FirstEnergy Corp. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual filing, not a standalone quarterly report; it also provides unaudited fourth-quarter data. The combined filing covers FirstEnergy and named subsidiaries. FirstEnergy operates regulated electric utilities in Ohio, Pennsylvania and New Jersey and competitive generation and energy businesses.
Financial performance and condition
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Revenue | $12.967 billion | $13.627 billion |
| Operating income | $1.879 billion | $2.759 billion |
| Net income | $990 million | $1.339 billion |
| Earnings available to FirstEnergy | $1.006 billion; $3.31 basic and $3.29 diluted EPS | $1.342 billion; $4.41 basic and $4.38 diluted EPS |
| Cash from operations | $2.465 billion | $2.224 billion |
- At December 31, 2009, total assets were $34.304 billion, total equity $8.557 billion, and long-term debt and other long-term obligations $11.908 billion. Current liabilities included $1.834 billion of currently payable long-term debt and $1.181 billion of short-term borrowings.
- Cash and cash equivalents were $874 million, up from $545 million a year earlier. As of January 31, 2010, reported available liquidity was approximately $2.459 billion, including cash; total committed facilities and receivables financing were about $3.365 billion.
- Capital expenditures were $1.770 billion in 2009. Cash used for investing was $2.185 billion; financing provided $49 million. FirstEnergy issued approximately $4.632 billion of debt and redeemed or repaid approximately $2.610 billion during the year.
- Annual dividends declared were $2.20 per share. FirstEnergy received $972 million in subsidiary dividends and paid $670 million to common shareholders.
Material changes versus the prior year
- Revenue fell about 4.8%, operating income about 31.9%, and earnings available to FirstEnergy about 25.0% from 2008. Management cited recession-related industrial weakness, mild weather, lower sales volumes and lower wholesale prices. Distribution deliveries declined 7.3%; generation output fell to 65.9 million MWh from 82.4 million MWh.
- Energy Delivery Services earnings fell to $435 million from $916 million, while Competitive Energy Services earnings rose to $517 million from $472 million. The latter benefited from a $159 million after-tax gain on the sale of a 9% OVEC participation interest and improved sales margins, partly offset by a $129 million after-tax mark-to-market charge on modified purchased-power contracts.
- Other significant 2009 items included a $216 million CEI regulatory-asset impairment, approximately $200 million of favorable tax settlements, $90 million of debt-redemption costs, and $66 million of workforce-reorganization charges before tax. The filing’s EPS bridge also identifies regulatory charges, derivative mark-to-market effects and debt-redemption premiums.
- Long-term debt and other long-term obligations rose to $11.908 billion from $9.100 billion. Management said 2009 operating cash flow increased despite lower net income, in part because of higher non-cash charges; it also made a $500 million voluntary pension contribution.
Fourth-quarter detail (unaudited)
For the quarter ended December 31, 2009, FirstEnergy reported revenue of $2.954 billion, operating income of $244 million, income before taxes of $52 million, an income-tax benefit of $185 million, and earnings available of $239 million. In Q4 2008, the corresponding figures were $3.201 billion, $713 million, $520 million, $192 million of income-tax expense, and $332 million. The large Q4 2009 tax benefit is a notable unusual item.
Outlook, risks and contingencies
- Management outlook: FirstEnergy forecast 2010 capital spending of approximately $1.651 billion, excluding nuclear fuel, and planned to reduce debt by at least $500 million. It expected 2010 distribution deliveries of 110 million MWh versus 102 million in 2009. No consolidated EPS guidance is stated in the supplied filing text.
- Management identified potential 2010 earnings support from retail strategy execution, a full year of Ohio distribution rate increases and cost savings, and fewer nuclear refueling outages. Potential offsets included higher benefit, financing, tax and depreciation costs and fewer gains on nuclear trust investments. Management expected capital spending of $1.0–$1.2 billion annually in 2011–2012.
- Credit and liquidity: On February 11, 2010, S&P lowered FirstEnergy’s senior unsecured rating to BB+; Moody’s and Fitch affirmed their ratings. The downgrade could require up to $48 million of collateral. Disclosed collateral exposure under specified provisions was $648 million, rising to $807 million in a stress case. Management considered liquidity sufficient, but funding depends in part on operating cash flow, capital markets and credit facilities.
- Proposed Allegheny merger: Announced February 10, 2010, after year-end. The stock-for-stock transaction would exchange 0.667 FirstEnergy shares for each Allegheny share; FirstEnergy would assume about $3.8 billion of Allegheny net debt. Shareholder, antitrust, FERC and state approvals were required; management anticipated approvals in 12–14 months. Failure, conditions or integration challenges could affect results.
- Environmental and legal matters: The filing cites uncertain future costs from greenhouse-gas, air-quality, coal-ash and cooling-water rules, as well as EPA New Source Review inquiries and other claims. Accrued environmental liabilities were approximately $101 million. Sammis consent-decree and related environmental work included substantial planned capital spending; the filing estimated $399 million for 2010–2012 for specified consent-decree work.
- Other exposures: The pension and OPEB plans were underfunded by about $1.3 billion in aggregate; additional pension contributions were anticipated beginning in 2012. Guarantees and other assurances totaled approximately $4.2 billion. Net present value of sale-and-leaseback operating lease commitments was $1.7 billion. Regulatory outcomes—including Pennsylvania transmission-cost recovery and Ohio generation procurement—remain important uncertainties.
Most important facts for investors to verify
- Whether 2010 sales, margins and cost reductions met management’s outlook, and how much 2009 earnings depended on asset-sale and tax-related items.
- The final accounting and cash consequences of the $205 million purchased-power mark-to-market charge and whether the related contracts create further exposure.
- Progress on the Allegheny merger, required approvals, any conditions, financing implications and realized synergies.
- Liquidity after the S&P downgrade, collateral calls, debt reduction and refinancing needs, including near-term variable-rate PCRB and receivables-facility maturities.
- Regulatory and environmental decisions affecting cost recovery, transmission charges, generation procurement and required capital investment.