FIRSTENERGY CORP quarterly report, Q3 FY2010

FirstEnergy Corp. — Form 10-Q Summary

Reporting period: Third quarter and nine months ended September 30, 2010; filed October 26, 2010. This combined filing covers FirstEnergy and certain subsidiaries. FirstEnergy operates regulated electric transmission and distribution businesses serving 4.5 million customers in Ohio, Pennsylvania and New Jersey, alongside competitive generation and energy services.

Financial performance and position

Metric	Q3 2010	Q3 2009	Nine months 2010	Nine months 2009
Revenue	$3.693 billion	$3.408 billion	$10.122 billion	$10.013 billion
Operating income	$415 million	$487 million	$1.357 billion	$1.636 billion
Net income	$175 million	$230 million	$580 million	$754 million
Earnings available to FirstEnergy	$179 million	$234 million	$599 million	$768 million
Basic EPS	$0.59	$0.77	$1.97	$2.52
Cash from operations	Not stated for quarter	Not stated for quarter	$2.073 billion	$1.464 billion

• Quarterly revenue rose about 8%, but earnings available fell about 24%; nine-month revenue was nearly flat while earnings available declined about 22%. Operating income decreased in both comparisons.
• FirstEnergy reported a $292 million impairment charge related to certain coal-fired generating units, including a $285 million asset write-down and $7 million of obsolete inventory. Management cited weak demand and market prices, and uncertainty over environmental requirements.
• By segment, third-quarter Energy Delivery Services earnings rose to $224 million from $148 million. Competitive Energy Services reported a $27 million loss versus $183 million of earnings, principally reflecting the impairment and lower nuclear trust investment income. For the nine months, segment earnings were $481 million and $174 million, respectively, compared with $285 million and $614 million.
• Nine-month operating cash flow increased $609 million year over year, helped by the absence of a $500 million pension contribution made in 2009 and improved working capital. Property additions were $1.467 billion, leaving approximately $606 million of operating cash flow after property additions, versus approximately negative $111 million in 2009.
• Cash and cash equivalents were $632 million at September 30, down from $874 million at year-end 2009. Current liabilities exceeded current assets, principally due to $1.0 billion of short-term borrowings and debt classified as currently payable.
• At September 30, the balance sheet showed $1.590 billion of currently payable long-term debt, $1.0 billion of short-term borrowings and $12.104 billion of long-term debt and other long-term obligations. FirstEnergy’s revolving-credit-facility debt-to-capitalization ratio was 60.2%, against a 65% covenant ceiling.
• As of October 22, available liquidity, including cash, was reported at $2.806 billion. A $2.75 billion revolving facility had $1.650 billion available; the filing also reported $245 million of available receivables financing for Ohio and Pennsylvania companies.
• Nine-month financing cash flow was negative $870 million, versus positive $617 million in 2009; investing cash flow was negative $1.445 billion, versus negative $1.788 billion. Common dividends paid were $503 million for the nine-month period. Declared dividends were $1.10 per share for Q3 and $1.65 year to date, unchanged from 2009.

Material changes and management commentary

• Lower earnings chiefly reflect the coal-unit impairment, lower investment income from nuclear decommissioning trusts, and the prior-year benefit of a $252 million pretax gain from selling a 9% OVEC participation interest. The 2009 period also included debt-retirement costs that did not recur in 2010.
• Energy Delivery Services benefited from higher distribution deliveries and distribution revenues. Across the business, delivery volumes were supported by warmer weather and improved industrial activity; management reported third-quarter distribution deliveries up 12% year over year.
• Customer shopping substantially reduced utility generation sales in Ohio. Alternative suppliers provided 64% of Ohio Companies’ third-quarter delivered KWH, compared with 21% a year earlier; management expected this trend to continue affecting comparisons through the rest of 2010.
• FES expanded direct and government-aggregation sales. Ohio government aggregation served about 1.2 million residential and small commercial customers at September 2010, compared with about 500,000 a year earlier. Higher sales also brought increased purchased-power, customer-acquisition and related costs.
• Management said existing liquidity sources were expected to be sufficient for anticipated obligations, with operating cash, borrowing capacity and capital-market access expected to fund requirements. Remaining-quarter 2010 property additions and capital-lease cash needs were estimated at about $410 million. No specific consolidated earnings or EPS guidance is provided in the supplied filing text.

Outlook, significant events and risks

• Generation changes: Beginning in September 2011, Bay Shore and Eastlake units totaling 1,131 MW were planned to operate only in summer and winter; Ashtabula and Lake Shore units totaling 489 MW were planned for temporary idling for approximately 18 months. Before then, the affected 1,620 MW was expected to operate on short notice and in response to demand, subject to reliability review.
• Allegheny Energy merger: Shareholders of both companies approved the transaction. FirstEnergy expected completion in the first half of 2011, subject to remaining regulatory and antitrust approvals. Allegheny shareholders would receive 0.667 FirstEnergy share per share, representing about 27% ownership of the combined company, and FirstEnergy would assume Allegheny debt. Merger costs were $14 million pretax in Q3 and $35 million pretax year to date. Litigation settlements were preliminarily approved, with final approval still pending.
• Regulation and rates: Ohio’s new electric security plan was approved in August 2010, including no base distribution-rate increase through May 2014 and a capital-recovery rider subject to stated caps. Rehearing proceedings remained unresolved. Ohio energy-efficiency plan approval delays could jeopardize 2010 targets and expose utilities to forfeitures. Pennsylvania transmission-loss recovery of approximately $199.7 million remained under appeal.
• Regional transmission: ATSI’s move from MISO to PJM was expected June 1, 2011. Cost allocation for MISO transmission projects and potential MISO exit or PJM integration costs remained subject to regulatory proceedings. Pennsylvania cost recovery for certain transition expenses also depended on FERC approval.
• Environmental exposure: Required consent-decree pollution-control and repowering work was estimated at approximately $399 million for 2010–2012. Proposed air, greenhouse-gas, coal-ash and water rules could require substantial additional spending or operational changes; management could not estimate the full financial impact. Environmental remediation liabilities accrued were approximately $105 million.
• Other risks and contingencies: Outstanding guarantees and other assurances totaled approximately $3.8 billion. Credit downgrades or other triggers could require collateral; maximum exposure under specified collateral provisions was $419 million, or $511 million under stress assumptions. FES had posted $244 million of collateral for power contracts and could need additional amounts. Risks also include nuclear oversight and plant availability, regulatory cost recovery, commodity prices, weather and demand, pension funding, financing access, and litigation. Davis-Besse returned to service after nozzle repairs; the NRC’s final inspection report identified three findings of very low safety significance that were corrected.

Most important facts for investors to verify

• Whether the $292 million generation-asset impairment and announced unit operating changes lead to further write-downs, reduced generation or reliability constraints.
• Whether cash generation and available liquidity can support capital spending, debt maturities, dividends and collateral needs, particularly given the working-capital deficit and $1.590 billion of currently payable long-term debt.
• How Ohio customer shopping, weather-sensitive volumes, competitive retail growth and power procurement affect margins after the unusually large revenue shifts between utility and competitive businesses.
• Final regulatory and antitrust approvals, timing, financing and integration risks for the Allegheny Energy merger, including the remaining litigation and settlement approval.
• Outcomes of environmental and rate proceedings, especially the $199.7 million Pennsylvania transmission-loss appeal, emissions-control requirements and potential PJM/MISO cost allocation.
• Whether decommissioning trusts, pension funding, guarantees and contingent collateral requirements change materially as markets, credit ratings and operating conditions evolve.