FirstEnergy CEO Discusses Q3 2010 Results - Earnings Call Transcript

FirstEnergy CEO Discusses Q3 2010 Results - Earnings Call Transcript
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FirstEnergy Corp. (

FE

)

Q3 2010 Earnings Call Transcript

October 26, 2010 1:00 pm ET

Executives

Irene Prezelj – Director, IR

Mark Clark – EVP and CFO

Tony Alexander – President and CEO

Jim Pearson – VP and Treasurer

Bill Byrd – VP, Corporate Risk and Chief Risk Officer

Harvey Wagner – VP and Controller

Analysts

Daniel Eggers – Credit Suisse

Jonathan Arnold – Deutsche Bank

Paul Patterson – Glenrock Associates

Azhar Khan [ph] – Vision Management [ph]

Greg Gordon – Morgan Stanley

David Frank – Catapult

Carrie St. Louis – Fidelity

Hugh Wynne – Sanford Bernstein

John [ph] – Duquesne Capital

Steve Fleishman – Bank of America

Paul Fremont – Jefferies & Company

Presentation

Operator

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Greetings, and welcome to the FirstEnergy Corp. third quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Irene Prezelj, Director of Investor Relations for FirstEnergy Corp. Thank you. Ms. Prezelj, you may begin.

Irene Prezelj

Thank you, Jackie, and good afternoon. 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 on our Web site under the Earnings Release link.

Reconciliations to GAAP for the non-GAAP earnings measures we will be referring to today are also contained in that report, as well as on the Investor Information section on our Web site at www.firstenergy.com/ir.

Participating in today’s call are Tony Alexander, President and Chief Executive Officer; Mark Clark, Executive Vice President and Chief Financial Officer, Harvey Wagner, Vice President and Controller; James Pearson, Vice President and Treasurer; Will Byrd, Vice President of Corporate Risk; and Ron Seeholzer, Vice President of Investor Relations.

I’d now turn the call over to Mark.

Mark Clark

Thanks Irene and good afternoon everyone. This morning we reported strong third quarter results that on a non-GAAP basis represented an increase over the third quarter of 2009. Like many of our peers in the region, unusually warm weather and the corresponding higher distribution deliveries had a positive impact on third quarter results.

However, as we review the numbers, the biggest driver of our strong quarter was the success of our retail strategy, as we continued to move competitive customers away from POLR and into direct sales and government aggregation channels. We are not just selling more megawatt hours but reducing shopping risk, as well as enhancing our flexibility to structure favorable contracts and our opportunity to maximize our margins.

As I walk through our results, it may be helpful for you to refer to the consolidated report to the financial community we issued this morning. Later, Tony will update you on the merger, the status of the recent POLR auction in Ohio, and outline information on some of the factors that we expect to impact earnings in 2011.

Excluding special items, normalized non-GAAP earnings for the quarter were $1.28 per share compared to $1.11 per share in the third quarter of 2009. On a GAAP basis, this quarter’s earnings were $0.59 per share compared to $0.77 per share last year.

As detailed on page 16 of the consolidated report, four special items decreased this quarter’s GAAP earnings by a total of $0.69 per share. By comparison, special items reduced GAAP earnings by $0.34 per share in the third quarter of 2009.

The first of the 2010 special items was $0.60 per share impairment as a result of the operational changes we recently announced regarding several of our smaller coal-fired plants. These changes will provide us with operational flexibility and cost savings that we expect to bring long-term benefits. The second special item was $0.04 per share charge related to merger transaction cost.

As in prior quarter, these costs will continue to be expensed as incurred. Third was $0.03 per share charge related to power contract mark-to-market adjustments of certain wholesale power contracts. Finally, $0.02 per share related to charges resulting from our new stipulated electric security plan in Ohio.

I’d like to quickly outline the key drivers of our third quarter non-GAAP results, starting with the positives. First, a 12% increase in overall distribution deliveries benefited earnings by $0.17 per share. Residential usage was at its highest level in nearly a decade and 19% above the third quarter of 2009, a quarter with record low usage dating back to 2002. This significant increase was largely related to warmer than normal summer temperatures across our service area and the resulting higher air conditioning usage.

Industrial deliveries were up 11%, primarily related to higher usage by steel and automotive manufacturers, many of which had idle facilities for some portion of the third quarter last year. With this result, our industrial customer sector has recorded year-to-date double-digit sales increases for the entire nine-month period of 2010.

Commercial deliveries were 5% higher than the previous period. Year-to-date, we remain slightly ahead of our 2010 forecast of 106 million megawatt hours. While these results are an encouraging sign that the economy continues to recover, we expect overall distribution deliveries to remain below 2007 and 2008 levels at least through next year.

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