01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
FirstEnergy's 2007 Form 10-K (filed February 29, 2008) shows a company in transition.
Net income rose 4% to $1.31 billiona ($4.22 diluted EPS), driven by higher electric sales revenues, partially offset by higher purchased power costs and amortization of regulatory assets. Management guides to moderating 2008 earnings growth: Ohio transition cost amortization rises about $69 million, and depreciation and property taxes increase as capital is redeployed. Earnings are then expected to improve in 2009-2010 as Ohio market-based generation pricing begins, though rate-plan roll-offs and below-market supply obligations weigh on results during that period.
The balance sheet and cash generation remain solid. Operating cash flow was $1.7 billionb (expected to rise to about $2.3 billion in 2008), and a $1.3 billion sale-leaseback of a 93.825% interest in Bruce Mansfield Unit 1 funded debt reduction and the roughly $900 million share repurchase. Capital spending for 2008-2012 is forecast at about $7.6 billion, including roughly $1.3 billion of Air Quality Control projects.
The company is rated investment grade, though S&P's outlook is negative. Key investor risks include pending Ohio and Pennsylvania rate decisions (including the PUCO distribution rate case and the Ohio fuel-deferral recovery after the Supreme Court of Ohio ruling), possible Commonwealth Court reversal on PJM transmission congestion, evolving state energy legislation, and environmental regulation (CAIR, mercury rule vacatur, climate change, NSR). The company also carries material nuclear and sale-leaseback exposures, with an estimated $1.3 billionc maximum casualty exposure at FES.
02—Key points
Key Highlights
- Net income of $1.31 billion, or $4.22 per diluted share, in 2007 versus $1.25 billion ($3.81) in 2006; the 2007 increase was driven primarily by higher electric sales revenues.
- Bruce Mansfield Unit 1 sale-leaseback closed July 2007 for approximately $1.329 billion (about $1.2 billion net after tax), used to repay short-term debt tied to the $900 million accelerated share repurchase; the $1.1 billion book gain is deferred and amortized over the roughly 33-year lease.
- Dividend raised 10% to a $2.20 annualized rate; cumulative increase of 47% since the start of 2005, with about 25 million shares (8%) repurchased under two accelerated programs.
- Capital expenditure forecast of about $7.6 billion for 2008-2012, including roughly $1.3 billion for AQC environmental projects that peak in 2008.
- 2008 earnings growth expected to moderate, with a $69 million increase in Ohio transition cost amortization and higher depreciation and property taxes, partly offset by lower financing costs and higher generation output (about 85 billion KWH).
- Pending regulatory catalysts include the PUCO distribution rate case (Staff range of $114-132 million versus a $332 million request), the $220 million deferred fuel recovery application, the Ohio generation supply plan, and the Commonwealth Court congestion appeal, which management says could be materially adverse if it does not prevail.
- Investment-grade senior unsecured ratings from S&P (BBB-) and Moody's (Baa3); S&P outlook negative, Moody's stable, with total liquidity of about $2.4 billion.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Revenue | $12.80B |
| Operating Expenses | $9.98B |
| Operating Income | $2.82B |
| Net Income | $1.31B |
| EPS (Basic) | $4.27 |
| EPS (Diluted) | $4.22 |
| Shares Outstanding (Basic) | 306.00M |
| Shares Outstanding (Diluted) | 310.00M |
05—Questions
Frequently Asked Questions
Why did FirstEnergy sell and lease back part of the Bruce Mansfield plant, and what does it cost shareholders?
FGCO sold its 93.825% interest in Bruce Mansfield Unit 1 (779 MW) for about $1.329 billion and leases it back for roughly 33 years. Proceeds repaid short-term borrowings used to fund the share repurchase and a $300 million pension contribution. The transaction is an operating lease under GAAP, and FES guarantees FGCO's lease obligations, so it adds off-balance-sheet commitments and contingent exposure.
What are the biggest near-term regulatory risks to earnings?
The most significant items are the PUCO's pending decision on Ohio distribution rates (expected in the second or third quarter of 2008), the treatment of approximately $220 million in deferred Ohio fuel costs after the Supreme Court of Ohio remand, and the Met-Ed/Penelec transmission congestion appeal in Pennsylvania. Management also cites the Ohio generation supply plan and the pending Ohio Senate Bill 221 as uncertain outcomes.
Will earnings grow in 2008?
Management expects 2008 earnings growth to moderate. Positives include more customers and 1-2% higher usage, lower outage costs, lower financing costs, a full-year benefit from fewer shares, and about 4 billion KWH more generation. Offsets include a $69 million increase in Ohio transition amortization, higher depreciation and property taxes, and rising fuel and purchased power costs.
How strong is the company's cash position and credit profile?
Operating cash flow was $1.7 billion in 2007 (after a $300 million pension contribution) and is expected to rise to about $2.3 billion in 2008. Short-term debt was about $903 million at year-end against a $2.75 billion revolving facility, with about $2.4 billion of unused capacity. Senior unsecured ratings are investment grade, though S&P's outlook is negative.
What are the main nuclear and environmental exposures?
FES faces a maximum casualty-value exposure of about $1.3 billion under its sale-leaseback arrangements, and the Davis-Besse NRC Demand for Information remains under review. Environmental capital spending is about $1.4 billion for 2008-2012, driven by the Sammis NSR consent decree and CAIR. The February 2008 D.C. Circuit vacatur of the CAMR mercury rule and pending climate-change legislation add uncertainty to future compliance costs.
06—Continue