第一能源 (FE) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the FirstEnergy first quarter 2005 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Kurt Turosky, Director of Investor Relations. Sir, the floor is yours.

Thank you, Maria. During this conference call we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects and other aspects of the business of FirstEnergy Corp. are based on current expectations that are subject to risks and uncertainties. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the Safe Harbor statement contained in the consolidated report to the financial community which was released earlier today and is also available in our website under the earnings release link.

Participating in today's call are Tony Alexander, President and Chief Executive Officer; Rich Marsh, Senior Vice President and Chief Financial Officer; Harvey Wagner, Vice President and Controller; Tom Navin, Treasurer and Terry Howson, Vice President / Investor Relations. I'll now turn the call over to Rich Marsh.

Thanks, Kurt, and good morning everyone. Thanks for being with us today. I will begin the call by providing a brief overview of first quarter results and then I'll also update you on some of our regulatory initiatives, and following that Tony Alexander will discuss our nuclear operations and other matters.

We released our consolidated report to the financial community this morning and it might be helpful to refer to that report as we discuss our results. Please note that I'll refer to earnings on a non-GAAP basis and that the reconciliation to result on a GAAP basis is available in the consolidated report. Also, the investor information page of our website contains non-GAAP to GAAP reconciliations for both earnings and free cash flow measures.

Earnings on a GAAP basis in the first quarter of 2005 were $0.49 per share compared to $0.53 per share during the same quarter in 2004. In the first quarter, non- - normalized non-GAAP earnings were $0.47 per share excluding $.02 of unusual items. These results compared to normalized non-GAAP earnings of $0.65 per share in the first quarter of last year which excluded $0.12 per share of incremental expense associated with the Davis-Besse extended outage. And as I'll explain in a minute, the change in normalized earnings year-over-year was primarily driven by the 3 nuclear outages in the first quarter of 2005. Unusual items included a gain of $0.07 per share related to the sale of non-core assets, partially offset by $0.04 per share of expense associated with the CSMNS(ph) [audio cutout] NSR settlement and $0.01 per share of expense for the portion of the NRC fine at Davis-Besse that had not been previously accrued. These unusual items are detailed on pages 2 and 8 of the consolidated report.

Our solid financial and operational progress continued during the period. The quarterly allocation of our annual earnings guidance which we provided on last quarter's call, which was February 15th, reflected the scheduled Davis-Besse mid-cycle outage and the scheduled Perry refueling outage, as well as the impact of the 26 day Perry forced outage in January. However, a record first quarter output from our fossil fleet helped mitigate replacement power costs and enabled us to exceed our first quarter guidance. Tony will provide additional information on the performance of our generating fleet in his portion of the presentation.

Other factors contributing to our positive performance during the quarter included a $0.05 per share reduction in pension and other employee benefit costs, in part resulting from the voluntary $500 million contribution to the pension plan that we made in September of 2004; a $0.04 per share increase in other electric gross margin produced by our record first quarter output from the fossil fleet; a $0.02 per share reduction in the fossil operating expenses as the result of fewer planned outages; and a $0.02 per share benefit from decreased interest costs as a result of our continued debt reduction and refinancing activities. Offsetting factors included $0.12 per share increase in nuclear operating expenses and a $0.12 per share increase in replacement power costs [audio cutout] nuclear outages, as well as a $0.02 per share reduction in investment income from corporate owned life insurance, and a $0.02 per share reduction in the contribution to net income from non- core businesses due to our continued effort to divest these operations.

During the quarter we successfully completed the sale of 4 of our non-core businesses. And these were the Elliott-Lewis and Spectrum companies which were subsidiaries of our FirstEnergy Facilities Services Group; Power Piping, which was a subsidiary of MYR, and also our 51% ownership interest in First Communications. We also monetized our natural gas retail book and sold our interests in several venture capital related investments. And as I mentioned, the sale of these assets combined resulted in a one time after tax gain of $0.07 per share.

During the quarter, we continued our active efforts to reduce debt and lower financing costs. Net redemptions of debt and preferred securities totalled $133 million and we will reduce financing costs by $7 million during 2005. We continue to target debt reductions of $600 and $700 million during this year which should result in an adjusted debt to total capital ratio of about 54% by year-end. The majority of our remaining debt reduction activities will take place in the third and fourth quarters of this year. Our liquidity position remains very strong with nearly $2 billion of undrawn credit capacity and, in fact, right now our revolving credit lines are totally undrawn on.

During the quarter total cash generation was $156 million which included $103 million from operations and $53 million from the sale of non-core assets. Our total cash generation target for the year remains at $560 million.

We have a number of regulatory initiatives under way and I would like to provide a brief update on these. On March 2nd, the Federal Energy Regulatory Commission approved our request to defer approximately $54 million of vegetation management costs over the 2004 to 2007 period. We expect to defer about $19 million of expenditures this year and that deferral is already reflected in our earnings guidance. Looking forward, our hour rate stabilization plan allows us to take recovery of increased - - increased fuel and fuel related costs and we expect to file with the PUCO in the coming weeks to seek recovery beginning January 1st, 2006.

On March 18th we reached a settlement in regard to the Sammis new source review litigation, and that settlement was with the EPA, the Department of Justice, and the States of New York, New Jersey, and Connecticut. Under the settlement FirstEnergy will pay $8.5 million in civil penalties to the Department of Justice and contribute up to $25 million over 5 years to support various environmentally beneficial projects. During the quarter, we provided a $10 million reserve for potential cash contributions to the 3 states. The settlement is subject to a 30 day public comment period which ends this coming Friday. The agreement resolves all issues related to the parties actions against the Company's Sammis plant violations of the new source review provisions of the Clean Air Act. Under the agreement FirstEnergy will install environmental controls on all 7 units of the Sammis plant, upgrade existing scrubber systems at our Bruce Mansfield plant and achieve additional reductions at our other power plants. Projects at the Sammis plant are expected to reduce 95% of the SO2 emissions and 90% of NOx emissions from the plant's largest 2 units.

Environmental controls could be installed on nearly 5500 megawatts of the Companies 7400 megawatt whole-base generating capacity with construction beginning in 2005 and being completed no later than the end of 2012. We expect to invest about $1.1 billion in environmental expenditures as a result of the settlement with about 75% of those expenditures occurring over the 2008 to 2011 time frame. Our estimate of these investments on an annual basis was included in the letter that we issued to the investment community on March 18th. It's important to note that these expenditures will materially assist us in complying with the new Clean Air interstate rules and the Clean Air Mercury rule. As we begin the process of upgrading our environmental controls, we'll also pursue opportunities to extend the useful life of the plants and increase the generation output of our units as well.

I appreciate your attention this morning, and I now would like to turn the call over to Tony Alexander.

Thanks, Rich, and good morning everyone.

I'll start with an update on our nuclear operations. We have essentially completed the refueling outage at [ audio cut out] Beaver Valley unit No. 2 and our now in the reactor startup process. This outage began on April 4th after the unit operated for a record 537 consecutive days at a 100% availability factor. Activities during the outage included inspection of the reactor vessel head and under vessel areas with no issues identified, routine inspections and work on the steam generators, as well as various other plant modifications and improvements. From what I've seen, this has been a well executed outage.

During the quarter, Davis-Besse also completed its mid - cycle outage. The plant returned to service on February 9th, following a successful 23 day steam generator inspection. Both Davis-Besse and Beaver Valley 1 are operating well at 100% power.

The Perry plant is currently in the final stages of its refueling and maintenance outage and we expect the unit will commence restart within the next several days. The scope and duration of the outage were expanded to address additional equipment repairs to the main electrical generator, the onsite diesels and the emergency service water pumps. We also made several improvements, including digital controls for the feed water system, and upgraded materials on various pumps and valves. The new management team has used this outage to address many of the challenges that Perry has faced as well as to ensure safe and reliable operations going forward.

As to the NRC's 95-003 inspection process of Perry, the first phase of the 3 part inspection was completed in January. The second phase was completed during the refueling outage [audio cutout] and the final phase is currently underway. We expect their final report and confirmatory action letter to be issued later this spring. Even with 3 nuclear outages during this period we established a new first quarter generation output record of 18.5 million megawatt hours. This was achieved due to the continued outstanding performance of our fossil generation fleet which produced 13.2 million megawatt hours during the quarter. Our largest plant, the Bruce Mansfield plant, which has 2360 megawatts operated at 98% capacity factor during the quarter. One of the factors that facilitated this strong performance was the designation of the Beaver Valley units as PJM based as assets beginning on January 1st. This increased the amount of generation that we could deliver that PJM market for our Pennsylvania polar load, and significantly reduced the transmission constraints experienced in prior years. Dedicating the output of Beaver Valley to PJM also provides additional dispatch opportunities for our MISO(ph) based load following coal units and they successfully took advantage of those opportunities. With this outstanding fossil performance, we remain on track to establish a new annual generation output record in 2005.

In closing we affirm our annual earnings guidance of $2.70 to $2.85 per share excluding unusual items. And our cash generation target of $560 million after capital expenditures and payment of common dividends. We also remain on track to achieve our targeted 54% debt to total capital ratio by year-end. We will remain focused on the 5 key objectives we established for 2005. Those are to maximize the contribution from our generation business, improve our reliability and customer service, continue to enhance our financial strength and flexibility, achieve an investment grade credit rating from S&P, and deliver consistent financial results that meet or exceed our guidance. We've made significant progress on these objectives during the first quarter and produced financial results that exceeded our earnings guidance and the analyst consensus. We'll work hard to continue this level of performance during the remainder of the year.

I appreciate your time and thank you for joining us this morning. Now I'll now ask the operator to open the call to questions.

Thank you, the floor is now open for questions. If you do have a question, please press star then 1 on your touchtone telephone at this time. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you please pick up your handset to provide optimum sound quality. Once again ladies and gentlemen, that is star, then 1 on your touchtone telephone.

Your first question is coming from Paul Fermont from Jefferies.

Thank you, 2 questions really, 1 relating to earnings guidance, 1 relating to the current status of your regulatory filings. With respect to the earnings guidance, you had at the analyst meeting sort of in slide 12, sort of indicated increased transition cost amortization on an annual basis of $0.16. It looks like the amortization is running about flat to last year in the first quarter, and you had also indicated that benefits, general taxes and non-core businesses would be $0.10 negative, but it looks like they were actually $0.05 positive in the first quarter. So I'm wondering if we should still assume that those numbers are good or whether those numbers may have changed?

And then the second question just relates to whether you plan on filing a transmission and distribution general rate case in either Pennsylvania or in Ohio?

Let me answer your first question first, Paul. The numbers are still good. The transition cost amortization was approved in June of 2004 with our rate stabilization plan, which means that you didn't see the impact of it in the first quarter of 2005. You will see that impact going forward. So, you know, when you look at year-over-year comparisons you will see that second, third, fourth [audio cutout] quarters as we go on. So we will still get to that delta that we talked about at the analyst meeting, so those are still good numbers for us.

As far as your second question in terms of the rate filings, I think you're aware we did file in Pennsylvania on the transmission side for deferral of cost. That's the only case that we have filed at this point in PA.

So at this point you have no plans to file general rate case proceedings in either Ohio or Pennsylvania?

When you say general, in Ohio remember we're still under the rate freeze for our distribution Companies.

Yeah, for the Ohio side of the equation we filed 2 cases, 1 was a deferral request for the increased transmission-related costs in 2005, and - - but we have also filed a companion filing that requests recovery of those increased transmission costs in 2006. On the Pennsylvania side, we have just filed a deferral request and that's been it.

Right. But in Ohio we're still - - for D we're still under frozen rates.

That's correct.

Thank you.

Thanks Paul.

Thank you. Your next question is coming from Steve Fleishman with Merrill Lynch.

Hi, guys.

Hi, Steve. How are you?

Okay. The benefit of $0.05 from pension and lower benefits cost in the quarter. My recollection on that benefit from putting the $500 million in was that it was supposed to be about $0.06 on a full year basis.

Right.

So I guess I'm curious for the full year, you know, any view of an update on how much you - - that - - that - -these cost items might be down?

I mean there's a coup - - there's really 3 parts to it. There's pension, Steve, there's other post employment benefits and then there is health care costs. The pension OPEB(ph) cost, as you know, I mean, you set that expense base (inaudible) and accrue it through the the year. That reflects the $500 million contribution as well as market conditions that existed at the [audio cutout] during 2004 and at the end of the year, and we set that expense for 2005. The health care piece, which was a little bit of a benefit this year, will vary during the year based on claims received and so forth so that becomes a little more variable. Pension and OPEB(ph) will continue, the health care will fluctuate a little bit.

Any sense of a pension OPEB, what the full year savings will be?

You know I think we said for 2005 pension and OPEB would be about something like $59 or $60 million less than in 2004.

Okay. And then on the industrial sales or commercial-industrial which were very strong, are you seeing signs that that can continue? Is it peaking out?

I think there was a bit of an anomaly in the numbers, if you will Steven, that when you look at first quarter '05 versus first quarter '04, 2004 sales and revenues were really reflected from historical meter but on billed adjustment that reduced '04 sales levels.

Okay.

So when you look at '05 over '04, '04 looks abnormally low because of that and that's part of what you're seeing.

Okay. Understood. And - - okay, and no update on the deferral filings in Ohio or Pennsylvania, nothing has happened?

Nothing has happened to this point, nope.

Okay. Thank you.

Thank you, Steve.

Thank you, your next question is coming from Paul Rightsen(ph) with Key/ McDonald.

Good morning, Rich and Tony. How are you?

Well. How are you.

Can you remind us what you're going to be filing for in Ohio to take effect 1/1/06, the magnitude of that?

Are you talking about the fuel increase?

Yes.

You know, we haven't filed it yet so we don't know what the final numbers are. Certainly when we do make that filing all of the details will be provided in that. I mean, to give you the baseline, Paul. You know, it will be measured against the 2002 baseline costs, that's how it was provided for in the rate stabilization plan, and that base line cost was about $10.82 per megawatt hour, and that includes our cost of coal, natural gas, emission allowances, line, nuclear fuel disposal and so forth. So it's a pretty encompassing definition. And in 2002 that was based on generation of about 72 million megawatt hours. So that's the baseline we're comparing against. Don't know what the final numbers that we'll be filing will be, but certainly when it is filed all of that detail will be provided in that.

Is this reduction in coal heat a trend or just an anomaly?

It's base on market results. And what it is, Paul, is this is variable life insurance that we have to recover the costs of some executive non-qualified benefit programs. So a portion of it is invested in equities, if you will. So it reflects, you know, current equity market conditions. So, you go up or down based on what the market does.

Other utilities with Coley (ph) have had IRS challenges. I assume you have not had anything like that because I haven't seen any disclosure to that effect.

That's correct the companies that were challenged are on very broad based Coley where we've always based our Coley only on highly compensated individuals, so we've never had those issues.

Given - - given the unexpected length of Perry, as you kind of do some ancillary work, are you able to offset those costs or do we need to start thinking one end or the other of the guidance range?

Well, as Tony said, we're affirming our original guidance. So, you're right, I mean, Perry, both the forced outage in January and the current refueling outage going longer than we expected, that creates a little bit of a hole. But we have got to make up as we go forward, but we feel that, you know, we'll be able to do that and certainly be within that earnings guidance range.

Okay. Thank you very much.

Thank you, Paul.

Thank you. Your next question is coming from Paul Patterson with Glenrock Associates.

Good morning, guys.

Hey, Paul.

Just to follow up on the Coley and the pension, it looks like the pension sort of benefited from favorable market returns and the Coley didn't, so the opposite happened. Is that a timing? - - What happened there, I guess? I'm just a little confused.

Paul this is Harvey Wagner. You might recall the pension valuation is based on year-end.

Right.

Plan assets and it was the performance during the quarter in the market that affected the Coley.

Okay. So that's the difference.

Right.

Okay and then, just if you could clarify again, I mean, the deferral filings, you haven't filed anything yet? Is that correct? In Pennsylvania and Ohio?

Are you talking transmission?

Yeah, transmission the RTO stuff.

We have filed in both Ohio and Pennsylvania.

Okay. And how much did you file for?

This is Kurt. The Ohio deferral filing was for increased 2005 MISO-related costs in the neighborhood of $25 to $35 million, whereas on the Pennsylvania side of the house it was due to higher, you know, PJM transmission and ancillary service type costs which were in deferral requests, I believe was in the $80 to $100 million range.

$80 to $100 million range? And right now you're incurring these expenses?

Yes.

Okay so this would be added to earnings?

Yes.

And it's not in guidance, is that correct?

That is correct, Paul.

Not in guidance.

So it's somewhere in the neighborhood of $100 million to $130 million - - I mean, if - - $100 to $130 million that you guys have filed for? For deferrals?

That's what we filed for. Doesn't mean we'll get all of it, but that's what we filed for.

Right. Sure. And what is the schedule?

There really is no schedule, Paul. I mean, they've both been filed and nothing substantive has happened on - - in either state yet but there really is no schedule.

Okay. But do you have any idea - - or I mean I understand there may not be an actual schedule ordering - -you know, ordering - - schedule out there yet, but is there - you know, when would you expect to see some sort of response from the regulators on this?

It's really hard to say, I mean, it's - - the pace of it is up to them. We really don't know how quickly they may choose to move it or not.

But you would expect something this year though right, one way or the other? Or is that a wrong time frame?

We would hope, but as I say, it's not directly within our control but we would hope so.

Okay. And uhm - - okay, and it's not in guidance? Right.

Not in guidance.

Okay, great. Thanks a lot.

Thank you. And another reminder, to ask a question you may press star 1 on your touchtone telephone at this time. Your next question is coming from Ben Sung (ph) with Luminous Management.

Hi, just to get back to the fuel price adjustment that you might be filing here soon. Does that include the outage at Perry or will the filing be made pro forma for the outage at Perry?

It's really - - I mean - - it would become effective 1/1/2006. So we're essentially forecasting what 2006 fuel costs will be in this filing. It's to come effective at the beginning of the year.

It's on a forward looking basis not on a backward looking basis?

You compare it against the base year of 2002 but basically it's our forecast fuel cost.

They are for costs that we will be incurring in 2006.

Okay, great, thank you.

Thank you, your next question is coming from Danielle Sites (ph) with Maxcor.

Could you- -did you have a sort of estimate on the free cash flow you're anticipating in '06? And I recall you mentioned that you may be looking for generating capacities to buy. Have you changed those plans?

You know we haven't given specific earnings or cash flow guidance for 2006. We have said, you know, we expect our free - - our cash flow from operations to remain at 2 plus billion dollar level going forward. We've talked about, you know, what our capital will likely be and our dividends will likely be, so that should give you a good, you know, indicative view of what free cash flow would be. I'm sorry, Danile, I didn't catch the second part of your question.

With free cash flow now that you have a capitalization structure that - close to normal and, are you looking for investments? And I recall in previous conference calls you may have mentioned that you may buy some capacity in the mid-Atlantic area.

Okay, thank you. I mean, you are correct this year we will be wrapping up really our debt redemption, debt pay down program. As you know over the past several years virtually all of our free cash flow has gone to reduce debt. So, when we're done with that program this year, we will have free cash going forward. And we've said, you know, we'll look at a number of options, including, you know, certainly share repurchase at some point down the road to share of that cash with our owners. And we would also keep our eye out for incremental generation, if we were to find something in the right place of the right type, that makes sense. We haven't seen that at this point and time we don't have any immediate plans, but we will keep our eyes open.

Okay. Just one quick additional questions. What was the impact of Perry loan in the outside of the ordinary outage?

The impact in the first quarter on Perry?

Yeah, unscheduled part.

Yes. Probably the unscheduled portion. We estimate replacement power costs for Perry typically at about $30 million a month. You know, about $1 million a day. S if you include the forced outage in January which was unplanned, plus, you know, a few extra days with respect to the first quarter on the refueling. If you're somewhere in that, getting near $30 million a range. Upper 20s to $30 million. Great, thanks a lot.

Thank you.

Thank you. Your next question is coming from Dan Jenkins with the State of Wisconsin.

Hi.

Hi, Dan.

First, I was looking at pages 4 and 5, and there was quite a change in the power supply management services, there is quite a bit. And the operating income was significantly lower, or the loss was lower than- -and I was wondering if you could give me some detail on what was driving that?

The power supply management issue that is about $35 million reduction in net income, Dan, and that was really a reflection of the nuclear outages.

Okay. And then you know you mentioned you sold a number of the non-core assets in the quarter. And I was kind of curious, how much left of that do you have to do and where you kind of stand on that?

The biggest - - the biggest asset in that category right now is NYR which we acquired in our merger with GPU. That's basically an infrastructure construction company, I guess, if you will. We,, you know, have sold various pieces of it. This past quarter we sold Power Piping, which was a segment of it and we've worked to reorganize and improve their results. But that's the largest asset in that category that we still have left.

What - - what's the book value of that?

Book value of that. Harvey, do you remember off hand?

I don't recall but we can get back to you on that, Dan.

Let's us get back to you.

Okay, and then, you know, you mentioned most of the remaining debt reduction will be in the third and fourth quarters.

Yeah, it's sort of a back end loaded schedule.

What is the amount you're targeting for that?

In the third and fourth quarters?

Right.

Debt reduction in the third quarter and fourth quarter, Tom.

Yeah. Primarily the debt reduction that's maturing or occuring due to maturity schedule is going to occur in the fourth quarter, Dan. And that's really made up of 2 large components, $300 million is a FirstEnergy Corp. debenture that matures on December 1st, and then the other big piece in the fourth quarter is for Ohio Edison which is about $130 million. And then there is a few other minor other operating Company redemptions but they're all below $20 million each.

Okay. That's all I had, thanks.

Thanks, Dan. Let's do 1 more question.

Thank you. Our final question is coming from Greg Gordon with Smith Barney.

Hi, Greg.

Thanks. I hopped on the call late so I apologize if this is being repeated. But when I look at your gross margin which is just electric sales, as a percentage of fuel and purchase power costs, it actually looks like, even net of replacement power costs, that you posted about a 63% gross margin in the quarter, which is pretty strong relative to where you were last year . I know with Davis-Besse was still down, you were at 57%. That was dulled by purchase power cost and that was also dulled by at higher operating expenses because of the nuclear outages.

Right.

But, you know, is that type of gross margin something you think, on a normal course of business, you guys are now able to sustain?

That really reflects a couple of things, as you said. I mean, we - - obviously we had nuclear outages and the replacement power and so forth during the quarter. Factoring that out, kind of normalizing those out, Greg, I mean, there was about a $0.04 per share, about a $24 million improvement in the electric gross margin first quarter '05 versus first quarter '04. Probably 2/3 of that was because of a fossil generation output. And we do expect those higher -- higher levels of output to continue during the year even though, obviously, our generation in the first quarter was a little bit behind budget. We're still on track to hit a record generation output this year, so you will see that improvement continue, and also there was the other 1/3, if you will, was from higher deliveries. So certainly the improved performance of the generation fleet is something we've been very focus on, it's very meaningful impact on gross margin we certainly do continue or plan to continue to see that through the year.

So basically, inferentially, 1 of the reasons why you're comfortable reiterating guidance is because of that success you've seen so far in your fossil program year-to-date?

It's been an important component of our success, yes, and will remain so.

Thank you.

Thank you. Greg. Well I appreciate everybody's time today. I know this is a busy morning, lots of earnings call and we appreciate you spending some time on us. We're pleased with our results this quarter and look forward to continuing to work hard to deliver those results for the remainder of the year. So we appreciate your time, and everybody have a good day, thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.