FirstEnergy Corp. 2009 Q2 Form 10-Q Summary
Business context and period. Combined quarterly filing for FirstEnergy and several wholly owned subsidiaries, including regulated electric utilities and competitive generation businesses. The reporting period ended June 30, 2009; financial statements are unaudited and were reviewed, not audited, by the independent accountant. FirstEnergy serves about 4.5 million customers in Ohio, Pennsylvania and New Jersey and operates regulated delivery and competitive generation businesses.
Financial results and liquidity
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $3.271 billion | $3.245 billion | $6.605 billion | $6.522 billion |
| Operating income | $802 million | $582 million | $1.148 billion | $1.200 billion |
| Net income | $408 million | $263 million | $523 million | $540 million |
| EPS, basic / diluted | $1.36 / $1.36 | $0.86 / $0.85 | $1.75 / $1.75 | $1.77 / $1.75 |
| Cash from operations | Not stated for the quarter | $1.102 billion | $319 million |
- Second-quarter operating margin was approximately 24.5%, up from 17.9%; first-half operating margin was approximately 17.4%, down from 18.4%. First-half revenue increased modestly, but operating income and net income declined.
- Q2 earnings benefited materially from the sale of FirstEnergy’s 9% OVEC participation interest. The filing attributes approximately $252–$254 million pretax gain to the transaction (the text gives differing figures) and about $158 million after tax, or roughly $0.52 per share.
- First-half operating cash flow rose $783 million year over year, mainly from higher noncash charges and improved working-capital movements, despite lower net income. Investing cash use was $1.173 billion, including $1.143 billion in property additions; financing provided $426 million. Common dividends paid were $335 million.
- At June 30, cash was $900 million, versus $545 million at year-end 2008. Total current liabilities were $6.228 billion, including $2.397 billion of short-term borrowings and $1.984 billion of currently payable long-term debt. Long-term debt and other long-term obligations were $10.399 billion; together these disclosed debt categories total approximately $14.8 billion.
- Management cited a working-capital deficit, principally due to short-term borrowings and debt classified as currently payable. Liquidity available on July 30 was reported at $1.965 billion, including cash and borrowing availability. FirstEnergy’s debt-to-capitalization ratio under its revolver covenant was 60.7%, against a 65% maximum.
- FirstEnergy’s net regulatory assets were $2.819 billion at June 30, down $321 million from December 31, 2008. Credit ratings were affirmed with stable outlooks: FirstEnergy Baa3 by Moody’s and BBB- by S&P.
Material changes and management commentary
- Competitive Energy Services net income increased to $276 million in Q2 from $66 million, chiefly due to the OVEC sale gain and higher gross sales margins. Energy Delivery Services earnings fell to $133 million from $193 million, reflecting lower revenues and greater regulatory-asset amortization. Ohio Transitional Generation Services earnings were broadly steady at $21 million.
- For the first half, Energy Delivery Services earnings fell to $91 million from $372 million, while Competitive Energy Services rose to $431 million from $153 million; Ohio Transitional Generation Services rose to $45 million from $43 million. The OVEC gain was an important contributor to competitive-segment growth.
- Recessionary conditions, particularly in automotive and steel, and unusually mild weather weakened electricity demand. First-half distribution deliveries declined 8.0% overall; industrial deliveries fell 19.2%, including pronounced weakness among automotive and steel customers. Management cited cost controls, workforce changes and reduced contractor use to mitigate pressure.
- The Ohio Companies’ May 2009 supply auction set a weighted average wholesale price of 6.15 cents per kWh for generation and transmission for June 2009–May 2011. FES won 51% of the load and later acquired additional tranches, bringing its expected share to 62% effective August 1, 2009. FES also had signed 50 aggregation contracts covering approximately 600,000 customers.
- FirstEnergy announced plans to withdraw transmission facilities from MISO and realign them into PJM, targeting integration by June 1, 2011, subject to regulatory approvals.
Outlook, risks, contingencies and unusual items
- No specific consolidated EPS or revenue guidance is provided. Management expected existing liquidity sources to meet anticipated needs, using operating cash flow and capital-market funding as conditions warranted. Planned 2009–2013 capital spending was approximately $7.9 billion excluding nuclear fuel; about $1.6 billion was expected in 2009. Environmental-compliance capital spending was estimated at $808 million for 2009–2013.
- Management expected higher eastern-coal unit costs to continue through the remainder of 2009. FES estimated generation hedges at 93% of forecast output for 2009 and 76% for 2010. New aggregation contracts were expected to support higher retail revenue in the second half of 2009.
- Ohio Companies sought accelerated recovery of $298.4 million in deferred distribution costs; approval was pending. Pennsylvania’s updated Met-Ed transmission charge was expected to increase customer monthly bills about 9.4% for June 2009–May 2010; Penelec’s charge was expected to reduce bills about 1%.
- Key exposures include changing energy prices and demand, regulatory recovery and rate-plan decisions, fuel and transmission costs, credit-market access, collateral calls, and environmental rules. FirstEnergy reported $4.585 billion of maximum exposure under guarantees and other assurances; potential collateral exposure under specified downgrade or adverse-event provisions was $601 million, rising to a $700 million stress case. FES had posted $179 million in collateral and could need an additional $73 million under a specified adverse price scenario.
- Environmental and legal matters include uncertain future costs from air, greenhouse-gas, water-intake and coal-combustion-waste regulation; approximately $104 million of accrued environmental liabilities; and estimated $706 million capital spending for the Sammis consent-decree work during 2009–2012, including $414 million in 2009. The NRC identified a tentative $147.5 million present-value decommissioning-fund shortfall for Beaver Valley Unit 1; further action could include additional guarantees or contributions.
- Other notable items: CEI recorded a $216 million regulatory-asset write-off under Ohio’s amended ESP and reported a first-half net loss of $58 million, versus $125 million net income a year earlier. A health-plan amendment was expected to reduce postretirement benefit cost by $48 million for the remainder of 2009. A NERC investigation and a separate potential reliability-standard violation involving JCP&L/Penelec remained unresolved.
Important facts for investors to verify
- Reconcile the OVEC sale gain figures in the filing and assess normalized earnings excluding this one-time gain.
- Review cash-flow quality, the working-capital deficit, near-term debt and PCRB refinancing/remarketing needs, and the durability of reported liquidity.
- Track regulatory outcomes for Ohio’s $298.4 million deferred-cost recovery request and Pennsylvania transmission charges, as well as the possible effects of rate caps and generation procurement after 2010.
- Assess exposure to industrial demand weakness, weather, coal costs, wholesale power prices and FES collateral requirements; verify the assumptions behind hedge coverage.
- Monitor environmental compliance spending, Beaver Valley decommissioning funding, unresolved environmental/reliability matters, and the status of the MISO-to-PJM realignment.