidiaries consolidate a VIE when it is determined that it is the primary beneficiary (see Note 6, Variable Interest Entities). Investments in affiliates over which FE and its subsidiaries have the ability to exercise significant influence, but do not have a controlling financial interest, follow the equity method of accounting. Under the equity method, the interest in the entity is reported as an investment in the Consolidated Balance Sheets and the percentage of FE's ownership share of the entity’s earnings is reported in the Consolidated Statements of Income and Comprehensive Income.
For the three months ended March 31, 2016 and 2015, capitalized financing costs on FirstEnergy's Consolidated Statements of Income include $8 million and $16 million, respectively, of allowance for equity funds used during construction and $17 million and $18 million, respectively, of capitalized interest.
New Accounting Pronouncements
In May 2014, the FASB issued, ASU 2014-09 "Revenue from Contracts with Customers", requiring entities to recognize revenue by applying a five-step model in accordance with the core principle to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the accounting for costs to obtain or fulfill a contract with a customer is specified and disclosure requirements for revenue recognition are expanded. In August 2015, the FASB issued a final ASU deferring the effective date until fiscal years beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, (the original effective date). In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)", clarifying the principal versus agent implementation guidance in the following areas: unit of account at which the principal/agent determination is made; applying the control principle to certain types of transactions and the control principle and principal/agent indicators. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing”, clarifying the identification of performance obligations and the licensing implementation guidance. The standards shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. FirstEnergy is currently evaluating the impact on its financial statements of adopting these standards.
In February 2015, the FASB issued, ASU 2015-02 "Consolidations: Amendments to the Consolidation Analysis", which amends current consolidation guidance including changes to both the variable and voting interest models used by companies to evaluate whether an entity should be consolidated. A reporting entity must apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the period of adoption or apply the amendments
9
retrospectively. FirstEnergy's adoption of ASU 2015-02, on January 1, 2016, did not result in a change in the consolidation of VIEs by FirstEnergy or its subsidiaries. See Note 6, Variable Interest Entities, for additional information.
In April 2015, the FASB issued, ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. In addition, in August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements", which allows debt issuance costs related to line of credit arrangements to be presented as an asset and amortized ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. FirstEnergy adopted ASU 2015-15 and ASU 2015-03 beginning January 1, 2016. As of December 31, 2015, FirstEnergy and FES reclassified $93 million and $17 million of debt issuance costs included in Deferred Charges and Other Assets to Long-term Debt and Other Long-term Obligations. FirstEnergy will elect to continue presenting debt issuance costs relating to its revolving credit facilities as an asset.
In January of 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities", which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The ASU will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. In addition, new qualitative and quantitative disclosures of the amounts, timing, and uncertainty of cash flows arising from leases will be required. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Lessors and lessees will be required to apply a modified retrospective transition approach, which requires adjusting the accounting for any leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.
In March of 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting", which simplifies several aspects of the accounting for employee share-based payment. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will not require liability accounting when an employer repurchases more of an employee’s shares for tax withholding purposes. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.
Additionally, in March of 2016, the FASB issued the following ASUs:
• | ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”, |
• | ASU 2016-06, “Contingent Put and Call Options in Debt Instruments (a consensus of the FASB Emerging Issues Task Force)", and |
• | ASU 2016-07, “Simplifying the Transition to the Equity Method of Accounting”. |
FirstEnergy does not expect these ASUs to have a material effect on its financial statements.
2. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share of common stock are computed using the weighted average number of common shares outstanding during the relevant period as the denominator. The denominator for diluted earnings per share of common stock reflects the weighted average of common shares outstanding plus the potential additional common shares that could result if dilutive securities and other agreements to issue common stock were exercised.
10
The following table reconciles basic and diluted earnings per share of common stock:
(In millions, except per share amounts) | For the Three Months Ended March 31 | |||||||
Reconciliation of Basic and Diluted Earnings per Share of Common Stock | 2016 | 2015 | ||||||
Net income | $ | 328 | $ | 222 | ||||
Weighted average number of basic shares outstanding | 424 | 421 | ||||||
Assumed exercise of dilutive stock options and awards(1) | 2 | 2 | ||||||
Weighted average number of diluted shares outstanding | 426 | 423 | ||||||
Basic earnings per share of common stock | $ | 0.78 | $ | 0.53 | ||||
Diluted earnings per share of common stock | $ | 0.77 | $ | 0.53 | ||||
(1) | For both the three months ended March 31, 2016 and March 31, 2015, one million shares were excluded from the calculation of diluted shares outstanding, as their inclusion would be antidilutive. |
3. PENSION AND OTHER POSTEMPLOYMENT BENEFITS
In 2016, FirstEnergy has minimum required funding obligations of $381 million to its qualified pension plan, of which $160 million has been contributed to date. FirstEnergy expects to make future contributions to the qualified pension plan in 2016 with cash, equity or a combination thereof, depending on, among other things, market conditions.
The components of the consolidated net periodic cost (credits) for pension and OPEB (including amounts capitalized) were as follows:
Components of Net Periodic Benefit Costs (Credits) | Pension | OPEB | ||||||||||||||
For the Three Months Ended March 31 | 2016 | 2015 | 2016 | 2015 | ||||||||||||
(In millions) | ||||||||||||||||
Service costs | $ | 48 | $ | 48 | $ | 1 | $ | 1 | ||||||||
Interest costs | 100 | 96 | 7 | 7 | ||||||||||||
Expected return on plan assets | (97 | ) | (111 | ) | (8 | ) | (8 | ) | ||||||||
Amortization of prior service costs (credits) | 2 | 2 | (20 | ) | (33 | ) | ||||||||||
Net periodic costs (credits) | $ | 53 | $ | 35 | $ | (20 | ) | $ | (33 | ) | ||||||
FES' share of the net periodic pension and OPEB costs (credits) were as follows:
Pension | OPEB | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In millions) | ||||||||||||||||
For the Three Months Ended March 31 | $ | 6 | $ | 4 | $ | (4 | ) | $ | (5 | ) | ||||||
Pension and OPEB obligations are allocated to FE's subsidiaries, including FES, employing the plan participants. The net periodic pension and OPEB costs (credits) (net of amounts capitalized) recognized in earnings by FE and FES were as follows:
Net Periodic Benefit Expense (Credit) | Pension | OPEB | ||||||||||||||
For the Three Months Ended March 31 | 2016 | 2015 | 2016 | 2015 | ||||||||||||
(In millions) | ||||||||||||||||
FirstEnergy | $ | 37 | $ | 25 | $ | (15 | ) | $ | (23 | ) | ||||||
FES | 6 | 4 | (4 | ) | (4 | ) | ||||||||||
11
4. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in AOCI, net of tax, in the three months ended March 31, 2016 and 2015, for FirstEnergy are included in the following tables:
FirstEnergy | ||||||||||||||||
Gains & Losses on Cash Flow Hedges | Unrealized Gains on AFS Securities | Defined Benefit Pension & OPEB Plans | Total | |||||||||||||
(In millions) | ||||||||||||||||
AOCI Balance as of January 1, 2016 | $ | (33 | ) | $ | 18 | $ | 186 | $ | 171 | |||||||
Other comprehensive income before reclassifications | — | 41 | — | 41 | ||||||||||||
Amounts reclassified from AOCI | 2 | (13 | ) | (18 | ) | (29 | ) | |||||||||
Other comprehensive income (loss) | 2 | 28 | (18 | ) | 12 | |||||||||||
Income tax (benefits) on other comprehensive income (loss) | 1 | 10 | (7 | ) | 4 | |||||||||||
Other comprehensive income (loss), net of tax | 1 | 18 | (11 | ) | 8 | |||||||||||
AOCI Balance as of March 31, 2016 | $ | (32 | ) | $ | 36 | $ | 175 | $ | 179 | |||||||
AOCI Balance as of January 1, 2015 | $ | (37 | ) | $ | 25 | $ | 258 | $ | 246 | |||||||
Other comprehensive income before reclassifications | — | 14 | — | 14 | ||||||||||||
Amounts reclassified from AOCI | 1 | (10 | ) | (31 | ) | (40 | ) | |||||||||
Other comprehensive income (loss) | 1 | 4 | (31 | ) | (26 | ) | ||||||||||
Income tax (benefits) on other comprehensive income (loss) | — | 1 | (11 | ) | (10 | ) | ||||||||||
Other comprehensive income (loss), net of tax | 1 | 3 | (20 | ) | (16 | ) | ||||||||||
AOCI Balance as of March 31, 2015 | $ | (36 | ) | $ | 28 | $ | 238 | $ | 230 | |||||||
The following amounts were reclassified from AOCI for FirstEnergy in the three months ended March 31, 2016 and 2015:
12
For the Three Months Ended March 31 | Affected Line Item in Consolidated Statements of Income | |||||||||
Reclassifications from AOCI (2) | 2016 | 2015 | ||||||||
(In millions) | ||||||||||
Gains & losses on cash flow hedges | ||||||||||
Commodity contracts | $ | — | $ | (1 | ) | Other operating expenses | ||||
Long-term debt | 2 | 2 | Interest expense | |||||||
2 | 1 | Total before taxes | ||||||||
(1 | ) | — | Income taxes | |||||||
$ | 1 | $ | 1 | Net of tax | ||||||
Unrealized gains on AFS securities | ||||||||||
Realized gains on sales of securities | $ | (13 | ) | $ | (10 | ) | Investment income | |||
5 | 4 | Income taxes | ||||||||
$ | (8 | ) | $ | (6 | ) | Net of tax | ||||
Defined benefit pension and OPEB plans | ||||||||||
Prior-service costs | $ | (18 | ) | $ | (31 | ) | (1) | |||
7 | 11 | Income taxes | ||||||||
$ | (11 | ) | $ | (20 | ) | Net of tax | ||||
(1) These AOCI components are included in the computation of net periodic pension cost. See Note 3, Pension and Other Postemployment Benefits for additional details. | ||||||||||
(2) Amounts in parenthesis represent credits to the Consolidated Statements of Income from AOCI. | ||||||||||
The changes in AOCI, net of tax, in the three months ended March 31, 2016 and 2015, for FES are included in the following tables:
FES | ||||||||||||||||
Gains & Losses on Cash Flow Hedges | Unrealized Gains on AFS Securities | Defined Benefit Pension & OPEB Plans | Total | |||||||||||||
(In millions) | ||||||||||||||||
AOCI Balance as of January 1, 2016 | $ | (9 | ) | $ | 16 | $ | 39 | $ | 46 | |||||||
Other comprehensive income before reclassifications | — | 36 | — | 36 | ||||||||||||
Amounts reclassified from AOCI | — | (13 | ) | (4 | ) | (17 | ) | |||||||||
Other comprehensive income (loss) | — | 23 | (4 | ) | 19 | |||||||||||
Income tax (benefits) on other comprehensive income (loss) | — | 9 | (2 | ) | 7 | |||||||||||
Other comprehensive income (loss), net of tax | — | 14 | (2 | ) | 12 | |||||||||||
AOCI Balance as of March 31, 2016 | $ | (9 | ) | $ | 30 | $ | 37 | $ | 58 | |||||||
AOCI Balance as of January 1, 2015 | $ | (7 | ) | $ | 21 | $ | 43 | $ | 57 | |||||||
Other comprehensive income before reclassifications | — | 13 | — | 13 | ||||||||||||
Amounts reclassified from AOCI | (1 | ) | (10 | ) | (4 | ) | (15 | ) | ||||||||
Other comprehensive income (loss) | (1 | ) | 3 | (4 | ) | (2 | ) | |||||||||
Income tax (benefits) on other comprehensive income (loss) | — | — | (1 | ) | (1 | ) | ||||||||||
Other comprehensive income (loss), net of tax | (1 | ) | 3 | (3 | ) | (1 | ) | |||||||||
AOCI Balance as of March 31, 2015 | $ | (8 | ) | $ | 24 | $ | 40 | $ | 56 | |||||||
The following amounts were reclassified from AOCI for FES in the three months ended March 31, 2016 and 2015:
13
For the Three Months Ended March 31 | Affected Line Item in Consolidated Statements of Income (Loss) | |||||||||
Reclassifications from AOCI (2) | 2016 | 2015 | ||||||||
(In millions) | ||||||||||
Gains & losses on cash flow hedges | ||||||||||
Commodity contracts | $ | — | $ | (1 | ) | Other operating expenses | ||||