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FirstEnergy Earnings Nosedive on Competitive Power Exit, NatGas-Fired Plant Sales

FirstEnergy Corp. this week reported a steep $6.2 billion (minus $14.49/share) net loss for 2016, reflecting asset impairment and plant exit costs related to its recent decision to leave the competitive power generation business and transition to a fully regulated company by 2018.

The company reached an agreement last month to sell four natural gas-fired power plants in Pennsylvania and its interest in a pumped storage hydro facility in Virginia for $925 million in a deal that isn't expected to close until the third quarter. Management said last year the company wants out of the competitive power generation business. It launched a strategic review to sell gas and hydroelectric units and to explore alternatives for remaining assets that make up its competitive segment.

The company operates 10 regulated electric utilities in six states and said weak power prices, insufficient capacity auction results and a low-growth forecast pushed it toward the fully regulated model. After the deal to sell the plants to New York-based power developer LS Power Group is completed, FirstEnergy would be left with ownership of 15,380 MW of mostly nuclear, coal, hydro, wind and solar facilities across six states.

For the fourth quarter, the company reported a net loss of $5.8 billion (minus $13.44/share), compared with a net loss of $226 million (minus 53 cents) in the year-ago period. The company's 2016 loss compared with net income of $578 million ($1.37/share) in 2015.

While FirstEnergy recorded pre-tax impairment charges and exit costs in 2Q2016 associated with its decision to deactivate its largest coal-fired plant in Ohio and another petroleum coke unit in the state, the steepest writedowns came in the fourth quarter. The company recognized impairment charges of about $9.2 billion during the period related to its intent to exit competitive operations by next year before the end of the plants' useful lives. Those impairment charges reduced the carrying value of the assets.

Earnings increased for both the full-year and fourth quarter in the company's regulated distribution business on rate case approvals and higher weather-related sales. The company also increased its 2017 earnings guidance range up to $2.77/share to reflect lower depreciation costs on the impaired assets.

If the company's plan to sell the gas/oil-fired Buchanan plant in Virginia goes through, it would be left with only one 545 MW gas/oil-fired power plant in Ohio, according to a list of assets on its website. The power market has been upended by low-cost shale gas supplies and increasing renewable energy sources in recent years, opening the market to more developers. The Energy Information Administration (EIA) said last month that if all the new gas-fired power plants planned for this year and next come online, gas-fired generating capacity could reach its highest level since 2005.

At the same time, tighter environmental regulations and the abundance of shale gas has led to more coal-fired power plant retirements or coal-to-gas switching. Available coal-fired capacity fell by 15%, or an estimated 47.2 GW between 2011 and 2016, the EIA said. A recent NGI special report, "Pipelines & Power: How New Infrastructure Could Uncork the Marcellus-Utica Bottleneck," explores the shift underway in power markets, particularly in the Northeast, and what it means for gas demand going forward. 

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