FirstEnergy Corp. — 2009 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2009; filed May 7, 2009. FirstEnergy is a diversified electric utility and generation company serving approximately 4.5 million customers in Ohio, Pennsylvania and New Jersey. This combined filing also reports results for subsidiaries, including FirstEnergy Solutions (FES) and regulated utilities. Amounts below are consolidated FirstEnergy figures unless identified otherwise.
Financial performance and liquidity
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenue | $3.334 billion | $3.277 billion |
| Operating income | $346 million | $618 million |
| Net income | $115 million | $277 million |
| Earnings available to parent | $119 million | $276 million |
| Basic / diluted EPS | $0.39 / $0.39 | $0.91 / $0.90 |
| Operating cash flow | $462 million | $359 million |
| Investing cash flow | $(678) million | $(642) million |
| Financing cash flow | $70 million | $224 million |
Revenue increased 1.7%, but operating income fell 44% and net income fell 58%. Operating margin was approximately 10.4%, versus 18.9% a year earlier; net margin was approximately 3.4%, versus 8.5%. The principal earnings drag was $168 million of after-tax regulatory charges, primarily associated with implementing Ohio’s Amended Electric Security Plan (ESP). The filing’s EPS bridge also identifies lower fuel and purchased-power economics, restructuring costs and trust investment impairments, partly offset by higher revenues, regulatory-asset amortization/deferrals and a tax resolution.
Segment results: Energy Delivery Services swung to a $42 million loss from $179 million income, principally reflecting CEI’s $216 million regulatory-asset impairment and other regulatory charges. Competitive Energy Services earned $155 million, up $68 million, on improved generation margin. Ohio Transitional Generation Services earned $24 million, up $1 million.
Cash, working capital and debt: Cash and cash equivalents were $399 million at March 31, down from $545 million at year-end. Current assets were $3.004 billion and current liabilities $6.695 billion; the reported working-capital deficit was largely associated with $2.397 billion of short-term borrowings and debt classified as currently payable. Reported debt-related balances totaled approximately $14.2 billion, including current payable long-term debt ($2.144 billion), short-term borrowings ($2.397 billion) and long-term debt and other long-term obligations ($9.697 billion). These categories include obligations and classifications that may not equal debt under every analytical definition.
As of May 1, FirstEnergy reported $1.961 billion of available liquidity, including $1.263 billion of available facilities and $698 million of cash. Its $2.75 billion revolving credit facility runs to August 2012. FirstEnergy’s covenant debt-to-capitalization ratio was 60.8% at March 31, against a 65% limit; credit ratings were BBB-/Baa3 with stable outlook. First-quarter property additions were $654 million. Common dividends paid were $168 million; the declared dividend was $0.55 per share, unchanged from Q1 2008.
Material changes and notable items
- Operating expenses rose $329 million year over year, including a $153 million increase in regulatory-asset amortization, mainly from the CEI impairment; purchased power expense rose $143 million, while fuel expense declined $16 million.
- Distribution deliveries declined 6.7% overall, with industrial deliveries down 17.5%, reflecting weak economic conditions. Automotive, steel and refinery customers recorded particularly steep reductions. Ohio customer return to utility default service increased some retail generation sales.
- Operating cash flow rose $103 million despite lower earnings, mainly because of non-cash charges, including regulatory-asset amortization, and improved working-capital movements. Investing cash use increased $36 million, partly because the prior-year period included proceeds from a telecommunications asset sale.
- Met-Ed issued $300 million of 7.70% senior notes due 2019 and JCP&L issued $300 million of 7.35% senior notes due 2019; proceeds were used mainly to repay short-term borrowings and for other corporate purposes. TE issued $300 million of 7.25% secured notes due 2020 in April, after quarter-end.
- FirstEnergy recorded approximately $22 million of one-time restructuring charges, or $0.05 per share, after announcing a 335-person management and support workforce reduction. First-quarter net income also included a $13 million favorable resolution of prior-year tax matters.
Outlook, regulation and risks
- Ohio ESP: The PUCO approved the Amended ESP on March 25. It provides a competitive generation procurement process for June 2009–May 2011, freezes base distribution rates through 2011 subject to exceptions, and requires CEI to write off approximately $216 million of its Extended Regulatory Transition Charge balance. The upcoming competitive auction was scheduled to begin May 13; FES’s future affiliate sales depend partly on its auction results.
- Generation and capital spending: Management expected 2009 generation output to be below 2008 levels, partly because of three scheduled nuclear refueling outages and planned fossil-plant work. Estimated 2009–2013 capital spending was $8.1 billion excluding nuclear fuel, including approximately $1.6 billion in 2009; nuclear fuel spending was estimated separately at $1.3 billion over the period. Environmental compliance spending was estimated at $808 million for 2009–2013, including $706 million for the Sammis consent decree and related work during 2009–2012 ($414 million expected in 2009).
- Pennsylvania and New Jersey: Met-Ed and Penelec’s proposed 2009–2010 transmission riders implied an approximately 9.4% monthly bill increase for Met-Ed customers and a 1% decrease for Penelec customers; these were proposals, not final outcomes. Potential exposure also arises if FES reduces or fails to provide contracted supply to Met-Ed and Penelec while their rate caps remain in effect. Pennsylvania efficiency and smart-meter requirements and New Jersey energy-plan initiatives may entail costs, with recovery dependent on regulatory decisions.
- Subsequent transaction: On May 1, FGCO announced the sale of a 9% interest in OVEC output, equivalent to 214 MW, for $252 million. Management expected a $159 million increase to second-quarter 2009 earnings. This transaction occurred after the reporting date.
- Contingencies and market exposure: Guarantees and other assurances had maximum exposure of approximately $4.5 billion. Credit-rating or other triggers could require collateral or accelerated payments of up to $761 million, or $830 million in a stated stress case. FES had posted $205 million of power-contract collateral, with a further $77 million estimated under a specified adverse-price scenario. Sale-and-leaseback operating lease commitments, net of trust investments, had a present value of $1.7 billion.
- Environmental and legal uncertainties include evolving air, greenhouse-gas, coal-ash and cooling-water rules; air-emissions litigation involving the Bruce Mansfield plant; and a NERC investigation into a JCP&L substation outage. Accrued environmental liabilities were approximately $91 million. The NRC reported in April 2009 that FENOC had completed actions required by its Davis-Besse Confirmatory Order. The filing states that several potential regulatory and legal outcomes cannot yet be quantified.
- FirstEnergy said existing liquidity sources were expected to be sufficient for anticipated obligations, with operating cash, capital-market funding and credit facilities available to support investment and maturities. No specific earnings or EPS guidance was provided in the filing text.
Investor verification priorities
- Confirm the treatment and recovery prospects for CEI’s $216 million regulatory write-off and other Ohio ESP-related charges, and monitor the competitive auction’s pricing and FES award share.
- Reconcile the reported earnings figures: $115 million consolidated net income versus $119 million earnings available to the parent, reflecting noncontrolling interests, and assess whether the EPS bridge’s regulatory and other items recur.
- Review near-term refinancing and liquidity needs, including short-term borrowings, variable-rate pollution-control bonds, debt maturities and the covenant cushion to the 65% limit.
- Track generation availability, outage schedules, fuel and purchased-power costs, and industrial demand trends against management’s expectation for lower 2009 output.
- Verify completion, proceeds and second-quarter earnings recognition for the OVEC sale; assess environmental capital requirements and legal, collateral and pension-funding exposures.
- Note that the interim financial statements were reviewed, not audited; the independent accountant stated that the review did not constitute an audit opinion.