01—Abstract
Summary
Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.
FirstEnergy Corp. (FE) reported 2006 net income of $1.25 billiona, or $3.84 basic EPS ($3.81 diluted), up from $861 million ($2.62) in 2005, driven mainly by higher electric sales revenues, reduced transition cost amortization for the Ohio Companies, PUCO- and PPUC-authorized cost deferrals, and lower operating expenses.
Total revenues were $11.5 billionb. Regulated Services earned $932 million, down from $1.15 billion, while Power Supply Management Services swung to $465 million from a $50 million loss, reflecting the 2005 generation asset transfers to FGCO and NGC. The filing highlights a sizable capital program of nearly $8 billion for 2007-2011 (excluding nuclear fuel), including about $1.8 billion of environmental compliance spending and roughly $1.5 billion for Sammis NSR consent decree work.
Management also raised the indicated annual dividend to $2.00c per share from $1.80 and authorized a share repurchase program of up to 16 million shares, bringing the combined potential repurchase to 26.6 million shares. Shareholder earnings are supported by stable investment-grade credit ratings, though senior unsecured ratings sit at the low end (BBB- at S&P and Baa3 at Moody's). Key risks for investors include regulatory outcomes in Pennsylvania (the PPUC's January 2007 order granted far less than requested rate relief for Met-Ed and Penelec, leading to a goodwill review and a $355 million goodwill impairment at Met-Ed in the fourth quarter of 2006), the expiration of the FES partial requirements arrangement, ongoing FERC proceedings on SECA and PJM transmission rates, the pending SEC formal investigation, and the broader electric industry shift toward competitive markets.
02—Key points
Key Highlights
- 2006 net income of $1.25 billion ($3.84 basic EPS), up from $861 million ($2.62) in 2005
- Total 2006 revenues of $11.5 billion, with electric sales revenues up on higher retail generation prices and lower Ohio transition cost amortization
- Indicated annual dividend raised to $2.00 per share from $1.80, consistent with a policy of sustainable dividend growth
- New share repurchase program authorized January 30, 2007 for up to 16 million shares (about 5% of outstanding); combined with prior program up to 26.6 million shares may be repurchased
- Capital expenditure plan of nearly $8 billion for 2007-2011, including about $1.8 billion for environmental compliance and $1.5 billion for Sammis NSR consent decree requirements
- Pennsylvania rate order (January 11, 2007) granted substantially less than requested for Met-Ed and Penelec, triggering a $355 million goodwill impairment at Met-Ed in Q4 2006
- Senior unsecured debt ratings remain investment grade but at the low end (BBB- at S&P and Baa3 at Moody's); FES partial requirements agreement restated effective January 1, 2007
03—Questions
Frequently Asked Questions
How did FirstEnergy's earnings change in 2006 and what drove it?
Net income rose to $1.25 billion ($3.84 basic EPS) from $861 million ($2.62) in 2005. The increase was driven primarily by higher electric sales revenues, reduced transition cost amortization for the Ohio Companies, cost deferrals authorized by the PUCO and PPUC, and reduced operating expenses. Earnings in Regulated Services declined to $932 million from $1.15 billion, while Power Supply Management Services improved to $465 million from a $50 million loss.
Did FirstEnergy change its dividend or buyback plans?
Yes. The Board raised the indicated annual dividend to $2.00 per share (quarterly $0.50) from $1.80. On January 30, 2007 it authorized a new repurchase program of up to 16 million shares, which together with the June 2006 program allows up to 26.6 million shares to be repurchased. The company said the program does not require any purchases and may be terminated at any time.
What are the biggest regulatory risks facing FirstEnergy?
The most immediate risk is in Pennsylvania, where the PPUC's January 2007 order denied Met-Ed's and Penelec's requested generation rate increases and limited overall rate increases to about 5% and 4.5%. If FES terminates or significantly modifies its supply arrangement before generation rate caps expire in 2010, the filing states timely regulatory relief is not likely. Other risks include pending FERC decisions on SECA charges and PJM transmission rates, the Ohio RCP and fuel recovery mechanisms, and possible Pennsylvania energy legislation proposed in February 2007.
How large are FirstEnergy's environmental and capital spending obligations?
FirstEnergy estimates about $1.8 billion of additional environmental compliance capital spending for 2007-2011. Capital expenditures for all subsidiaries excluding nuclear fuel are forecast at about $7.9 billion for 2007-2011. Separately, Sammis NSR consent decree capital costs are estimated at $1.5 billion, with $400 million expected in 2007. Future CAIR and CAMR compliance costs remain uncertain and could be substantial.
What is the status of FirstEnergy's credit ratings and liquidity?
FirstEnergy's senior unsecured debt is rated BBB- (S&P), Baa3 (Moody's) and BBB (Fitch), all investment grade. S&P's outlook is stable and Moody's outlook is positive. The company has a $2.75 billion five-year revolving credit facility maturing in 2011 and about $1.8 billion of unused borrowing capability at year-end 2006. Short-term borrowings were about $1.1 billion at year-end, largely used to fund the August 2006 share repurchase. A rating downgrade to below investment grade could increase borrowing costs and collateral requirements.
04—Continue