FirstEnergy's CEO Discusses Q4 2011 Results - Earnings Call Transcript

FirstEnergy (FE)

Q4 2011 Earnings Call

February 29, 2012 8:15 am ET


Anthony J. Alexander - Chief Executive Officer, President and Executive Director

Mark T. Clark - Chief Financial Officer and Executive Vice President

Charles E. Jones - Principal Executive Officer of Ohio Edison Company, Principal Executive Officer of The Cleveland Electric Illuminating Company, Principal Executive Officer of The Toledo Edison Company, Principal Executive Officer of Pennsylvania Electric Company, President, Firstenergy Utilities, President of Pennsylvania Electric Company, President of The Toledo Edison Company and President of The Cleveland Electric Illuminating Company

James H. Lash - President of Firstenergy Generation Corp and Chief Nuclear Officer of Firstenergy Nuclear Operating Company

Unknown Executive -

Donald R. Schneider - Principal Executive Officer and President

Irene M. Prezelj -

Leila L. Vespoli - Executive Vice President and General Counsel


Unknown Analyst

Carrie Saint Louis

Steven I. Fleishman - BofA Merrill Lynch, Research Division



Good morning, everyone. I'm Irene Prezelj, Vice President of Investor Relations, and I want to thank you for coming to FirstEnergy's Analyst Meeting today. Before I review this morning's agenda, I'd like to point your attention to the slide, which is also available in your presentation book. It contains the Safe Harbor statement, under the Private Securities Litigation Reform Act of 1995. For those listening on the webcast, this is also contained in the materials posted on our website. Please review this document closely as you consider the comments we will be making today. We have a full agenda and we'll kick the meeting off with Tony Alexander, our President and CEO. Tony will be followed by Mark Clark, our Executive Vice President and Chief Financial Officer, who will provide our financial outlook. Mark will be followed by Chuck Jones, President of our Utilities Group, who will review our regulated utility and transmission operations. Mark and Chuck will take questions after their presentations. We're planning a short break following Chuck's presentation; and then we'll have Jim Lash, President of FE Generation and our Chief Nuclear Officer. Donny Schneider, President of FirstEnergy Solutions will follow Jim; and Leila Vespoli, Executive Vice President and General Counsel rounds out our speaker list today. Tony will return to close the meeting, and he will take questions at that time.

Members of the IR team will be in the audience with microphones. Since today's meeting is being webcast, I would ask those with a question to wait for the microphone so that everyone in the room and on the webcast can hear it. Finally, I'd like to announce that FirstEnergy is introducing an iPad app for investors today. This is a screenshot of the app, and you'll also see with your materials in front of you, the QR code that you can easily scan with your device here today. We will be introducing an iPhone app, shortly, that you'll also be able to get. The app can be accessed through our website or by going through the Apple Store and searching for FirstEnergy investors. We hope you will find this information useful. With that, I'll turn things over to Tony.

Anthony J. Alexander

Thanks, Irene. Good morning, everyone, and thank you for joining us. Today, we'll be discussing FirstEnergy's strategy, our plans to grow our business, and how we expect to increase shareholder value. It's been about a year since we completed our merger with Allegheny Energy, and I'm very pleased with the progress we've made. Yet as you listen to the presentations today, you'll recognize that the merger is just one of the positive steps we have taken to better position FirstEnergy for the future. Let me start by saying our strategy hasn't changed. We operate 3 businesses, and have a substantial position in each. We draw first, flexibility, growth opportunities and financial stability. Our Distribution business has the largest regulated customer base in the United States. Our Transmission business is one of the largest holders of independent transmission assets in the nation. And our Generation business, operates one of the country's largest and most diversified competitive generating fleets.

We do not need to grow our businesses by expanding rate base. Instead, we will continue to operate our company as we have in the past with a focus on our core businesses, operational excellence, retail sales growth and delivering solid financial results for our investors, including a strong dividend and investment grade credit ratings.

Building on this foundation, I'm confident that our competitive business model, our diverse generating assets and the scale of our utility service area will help us become one of, if not the best-positioned company, in our industry.

Today, we'll talk about our recent achievements, and our initiatives going forward. We'll discuss our plans to achieve the earnings guidance we've outlined, despite the headwinds faced by our entire industry. I will explain why FirstEnergy's position overall, provides a solid base to grow shareholder value, as the economy improves.

Let me start with the Allegheny merger. It has been a terrific success story from the start. We worked through the merger approval process in about a year, an outstanding accomplishment in our industry, and the integration was even better than we expected. In fact, the merger has gone so well, that it sometimes seems like Allegheny has always been a part of FirstEnergy. The people and the assets are a very good fit. We essentially began operating as a unified organization from day one. We exceeded our first year synergy goals, and everything is in place to capture the savings up opportunities we've identified. At this point, we are making all business decisions as an integrated company. And as a result, tracking merger-specific synergies is no longer necessary, and we will no longer be doing it. And quite frankly, the way we operate the company, it would be a distraction.

In 2011, we also achieved considerable success with our retail sales strategy. FirstEnergy solutions, our competitive subsidiary, captured new customers in Pennsylvania, and increased its governmental aggregation businesses in Ohio and Illinois. It now serves nearly 2 million customers across Ohio, Pennsylvania, Illinois, Michigan, New Jersey and Maryland. We sell about 100 million megawatt hours directly to retail customers, and that's more than we did as a regulated company. Later this morning, Donny Schneider will talk more about our retail strategy, and how we are building a strong foundation for future growth.

When we met with you last spring, we described our plans to continue delivering solid financial results, positive cash flow and a stronger balance sheet. Last year, we sold non-core assets like the Fremont Energy Center, the Richland and Stryker plants and a partial interest in the Signal Peak coal mine, and took other actions to reduce debt by $2.4 billion. We also recently adopted a change in our pension accounting method. And we made other -- and we made another significant contribution to our pension plan last month, that reduces the unfunded portion of our liability. As a result, we've driven our debt-to-equity ratio down to about 57%, and we will continue our efforts to further strengthen our balance sheet and financial position. Mark Clark will talk about the actions we are exploring to further enhance our financial profile, including opportunities related to the Bruce Mansfield sale leaseback arrangement, and the recent Ohio legislation that allows for securitization of deferrals.

While we still have work to do, we are in a much better position today to meet the challenges of our industry. One of those key challenges is that our region is still stressed by the sluggish economy. For example, while industrial sales are improving with growth that facilities at GM Lordstown's plant, Chrysler Jeep in Toledo, and AK Steel in Butler, Pennsylvania, industrial sales are not as strong as anyone would like. We are also seeing limited residential and commercial growth. Although again, we do have pockets of very robust commercial activity, particularly in the healthcare, and in both Ohio and Pennsylvania, as the Marcellus and Utica shale fields are being developed. Overall however, sales have not yet recovered to the levels we had in 2007. In the current rate of economic growth, it is not strong enough to support higher power prices. Even though we're encouraged by increased capacity prices starting in 2014, overall improvement will depend on a host of market conditions including and primarily, the strength of the U.S. economy.

One of the factors however, is -- that's also likely to impact what's going on, that is environmental regulations. And what they could do from a standpoint of cost of producing as well as the supply of electricity. These new environmental mandates will have an impact on FirstEnergy. For example, we recently decided to retire some older, less efficient Fossil units in response to EPA's stringent new standards known as MACT and other environmental regulations. We will however, make the investments needed to ensure that our remaining plants are competitive in the future. And we will focus our resources on the units that will remain in place over the long term. We've already reduced these investments by roughly half of what we anticipated last year. And we will continue to aggressively seek low-cost solutions or compliance and options to further reduce these capital costs. Jim Lash will talk more about our efforts and the expected impact of the environmental regulations on our fleet.

Once our older Fossil units are retired, nearly 100% of the power we produce will come from resources that are low or non-emitting. Last night, we provided 2012 non-GAAP guidance of $3.30 to $3.60 per share. We also updated guidance for 2013 of $3.10 to $3.40 per share. The midpoint of each of these is within the range of guidance we provided last year. While these are not easy times for anyone in our industry, we are facing these challenges head-on as we always have. You can count on our management team to continue to drive costs and revenues, identify opportunities, and deliver on the commitments we've made to you. This is truly an exciting time for the company. The strength of FirstEnergy, rests on the diversity of its operations and the flexibility and responsiveness of its employees. And we are better positioned than ever, to grow, compete and increase shareholder value. Your support has been and continues to be greatly appreciated. Thank you.

Now, I'm going to turn the podium over to Mark, and the rest of my senior management team will provide more details on the key areas of focus for 2012 and 2013. After each presentation, we'll provide time for your questions. And as Irene said, I'll be back at the end to close the meeting, and I will also be available for questions at that time. Okay, let's get started. Mark?

Mark T. Clark

Thanks, Tony. Good morning. Before I start, I'd like to thank everyone for being with us today. We do appreciate it. As Tony said, no question, 2011 was a more than interesting year. Either selling assets, dealing with the weather, the integration of FirstEnergy, despite that we think we had a solid year. And we're looking forward to the next 2 years. My presentation today is going to cover 2 topics: First, I'm going to review 2011, and then I'll speak a little bit to 2012 and 2013. I suppose it would help if I put the slide up. But -- let me speak to 2012. As Tony just said, non-GAAP earnings for the year were $3.64, and GAAP earnings were $2.22 per share. Last May I stood up here and said our guidance would be $3.20 to $3.50, we changed that as we went through the year. We upped it a little bit. Now, we've ended the year at $3.60 -- $3.64. And also, a lot has happened between then and now, and I'll admit that this is an extraordinarily busy slide. But it does somewhat capture both the headwinds and the successes that we had last year. Three big impacts in terms of the difference between GAAP and non-GAAP, 2 negative, 1 positive. On the negative side, we have the mark-to-market adjustment for the pension accounting, which was $0.78. We had the generation impairment, which was $0.52 and as Tony alluded to on the positive side, we had Signal Peak, which was $0.93.

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