01—Abstract
Summary
Summary of the 10-K filed February 25, 2009. Cited figures are marked; the original filing is the authoritative source.
FirstEnergy Corp. (FE) filed its 2008 Form 10-K on February 25, 2009, describing a holding company whose eight utility subsidiaries serve about 4.5 million customers across Ohio, Pennsylvania and New Jersey, alongside a large competitive generation business (FES) with 14,173 MW of diversified capacity, roughly 53.5%a coal.
FirstEnergy reported 2008 net income of $1.342 billionb, or $4.41 basic and $4.38 diluted EPS, up from $4.27 in 2007, on revenues of $13.6 billion. The results were supported by higher generation prices in Ohio and PJM, offset by a $1.2 billion after-tax hit to common equity from pension losses and a 23.8% pension asset return shortfall, plus $123 million of nuclear trust impairments. The filing's central investor issue is regulatory uncertainty in Ohio.
The PUCO rejected the Ohio Companies' market-rate offer, the ESP was modified and then withdrawn, and the company is operating under a Jan-Mar 2009 competitive bid procurement, with a stipulated ESP now pending hearings starting February 25, 2009. Management guided that 2009 earnings guidance would wait for regulatory clarity, and cited negative drivers including higher pension costs (about $230 millionc increase in pension and OPEB expense), lower wholesale prices, lost favorable supply contracts at Met-Ed and Penelec, and reduced loads. Liquidity was described as over $4 billion of facilities, with about $2.6 billion available as of January 31, 2009, and the company expects no required pension contributions in 2009 or 2010.
Key longer-term exposures include Met-Ed and Penelec rate caps expiring in 2010-2011, environmental capital needs (about $608 milliond for 2009-2013 and a $1.7 billion AQC program at Sammis), and CO2 and mercury regulation uncertainty. Total 2009-2013 capital expenditures are forecast at about $8.1 billion, with the company citing a reduction of more than $600 million versus 2008 spending.
02—Key points
Key Highlights
- 2008 net income of $1.342 billion; basic EPS $4.41 (up from $4.27), diluted EPS $4.38 on revenues of $13.627 billion.
- Ohio regulatory outcome is the key swing factor: the PUCO denied the MRO, modified and then the ESP was withdrawn, and a stipulated ESP (FES supply at the RFP average of 6.98 cents/kWh for April-May 2009, then a descending-clock CBP from June 2009 to May 2011) is pending a February 25, 2009 hearing. Stipulated ESP one-time charges are estimated at about $250 million, or $0.53 per share.
- Pension plan lost 23.8% in 2008 (versus a 9% assumption), reducing equity by $1.2 billion after tax and lifting 2009 pension and OPEB expense by about $230 million; no required contributions are expected in 2009 or 2010.
- Nuclear decommissioning trust impairments of $123 million in 2008 and a $50 million lower earnings contribution from trust investments; trust balances of about $1.7 billion.
- Liquidity of more than $4 billion with approximately $2.6 billion available as of January 31, 2009; $2.75 billion revolver expires August 2012; $1.2 billion of long-term debt issued since mid-October 2008.
- Generation portfolio of 14,173 MW (FES 13,973 MW), roughly 53.5% coal, 28.6% nuclear and 11.4% oil/gas peaking; 2008 record generation output of 82.4 billion kWh.
- Environmental and carbon exposure: about $608 million of environmental capex for 2009-2013, $506 million Sammis NSR consent-decree spending, and uncertainty from the July 2008 CAIR vacatur (partially reinstated) and the February 2009 CAMR dismissal.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 25, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $13.63B$12.80B | +6.4% |
| Operating Expenses | $10.87B$9.98B | +8.9% |
| Operating Income | $2.76B$2.82B | −2.1% |
| Net Income | $1.34B$1.31B | +2.5% |
| EPS (Basic) | $4.41$4.27 | +3.3% |
| EPS (Diluted) | $4.38$4.22 | +3.8% |
| Shares Outstanding (Basic) | 304.00M306.00M | −0.7% |
| Shares Outstanding (Diluted) | 307.00M310.00M | −1.0% |
05—Questions
Frequently Asked Questions
What drove FirstEnergy's 2008 earnings growth, and what offset it?
Basic EPS rose to $4.41 from $4.27, driven primarily by higher revenues from generation price increases (revenues up $1.61 per share in the EPS bridge) and reduced share count from 2007 repurchases. Offsets included fuel and purchased power costs (about $1.24 per share), a $0.37 per share hit from deferring new regulatory assets, and a $0.20 per share charge for trust securities impairments.
What is the biggest near-term regulatory risk for investors?
The Ohio Electric Security Plan. The PUCO rejected the market-rate offer and modified the ESP, which the company withdrew. A stipulated ESP is pending, and if approved it would bring about $250 million in one-time charges ($0.53 per share), while if the PUCO authorizes less revenue than assumed, goodwill impairment testing could be triggered. Management said it would not issue 2009 earnings guidance until Ohio regulatory clarity is achieved.
How exposed is FirstEnergy to its pension and nuclear trust markets?
Significantly. The pension was underfunded by about $948 million at year-end 2008 on a funded-status basis, and the company estimates that 2009 pension and OPEB expense will rise by about $230 million. Nuclear decommissioning trusts of about $1.7 billion include $627 million of equities, where a 10% decline would reduce value by about $63 million, and the company may need to make additional contributions if values keep falling.
When do Met-Ed and Penelec's generation rate caps expire, and what happens then?
The generation rate caps expire in 2010 (described as through 2010 with the transition period ending in 2011). FES currently supplies a portion of their default service at below-market fixed prices, and the Third Restated Partial Requirements Agreement limits FES's supply to about two-thirds of their needs in 2009-2010. Beginning in 2011, the companies plan to procure power competitively under a PPUC-reviewed plan filed February 20, 2009, and FES expects to redeploy the power to the wholesale market.
Are there material environmental or legal exposures that could hit cash flow?
Yes. The company expects about $608 million of environmental capex in 2009-2013, including $506 million for Sammis consent-decree work, and must decide by March 31, 2009 whether to retrofit, repower or shut the R.E. Burger units. It faces New Source Review citizen suits and EPA information requests at several plants, class actions tied to Bruce Mansfield emissions, and a 1999 Red Bank outage class action with no liability accrued. Future CO2 and mercury rules could require significant additional expenditures, but the company said it cannot yet estimate the financial impact of climate policy.
06—Continue