| EXHIBIT 99.2 | |
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Terrance
G. Howson
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Vice
President
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Investor
Relations
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FirstEnergy
Corp.
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76
S. Main
Street
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Akron,
Ohio
44308
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Tel
973-401-8519
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November
29,
2005
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TO
THE
INVESTMENT COMMUNITY:
1
As
detailed in
today’s attached news release, FirstEnergy Corp. announced changes to components
of its 2005 and 2006 financial guidance, and announced that its subsidiaries
will make a voluntary contribution of between $500 million to $600 million
to
their pension plans before the end of 2005. This letter provides additional
details concerning these announcements and other financial matters.
2005
Financial Guidance
We
are maintaining
our 2005 earnings guidance, excluding unusual items (non-GAAP)
2
,
of $2.85 to $3.00
per share. We are modifying our 2005 cash generation (non-GAAP) guidance from
$620 million to $390 million to reflect two changes. The first is an increase
of
$100 million principally to reflect the release of cash collateral following
our
recent credit rating upgrade from Standard & Poor’s that raises guidance to
$720 million. The second is a reduction of $330 million to reflect the mid-point
of the after-tax cost of the $500 million to $600 million voluntary contribution
to our pension plan before year-end. Please see the Voluntary Pension Plan
Contribution section of this letter for more details.
Increased
2006 Earnings Guidance
We
established our
initial 2006 earnings guidance (non-GAAP) on July 27, 2005 at a level of $3.40
to $3.60 per share (see the Letter to the Investment Community dated July 27,
2005 for additional details, available at
www.firstenergycorp.com/ir
).
The following
table was provided at that time which reconciled the increase from the mid-point
of the 2005 earnings guidance ($2.93) to the mid-point of the 2006 earnings
guidance ($3.50).
1
Please see the
forward-looking statements at the end of this letter.
2
This investor
letter contains non-GAAP financial measures. Generally, a non-GAAP financial
measure is a numerical measure of a company’s historical or future financial
performance, financial position, or cash flows that either excludes or includes
amounts, or is subject to adjustments that have the effect of excluding or
including amounts, that are not normally excluded or included in the most
directly comparable measure calculated and presented in accordance with
accounting principles generally accepted in the United States
(GAAP).
Since
providing the
2006 earnings guidance, several regulatory, operating and financial developments
have modified our 2006 earnings outlook and we are revising our 2006 earnings
guidance (non-GAAP) upward by $0.05 per share, excluding any unusual items
that
may occur. The following table quantifies these changes.
Increased
2006 Cash Generation Guidance
We
also established
our initial 2006 cash generation guidance (non-GAAP) on July 27, 2005 at a
level
of $300 million based on 2006 capital expenditures of $1.1 billion and net
cash
from operating activities (GAAP) of in excess of $2 billion. Our revised 2006
financial outlook allows us to raise our 2006 cash generation guidance
(non-GAAP) to $460 million. The following table quantifies these
changes.
Voluntary
Pension Plan Contribution
FirstEnergy
Corp.’s
subsidiaries (or the company) previously made a voluntary contribution to their
defined benefit pension plans (Plan) of $500 million in September 2004. At
that
time the contribution resulted in the Plan being essentially fully funded on
an
Accumulated Benefit Obligation (ABO) basis and was also accretive to annual
earnings by about $0.06 per share over the 2005 through 2007
periods.
Since
that time, a
decline in the long-term interest rates used to discount these liabilities
and
restrained growth in the value of Plan assets have reduced the funded status
of
the Plan and will increase annual pension expense.
As
a result, the
company’s board has authorized the making of another voluntary contribution to
the Plan of $500 million to $600 million by year-end 2005. Since the
contribution is deductible for tax purposes, the after-tax cash impact will
be
between $300 million to $360 million. The subsidiaries will initially fund
this
payment through available short-term credit facilities and anticipate repaying
such borrowings during 2006 through positive cash flow. Our projections indicate
that absent this funding, cash contributions would have been required at some
point prior to 2010. Our pre-funding of the Plan is expected to eliminate this
future funding requirement under current pension funding rules and should also
minimize our exposure to any funding requirements resulting from proposed
pension reform legislation.
The
pre-funding is
favorable from both a credit and liability management perspective. Due to the
tax deductibility of the contribution, we will effectively eliminate a $500
million to $600 million debt-like liability through the use of $300 million
to
$360 million of cash. Additionally, common shareholders’ equity is expected to
be enhanced as the contribution should reduce the minimum pension liability
that
has been recognized as a reduction to accumulated other comprehensive income.
Additionally,
under
current accounting standards for pension costs, the pre-funding will be
accretive to earnings by approximately $0.06 per share during 2006 and in
subsequent years. This benefit arises from the spread between our borrowing
costs to fund the payment and the long-term asset earnings growth rate
assumption of the Plan.
We
believe it is
sound liability and financial management to pre-fund the Plan at this time
rather than being potentially subject to mandatory funding requirements over
the
next several years. In addition to the favorable earnings impact, the
pre-funding provides additional benefit security for our employees and retirees,
and will result in the Plan being essentially fully funded on an ABO basis.
Common
Stock Share Repurchase Program
FirstEnergy
will
consider a share repurchase program in the second-half of 2006 after clarity
of
three important milestones:
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·
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The
approval
of the RCP by the PUCO. We are hopeful that the Commission will act
soon
as all of the major parties to the proceeding either support the
RCP or
have agreed not to oppose it.
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·
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Completion
of
the extended outage at our Beaver Valley Unit 1 nuclear plant. The
work
scope for this outage, scheduled to be completed during the second
quarter
of 2006, includes replacement of the unit’s steam generators and the
reactor vessel head.
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·
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Finalizing
the
scope, technology to be employed and cost of our environmental compliance
program for our fossil power plants. We expect to resolve these issues
by
mid-2006.
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We
believe it is
appropriate to seek clarity on these milestones prior to seeking authorization
from our board of directors for a share repurchase program. In addition,
management’s decision to seek board authority, any decision by the board to
grant such authority, and the size and other terms and conditions of such
program will be subject to other factors as management and the board deem
appropriate, including but not limited to available cash, the price of our
common stock, and market conditions. If implemented, the program may be modified
or discontinued at any time.
The
company expects
to achieve its targeted debt-to-total capital ratio of approximately 55% (rating
agency view) by year-end 2005. Going forward, we will have the ability to issue
additional debt to maintain the 55% debt-to-capital ratio as equity increases
due to retained earnings growth. For example, assuming annual earnings growth
of
4%, over $2 billion of debt could be issued over the 2007 to 2009 period (before
a share repurchase program) while maintaining a 55% debt-to-capital ratio.
Any
such financing proceeds would be incremental to free cash in supporting a share
repurchase program or capital expenditures.
Additional
Details
Additional
details
on these and other company issues will be provided at FirstEnergy’s analyst
conference being held in New York City at approximately 8:15 a.m. Eastern time
on Wednesday, November 30, 2005. The conference can be accessed at the company’s
Internet address which is
www.firstenergycorp.com/ir
.
A recording of the
conference will be archived on FirstEnergy’s Internet site as will the
conference presentation slides.
If
you have any
questions concerning information in this update, please call Kurt Turosky,
Director of Investor Relations, at (330) 384-5500, or me at (973)
401-8519
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Very
truly
yours,
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Terrance
G.
Howson
Vice
President
- Investor Relations
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Forward-Looking
Statements
This
investor letter
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 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 the proposed transfer of nuclear
generation assets and employees workforce factors), 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,
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 not 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, including our annual report on Form 10-K for the year ended December
31, 2004, and other similar factors. Dividends declared from time to time on
FirstEnergy’s common stock during any annual period may in aggregate vary from
the indicated amounts due to circumstances considered by FirstEnergy’s Board of
Directors at the time of the actual declaration. FirstEnergy expressly disclaims
any current intention to update any forward-looking statements contained herein
as a result of new information, future events, or otherwise.
Affirmed
on
November 29, 2005
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2005
Earnings Per Share (EPS)
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(Reconciliation
of GAAP to Non-GAAP)
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|||||||||||||
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Three
Months
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Nine
Months
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Annual
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|||||||||||
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Ended
Sep. 30
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Ended
Sep. 30
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Guidance
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Basic
EPS (GAAP basis)
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$
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1.01
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$
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2.04
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$
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2.67
- $2.82
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Excluding
Unusual Items:
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Gain
on
non-core asset sales
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-
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(0.07
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)
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(0.07
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)
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EPA
settlement
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-
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0.04
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0.04
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NRC
fine
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-
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0.01
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0.01
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JCP&L
rate
settlement
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-
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(0.05
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)
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(0.05
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)
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JCP&L
arbitration decision
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0.03
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0.03
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0.03
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Ohio
tax
write-off
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-
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0.22
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0.22
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Basic
EPS (non-GAAP basis)
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$
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1.04
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$
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2.22
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$
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2.85
- $3.00
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|||||||
Issued
Prior
to November 29, 2005
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Reconciliation
of 2005 Estimated Cash from Operating Activities (GAAP)
to
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|||||||
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Estimated
Free Cash Flow (Non-GAAP) and Estimated Cash Generation
(Non-GAAP)
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|||||||
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(in
millions)
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|||||||
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GAAP
Earnings
Guidance
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$
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887
- $937
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Adjustments:
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Depreciation
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578
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Amortization
of regulatory assets
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1,277
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Deferral
of new regulatory assets
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(381
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)
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Deferred
purchased power costs
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(390
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)
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Deferred
income taxes and ITC, net
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23
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Conversion
of off-balance sheet receivables financing
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|||||||
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to
on-balance
sheet
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(155
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)
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Ohio
School Council's prepayment for electric service,
net
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220
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Other,
including changes in working capital
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(27
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)
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Net
Cash from Operating Activities (GAAP)
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$
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2,057
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Other
Items:
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Capital
expenditures
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(1,005
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)
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Nuclear
fuel
fabrication
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(80
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)
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Contributions
to nuclear decommissioning trusts
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(100
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)
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Common
stock
dividends
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(542
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)
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Conversion
of
off-balance sheet receivables financing
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|||||||
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to
on-balance
sheet
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155
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Other,
net
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50
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Free
Cash Flow (Non-GAAP)
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$
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535
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Non-core
asset
sales
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85
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Cash
Generation (Non-GAAP)
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$
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620
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The
GAAP to
Non-GAAP reconciliation statements are available on the Investor
Information
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|||||||
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section
of
FirstEnergy Corp.'s website at www.firstenergycorp.com/ir.
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|||||||
Issued
November 29, 2005
Guidance
Provided Prior to November 29, 2005
Issued
November 29, 2005