FIRSTENERGY CORP annual report, FY2011

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FirstEnergy Corp. 2011 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2011. FirstEnergy is an electric utility holding company with regulated distribution and transmission operations and competitive generation and energy-supply businesses across six states. The results include Allegheny Energy from its February 25, 2011 merger, providing approximately ten months of acquired operations.

Financial performance and liquidity

  • Revenue was $16.258 billion, up 21.9% from $13.339 billion in 2010, largely reflecting the Allegheny merger. Operating income was $1.698 billion, down from $1.743 billion; operating margin declined to approximately 10.4% from 13.1%.
  • Net income was $869 million and earnings available to FirstEnergy were $885 million, compared with $718 million and $742 million, respectively, in 2010. Diluted EPS fell to $2.21 from $2.42, reflecting the higher weighted-average share count following the merger. The 2011 results included a $569 million pre-tax gain on the partial sale of Signal Peak.
  • Cash from operations was $3.063 billion, essentially level with $3.076 billion in 2010. Property additions were $2.278 billion. Cash and cash equivalents ended the year at $202 million, down from $1.019 billion.
  • At year-end, long-term debt and other long-term obligations were $15.716 billion and currently payable long-term debt was $1.621 billion; short-term borrowings were zero. Total equity was $13.299 billion. Available liquidity at January 31, 2012 was $4.392 billion, including $4.343 billion of available credit and $49 million cash.
  • Common dividends declared were $2.20 per share, unchanged from 2010. FirstEnergy reported $47.326 billion in total assets.

Material changes versus 2010

  • Allegheny’s acquisition substantially expanded reported revenue, assets, debt, generation and customer base. FirstEnergy issued approximately 113 million shares in the merger.
  • FirstEnergy reported $570 million of Regulated Distribution earnings, $377 million from Competitive Energy Services and $112 million from Regulated Independent Transmission. Competitive Energy Services benefited from the Signal Peak gain, while earnings per share declined as the share count increased.
  • FirstEnergy recognized $413 million of long-lived-asset impairment charges. A $334 million pre-tax charge, or $207 million after tax, related to planned coal-plant retirements. Pension and OPEB mark-to-market expense rose to $507 million from $190 million following a change to immediate recognition of actuarial gains and losses; prior periods were retrospectively restated.
  • ATSI moved from MISO to PJM on June 1, 2011, and the TrAIL transmission line was completed. FirstEnergy also sold Fremont Energy Center for $510 million and sold the Richland and Stryker peaking facilities for approximately $80 million.

Outlook, commentary, risks and contingencies

  • Management forecast approximately $2.1 billion of 2012 capital spending, excluding nuclear fuel, and approximately $2.0 billion of baseline spending in 2013. Nuclear-fuel investment was forecast at $280 million in 2012 and $219 million in 2013. No explicit numeric 2012 EPS guidance is provided in the filing text presented.
  • Management identified a full-year Allegheny contribution, retail growth, lower fuel and operating costs from retirements and lower interest expense as potential 2012 earnings positives. Depressed power and capacity prices, higher Pennsylvania gross-receipts taxes and increased depreciation were cited as negatives.
  • FirstEnergy announced plans to retire nine coal-fired plants totaling 3,349 MW by September 1, 2012, subject to PJM reliability review. Management estimated $1.3–$1.7 billion to bring remaining units into environmental compliance. PJM’s preliminary review identified significant reliability concerns requiring resolution, so closures and timing remain uncertain.
  • Key environmental exposures include MATS and other emissions requirements, proposed water-intake and coal-combustion-residual rules, and water-quality disputes that could require significant investment. The filing does not provide a clear estimate for many related contingencies.
  • Other items to monitor include the $254 million Met-Ed/Penelec marginal transmission-loss recovery dispute; FTR underfunding losses of about $35 million for the 2010–2011 delivery year and an estimated $6 million to date for 2011–2012; and environmental remediation liabilities accrued at approximately $106 million.
  • FirstEnergy reported a $2.6 billion underfunded status for pension and OPEB plans at year-end and made a $600 million voluntary pension contribution on January 5, 2012. The filing also cites Davis-Besse shield-building cracks; experts found no impact on structural integrity or safety, but NRC review continued. Perry was subject to enhanced NRC oversight.
  • Management cited a $48 million settlement of spent-fuel claims against the DOE and a $104 million trial judgment for AE Supply and MP in a coal-supply dispute, which the defendant appealed. Outstanding guarantees and other assurances totaled approximately $3.7 billion; additional credit-contingent obligations were $636 million.

Most important facts for investors to verify

  • Separate merger-driven revenue and earnings growth from underlying performance; review the Signal Peak gain, plant impairments and pension-accounting change.
  • Track PJM’s reliability determination and the actual timing, capacity and costs of the planned 3,349 MW retirements.
  • Assess the affordability and recovery of environmental compliance spending, particularly the $1.3–$1.7 billion estimate and unresolved water-related requirements.
  • Follow material regulatory and legal outcomes, including the $254 million transmission-loss dispute, FTR underfunding complaint and coal-supply appeal.
  • Monitor pension funding after the $600 million contribution, available liquidity, debt maturities and any collateral requirements triggered by credit or commodity-market changes.