FirstEnergy Corp. — Q1 2010 Form 10-Q
Business context and reporting period. The combined, unaudited filing covers the three months ended March 31, 2010, and includes FirstEnergy and seven subsidiaries. FirstEnergy operates regulated electric delivery businesses and competitive generation and energy services, serving about 4.5 million customers in Ohio, Pennsylvania and New Jersey.
Key financial results
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $3.299 billion | $3.334 billion | Down $35 million, about 1% |
| Operating income | $416 million | $346 million | Up $70 million |
| Operating margin | 12.6% | 10.4% | Improved |
| Net income | $149 million | $115 million | Up $34 million |
| Earnings available to FirstEnergy; EPS | $155 million; $0.51 | $119 million; $0.39 | Up 30% in earnings |
| Cash from operating activities | $506 million | $462 million | Up $44 million |
| Cash and cash equivalents at quarter end | $310 million | $874 million at Dec. 31, 2009 | Down $564 million |
| Dividends declared per share | $0.55 | $0.55 | Unchanged |
First-quarter cash flows included $594 million used in financing, including $295 million of net short-term debt repayment and $168 million of common dividends. Investing used $476 million, including $508 million of property additions. At March 31, FirstEnergy reported $11.847 billion of long-term debt and other long-term obligations, $1.783 billion of currently payable long-term debt and $886 million of short-term borrowings. Its debt-to-capitalization ratio under the credit-facility covenant was 61.2%, against a 65% limit. Management reported a working-capital deficit, principally reflecting short-term borrowings and debt classified as currently payable. Available liquidity was reported at $2.009 billion as of April 30, 2010.
Material changes versus the prior period
- FirstEnergy’s earnings rose despite slightly lower consolidated revenue. Management attributed the improvement primarily to lower regulatory charges and higher investment income, partly offset by derivative mark-to-market losses and higher fuel, purchased-power and regulatory-asset amortization costs.
- Energy Delivery Services swung to $114 million of earnings from an $18 million loss, principally because Q1 2009 included CEI’s $216 million regulatory-asset impairment and because purchased-power and other operating costs declined.
- Competitive Energy Services earnings fell to $76 million from $155 million. Revenue grew $162 million as direct and government-aggregation sales expanded, but purchased-power and fuel expenses rose; lower margins and a $52 million power-contract mark-to-market charge also weighed on results.
- Electric utility revenue was $2.543 billion versus $3.020 billion, while unregulated-business revenue increased to $756 million from $314 million. Customer shopping reduced utility retail-generation volumes; milder weather also reduced residential usage. Industrial deliveries showed signs of recovery.
- Segment comparisons and reported earnings were affected by prior-period regulatory charges, investment impairments, tax items and current-period merger, regulatory and asset-sale expenses.
Outlook, commentary and risks
- Management expected 2010 distribution sales of approximately 106 million MWh and generation output of 77.1 million MWh, citing economic conditions and milder first-quarter weather. The filing provides no specific EPS guidance.
- FirstEnergy expected existing liquidity sources to meet anticipated obligations, using operating cash flow, capital-market funding as conditions warrant and credit facilities. Capital requirements for the remaining three quarters of 2010 were estimated at approximately $1.1 billion.
- The proposed Allegheny Energy merger, announced in February 2010, was anticipated to close in the first half of 2011, subject to shareholder, regulatory and other approvals. FirstEnergy recorded $14.2 million of merger transaction costs in Q1. Shareholder litigation could delay or prevent completion; the filing states there is no assurance of approval or timing.
- The Ohio Companies’ proposed 2011–2014 Electric Security Plan was pending PUCO review. FirstEnergy recorded approximately $39.5 million of regulatory-asset impairments and expenses related to the filing. Pennsylvania utilities were appealing a PPUC decision concerning approximately $199.7 million of marginal transmission losses; recovery remained uncertain.
- Davis-Besse was in a refueling outage after 24 of 69 control-rod-drive-mechanism nozzles were identified for modification. Restart was expected in July 2010, subject to work, testing and NRC review; a request to delay restart was pending before the NRC.
- Environmental compliance may require substantial future spending. The filing cites uncertainty around air-emissions rules, greenhouse-gas regulation, cooling-water requirements and coal-combustion residuals. Estimated 2010–2012 capital expenditures to complete Sammis consent-decree requirements were $399 million. Accrued environmental liabilities were approximately $101 million.
- S&P downgraded FirstEnergy and subsidiaries by one notch in February 2010, while maintaining a stable outlook; Moody’s and Fitch affirmed ratings. FirstEnergy reported $428 million of maximum exposure under collateral provisions, potentially rising to $656 million in a stress case. FES had posted $270 million of collateral, with a modeled additional $168 million requirement under an adverse forward-price scenario.
- Other notable items included a $12.6 million one-time charge from healthcare legislation affecting retiree prescription-drug tax benefits, $9.2 million of charges related to asset sales and termination of gas-drilling participation rights, and $51.9 million of pretax purchased-power mark-to-market expense. FirstEnergy said an adverse 10% commodity-price change would reduce net income by approximately $4 million over the next 12 months.
Important facts for investors to verify
- Whether reported earnings improvement is sustainable after adjusting for prior-year regulatory impairments and current-quarter one-time items, and how competitive-generation margins and power-contract mark-to-market effects develop.
- Liquidity, debt maturities and refinancing exposure—particularly the $1.6 billion of variable-rate pollution-control bonds classified as currently payable and the company’s access to credit and capital markets.
- PUCO and PPUC outcomes, including the Ohio ESP and Pennsylvania transmission-cost appeal, and whether deferred regulatory costs are recoverable from customers.
- Davis-Besse restart timing, required repairs, NRC actions and any resulting replacement-power costs.
- Merger approval, litigation, integration costs and expected benefits, alongside potential environmental compliance spending and collateral needs.