FirstEnergy Corp. 2010 Form 10-K Summary
Business context and reporting period
FirstEnergy filed an annual report for the fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. The company operates regulated electric transmission and distribution utilities in Ohio, Pennsylvania and New Jersey, alongside competitive generation and energy-marketing businesses. Its generation portfolio totaled 13,436 MW. The filing is dated February 16, 2011.
Financial results and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $13.339 billion | $12.973 billion | +2.8% |
| Operating income | $1.805 billion | $1.879 billion | -3.9% |
| Net income | $760 million | $990 million | -23.2% |
| Earnings available to FirstEnergy | $784 million | $1.006 billion | -22.1% |
| Basic / diluted EPS | $2.58 / $2.57 | $3.31 / $3.29 | Lower |
| Operating cash flow | $3.076 billion | $2.465 billion | +24.8% |
| Cash and cash equivalents at year-end | $1.019 billion | $874 million | +$145 million |
| Total assets | $34.805 billion | $34.304 billion | +1.5% |
| Long-term debt and other long-term obligations | $12.579 billion | $12.008 billion | +4.8% |
| Total equity | $8.513 billion | $8.557 billion | -0.5% |
Operating margin was approximately 13.5% versus 14.5% in 2009; net income margin was approximately 5.7% versus 7.6%. FirstEnergy reported a $1.586 billion working-capital deficit, primarily associated with short-term borrowings and debt classified as currently payable. As of January 31, 2011, management reported approximately $3.15 billion in total available liquidity, including $668 million of cash and $2.482 billion of available credit and receivables facilities. The $2.75 billion revolving credit facility matures in August 2012. Debt-to-capitalization was 60.6% under that facility’s covenant, against a 65% limit.
Capital expenditures were $1.813 billion in 2010; the company forecast approximately $1.42 billion for 2011, excluding nuclear fuel. Long-term debt maturities and sinking-fund requirements were $445 million in 2011. FirstEnergy paid $670 million of common dividends in 2010 and declared $2.20 per share.
Material changes versus comparable periods
- Revenue rose 2.8%, but earnings available to FirstEnergy fell 22.1% and diluted EPS declined from $3.29 to $2.57. Higher distribution deliveries and increased competitive retail sales supported revenue; utility generation sales volumes and prices, margins, and one-off items shaped earnings.
- Energy Delivery Services earnings increased to $607 million from $435 million, helped by the absence of CEI’s $216 million regulatory-asset impairment recorded in 2009. Competitive Energy Services earnings declined to $258 million from $517 million, primarily reflecting impairments and reduced proceeds associated with the sale of an OVEC participation interest.
- Operating cash flow increased to $3.076 billion from $2.465 billion, despite lower net income. The filing attributes much of the difference to non-cash charges and working-capital changes.
- Quarter-four revenue was $3.219 billion versus $2.960 billion; earnings available to FirstEnergy were $185 million versus $239 million. Fourth-quarter operating income was $448 million versus $244 million.
Outlook, management commentary, risks and unusual items
- Management forecast 2011 capital expenditures of about $1.4 billion and average baseline annual capital spending of about $1.2 billion in 2012–2013. It expected 2011 distribution deliveries and non-fuel, non-outage operating and maintenance costs to be essentially flat year over year.
- Management identified potential 2011 earnings supports from retail sales, lower fuel expense and Signal Peak; expected headwinds included higher purchased-power, congestion and capacity costs, the end of the Met-Ed/Penelec supply agreement with FES, a Davis-Besse reactor-head replacement outage, and higher depreciation and lower capitalized interest.
- The proposed Allegheny merger remained pending PPUC approval. Shareholder and several other regulatory approvals had been obtained; completion was anticipated in first-quarter 2011. The transaction would issue 0.667 FirstEnergy share per Allegheny share, with Allegheny investors expected to own about 27% of the combined company. FirstEnergy would assume Allegheny debt.
- FirstEnergy recorded $384 million of long-lived-asset impairments in 2010, including $303 million related to smaller coal-fired units shifted to limited, demand-driven operation and $72 million tied to canceled R.E. Burger biomass repowering. A separate $6 million loss followed the Sumpter plant sale. Sale of an OVEC interest contributed $53.8 million to 2010 net income.
- Environmental exposure includes proposed air, greenhouse-gas, coal-ash and water regulations, as well as Clean Air Act New Source Review litigation and investigations. Management said future compliance costs could be substantial and some effects could not yet be estimated. Probable environmental remediation liabilities accrued were approximately $104 million.
- Other significant risks include power-plant outages and replacement-power costs, fuel and market-price volatility, derivative collateral needs, pension and decommissioning funding, regulatory cost recovery, and pending FERC proceedings on the planned ATSI move from MISO to PJM. FirstEnergy cited a $252.7 million disputed marginal-transmission-loss recovery for Met-Ed and Penelec.
- Signal Peak received an MSHA notice of potential pattern of violations in November 2010. The filing reports six significant-and-substantial citations, two unwarrantable-failure citations or orders, one pending legal action and $1,188 in proposed assessments for the quarter; no mining fatalities were reported.
Important facts for investors to verify
- Reconcile the 2010 earnings decline, including the $384 million impairment charge, tax settlements, lower investment income and segment-level margin changes.
- Confirm available liquidity, short-term borrowing needs, near-term debt and PCRB tender/refinancing exposure, and progress toward management’s debt-reduction plans.
- Track completion terms and final PPUC approval for the Allegheny merger, including assumed debt, integration costs, expected synergies and any conditions imposed.
- Assess the ultimate cost and timing of environmental rules and litigation, particularly NSR matters, coal-combustion residuals, emissions controls and cooling-water requirements.
- Monitor Davis-Besse’s 2011 reactor-head replacement, license-renewal process, outage duration and any resulting operating or funding requirements.
- Review the full audited financial statements and notes for cash-flow detail, debt covenants, pension obligations, guarantees, contingencies and the scope of the filing’s consolidated entities.