FirstEnergy’s first quarter investor call transcript is now on line here. If you can get through all the “timeframes” and “glide paths” without gagging, take a look for yourself.
The big reveal is that FirstEnergy seems to be implementing Plan B after reading expert testimony in the WV PSC’s Harrison case.
Last quarter, FirstEnergy’s CFO James Pearson put the Harrison plant scheme at the heart of FE’s plan to dig itself out of its debt hole:
Looking now at 2013, our financial plan is structured to improve the balance sheet, enhance liquidity and maintain investment grade credit metrics. The plan initially focuses on reducing debt at our competitive companies, primarily FES and Allegheny Supply by at least $1.5 billion. The proceeds of the Harrison Pleasants transaction at West Virginia combined with asset sales are expected to be sufficient to fund the debt reduction.
Today, Pearson told the investor analysts that FirstEnergy has rejiggered its debt structure, and will be issuing stock to raise needed cash. Interestingly, when an analyst asked Pearson what the ratings agencies think of FirstEnergy’s new plan, he said this:
Well, they came out with a report. I believe it was in the February timeframe where they gave a report on FirstEnergy consolidated. We’ve shared our plan with them. I think they are waiting to see the success of some of the financial initiatives that we’ve laid out as well as the outcome in the Jersey rate proceeding. So, I think they’re waiting to see the end results of all of those, but we’ve fed them all with the information and we’re in an active dialogue with them.
Which, translated from investor call jargon, means “we don’t know.”
Meanwhile, CEO Tony said this about the Harrison scheme:
Our success with the actions we have already taken, particularly the bond deal at FirstEnergy Corp. means the Harrison transaction while still important to both West Virginia and FirstEnergy Solutions is no longer critical to the successful completion of our financial plan.
So, three months ago, the Harrison scheme was “sufficient to fund the debt reduction,” but today it is “no longer critical to the successful completion of our financial plan.”
So what changed? Here are my thoughts –
- The stock market is again at record highs. It’s a good time to raise cash by issuing new stock.
- All the parties in the Harrison case filed expert testimony a little over a week ago, and things look pretty grim for FirstEnergy getting what they want from the WV PSC.
- Interest rates remain low, allowing FirstEnergy to restructure a lot of their debt, essentially refinancing at lower interest rates.
The Harrison case looms large in this investor call, despite Tony’s claim that the scheme:
… is far more important to West Virginia and Mon Power in terms of providing them with a stable and long-term resource that they can rely on than it is at this point from a balance sheet standpoint at FES or at FirstEnergy.
Yeah, right, Tony. It’s not about FirstEnergy’s bottom line, you are a charity that’s just trying to help out WV electric customers.
As anyone with common sense knows, refinancing debt is not paying down debt. The fact that the credit ratings companies have not yet voiced an opinion about Tony’s Plan B is telling.
No matter what kind of financial games FirstEnergy plays, they are still in the business of selling electricity. And that isn’t going too well:
We also took a look at the residential sales over the longer period to see if there were any identifiable trends. That analysis revealed that since 2007 our residential customer count and usage has been relatively flat. Commercial and industrial sales are still down versus 2007 at 6% and 8% respectively.
In Ohio’s newly deregulated retail market, FirstEnergy is selling more electricity, but they aren’t making more money:
At FirstEnergy Solutions, we continue to focus on expanding our retail business, strengthening our brand among customers in both new and existing targeted markets, and implementing our multichannel sales strategy. We increased our retail customer base by about 800,000 customers, or 42% since March of 2012. More importantly, while sales margins are compressing somewhat as a result of continued pricing pressure, our strategy of channel shifting, for example, moving kilowatt hours from POLR to higher value retail channels such as mass market and government aggregation continues to help offset the impact of lower market prices.
Yes, “sales margins are compressing somewhat” translates to “our profit from sales sucks.”
So Tony and his NEOs are on to Plan B. Plan B provides some good old CEO cover-your-butt spin. If the Harrison scheme goes down in flames at the WV PSC, Tony hasn’t bet the farm on the deal. The bump in the stock market gave him just the out he was looking for – sell some more stock to raise the cash, even if his real business continues to stagnate.
And we still don’t know what the ratings agencies think of Plan B. But it lets Tony tapdance his way through another investor call.