第一能源 (FE) 2007 Q4 法說會逐字稿

Good afternoon. My name is Jolene and I'll be your conference operator today. At this time I would like to welcome to the First Energy Corp's fourth quarter 2007 earnings conference call. All line have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS). Thank you.

It is now my pleasure to turn the floor over to your host, Director of Investor Relations, Kurt Turosky, sir, you may begin your conference.

Thank you. During this conference call we will make various forward-looking statements within the meanings 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 First Energy 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 on our website under the earnings release link.

Reconciliations to GAAP fir the non-GAAP earnings measure we'll be referring to today are also contained in that report and as well as on the investor information section of our website at www.FirstEnergyCorp.com/IR. 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, Jim Pearson, Vice President and Treasurer, and Ron Seeholzer, Vice President of Investor Relations. I'll now turn the call over to Tony.

Thanks Kurt, and good afternoon, everyone. We had a solid year in 2007, and achieved the highest earnings in FirstEnergy's 10-year history.

We reported non-GAAP normalized earnings of $4.23 per share, which was near the top end of our earnings guidance and a 9% increase over our 2006 non-GAAP earnings. We generated approximately $1.7 billion in net cash from operating activities, which included a $300 million pension contribution. And our stock price appreciation plus reinvested dividends produced a total return for shareholders of more than 23%. In December, we announced a 10% increase in the common dividend, our fifth in the last three years, for a total increase of 47% since the beginning of 2005. We further enhanced shareholder value for the repurchase of approximately 14.4 million shares of common stock, combined with the 10.6 million share purchase in August of 2006. These programs have reduced shares outstanding by nearly 8%.

Our strong financial results were driven by solid operational performance as we continued to improve the efficiency and reliability of our power plant and further enhance the quality of service to our distribution and transmission customers. Our employees achieved the best safety result in our history and one of the best in the industry with an OSHA rate of 0.86 incidents per 100 employees, which represents less than one lost-time incident per 200,000 hours worked. And our generation fleet nearly matched it's record 2006 production with an output of 81 million-megawatt hours. Our nuclear fleet set a new annual generation output record of 30.3 million-megawatt hours with especially strong performance at Beaver Valley Unit 2 and Davis-Besse contributing to this achievement.

We also continued our efforts to increase the output of our generation fleet through incremental, low cost, and low risk investments. In 2007, we added more than 200-megawatts through unit uprights and long-term contracts for wind generation. We also reduced seasonal due rates by 149 megawatts at our peaking units. And last month we acquired the partially completed Fremont generating plant in northwest Ohio. This unit includes two combined cycle combustion turbines and a steam turbine and is capable of 544-megawatts of load-following capacity and 163-megawatts of peaking capacity. It also has connections with both Miso and PJM. This asset is a valuable addition to our fleet and will further diversify our generation mix and reduce our average carbon dioxide emission rate.

In our energy delivery business, we continued to improve customer reliability in 2007, with a 14% decrease in outage duration, bringing our 2 year improvement to nearly 32%. We also achieved 7% reduction in the frequency of outages. These accomplishments were facilitated by the significant capital investment we continue to make in our wires business. In 2008, we will remain focused on the fundamentals and continue to grow the value of our business through the pursuit of operational excellence, continued financial discipline, and a commitment to continuous improvement.

Before I turn the call over to Rich, let me briefly update you on the legislative initiatives going on now in Ohio and Pennsylvania. In Ohio, as you know, substitute Senate Bill 221 passed the senate in late October of last year. Since that time, the House Public Utilities Committee has conducted hearings on the bill and is taking a very deliberate and thorough approach to this complex issue. And just last week, a new bill was introduced into the House that contains a two-part proposal focusing on renewable energy and investments in advanced energy sectors. This proposal would require Ohio utilities to make annual progress toward both renewable energy and energy efficiency benchmarks with penalties for noncompliance. The new bill does not address the other provisions of electric restructuring.

First Energy continues to be actively involved rashing the transition to competitive generation markets in 2009. And as we've stated in our filed testimony, we believe that Ohio customers should have the opportunity to participate in the competitive electricity market, provided for under Ohio's current law. In Pennsylvania, there are various initiatives under way in both the regular and special legislative sessions. These deal with funding for clean energy initiatives, energy efficiency and demand side management, rate phasing proposals and even the possibility of extending generation rate caps. We also remain actively engaged in Pennsylvania and have provided testimony regarding the proposed phase-in language aimed at achieving a transition of customers to competitive generation markets and on the need for full cost recovery for advanced metering.

Regarding the proposed rate cap legislation, let me remind you that our Met-Ed and Penelec distribution utilities do not own generation assets. Under the 1998 restructuring agreement, both Met-Ed and Penelec were required to auction their generation plant assets and to credit customers with all net divesture proceeds thus they are not in a position to continue to provide generation services under capped rates and any power requirements for their customers must come from the market purchases past 2010.

Now I'll turn the call over to Rich to discuss our fourth quarter results. Rich?

Thank you, Tony. As I review our fourth quarter results, it might be helpful to refer to our consolidated report to the financial community that we issued earlier this morning. Earnings on a GAAP basis in the fourth quarter were $0.88 per share compared to GAAP earnings of $0.85 per year in the same period last year. Excluding special items, normalized non-GAAP earnings were $0.90 per share compared to $0.84 per share in the fourth quarter of last year. And this year's normalized non-GAAP earnings exclude the loss of $0.02 per share related to the impairment of securities, held in our nuclear decommissioning trust. Kilowatt hour deliveries to our distribution system were 3% higher than in the prior year due primarily to colder weather and a modest growth in load. Heating degree days were 6% above the same period last year, but 8% below normal. Commercial and residential deliveries increased 5% and 4% respectively while industrial deliveries increased 0.3%.

The key drivers for this quarter's favorable results include a $0.26 per share increase in generation revenues resulting from higher wholesale and retail prices as well as higher sales volumes, a $0.05 per share increase in distribution delivery revenues, mainly due to the higher residential and commercial sales volumes I mentioned. A $0.06 per share reduction in post retirement benefit costs due to retiree health care design changes and lower pension expense following the $300 million contribution we made to the plan in January of 2007. A $0.05 per share decrease in financing costs attributable to reduce short-term borrowings, interest capitalized in spending and lower refinancing costs and a $0.04 per share benefit related to the reduction in common shares from the accelerated share repurchase of 14.4 million shares in March of 2007.

Factors partially offsetting these positive contributions included an $0.18 per share increase in purchase power expense due primarily to higher market prices, a $0.02 per share reduction due to higher fuel costs. A $0.05 per share reduction due to the distribution rate decrease in our Met-Ed and Penelec subsidiaries effective in January 2007. A $0.05 per share increase in energy delivery expenses resulting from higher storm-related maintenance and increased reliability spend. A $0.06 per share decrease in investment income from our corporate owned life insurance due to the fourth quarter's investment performance compared to the same period last year and a $0.02 per share increase in depreciation expense resulting from our growing asset base.

Today we reaffirm our 2008 non-GAAP earnings guidance of $4.15 to $4.35 per share. GAAP earnings are expected to be about $0.08 per share higher than that or $4.23 to $4.43 due to special items, including an anticipated gain on the planned sale of non-core assets. On page two of the consolidated report we provide our estimate of the quarterly pattern for our 2008 earnings guidance. At our annual analyst meeting on December 6th, we projected a 2008 capital budget of $1.7 billion. Since that time, our capital budget has been revised to $2 billion, primarily to reflect the purchase of the Fremont generating asset that Tony mentioned for $254 million. This revised budget doesn't include capital for construction of the Fremont unit as we've not yet completed our engineering studies regarding that.

Our capital spend is expected to peak in 2008 as expenditures for our air quality construction programs reach $650 million. Capital for this project will decrease to about $500 million in 2009 and about $156 million in 2010 with the project slated for completion in 2011. And as the heavy outliers out ways for the ACQS program weigh down, we anticipate a substantial increase our free cash flow that will further increase our ability to improve our flexibility and credit metrics. This will also give us the opportunity to consider opportunities to further grow our dividend, repurchase shares, and invest for future growth. Our forecasted 2008 net cash from operating activities has also been updated to reflect the cash recovery of incremental 2008 fuel costs for our Ohio companies. At the December 6th analyst meeting, we indicated this measure would be $2.2 billion for 2008 and following this change, our projection of net cash from operating activities is $2.3 billion during the year.

I would like to briefly update you on a few regulatory developments in Ohio and Pennsylvania. Let's start with Ohio. And our pending distribution rate cases. In our filing for our three Ohio companies made in August, we requested a total distribution rate increase of $332 million. In December, PUCO staff issued their report implementing an increase of between $161 million to $181 million. It's important to note that staff recommended that various matters in our case segregated to about $115 million be considered in separate proceedings.

During the hearings, staff submitted testimony decreasing the recommended revenue increase to $114 million to $132 million and this primarily relates to corrections in the calculation of property tax and depreciation made by the staff. Evidentiary hearings in the cases begin on January 29th and are actually concluding today. The legal briefing process will occur following the completion of hearings and we expect the PUCO to render its decision during the second or third quarter of the year. On January 9th, the PUCO approved the implementation of a new generation-related tariff rider to allow our Ohio Companies to begin current recovery of incremental fuel costs incurred during 2008. This is expected to increase our revenues by about $167 million, but won't impact earnings since we won't be deferring these costs in 2008. For the recovery of incremental fuel costs and carrying charges deferred during 2006 and 2007, which total about $220 million, the Ohio companies filed an application earlier this month to provide to recover those balances via separate generation-related tariff rider over periods ranging from five years to 25 years and that application is pending before the PUCO.

In Pennsylvania, our Penn Power utility is in the process of finalizing the procurement plan for the default service supply period that will begin in June of this year and run through May of 2011. Penn Power transitioned its customers to competitive generation service on January 1st of 2007 using a request for proposal process that covered an 18 month period of time N. In late December, the public utility commission accepted all provisions of a joint petition for settlement agreement regarding the second period except for the specific default service procurement for residential customers. In the order, the commission encouraged Penn Power to encourage adopting a portfolio approach for residential default service that incorporates the use of a variety of energy products in lieu of the previously planned load following full requirement contract approach.

On February 5th, Penn Power filed a proposed supply plan for the residential default service load that consists of a one-time RFP for a three-year fixed price contract-based component, quarterly forward purchases of on and off peak strips and day ahead spot purchases. An evidentiary hearing is scheduled for tomorrow and this matter is expected to be presented to the commission for its consideration by March 13th. Per the settlement agreement, the default service agreement for small commercial customers is proceeding forward using multiple requests for proposals, while the default service procurement for large commercial and industrial customers who utilize hourly pricing. Bids in the first RFP for small commercial customers were received on February 20th and approved by the commission on February 22nd and a second RFP will be held for small commercial customers in March.

Well in closing let me say that we're gratified that our strong operational and financial performance continued in 2007. And we look forward to an even better year in 2008. FirstEnergy is well positioned for success and we remain focused on continuing to grow value for our investors to consistent financial performances. We appreciate your time today and continued interest in First Energy and I would now like to ask the operator to open the call to questions from analysts.

Thank you. (OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster. Thank you. Our first question is coming from Paul Fremont.

Thank you. A quick technical question. In terms of the storm related maintenance that you talk about in the energy delivery sector, are you able to break out just the increase in O and M that's attributable to storms, and second of all, in Ohio, is there anything less procedurally before the House of Representatives would draft a new bill or are we completely through hearing and all of the -- and all of the gates that are necessary for them to draft the legislation?

Well let me answer the first part of your question, Paul. The amount related to storm damage is relatively minor, about $5 million.

Okay, Paul, with respect to the other -- what is going on in the House, I think the House committee continues to hold hearings, several I believe are already scheduled through early March. So no, I don't believe they've completed their work in terms of understanding the various cot steps or in terms of giving parties opportunities to discuss various issues in connection with restructuring.

Thank you.

Thank you. Our next question is coming from John Kiani.

Good afternoon.

Hi, John.

there were some recent management promotions that created new positions of president of FE's utility businesses on a stand-alone basis, is this a step that you think helps facilitate a corporate separation, if hypothetically speaking, you do not get an acceptable market-based outcome in Ohio?

John, no I -- well, obviously any step you take like that has lots of different kinds of implications but we've already corporately separated the company.

Right.

So from the standpoint of that, I don't think it facilitates it one way or the other. What this was primarily done was to allow senior officers to focus on maximizing the value of each of those individual businesses. Looking at the wires business as a separate business from the generation business. And taking out any issues with respect to that. So really, it's a leadership model that says we're going to run the wires business to maximize its value, to concentrate primarily on system reliability, and the greater emphasis on energy efficiency that we're seeing not only on the state but on a federal level. From a generation standpoint, with the purchase of Fremont and the continued emphasis on expanding our generation fleet in a cost-effective way, we thought it was important to have that organization focus solely on -- and its senior leadership focus solely on that aspect of the business. So it's really a -- an organizational change that allows the senior officers in each of those groups to focus all of their time on how they can make each of those companies better.

That's helpful. That makes a lot of sense. And then one other quick question. Can you talk a little bit about a potential power procurement mechanism for Met-Ed and Penelec after the 2011 expiration of the FES purchase contract.

Well I think we're planning on filing something probably later this year. My sense is, although I haven't seen anything yet, there are a number of ways you can go about it. But my sense is that we would use at least propose using the same types of methodologies we've used in the past, some sort of descending clock option to assure that the customers of Met-Ed and Penelec have a firm and assured supply for default service.

Okay. Great. Thanks, Tony.

Thanks, John.

Thank you. Our next question is coming from Hugh Wynne. Hugh, your line is live.

Hi. I just had a couple of questions that relate to forecasting results in 2008 and 2009. I can see, first, you mentioned in your December presentation that 2009 results would be adversely affected by the expiry of the Met-Ed and Penelec third quarter power contract and I was hoping if you could help quantify the impact of that contract going away?

4.5 million. Yes. It's about 4.5 million-megawatt hours, Hugh, at that point in time.

We're basically taking them -- this is Ron Seeholzer. From an underlying contracts that being supplied by a third party today and moving up to an FES supply contract in the future. A lot of it has to do with an opportunity cost you want to look at between the two of them. But the megawatt hours, about 4.5 million-megawatt hours. The underlying contract is in the mid 30s right now. We're supplying all in with or without gross receipt tax 4150 or 4650 in that market right now from the FES and that's a difference from the step up for both 9 and 10 until we get to the end of the market period in Pennsylvania.

So you have a 4.5 million contract and you're paying in the mid 30s and you would anticipate going from that level to did you say 4150?

Correct.

And then -- thank you. The second question had to do with the results of your procurement efforts at Penelec. Could you tell us more or less the rates that you're seeing for full requirements power for your smaller customers?

You mean Penn Power, Hugh?

Yes. I'm sorry.

Yes. Not available at this point, Hugh.

Okay. Very good. Thank you very much.

Thank you.

Thank you. Our next question is coming from Paul Patterson.

Good morning -- or good afternoon.

Hi, Paul.

Hugh just asked one of my questions but I wanted to ask you about SB 221 and, this is going on and on. How would you handicap a successful sort of a -- a successful passage of this legislation in terms of being [pencil] to you guys at this point in time, if you could.

Want to take that, Tony?

I typically do not handicap legislation because there are some very talented people in Ohio, members of our general assembly that are spending a lot of time on this issue. And we'll see how they come out with respect to it. I think an indication of the thoughtfulness came out just last week when the speaker and one of the members introduced legislation dealing with renewables and energy efficiency, which I believe was handled at a much more comprehensive way. And pretty well thought out with respect to the issues and how it would work over the next several years. I think the House is spending that same amount of time with the other issues because I truly believe that substitute Senate Bill 221 will not work in its current form. It has no long-term sustainability with respect to rates in the state of Ohio and quite frankly I appreciate the House spending the time to analyze the issue, have it debated and hopefully resolve it in a timely way.

Okay. So you guys are expecting some sort of I guess clarity with respect to that in the committee, if I understood from Paul Fremont's earlier question, early March? And then what is the thought process after that? Just that it goes to the House in general and then goes to the Senate? You think that what will come out of there that is probably acceptable to the governor and what have you?

I would certainly hope so. I mean the process basically is the House committee will complete its hearings, we'll consider amendments I assume at some point in that process, we'll then, assuming the House committee can reach a vote that passes a bill or with amendments, we'll then go to the House floor. The House accepts the legislation or amends it on the floor, then it will go to the Senate for either concurrence with the legislation as modified or as passed by the House or go into a conference committee, in which any differences would have to be resolved. Once that is done, one of those formats, then it will go to the governor.

Okay. But just --

For consideration.

But in general it feels like you're feeling generally optimistic about the whole process as it stands right now.

I feel good that the process is allowing the issues to be fully debated and aired, such that I believe this House committee will have a very complete and full understanding with respect to the issues that are involved.

Okay. Thanks a lot. Appreciate it.

Thanks, Paul.

Thank you. Our next question is coming from Paul Ridzon.

Hi, Paul.

Hi, Rich, how are you?

Okay. How are you?

Good. What does access into PJM through Fremont give you. You can kind of lever that up for any strategic advantage?

It's just another benefit. And what Paul is referring to is that the Fremont generating access can be connected either to PJM or to Miso because of its location, and it gives us more optionality around that unit going forward, just a nice advantage, it's sort of frosting on a cake for an asset that was already a fit for us. That's another good long term advantage for us.

Thank you.

Thanks, Paul.

Thank you. Our next question is coming from Daniele Seitz.

Thank you. I was just wondering if you could remind us of the upside from in command generation and given the rates that have been completed in 2007.

Sure. Let me take a shot at that. Over the 2005-2007 period, we've had total megawatt hour additions, Daniele, of about 447-megawatts so about 130 of those fossil base load uprates, about 16 peaking unit uprates, nuclear-based load uprates are about 152-megawatts and then efficiency and capacity factor improvements are just about 150, bringing us close to 450 over the 2005-2007 period. So that's generation that we can use to either meet customer load or sell in the market or whatever that we're able to put in at a very low cost. Over the next several years, 2008 to 2011, we plan to add about 251-megawatts in addition to the 447 which brings us up to almost 700-megawatts over that span time which is the size of a small generating plant built within existing assets at low cost and low risk and additions that we can take quickly to the market. So we continue to believe that this approach is the right thing for us to do. I look forward to completing these additions that we've identified over the next couple of years.

And between '07 and '08, is there a definite step up that will be visible in your numbers or is it all absorbed? A lot of it has been absorbed already in recent performance?

Well I, mean, there will be more megawatts, certainly coming on in 2008. Is it a driving factor year-over-year, there is lots of other items included in that. So, sure, I mean one of the things, maybe looking at this a little more holistically. This year we'll target generation of about 84.7 million-megawatt last year we did around 81 million-megawatt hours.

Yes.

And that's the benefit of what we're doing here. Running our plants, better, more efficiently and incrementally and adding on a low-risk basis to the existing assets.

Thank you.

Thanks, Daniele.

Thank you.

Let's take one more call, operator.

Thank you. Our final question is coming from Hugh Wynne.

Thank you. I thought I would sneak one last one in.

Sure.

The Ohio distribution rate case filing, I wonder if you could clarify two things for me. One, when do you anticipate the revenue benefit from the increase that the PUCO staff has recommended? And I guess secondly, when, if at all, would you accept the separate proceedings to generate a revenue benefit.

The revenue benefit begins in 2009, Hugh.

January 1st?

Well for two of our companies, yes, for Ohio Edison and Toledo Edison at the beginning of the year, for CEI approximately around May.

And the separate proceedings, would they have an impact on 2009 or is it hard to tell when this is coming through.

Hugh, this is Harvey Wagner. The fuel portion for 2008 already will be reflected I think Rich mentioned, in the vicinity of $170 million on an annualized basis. The fuel deferrals for 2006 and 2007, we filed an application in early February and the commission is dealing with that as we speak.

Got it. But I was under the impression that when the PUCO staff had recommended the distribution rate increase of I guess it was 114 to $132 million, they had simultaneously suggested that matters be considered in a separate proceeding and that those might increase your revenues by a further $115 million, did I get that wrong?

No, that's correct. There are some of those items in our original filing which will be considered in a separate hearing.

And will those also come into effect on the dates that you stated earlier, Richard?

Well I think there are two components to it, Hugh. This is Tony. The fuel component side of that, that application is before the commission today, right now, I should say. And we would expect them to rule on that by own senses at the -- the commission could make that effective in terms of allowing recovery sometime this year or could wait until maybe '09 and have it coincide with the other distribution increases. With respect to the remaining items that they're talking about, other proceedings, that's really a -- those are really deferrals that occur post-date certain in the case. Which would essentially mean that you continue to incur carrying charges to those balances, and then they would be addressed in a following rate case for distribution services.

Okay. All right. So a little bit difficult to pin down when all of those are going it be --

That's right. That will require an additional rate filing for distribution, sometime later than '09, probably.

Great. That's very helpful. Thank you.

Good. Thank you, Hugh. Well we certainly appreciate everybody's time and continued interest in First Energy. If there is any follow-up questions please feel free to give our investor relations folks a call and we hope everybody has a great day. Thanks.

Thank you. This does conclude today's First Energy Corp's fourth quarter 2007 earnings conference call. You may now disconnect.