Citigroup Power, Gas and Utilities Conference

Transcription

1 Citigroup Power, Gas and Utilities Conference Miami, Florida March 2-3, 2006

2 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Forward-looking Statements: This discussion includes forward-looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms "anticipate," "potential," "expect," "believe," "estimate" and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, replacement power costs being higher than anticipated or inadequately hedged, the continued ability of our regulated utilities to collect transition and other charges or to recover increased transmission costs, maintenance costs being higher than anticipated, legislative and regulatory changes (including revised environmental requirements), the repeal of Public Utility Holding Company Act of 1935 and the legal and regulatory changes resulting from the implementation of the Energy Policy Act of 2005, the uncertainty of the timing and amounts of the capital expenditures (including that such amounts could be higher than anticipated) or levels of emission reductions related to the settlement agreement resolving the New Source Review litigation, adverse regulatory or legal decisions and outcomes (including, but not limited to, the revocation of necessary licenses or operating permits, fines or other enforcement actions and remedies) of governmental investigations and oversight, including by the Securities and Exchange Commission, the United States Attorney's Office, the Nuclear Regulatory Commission and the various state public utility commissions as disclosed in our Securities and Exchange Commission filings, generally, and with respect to the Davis-Besse Nuclear Power Station outage and heightened scrutiny at the Perry Nuclear Power Plant in particular, the continuing availability and operation of generating units, the ability of our generating units to continue to operate at, or near full capacity, our inability to accomplish or realize anticipated benefits from strategic goals (including employee workforce factors), the anticipated benefits from our voluntary pension plan contributions, our ability to improve electric commodity margins and to experience growth in the distribution business, our ability to access the public securities and other capital markets and the cost of such capital, the outcome, cost and other effects of present and potential legal and administrative proceedings and claims related to the August 14, 2003 regional power outage, circumstances which may lead management to seek, or the Board of Directors to grant, in each case in its sole discretion, authority for the implementation of a share repurchase program in the future, the risks and other factors discussed from time to time in our Securities and Exchange Commission filings, and other similar factors. Dividends declared from time to time during any annual period may in aggregate vary from the indicated amounts due to circumstances considered by the Board at the time of the actual declarations. Also, a security rating should not be viewed as a recommendation to buy, sell or hold securities and it may be subject to revision or withdrawal at any time. We expressly disclaim any current intention to update any forward-looking statements contained herein as a result of new information, future events, or otherwise.

3 Business Plan & Management Focus

4 FirstEnergy Service Territories Pennsylvania Ohio New Jersey Customers Square Miles Ohio Edison 1,038,000 7,000 Illuminating Company 763,000 1,600 Toledo Edison 314,000 2,300 Met-Ed 534,000 3,300 Penelec 589,000 17,600 Pennsylvania Power 158,000 1,100 Jersey Central Power & Light 1,072,000 3,200 Total 4,468,000 36,100 Business Plan & Management Focus 2

5 FirstEnergy s Strengths Attractive Customer Base Electric Customers 5th Largest Balanced Sales Mix Ohio 2.1 million Residential 35% Commercial 32% New Jersey 1.1 million Pennsylvania 1.3 million Industrial 33% Business Plan & Management Focus 3

6 Our corporate profile revolves around the strength of the core enterprise. Seven stable regulated distribution companies Large, balanced customer base Stable cash flow from long-term rate plans Diversified, cost-effective generation portfolio 13,427 MW of generating capacity Integrated execution between the wires and competitive business units A dedicated and skilled workforce A focus on the fundamentals: Operational excellence Financial discipline Management credibility Specific geographic focus Business Plan & Management Focus 4

7 2005 Key Accomplishments Operational Record generation output of 80.2 million MWh Top decile performance from fossil baseload fleet (87% CF) Reliable T&D services across all service territories with no major service-related issues Regulatory Received approval for Rate Certainty Plan in Ohio Settled two JCP&L rate cases Successful recovery of increased MISO transmission costs for Ohio utilities Business Plan & Management Focus 5

8 2005 Key Accomplishments Financial Reduced debt/capital ratio to 56% Retired $779M* in 2005; nearly $4B in the last 4 years Achieved 2005 EPS at upper end of increased EPS guidance of $2.85 $3.00** Generated $688M* of cash Increased common stock dividend Two dividend payment increases in 2005 totaling 14.7% Announced a 4.7% increase, payable March 1, 2006 * Excluding the effect of the late December pension contribution ** See GAAP to non-gaap reconciliation on Investor Relations section of website ( Business Plan & Management Focus 6

9 2005 Key Accomplishments Positioning for the Future Strengthened funding status of pension plan Voluntary $500M contribution Accretive by approximately $0.06 per share annually during 2006 and in subsequent years Minimizes exposure to future funding requirements Completed generation asset transfer Align ownership with unregulated generation companies Better positions fleet for future market opportunities Business Plan & Management Focus 7

10 Focused on the Future Operations Positioning generation fleet for competitive markets Controlling commodity costs and mitigating supply risks Reinvesting to improve reliability and customer service Regulatory Actively seeking full and timely recovery of costs Preparing for POLR loads going to market (PennPower 2007, Ohio 2009) Financial Continuing to enhance financial strength and flexibility Meeting or exceeding investor expectations Business Plan & Management Focus 8

11 Generation Portfolio

12 FirstEnergy Generation Stryker 18 MW Michigan Sumpter 340 MW Toledo Bay Shore 648 MW Lake Shore 249 MW Cleveland Eastlake 1,262 MW Perry 1,260 MW Ashtabula 244 MW Seneca 435 MW Erie Towanda Yards Creek 200 MW Richland 432 MW Davis-Besse 883 MW West Lorain 545 MW Edgewater 48 MW Akron New Castle Johnstown Pennsylvania Harrisburg Reading Morristown Newark Allenhurst Trenton Mad River 60 MW Columbus Ohio W. H. Sammis 2,233 MW R. E. Burger 413 MW Beaver Valley 1,642 MW Bruce Mansfield 2,410 MW Plant Load Strategy York Haven 19 MW New Jersey Forked River 86 MW Baseload MW Load Following MW Peaking Units MW FirstEnergy Power Plants C Coal 7,389 MW N Nuclear 3,785 H Hydro 654 G Gas & O Oil 1,599 Total 13,427MW Mansfield 1-3 2,410 Beaver Valley 1,2 1,642 Perry 1,260 Sammis 6,7 1,200 Davis Besse 883 Eastlake Bay Shore York Haven 19 Total Baseload 8,147 Sammis 1-5 1,020 Eastlake Bay Shore Burger Lake Shore 245 Ashtabula 244 Total Load Following 2,952 West Lorain 545 Seneca 435 Richland 432 Sumpter 340 Yard s Creek 200 Burger 3 & EMDs 101 Forked River 86 Mad River 60 Other 129 Total Peaking Units 2,328 Generation Portfolio 2

13 FirstEnergy s Strengths Competitive Generation Portfolio 13,427 MW Balanced Mix Expected 2006 Output Nuclear 28% Hydro 5% CT 12% Baseload 60% Intermediate 23% Nuclear 36% Fossil 55% Peaking 17% Fossil 62% Peaking 2% Generation Portfolio 3

14 Generation Maximizing Generation Margins Increased fleet utilization through mission-driven philosophy Managing to market conditions Forecasting and scheduling on an 8760-hour per year basis Managing generation output between PJM and MISO Fuel flexibility Establishing new generation output records (million) Generation Output (MWh) E Fossil & Hydro Nuclear Generation Portfolio 4

15 2005 Nuclear Fleet Performance Achieved Top Quartile in: OSHA Rate Fuel Costs Corrective Maintenance Backlog Summer Capacity Factor of 99.9% Successful Industry Corporate Evaluation Capacity Factor (%) Net Generation MWh (in millions) Beaver Valley * Beaver Valley Davis-Besse Perry Fleet Avg ** 26.6 * Record Generation for Beaver Valley Unit 1. **Includes extended outage at Davis-Besse from the 1st Qtr 2002 through the 1st Qtr Generation Portfolio 5

16 Nuclear Operations Upside Opportunities Targeting top quartile performance Strengthened the management team Centralized engineering and oversight Standardized practices across fleet Reducing outage durations 2006 refueling outages Beaver Valley Unit 1 (821 MW) Replacement of 3 steam generators and reactor vessel head Davis-Besse (883 MW) Replacement of 2 reactor coolant pumps and 11 MW uprate Beaver Valley Unit 2 (821 MW) 100% 90% 80% 70% 60% 50% Nuclear Capacity Factor 64% Top Quartile 90% 87% 89% 1) 1) 2) 94% E 2007E Generation Portfolio 6

17 Nuclear Refueling Outage Schedule 2006 BV Unit 1 Steam Generator Replacement DB Refueling Outage BV Unit 2 Refueling Outage 2007 PY Refueling Outage BV Unit 1 Refueling Outage 2008 DB Refueling Outage BV Unit 2 Refueling Outage Generation Portfolio 7

18 Fossil Operations Continuous Improvement Targeting top industry performance Maintenance initiatives Reducing forced outages Fossil MW uprates 50 MW additions in each of from turbine upgrades Steady improvement in capacity factors Fossil Baseload Capacity Factor 100% 90% 80% 70% 60% 50% Top Decile Top Quartile 80% 85% 87% 86% E * Top performance came from Navigant benchmarking study Generation Portfolio 8

19 Consistent Improvement in our Baseload Units 88% 86% 84% 82% 80% 78% 76% 74% 72% 70% Baseload Capacity Factor 76% Top Decile Top Quartile 80% 85% 87% 86% E Top performance came from Navigant benchmarking study 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4.5% Baseload EFOR 3.4% 3.5% 2.8% Top Quartile 3.0% Top Decile E Top performance came from Navigant benchmarking study Top decile in baseload capacity factor in 2005 compared to Navigant benchmark database Generation Portfolio 9

20 Plant Uprates (MW) Total Nuclear Davis-Besse Beaver Valley Beaver Valley Total Fossil Mansfield Mansfield Mansfield Total Total Uprates Generation Portfolio 10

21 Fuel & Transportation Optionality Provides flexibility to adjust to market conditions Fuel Flexibility 8 units can burn any of 3 coal types and can switch quickly 9 additional units can operate within a wide blending range Coal Delivery Optionality MW Rapid Rotary Lake Discharge Dump Barge Freighter Rail Rail Truck Mansfield 2,410 Sammis 2,233 Eastlake 1,262 Bay Shore 648 Ashtabula 244 Generation Portfolio 11

22 Optimizing Generation Deployment between PJM & MISO Beaver Valley was classified as a PJM asset beginning in 2005 Increases the amount of generation we can deliver into PJM Improves balance in both on-peak and off-peak positions Load-following units produced an additional 4.1 million MWh in 2005 In 2005, BV alone supplied 14.0 million MWh into PJM In 2004, FE supplied 9.8 million MWh into PJM A balanced supply position results in increased generation asset utilization Generation Portfolio 12

23 Environmental Update Clean Air Interstate Rule (CAIR) Issued on March 10, 2005 by the EPA SO 2 NOx, and Fine Particulate Cap-and-Trade program SO 2 and NOx emissions cut 70% and 60%, respectively Utility Mercury Rule Issued on March 15, 2005 by the EPA Regulates stack emissions of mercury Cap-and-Trade program FE Compliance Strategy Invest in control equipment over period Purchase a portion of required allowances Generation Portfolio 13

24 CAIR Phase I Capital Expenditures CAIR compliance timing and actions are still under review 2006 AQC CapEx projection is $103M Current projection in the range of $1.6B $1.8B over Peak spending expected to occur during Generation Portfolio 14

25 Commodity Supply

26 Predictable and Profitable Power Margin Power Margin Generation Margin Transmission Expense Generation O&M Depreciation, Lease, Expense Power Margin Generation Margin Generation Revenue Fuel Purchased Power Generation Margin FENOC 30M MWh Fossil 52M MWh Purchased Power & NUGs 35M MWh NUGs = Non-Utility Generators MSG = Market Support Generation Excludes JCP&L NUG contracts MWH COST MWH COST MWH COST FES Commodity Operations MWH REV MWH REV MWH REV MWH Regulated Sales 80M MWh Competitive Sales 11M MWh Wholesale Sales& NUGs 19M MWh Losses & Pumping 7M MWh Commodity Supply 2

27 Commodity Supply Balanced, economic and flexible coal supply 2006 coal mix (45% NAPP, 41% PRB, 14% CAPP) Contract prices are below market, but escalate over time Fuel burn flexibility and coal delivery optionality Effectively Hedged % Hedged * Coal only** 100% 91% Coal Transportation 100% 100% SO 2 98% 100% NOx 97% 85% Nuclear Fuel 100% 100% * Represents the percentage hedged of total forecasted generation. ** Open position primarily relates to non-polr and non-contract commitments. Commodity Supply 4

28 Coal Supply Balanced & Economic Entered into long-term contracts in 2001 Contract prices are below market but escalate over time Coal Supply Annual requirement of million tons Increasing usage of PRB coal % % % % 2006 Coal Mix by Origin (tons) NAPP 45% PRB 41% CAPP 14% Commodity Supply 5

29 Transmission and Distribution Reliability Initiatives

30 Improving Reliability and Customer Service Accelerated Reliability Improvement Program Targeted at reducing outages, restoration time, and customers affected Implementing right-of-way vegetation management reclamation project Initiative began 1/01/05 Leveraging technology to enhance the quality of customer service Initiated interactive voice response technology (IVR) New outage mapping and analytical tools to pinpoint pockets of poor reliability and better manage storm restoration efforts Transmission & Distribution Reliability Initiatives 2

31 Regulatory Update

32 Retail Regulatory Structure Generation Transmission Distribution Transition Cost Ohio Edison CEI Toledo Edison Stable rates thru 2008* g + RSC Pass thru MISO costs in 2006 Fixed rates thru 2008*** RTC thru 2008 OE, TE 2010 CEI Penn Power Market in 2007 Met-Ed Penelec POLR rates thru 2010 No restriction CTC ended Jan 06 CTC thru 2010** CTC thru 2010** JCP&L BGS Supply No restriction MTC thru 2018 * Subject to success of auction and pass through of increased fuel costs. ** CTC recovery can be extended; NUG recovery thru *** CEI fixed through April Regulatory Update 2

33 Regulatory Update Ohio Rate Certainty Plan Lower and more certain rate levels through 2008 Greater earnings stability and consistency Can defer up to $450M of delivery expenditures Current or deferred recovery of fuel cost increases Competitive Bid Process (CBP) Auction schedule Auction originally scheduled for March 21 Starting price set at 5.1 per kwh Previous auction cleared at 5.45 per kwh, which PUCO rejected On February 22, auction manager notified PUCO that CBP cannot proceed due to lack of interest Regulatory Update 3

34 Ohio Rate Certainty Plan (RCP) Objectives Avoids multiple customer rate changes under the existing Rate Stabilization Plan for anticipated: Annual fuel costs increases during Distribution rate increases in 2008 Transition charge decreases beginning mid-2008 Synchronizes rate changes in 2009 RTC recovery ends (OE and TE) Distribution case Deferral recovery Market-based generation pricing Provides a more stable earnings profile for the Company Regulatory Update 4

35 Ohio Rate Certainty Plan Key Plan Elements Maintains current customer rate levels through 2008 Provides for the recovery of increased fuel costs currently and through deferrals with carrying charges Modifies RTC and Extended RTC recovery periods, rate levels, and amortization expense Permits deferral of up to $450M of distribution costs, with carrying charges Regulatory Update 5

36 Regulatory Update Pennsylvania Penn Power RFP (POLR ends 12/31/06) RFP for 900 MW of supply for 1/01/07 through 5/31/08 ALJ decision on February 17, 2006 Commission vote expected on April 6, 2006 Met-Ed and Penelec Regulatory Filings Expect to file notice in the second quarter 2006 Actual filing would occur no less than 30 days later Current rates yield inadequate returns Comprehensive filing that will address a number of transmission, distribution and supply issues (e.g., increased PJM congestion and ancillary service costs) Regulatory Update 6

37 Regulatory Update New Jersey JCP&L Securitization BPU selected Bear Stearns as financial advisor BPU approval expected during second quarter Securitization expected during 3rd Qtr ($ M) JCP&L Non-Utility Generation Clause Request Filed for $165M increase in NUG clause Would increase cash flow, but earnings neutral Regulatory Update 7

38 Financial Update

39 2005 Review Financial Performance Consistent financial results Exceeded Street guidance for first three quarters Increased 2005 earnings guidance by $0.15 per share Strong and stable cash flow Net cash from operations exceeded $2B, excluding contribution to the pension plan Generated over $688M of free cash, excluding contribution to the pension plan Strengthened credit profile Completed the debt-retirement program Over $3B from 2003 to 2005 Regained investment grade senior unsecured credit rating from S&P Increased dividend Increased dividend twice totaling 14.7% Announced a third dividend increase of 4.7% payable March 1, 2006 Financial Update 2

40 2005 Review Positioning for the Future Preparing for future competitive generation markets Generation Asset Transfer Penn Power RFP filing Strengthened pension plan Voluntary $500M contribution to pension plan Enhanced long-term liquidity position Entered into a new $2B syndicated 5-year credit facility Provided regulatory clarity Successful rate settlements and regulatory orders Rate Certainty Plan approval Financial Update 3

41 Strong Liquidity Position Company Company Type Type Term Term Maturity Maturity Amount ($M) Amount ($M) FE Corp. RCA* 5-year June 2010 $ 2,000 OH & PA Operating Companies * Revolving Credit Agreement. A/R Fin. 1-year 2006 $ 550 Total $ 2,550 Substantial liquidity available $1.9B available borrowing capacity as of February 24, 2006 Financial Update 5

42 FirstEnergy s Improving Debt Profile ($ billions) 15 $14.9 $13.0 $12.2 $ Total Debt (1) $14.9 $13.0 $12.2 $11.9 Debt/Cap 65% 59% 57% 56% FFO/ Interest(x) FFO / Debt 10% 15% 18% 18% (1) Total debt includes long-term debt, net sale leaseback debt equivalents, short-term debt, and current maturities; excludes ESOP and securitization debt. Financial Update 6

43 Credit Ratings Summary Corporate Credit Rating (S&P) / Issuer As of December 2005 Rating (Moody's) / Issuer Default Rating (Fitch) Senior Secured Senior Unsecured Preferred Stock S&P Moodys Fitch S&P Moodys Fitch S&P Moodys Fitch S&P Moodys Fitch FirstEnergy Corp.* BBB Baa3 BBB BBB- Baa3 BBB Ohio Edison BBB Baa2 BBB- BBB+ Baa1 BBB+ BBB- Baa2 BBB BB+ Ba1 BBB- Cleveland Electric Illuminating Co. BBB Baa3 BB BBB Baa2 BBB- BBB- Baa3 BB Toledo Edison BBB Baa3 BB BBB Baa2 BBB BB+ Ba2 BB Pennsylvania Power BBB Baa2 BBB- BBB+ Baa1 BBB+ BBB- Baa2 BBB BB+ Ba1 BBB- Jersey Central Power & Light BBB Baa2 BBB- BBB+ Baa1 BBB BB+ Ba1 BBB- Metropolitan Edison BBB Baa2 BBB- BBB+ Baa1 BBB+ BBB Baa2 BBB Pennsylvania Electric Co. BBB Baa2 BBB- BBB+ Baa1 BBB+ BBB Baa2 BBB On July 18, 2005, Moody s revised its outlook on all companies to Positive from Stable. On Oct. 3, 2005, S&P raised its corporate credit rating on all companies to 'BBB' from 'BBB '. S&P also raised the senior unsecured ratings at the holding company to 'BBB ' from 'BB+'. On Dec. 23, 2005, Fitch raised Rating Outlook to Positive from Stable. Financial Update 7

44 Deploy Cash to Increase Shareholder Value Dividend Policy Annual growth target of 4 5% Long-term payout ratio target of 50 60% Dividend Increases: Payment Quarterly Change from Annualized Date Rate Prior Period Rate 4Q $1.50 1Q % $1.65 2Q $1.65 3Q $1.65 4Q % $1.72 1Q % $1.80 Financial Update 8

45 Capital Expenditures ($ millions) E Energy Delivery $ 724 $ 632 FENOC 173* 225 * Fossil Corporate/Other Subtotal $ 1,088 $ 1,025 AQC** Total $ 1,144 $ 1,131 * Includes capital costs of $73M in 2005 and $119M in 2006 associated with steam generator and vessel head replacement at Beaver Valley Unit 1. ** Air Quality Compliance Financial Update 4

46 Capital Expenditures Excluding AQCS expenditures, annual capital expected to remain at approx. $1B in 2007 and 2008 Energy Delivery: approx. 65% of total (including Accelerated Reliability Program of approx. $125M per year) Nuclear: 15% Fossil: 15% Corporate: 5% AQCS compliance program Encompasses both CAIR compliance and NSR settlement Current projection in the range of $1.6B $1.8B over Peak spending expected to occur during Financial Update 9

47 Pension Plan Contribution Pressures in 2005 on pension expense and funding Discount rate Asset returns Voluntary contribution of $500M on Dec. 23, 2005 Tax-deductible ($341M net cash) Accretive to earnings of approx. $0.06 per share for 2006 and in subsequent years Initially funded with short-term debt Reduces a debt-like liability Reduces future funding requirements; provides additional security for participants Financial Update 10

48 Share Repurchase Program Will consider a share repurchase program in second-half 2006 pending: Approval of Rate Certainty Plan Completion of extended outage for steam generator replacement at Beaver Valley 1 Finalization of AQCS compliance plan Financial Update 11

49 Generation Asset Transfer Align generation ownership with competitive affiliates Leasehold interests in Mansfield, Beaver Valley 2 and Perry to remain with utilities (total of 1,258 MW) Aggregate asset transfer value approx. $4.9B $3B of liabilities assumed by generating companies Remainder of consideration in the form of secured notes Credit ratings Intent is to achieve investment grade rating for rated entity Additional flexibility and enhanced access to credit and capital markets Reduced parental guaranty support and counterparty collateral requirements Transfer positions generation fleet to capitalize on future market-based opportunities Financial Update 12

50 Financial Enhanced financial strength provides flexibility Financing Plan Completed 4-year debt reduction program of nearly $4B Achieved targeted debt-to-capital ratio of approx. 56% Focus shifts to capital structure management Reduce debt at holding company Appropriately capitalize operating companies With retained earnings growth, FE can issue debt to maintain debt-to-capital ratio Financial Update 13

51 Financial Meeting Investor Expectations Financial Guidance * 2006 EPS** $3.45 $3.65 Cash Generation*** $460M * See GAAP to non-gaap reconciliation on Investor Relations section of website ( ** Excluding unusual items. *** Net of capital expenditures and common dividends. Financial Update 16

52 EPS Growth Target plus Upside Opportunities (A) (B) (C) 2006 vs Reduced Ohio transition cost amortization and distribution deferral 2009 vs End of POLR obligation in Ohio Reduced Ohio transition cost amortization 2011 vs End of POLR obligation for Penelec / Met-Ed End of Ohio transition cost amortization EPS Illustrative (A) (B) (C) 3% 4% EPS Growth Actual results will depend on regulatory outcomes, market prices, etc. Financial Update 17

53 Major Earnings Drivers 2007 vs Generation Margin Market-based pricing for Penn Power generation Growth in the Distribution Business Wires delivery sales growth of approx. 1.5% annually Lower Nuclear O&M One less nuclear outage 2006 refueling outages: BV1 (extended), BV2, Davis-Besse 2007 refueling outages: BV1, Perry Lower Financing Costs Capitalized interest charges Financial Update 24

54 Major Earnings Drivers 2007 vs Ohio Regulatory Transition Plans Higher Ohio transition cost amortization Higher Depreciation Expenses Increased capital spending Transmission Margin Higher anticipated congestion and other costs Other O&M Wage increases, inflation, etc. Financial Update 25

55 Investment Highlights

56 FirstEnergy An Attractive Risk / Reward Opportunity Driving toward operational excellence Deploying strong free cash to increase shareholder value Dividend growth / potential share repurchase Reinvestment in the regulated and generation businesses Greatly improved financial strength Visible earnings growth potential Attractive total return potential Investment Highlights 2