Attached files
| file | filename |
|---|---|
| EX-12 - EXHIBIT 12 - FIRSTENERGY CORP | fe-03312017xex12.htm |
| EX-32 - EXHIBIT 32 - FIRSTENERGY CORP | fe-03312017xex32.htm |
| EX-31.2 - EXHIBIT 31.2 - FIRSTENERGY CORP | fe-03312017xex312.htm |
| EX-31.1 - EXHIBIT 31.1 - FIRSTENERGY CORP | fe-03312017xex311.htm |
| EX-10.1 - EXHIBIT 10.1 - FIRSTENERGY CORP | exhibit101-fes2017ltip0324.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, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth 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 |
Emerging Growth Company o | N/A |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. o
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, 2017 | ||
FirstEnergy Corp., $0.10 par value | 443,740,014 | ||
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. The public may read and copy any reports or other information that the registrants file with the SEC at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the SEC's public reference room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services and the website maintained by the SEC at www.sec.gov.
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 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. 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 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 ability to experience growth in the Regulated Distribution and Regulated Transmission segments and the effectiveness of our strategy to transition to a fully regulated business profile. |
• | The accomplishment of our regulatory and operational goals in connection with our transmission investment plan, including, but not limited to, our planned transition to forward-looking formula rates. |
• | 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 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. |
• | Success of legislative and regulatory solutions for generation assets that recognize their environmental or energy security benefits. |
• | The risks and uncertainties associated with the lack of viable alternative strategies regarding the CES segment, thereby causing FES, and possibly FENOC, to restructure its debt and other financial obligations with its creditors or seek protection under U.S. bankruptcy laws and the losses, liabilities and claims arising from such bankruptcy proceeding, including any obligations at FirstEnergy. |
• | The risks and uncertainties at the CES segment, including FES and its subsidiaries and FENOC, related to continued depressed wholesale energy and capacity markets, and the viability and/or success of strategic business alternatives, such as pending and potential CES generating unit asset sales, the potential conversion of the remaining generation fleet from competitive operations to a regulated or regulated-like construct or the potential need to deactivate additional generating units. |
• | The substantial uncertainty as to FES’ ability to continue as a going concern and substantial risk that it may be necessary for FES, and possibly FENOC, to seek protection under U.S. bankruptcy laws. |
• | The risks and uncertainties associated with litigation, arbitration, mediation and like proceedings, including, but not limited to, any such proceedings related to vendor commitments, such as long-term fuel and transportation agreements. |
• | The uncertainties associated with the deactivation of older regulated and competitive units, including the impact on vendor commitments, such as long-term fuel and transportation agreements, 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. |
• | 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. |
• | Costs being higher than anticipated and the success of our policies to control costs and to mitigate low energy, capacity and market prices. |
• | Replacement power costs being higher than anticipated or not fully hedged. |
• | 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. |
• | 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). |
• | 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. |
• | 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. |
• | 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 labor disruptions by our unionized workforce. |
• | 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 impact of the regulatory process and resulting outcomes on the matters at the federal level and in the various states in which we do business including, but not limited to, matters related to rates. |
• | 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; 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. |
• | The ability to comply with applicable state and federal reliability standards and energy efficiency and peak demand reduction mandates. |
• | Other legislative and regulatory changes, including the new federal administration's required review and potential revision of 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. |
• | 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. |
• | 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 significant accounting policies. |
• | The impact of any changes in tax laws or regulations or adverse tax audit results or rulings. |
• | 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. |
• | Further 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, increase requirements to post additional collateral to support, or accelerate payments under outstanding commodity positions, LOCs and other financial guarantees, and the impact of these events on the financial condition and liquidity of FirstEnergy and/or its subsidiaries, specifically FES and its subsidiaries. |
• | Issues concerning the stability of domestic and foreign financial institutions and counterparties with which we do business. |
• | 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.
These forward-looking statements are also qualified by, and should be read together with, the risk factors 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. The foregoing review of factors also should not be construed as exhaustive. 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 NG's nuclear generating facilities |
FES | FirstEnergy Solutions Corp., together with its consolidated subsidiaries, 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 | Global Rail Group, LLC, 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, which owns and operates 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 | Signal Peak Energy, LLC, 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 |
ii
GLOSSARY OF TERMS, Continued | |
ARO | Asset Retirement Obligation |
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 |
DMR | Distribution Modernization Rider |
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 IV | Electric Security Plan IV |
ESP IV PPA | Unit Power Agreement entered into on April 1, 2016 by and between the Ohio Companies and FES |
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 |
HB554 | Ohio House Bill No. 554 |
HCl | Hydrochloric Acid |
ICE | Intercontinental Exchange, Inc. |
IRP | Integrated Resource Plan |
IRS | Internal Revenue Service |
ISO | Independent System Operator |
kV | Kilovolt |
KWH | Kilowatt-hour |
LOC | Letter of Credit |
LSE | Load Serving Entity |
iii
GLOSSARY OF TERMS, Continued | |
LTIIPs | Long-Term Infrastructure Improvement Plans |
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 |
NOAC | Northwestern Ohio Aggregation Coalition |
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 |
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 |
PCB | Polychlorinated Biphenyl |
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 |
Regulation FD | Regulation Fair Disclosure promulgated by the SEC |
REIT | Real Estate Investment Trust |
RFC | ReliabilityFirst Corporation |
RFP | Request for Proposal |
iv
GLOSSARY OF TERMS, Continued | |
RGGI | Regional Greenhouse Gas Initiative |
ROE | Return on Equity |
RPM | Reliability Pricing Model |
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 Ohio Senate Bill No. 221 |
SB310 | Substitute Ohio Senate Bill No. 310 |
SB320 | Ohio Senate Bill No. 320 |
SBC | Societal Benefits Charge |
SEC | United States Securities and Exchange Commission |
Seventh Circuit | United States Court of Appeals for the Seventh Circuit |
SIP | State Implementation Plan(s) Under the Clean Air Act |
SO2 | Sulfur Dioxide |
Sixth Circuit | United States Court of Appeals for the Sixth Circuit |
SOS | Standard Offer Service |
SPE | Special Purpose Entity |
SREC | Solar Renewable Energy Credit |
SSO | Standard Service Offer |
TDS | Total Dissolved Solid |
TMI-2 | Three Mile Island Unit 2 |
TO | Transmission Owner |
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) | 2017 | 2016 | |||||||
REVENUES: | |||||||||
Regulated Distribution | $ | 2,490 | $ | 2,510 | |||||
Regulated Transmission | 313 | 286 | |||||||
Unregulated businesses | 749 | 1,073 | |||||||
Total revenues* | 3,552 | 3,869 | |||||||
OPERATING EXPENSES: | |||||||||
Fuel | 368 | 381 | |||||||
Purchased power | 863 | 1,124 | |||||||
Other operating expenses | 1,142 | 918 | |||||||
Provision for depreciation | 275 | 329 | |||||||
Amortization of regulatory assets, net | 59 | 61 | |||||||
General taxes | 271 | 280 | |||||||
Total operating expenses | 2,978 | 3,093 | |||||||
OPERATING INCOME | 574 | 776 | |||||||
OTHER INCOME (EXPENSE): | |||||||||
Investment income | 24 | 28 | |||||||
Interest expense | (287 | ) | (288 | ) | |||||
Capitalized financing costs | 20 | 25 | |||||||
Total other expense | (243 | ) | (235 | ) | |||||
INCOME BEFORE INCOME TAXES | 331 | 541 | |||||||
INCOME TAXES | 126 | 213 | |||||||
NET INCOME | $ | 205 | $ | 328 | |||||
EARNINGS PER SHARE OF COMMON STOCK: | |||||||||
Basic | $ | 0.46 | $ | 0.78 | |||||
Diluted | $ | 0.46 | $ | 0.77 | |||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | |||||||||
Basic | 443 | 424 | |||||||
Diluted | 444 | 426 | |||||||
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK | $ | 0.72 | $ | 0.72 | |||||
* Includes excise tax collections of $100 million and $107 million in the three months ended March 31, 2017 and 2016, 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) | 2017 | 2016 | |||||||
NET INCOME | $ | 205 | $ | 328 | |||||
OTHER COMPREHENSIVE INCOME: | |||||||||
Pension and OPEB prior service costs | (18 | ) | (18 | ) | |||||
Amortized losses on derivative hedges | 3 | 2 | |||||||
Change in unrealized gains on available-for-sale securities | 16 | 28 | |||||||
Other comprehensive income | 1 | 12 | |||||||
Income taxes on other comprehensive income | — | 4 | |||||||
Other comprehensive income, net of tax | 1 | 8 | |||||||
COMPREHENSIVE INCOME | $ | 206 | $ | 336 | |||||
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, 2017 | December 31, 2016 | ||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 164 | $ | 199 | ||||
Receivables- | ||||||||
Customers, net of allowance for uncollectible accounts of $52 in 2017 and $53 in 2016 | 1,396 | 1,440 | ||||||
Other, net of allowance for uncollectible accounts of $1 in 2017 and 2016 | 155 | 175 | ||||||
Materials and supplies | 531 | 564 | ||||||
Prepaid taxes | 202 | 98 | ||||||
Derivatives | 43 | 140 | ||||||
Collateral | 122 | 176 | ||||||
Other | 147 | 158 | ||||||
2,760 | 2,950 | |||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
In service | 42,976 | 43,767 | ||||||
Less — Accumulated provision for depreciation | 15,769 | 15,731 | ||||||
27,207 | 28,036 | |||||||
Construction work in progress | 1,588 | 1,351 | ||||||
28,795 | 29,387 | |||||||
INVESTMENTS: | ||||||||
Nuclear plant decommissioning trusts | 2,571 | 2,514 | ||||||
Other | 519 | 512 | ||||||
3,090 | 3,026 | |||||||
ASSETS HELD FOR SALE (Note 1) | 921 | — | ||||||
DEFERRED CHARGES AND OTHER ASSETS: | ||||||||
Goodwill | 5,618 | 5,618 | ||||||
Regulatory assets | 1,000 | 1,014 | ||||||
Other | 1,028 | 1,153 | ||||||
7,646 | 7,785 | |||||||
$ | 43,212 | $ | 43,148 | |||||
LIABILITIES AND CAPITALIZATION | ||||||||
CURRENT LIABILITIES: | ||||||||
Currently payable long-term debt | $ | 2,147 | $ | 1,685 | ||||
Short-term borrowings | 2,750 | 2,675 | ||||||
Accounts payable | 977 | 1,043 | ||||||
Accrued taxes | 555 | 580 | ||||||
Accrued compensation and benefits | 307 | 363 | ||||||
Derivatives | 27 | 78 | ||||||
Collateral | 46 | 42 | ||||||
Other | 848 | 660 | ||||||
7,657 | 7,126 | |||||||
CAPITALIZATION: | ||||||||
Common stockholders’ equity- | ||||||||
Common stock, $0.10 par value, authorized 490,000,000 shares - 443,740,014 and 442,344,218 shares outstanding as of March 31, 2017 and December 31, 2016, respectively | 44 | 44 | ||||||
Other paid-in capital | 10,253 | 10,555 | ||||||
Accumulated other comprehensive income | 175 | 174 | ||||||
Accumulated deficit | (4,333 | ) | (4,532 | ) | ||||
Total common stockholders’ equity | 6,139 | 6,241 | ||||||
Long-term debt and other long-term obligations | 17,762 | 18,192 | ||||||
23,901 | 24,433 | |||||||
NONCURRENT LIABILITIES: | ||||||||
Accumulated deferred income taxes | 3,882 | 3,765 | ||||||
Retirement benefits | 3,756 | 3,719 | ||||||
Asset retirement obligations | 1,505 | 1,482 | ||||||
Deferred gain on sale and leaseback transaction | 748 | 757 | ||||||
Adverse power contract liability | 157 | 162 | ||||||
Other | 1,606 | 1,704 | ||||||
11,654 | 11,589 | |||||||
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 10) | ||||||||
$ | 43,212 | $ | 43,148 | |||||
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) | 2017 | 2016 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 205 | $ | 328 | ||||
Adjustments to reconcile net income to net cash from operating activities- | ||||||||
Depreciation and amortization, including nuclear fuel, regulatory assets, net, intangible assets and deferred debt-related costs | 392 | 461 | ||||||
Deferred purchased power and other costs | 23 | (10 | ) | |||||
Deferred income taxes and investment tax credits, net | 114 | 206 | ||||||
Deferred costs on sale leaseback transaction, net | 12 | 12 | ||||||
Retirement benefits, net of payments | 10 | 16 | ||||||
Pension trust contributions | — | (160 | ) | |||||
Commodity derivative transactions, net (Note 8) | 47 | (64 | ) | |||||
Changes in current assets and liabilities- | ||||||||
Receivables | 68 | 1 | ||||||
Materials and supplies | 11 | 4 | ||||||
Prepaid taxes and other current assets | (111 | ) | (82 | ) | ||||
Accounts payable | 45 | 25 | ||||||
Accrued taxes | (131 | ) | (110 | ) | ||||
Accrued compensation and benefits | (137 | ) | (102 | ) | ||||
Other current liabilities | 20 | 66 | ||||||
Collateral, net | 58 | (6 | ) | |||||
Other | 159 | 65 | ||||||
Net cash provided from operating activities | 785 | 650 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
New Financing- | ||||||||
Long-term debt | 250 | — | ||||||
Short-term borrowings, net | 75 | 425 | ||||||
Redemptions and Repayments- | ||||||||
Long-term debt | (211 | ) | (31 | ) | ||||
Common stock dividend payments | (159 | ) | (152 | ) | ||||
Other | (13 | ) | (12 | ) | ||||
Net cash (used for) provided from financing activities | (58 | ) | 230 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Property additions | (588 | ) | (698 | ) | ||||
Nuclear fuel | (132 | ) | (149 | ) | ||||
Sales of investment securities held in trusts | 738 | 465 | ||||||
Purchases of investment securities held in trusts | (761 | ) | (488 | ) | ||||
Asset removal costs | (35 | ) | (34 | ) | ||||
Other | 16 | 39 | ||||||
Net cash used for investing activities | (762 | ) | (865 | ) | ||||
Net change in cash and cash equivalents | (35 | ) | 15 | |||||
Cash and cash equivalents at beginning of period | 199 | 131 | ||||||
Cash and cash equivalents at end of period | $ | 164 | $ | 146 | ||||
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) | 2017 | 2016 | ||||||
STATEMENTS OF INCOME (LOSS) | ||||||||
REVENUES: | ||||||||
Electric sales to non-affiliates | $ | 768 | $ | 1,007 | ||||
Electric sales to affiliates | 111 | 147 | ||||||
Other | 35 | 45 | ||||||
Total revenues | 914 | 1,199 | ||||||
OPERATING EXPENSES: | ||||||||
Fuel | 144 | 165 | ||||||
Purchased power from affiliates | 163 | 82 | ||||||
Purchased power from non-affiliates | 160 | 377 | ||||||
Other operating expenses | 518 | 240 | ||||||
Provision for depreciation | 25 | 83 | ||||||
General taxes | 21 | 26 | ||||||
Total operating expenses | 1,031 | 973 | ||||||
OPERATING INCOME (LOSS) | (117 | ) | 226 | |||||
OTHER INCOME (EXPENSE): | ||||||||
Investment income | 20 | 13 | ||||||
Miscellaneous income | 5 | 2 | ||||||
Interest expense — affiliates | (2 | ) | (2 | ) | ||||
Interest expense — other | (35 | ) | (36 | ) | ||||
Capitalized interest | 8 | 10 | ||||||
Total other expense | (4 | ) | (13 | ) | ||||
INCOME (LOSS) BEFORE INCOME TAXES (BENEFITS) | (121 | ) | 213 | |||||
INCOME TAXES (BENEFITS) | (41 | ) | 82 | |||||
NET INCOME (LOSS) | $ | (80 | ) | $ | 131 | |||
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | ||||||||
NET INCOME (LOSS) | $ | (80 | ) | $ | 131 | |||
OTHER COMPREHENSIVE INCOME: | ||||||||
Pension and OPEB prior service costs | (3 | ) | (4 | ) | ||||
Change in unrealized gains on available-for-sale securities | 16 | 23 | ||||||
Other comprehensive income | 13 | 19 | ||||||
Income taxes on other comprehensive income | 5 | 7 | ||||||
Other comprehensive income, net of tax | 8 | 12 | ||||||
COMPREHENSIVE INCOME (LOSS) | $ | (72 | ) | $ | 143 | |||
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, 2017 | December 31, 2016 | ||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 2 | $ | 2 | ||||
Receivables- | ||||||||
Customers, net of allowance for uncollectible accounts of $4 in 2017 and $5 in 2016 | 173 | 213 | ||||||
Affiliated companies | 376 | 452 | ||||||
Other | 51 | 27 | ||||||
Notes receivable from affiliated companies | — | 29 | ||||||
Materials and supplies | 252 | 267 | ||||||
Derivatives | 43 | 137 | ||||||
Collateral | 107 | 157 | ||||||
Prepaid taxes and other | 51 | 63 | ||||||
1,055 | 1,347 | |||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
In service | 7,108 | 7,057 | ||||||
Less — Accumulated provision for depreciation | 5,998 | 5,929 | ||||||
1,110 | 1,128 | |||||||
Construction work in progress | 488 | 427 | ||||||
1,598 | 1,555 | |||||||
INVESTMENTS: | ||||||||
Nuclear plant decommissioning trusts | 1,593 | 1,552 | ||||||
Other | 10 | 10 | ||||||
1,603 | 1,562 | |||||||
DEFERRED CHARGES AND OTHER ASSETS: | ||||||||
Property taxes | 30 | 40 | ||||||
Accumulated deferred income taxes | 2,268 | 2,279 | ||||||
Derivatives | 17 | 77 | ||||||
Other | 393 | 381 | ||||||
2,708 | 2,777 | |||||||
$ | 6,964 | $ | 7,241 | |||||
LIABILITIES AND CAPITALIZATION | ||||||||
CURRENT LIABILITIES: | ||||||||
Currently payable long-term debt | $ | 150 | $ | 179 | ||||
Short-term borrowings - affiliated companies | 114 | 101 | ||||||
Accounts payable- | ||||||||
Affiliated companies | 316 | 550 | ||||||
Other | 107 | 110 | ||||||
Accrued taxes | 137 | 143 | ||||||
Derivatives | 25 | 77 | ||||||
Other | 194 | 156 | ||||||
1,043 | 1,316 | |||||||
CAPITALIZATION: | ||||||||
Common stockholder's equity- | ||||||||
Common stock, without par value, authorized 750 shares - 7 shares outstanding as of March 31, 2017 and December 31, 2016 | 3,658 | 3,658 | ||||||
Accumulated other comprehensive income | 77 | 69 | ||||||
Accumulated deficit | (3,589 | ) | (3,509 | ) | ||||
Total common stockholder's equity | 146 | 218 | ||||||
Long-term debt and other long-term obligations | 2,812 | 2,813 | ||||||
2,958 | 3,031 | |||||||
NONCURRENT LIABILITIES: | ||||||||
Deferred gain on sale and leaseback transaction | 748 | 757 | ||||||
Retirement benefits | 202 | 197 | ||||||
Asset retirement obligations | 915 | 901 | ||||||
Derivatives | 3 | 52 | ||||||
Other | 1,095 | 987 | ||||||
2,963 | 2,894 | |||||||
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 10) | ||||||||
$ | 6,964 | $ | 7,241 | |||||
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) | 2017 | 2016 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | (80 | ) | $ | 131 | |||
Adjustments to reconcile net income (loss) to net cash from operating activities- | ||||||||
Depreciation and amortization, including nuclear fuel, intangible assets and deferred debt-related costs | 78 | 138 | ||||||
Deferred costs on sale and leaseback transaction, net | 12 | 12 | ||||||
Deferred income taxes and investment tax credits, net | 6 | 113 | ||||||
Investment impairments | 3 | 8 | ||||||
Commodity derivative transactions, net (Note 8) | 47 | (64 | ) | |||||
Changes in current assets and liabilities- | ||||||||
Receivables | 92 | 2 | ||||||
Materials and supplies | (2 | ) | 24 | |||||
Prepaid taxes and other current assets | 11 | (12 | ) | |||||
Accounts payable | (126 | ) | (103 | ) | ||||
Accrued taxes | (16 | ) | (15 | ) | ||||
Other current liabilities | 21 | 4 | ||||||
Collateral, net | 50 | (10 | ) | |||||
Other | 125 | 1 | ||||||
Net cash provided from operating activities | 221 | 229 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
New financing- | ||||||||
Short-term borrowings, net | 13 | 49 | ||||||
Redemptions and repayments- | ||||||||
Long-term debt | (29 | ) | — | |||||
Other | (3 | ) | (3 | ) | ||||
Net cash (used for) provided from financing activities | (19 | ) | 46 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Property additions | (85 | ) | (143 | ) | ||||
Nuclear fuel | (132 | ) | (149 | ) | ||||
Sales of investment securities held in trusts | 231 | 138 | ||||||
Purchases of investment securities held in trusts | (245 | ) | (151 | ) | ||||
Cash investments | — | 10 | ||||||
Loans to affiliated companies, net | 29 | 11 | ||||||
Other | — | 9 | ||||||
Net cash used for investing activities | (202 | ) | (275 | ) | ||||
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.
FE 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 equity 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, MAIT and TrAIL), and AESC. In addition, FE holds all of the outstanding equity of other direct subsidiaries including: FirstEnergy Properties, Inc., FEV, FENOC, FELHC, Inc., GPU Nuclear, Inc., and Allegheny Ventures, Inc.
FE 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 regulated and unregulated 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.
FES, a subsidiary of FE, was organized under the laws of the State of Ohio in 1997. FES provides energy-related products and services to retail and wholesale customers. FES also owns and operates, through its FG subsidiary, fossil generating facilities and owns, through its NG subsidiary, nuclear generating facilities. FES purchases the entire output of the generation facilities owned by FG and NG, and the output relating to leasehold interests of OE and TE in certain of those facilities that are subject to sale and leaseback arrangements, and pursuant to full output, cost-of-service PSAs. Prior to April 1, 2016, FES financially purchased the uncommitted output of AE Supply's generation facilities under a PSA. On December 21, 2015, FES agreed, under a PSA, to physically purchase all the output of AE Supply's generation facilities effective April 1, 2016. FES and AE Supply terminated the PSA effective April 1, 2017. FES complies with the regulations, orders, policies and practices prescribed by the SEC, FERC, NRC and applicable state regulatory authorities.
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, 2016. 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, 2017 and 2016, capitalized financing costs on FirstEnergy's Consolidated Statements of Income include $8 million of allowance for equity funds used during construction and $12 million and $17 million, respectively, of capitalized interest.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Strategic Review of Competitive Operations
FirstEnergy believes having a combination of distribution, transmission and generation assets in a regulated or regulated-like construct is the best way to serve customers. FirstEnergy’s strategy is to be a fully regulated utility, focusing on stable and predictable earnings and cash flow from its regulated business units.
9
Over the past several years, CES has been impacted by a prolonged decrease in demand and excess generation supply in the PJM Region, which has resulted in a period of protracted low power and capacity prices. To address this, CES sold or deactivated more than 6,770 MWs of competitive generation from 2012 to 2015 and announced in 2016 plans to exit and/or deactivate an additional 856 MWs by 2020 related to the Bay Shore Unit 1 generating station and Units 1-4 of the W.H. Sammis generating station. Additionally, CES has continued to focus on cost reductions, including those identified as part of FirstEnergy’s previously disclosed cash flow improvement plan.
However, the energy and capacity markets continue to be weak, as evidenced by the significantly depressed capacity clearing prices and current forward pricing as well as the long-term fundamental view on energy and capacity prices. In order to focus on stable and predictable cash flow from its regulated business units, in November of 2016, FirstEnergy announced that it had begun a strategic review of its competitive operations as it transitions to a fully regulated utility with a target to implement its exit from competitive operations by mid-2018.
As a result of this strategic review, FirstEnergy announced in January 2017 that AE Supply and AGC had entered into an asset purchase agreement to sell four of AE Supply’s natural gas generating plants and approximately 59% of AGC’s interest in Bath County (1,572 MWs of combined capacity) for an all-cash purchase price of $925 million, subject to customary and other closing conditions, including the satisfaction and discharge of $305 million of AE Supply’s senior notes, which is expected to require the payment of a “make-whole” premium currently estimated to be approximately $100 million based on current interest rates. As a further condition to closing, FE will provide the purchaser two limited guarantees of certain obligations of AE Supply and AGC arising under the purchase agreement. The guarantees vary in amount and scope and expire in one and three years, respectively. Assets held for sale as of March 31, 2017 include the property, plant and equipment (net of accumulated provision for depreciation) of $919 million, materials and supplies inventory of $3 million and asset retirement obligations of approximately $1 million.
Additionally, AE Supply’s Pleasants power station (1,300 MWs) was selected in MP's RFP seeking additional generation capacity, and on March 6, 2017, MP and AE Supply signed an asset purchase agreement for MP to acquire the Pleasants power station for approximately $195 million, subject to customary and other closing conditions, including regulatory approvals. In addition, on March 7, 2017, MP and AE Supply filed applications with the WVPSC and FERC requesting authorization for such purchase.
The strategic options to exit the remaining portion of CES' generation are still uncertain, but could include one or more of the following:
• | Legislative or regulatory solutions for generation assets that recognize their environmental or energy security benefits, |
• | Additional asset sales and/or plant deactivations, |
• | Restructuring FES debt with its creditors, and/or |
• | Seeking protection under U.S. bankruptcy laws for FES and possibly FENOC. |
Furthermore, the strategic options, and the timing thereof, could be impacted by various events, including but not limited to, the following:
• | The FES debt maturities, interest payments and sale-leaseback commitments due in June 2017. |
• | The outcome of the recently announced directive by the Secretary of Energy to complete a study by mid-June 2017 that explores critical issues central to protecting the long-term reliability of the electric grid, including the impact of federal policy interventions and the changing nature of electricity fuel mix, compensation of on-site fuel supply and other factors that strengthen grid resilience, and the impact of regulatory burdens, mandates and tax and subsidy policies on the premature retirement of baseload power plants. |
• | The resolution of recently introduced legislation before the Ohio General Assembly that would create a zero-emission nuclear (ZEN) credit that would compensate nuclear power plants for their environmental attributes and the potential for ZEN legislative action in Pennsylvania. |
• | The inability to finalize and consummate settlement agreements with the parties to the previously disclosed disputes regarding long-term coal transportation contracts as discussed in "Environmental Matters" below, whereby FG could be subject to materially higher damages owed to CSX, BNSF and NS. |
Today, the competitive generation portfolio is comprised of more than 13,000 MWs of generation, primarily from coal, nuclear and natural gas and oil fuel sources. The assets can generate approximately 70-75 million MWHs annually, with up to an additional five million MWHs available from purchased power agreements for wind, solar, and CES' entitlement in OVEC, of which a portion is sold through various retail channels and the remainder targeting forward wholesale or spot sales. Subject to the completion of the sale of AE Supply's natural gas generating plants and AGC’s interest in Bath County, as well as the transfer of the Pleasants Power station to MP, the size and generation capacity of CES’ portfolio will reduce to approximately 10,000 MWs with approximately 60-65 million MWHs produced annually.
The competitive business continues to be managed conservatively due to the stress of weak energy prices, insufficient results from recent capacity auctions and anemic demand forecasts that have lowered the value of the business. Furthermore, the credit quality of CES, specifically FES' unsecured debt rating of Caa1 at Moody’s, CCC+ at S&P and C at Fitch and negative outlook from each of the rating agencies has challenged its ability to hedge generation with retail and forward wholesale sales due to collateral
10
requirements that otherwise would reduce available liquidity. A lack of viable alternative strategies for its competitive portfolio has and would further stress the financial condition of FES. As a result, CES' contract sales are expected to decline from 53 million MWHs in 2016 to 40-45 million MWHs in 2017 and to 35-40 million MWHs in 2018. While the reduced contract sales will decrease potential collateral requirements, market price volatility may significantly impact CES' financial results due to the increased exposure to the wholesale spot market.
Going Concern at FES
Although FES has access to a $500 million secured line of credit with FE, all of which was available as of March 31, 2017, its current credit rating and the current forward wholesale pricing environment present significant challenges to FES. Furthermore, an inability to develop and execute upon viable alternative strategies for its competitive portfolio would continue to further stress the liquidity and financial condition of FES.
As previously disclosed, FES has $130 million of debt maturities in June of 2017 (and $515 million of maturing debt in 2018 beginning in the second quarter). Additionally, FES has interest payments and sale-leaseback commitments of $108 million due in June of 2017. Based on FES' current senior unsecured debt rating, capital structure and the forecasted decline in wholesale forward market prices over the next few years, the debt maturities are likely to be difficult to refinance, even on a secured basis. Failure to refinance the debt would further stress FES' anticipated liquidity. It is uncertain whether FES would use currently available liquidity to make upcoming debt and other payments. Furthermore, lack of clarity regarding the timing and viability of alternative strategies, including additional asset sales or deactivations and/or converting generation from competitive operations to a regulated or regulated-like construct in a way that provides FES with the means to satisfy its obligations over the long-term, may require FES to restructure debt and other financial obligations with its creditors or seek protection under U.S. bankruptcy laws. In the event FES seeks protection under U.S. bankruptcy laws, FENOC may similarly seek such protection. Although management is exploring capital and other cost reductions, asset sales, and other options to improve cash flow as well as continuing with legislative efforts to explore a regulatory solution, these obligations and their impact on liquidity raise substantial doubt about FES’ ability to meet its obligations as they come due over the next twelve months and, as such, its ability to continue as a going concern.
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers". Subsequent accounting standards updates have been issued which amend and/or clarify the application of ASU 2014-09. The core principle of the new guidance is that an entity recognizes revenue 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. More detailed disclosures will also be required to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. For public business entities, the new revenue recognition guidance will be effective for annual and interim reporting periods beginning after December 15, 2017. Earlier adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. FirstEnergy will not early adopt the standards. The standards shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. FirstEnergy has evaluated its revenues and expects limited impacts to current revenue recognition practices, dependent on the resolution of industry issues. FirstEnergy continues to assess the impact on its financial statements and disclosures as well as which transition method it will select to adopt the guidance.
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 for certain provisions 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 payments. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also does not require liability accounting when an employer repurchases more of an employee’s shares for tax withholding purposes. FirstEnergy adopted ASU 2016-09 on January
11
1, 2017. Upon adoption, FirstEnergy elected to account for forfeitures as they occur. The change was applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings of approximately $6 million as of January 1, 2017. Additionally, FirstEnergy retrospectively applied the cash flow presentation requirement to present cash paid to tax authorities when shares are withheld to satisfy statutory tax withholding obligations as financing activity by reclassifying $12 million from operating activity to financing activity in the 2016 Statement of Cash Flow.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which removes all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments". The standard is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, including the presentation of debt prepayment or debt extinguishment costs, all of which will be classified as financing activities. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. FirstEnergy early adopted this ASU as of January 1, 2017. There was no impact to prior periods.
In October 2016, the FASB issued ASU 2016-16, " Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory." ASU 2016-16 eliminates the exception for all intra-entity sales of assets other than inventory, which allows companies to defer the tax effects of intra-entity asset transfers. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the intra-entity transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted and the modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.
In November 2016, the FASB issued ASU 2016-18, "Restricted Cash" that will require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. FirstEnergy does not expect this ASU to have a material effect on its financial statements.
On January 5, 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" that clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The ASU will be applied prospectively to any transactions occurring within the period of adoption. Early adoption is permitted, including for interim or annual periods in which the financial statements have not been issued or made available for issuance. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.
On March 10, 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", which amends the requirements related to the presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU 2017-07 requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented. In addition, only service costs are eligible for capitalization. The ASU will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. FirstEnergy is currently evaluating the impact on its financial statements of adopting this standard.
Additionally, during 2017, the FASB issued the following ASUs:
• | ASU 2017-03, "Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update),” |
• | ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” |
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• | ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets" and |
• | ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." |
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. As discussed above, FirstEnergy adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" beginning January 1, 2017. As of March 31, 2017 and March 31, 2016 there were no material impacts to the basic or diluted earnings per share due to the new standard.
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 | 2017 | 2016 | ||||||
Net income | $ | 205 | $ | 328 | ||||
Weighted average number of basic shares outstanding | 443 | 424 | ||||||
Assumed exercise of dilutive stock options and awards(1) | 1 | 2 | ||||||
Weighted average number of diluted shares outstanding | 444 | 426 | ||||||
Basic earnings per share of common stock | $ | 0.46 | $ | 0.78 | ||||
Diluted earnings per share of common stock | $ | 0.46 | $ | 0.77 | ||||
(1) | For both the three months ended March 31, 2017 and March 31, 2016, one million shares were excluded from the calculation of diluted shares outstanding, as their inclusion would be antidilutive. |
3. PENSION AND OTHER POSTEMPLOYMENT BENEFITS
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 | 2017 | 2016 | 2017 | 2016 | ||||||||||||
(In millions) | ||||||||||||||||
Service costs | $ | 52 | $ | 48 | $ | 1 | $ | 1 | ||||||||
Interest costs | 97 | 100 | 7 | 7 | ||||||||||||
Expected return on plan assets | (112 | ) | (97 | ) | (8 | ) | (8 | ) | ||||||||
Amortization of prior service costs (credits) | 2 | 2 | (20 | ) | (20 | ) | ||||||||||
Net periodic costs (credits) | $ | 39 | $ | 53 | $ | (20 | ) | $ | (20 | ) | ||||||
FES' share of the net periodic pension and OPEB costs (credits) were as follows:
Pension | OPEB | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In millions) | ||||||||||||||||
For the Three Months Ended March 31 | $ | 3 | $ | 6 | $ | (4 | ) | $ | (4 | ) | ||||||
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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 FirstEnergy and FES were as follows:
Net Periodic Benefit Expense (Credit) | Pension | OPEB | ||||||||||||||
For the Three Months Ended March 31 | 2017 | 2016 | 2017 | 2016 | ||||||||||||
(In millions) | ||||||||||||||||
FirstEnergy | $ | 32 | $ | 37 | $ | (15 | ) | $ | (15 | ) | ||||||
FES | 3 | 6 | (4 | ) | (4 | ) | ||||||||||
As of March 31, 2017, and December 31, 2016, FES has $866 million of affiliated non-current liabilities related to allocated pension and OPEB mark-to-market costs, of which $570 million is from FENOC.
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4. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in AOCI, net of tax, in the three months ended March 31, 2017 and 2016, 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, 2017 | $ | (28 | ) | $ | 52 | $ | 150 | $ | 174 | |||||||
Other comprehensive income before reclassifications | — | 32 | — | 32 | ||||||||||||
Amounts reclassified from AOCI | 3 | (16 | ) | (18 | ) | (31 | ) | |||||||||
Other comprehensive income (loss) | 3 | 16 | (18 | ) | 1 | |||||||||||
Income taxes (benefits) on other comprehensive income (loss) | 1 | 5 | (6 | ) | — | |||||||||||
Other comprehensive income (loss), net of tax | 2 | 11 | (12 | ) | 1 | |||||||||||
AOCI Balance as of March 31, 2017 | $ | (26 | ) | $ | 63 | $ | 138 | $ | 175 | |||||||
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 taxes (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 | |||||||
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The following amounts were reclassified from AOCI for FirstEnergy in the three months ended March 31, 2017 and 2016:
For the Three Months Ended March 31 | Affected Line Item in Consolidated Statements of Income | |||||||||
Reclassifications from AOCI(2) | 2017 | 2016 | ||||||||
(In millions) | ||||||||||
Gains & losses on cash flow hedges | ||||||||||
Commodity contracts | $ | — | $ | — | Other operating expenses | |||||
Long-term debt | 3 | 2 | Interest expense | |||||||
3 | 2 | Total before taxes | ||||||||
(1 | ) | (1 | ) | Income taxes | ||||||
$ | 2 | $ | 1 | Net of tax | ||||||
Unrealized gains on AFS securities | ||||||||||
Realized gains on sales of securities | $ | (16 | ) | $ | (13 | ) | Investment income | |||
6 | 5 | Income taxes | ||||||||
$ | (10 | ) | $ | (8 | ) | Net of tax | ||||
Defined benefit pension and OPEB plans | ||||||||||
Prior-service costs | $ | (18 | ) | $ | (18 | ) | (1) | |||
6 | 7 | Income taxes | ||||||||
$ | (12 | ) | $ | (11 | ) | 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, 2017 and 2016, 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, 2017 | $ | (9 | ) | $ | 48 | $ | 30 | $ | 69 | |||||||
Other comprehensive income before reclassifications | — | 31 | — | 31 | ||||||||||||
Amounts reclassified from AOCI | — | (15 | ) | (3 | ) | (18 | ) | |||||||||
Other comprehensive income (loss) | — | 16 | (3 | ) | 13 | |||||||||||
Income taxes (benefits) on other comprehensive income (loss) | — | 6 | (1 | ) | 5 | |||||||||||
Other comprehensive income (loss), net of tax | — | 10 | (2 | ) | 8 | |||||||||||
AOCI Balance as of March 31, 2017 | $ | (9 | ) | $ | 58 | $ | 28 | $ | 77 | |||||||
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 | |||||||
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The following amounts were reclassified from AOCI for FES in the three months ended March 31, 2017 and 2016:
For the Three Months Ended March 31 | Affected Line Item in Consolidated Statements of Income (Loss) | |||||||||
Reclassifications from AOCI(2) | 2017 | 2016 | ||||||||
(In millions) | ||||||||||
Gains & losses on cash flow hedges | ||||||||||