Why did reported EPS fall to $1.82 in 1998 when the company's underlying earnings were roughly flat?

The $1.82 figure includes a one-time $30.5 million after-tax extraordinary charge ($0.13 per share) from Pennsylvania Power discontinuing SFAS 71 accounting for its generation business. Before that charge, EPS was $1.95 versus $1.94 in 1997. Results were also hurt by spot-market power purchase costs and power marketer credit losses, which the filing quantifies at about $0.22 and $0.12 per share, respectively.

How did the 1998 revenue jump relate to the merger with Centerior?

FirstEnergy was formed by the November 1997 merger of Ohio Edison and Centerior and uses purchase accounting, so 1997 included only about seven weeks of Centerior results. 1998 includes a full year of CEI and TE, which accounts for most of the $2.9 billion revenue increase. Acquisitions of MARBEL Energy and eight facilities services companies, and the FETPM trading business, added further revenue.

What is the company's near-term financing outlook and capital allocation plan?

Management says 1999 operating, construction and debt maturity needs will be met without issuing new securities. About $712 million of long-term debt and preferred stock matures in 1999, and about $2.6 billion matures over 1999-2003. The company also plans to repurchase up to 15 million common shares over a three-year period starting in 1999, which is a notable use of cash alongside roughly $2.2 billion of planned capital spending over 1999-2003.

What regulatory and competitive risks could affect future earnings?

Ohio's regulated base rates are frozen through 2005 under the rate plans, and the filing notes that Ohio deregulation legislation could arrive in 1999 with uncertain impact. Pennsylvania customer choice phases in 66% of customers in January 1999 and the rest in January 2000, and Penn is recovering $234 million of stranded costs via a CTC through 2005. Pending federal NOx reduction rules by May 2003 could require up to about $500 million in additional capital spending, and the FERC open access tariff remains subject to refund.

What is the status of the Duquesne transaction and the transmission restructuring?

FirstEnergy signed an agreement in principle with Duquesne Light in October 1998 to exchange 1,436 MW of Duquesne's CAPCO interests for 1,328 MW of the companies' non-CAPCO plants, which would give FirstEnergy exclusive control of all CAPCO units. A definitive agreement was still being negotiated, with closing expected in 12 to 18 months. Separately, transmission assets are being moved into American Transmission Systems, Inc., expected to be finalized in 1999 as a step toward a regional transmission entity with AEP, Virginia Power and Consumers Energy.

FE 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 29, 1999. Cited figures are marked; the original filing is the authoritative source.

FirstEnergy Corp. (FE) filed its combined 10-K for fiscal 1998 on behalf of the holding company and four operating subsidiaries (Ohio Edison, Cleveland Electric Illuminating, Toledo Edison, and Pennsylvania Power).

FirstEnergy reported 1998 revenues of $5.86 billion^a, up from $2.96 billion in 1997, reflecting a full year of the former Centerior companies after the November 1997 merger. Net income was $410.9 million, or $1.82 per share after a $30.5 million extraordinary charge tied to Pennsylvania Power's exit from SFAS 71 for its generation business; income before that item was $1.95 per share. Earnings were pressured by roughly $50 million in spot-market power purchases during the June 1998 price spike and about $27 million in after-tax credit losses from power marketers that defaulted, partly offset by $173 million in merger-related cash savings.

The balance sheet shows total assets of $18.1 billion^b, with long-term debt of $6.35 billion and common equity of $4.45 billion. The company reduced total debt by about $278 million and made net redemptions of $430 million in long-term debt and preferred stock, lowering the average cost of long-term debt to 7.83% from 8.02%. Management expects 1999 cash needs to be met without new securities, and it plans to repurchase up to 15 million shares over three years beginning in 1999.

Key forward-looking items include Ohio electric deregulation legislation expected possibly in 1999, a pending Duquesne asset exchange that would give FirstEnergy full ownership of CAPCO plants, the formation of American Transmission Systems as a step toward a regional transmission entity, Pennsylvania retail choice phasing in during 1999 and 2000, and NOx emission reduction requirements with potential capital costs of about $500 million^c. Year 2000 remediation is targeted for completion by September 1999 at an estimated total project cost of $92 million.

02—Key points

Key Highlights

Revenue rose to $5.86 billion in 1998 from $2.96 billion in 1997, mainly because the former Centerior utilities were consolidated for a full year rather than seven weeks.
Net income was $410.9 million ($1.82 per share), including a $30.5 million after-tax extraordinary charge; income before that charge was $1.95 per share, up from $1.94.
Spot-market power purchases during the June 1998 supply shortage cost about $50 million ($0.22 per share), and power marketer defaults cost about $27 million after tax ($0.12 per share).
Cash savings of $173 million were captured in 1998 from merger-related initiatives, about half from staffing reductions.
Total debt was reduced by roughly $278 million. The average cost of long-term debt fell to 7.83% from 8.02%, and the company plans to repurchase up to 15 million shares over 1999-2001.
Capital spending is forecast at about $2.2 billion for 1999-2003 (excluding nuclear fuel), and debt and preferred maturities total about $2.6 billion over the same period.
Regulatory risk remains significant: Ohio deregulation legislation may come in 1999, Pennsylvania retail choice phases in during 1999-2000, and a Duquesne generation-asset exchange is pending.

03—Questions

Frequently Asked Questions

Why did reported EPS fall to $1.82 in 1998 when the company's underlying earnings were roughly flat?
The $1.82 figure includes a one-time $30.5 million after-tax extraordinary charge ($0.13 per share) from Pennsylvania Power discontinuing SFAS 71 accounting for its generation business. Before that charge, EPS was $1.95 versus $1.94 in 1997. Results were also hurt by spot-market power purchase costs and power marketer credit losses, which the filing quantifies at about $0.22 and $0.12 per share, respectively.
How did the 1998 revenue jump relate to the merger with Centerior?
FirstEnergy was formed by the November 1997 merger of Ohio Edison and Centerior and uses purchase accounting, so 1997 included only about seven weeks of Centerior results. 1998 includes a full year of CEI and TE, which accounts for most of the $2.9 billion revenue increase. Acquisitions of MARBEL Energy and eight facilities services companies, and the FETPM trading business, added further revenue.
What is the company's near-term financing outlook and capital allocation plan?
Management says 1999 operating, construction and debt maturity needs will be met without issuing new securities. About $712 million of long-term debt and preferred stock matures in 1999, and about $2.6 billion matures over 1999-2003. The company also plans to repurchase up to 15 million common shares over a three-year period starting in 1999, which is a notable use of cash alongside roughly $2.2 billion of planned capital spending over 1999-2003.
What regulatory and competitive risks could affect future earnings?
Ohio's regulated base rates are frozen through 2005 under the rate plans, and the filing notes that Ohio deregulation legislation could arrive in 1999 with uncertain impact. Pennsylvania customer choice phases in 66% of customers in January 1999 and the rest in January 2000, and Penn is recovering $234 million of stranded costs via a CTC through 2005. Pending federal NOx reduction rules by May 2003 could require up to about $500 million in additional capital spending, and the FERC open access tariff remains subject to refund.
What is the status of the Duquesne transaction and the transmission restructuring?
FirstEnergy signed an agreement in principle with Duquesne Light in October 1998 to exchange 1,436 MW of Duquesne's CAPCO interests for 1,328 MW of the companies' non-CAPCO plants, which would give FirstEnergy exclusive control of all CAPCO units. A definitive agreement was still being negotiated, with closing expected in 12 to 18 months. Separately, transmission assets are being moved into American Transmission Systems, Inc., expected to be finalized in 1999 as a step toward a regional transmission entity with AEP, Virginia Power and Consumers Energy.

04—Continue

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