FirstEnergy Earnings Call Nuggets: Expense Reduction and Transmission Rights

FirstEnergy Corp (NYSE:FE) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Expense Reduction

Dan Eggers – Credit Suisse: I want to dig a little bit more into the $150 million to $200 million of savings and Tony, I appreciate it’s still a bit early in the process, but can you maybe help bucket out what fits into kind of capital savings relative to O&M savings, given all the efforts you guys have done in the last couple of years already to bring cost down and capital out of the business?

Anthony J. Alexander – President and CEO: Dan, this is Tony. When you think about it, it starts off all as an expense reduction, but a big part of our expenses end up being capitalized, because it’s all people related. So, it’s got to really turn out to be a function of whether or not that the workload and how it gets allocated is just going to be a question of whether or not that $150 million is going to be allocated to expense because that’s where the individual would have or is working on or whether it’ll be moved over to capital because of that same rationale. This isn’t capital in the sense that we’re relaying projects or we’re eliminating projects. These are real cash savings that will then get allocated depending on where our people are working and what projects we’re working on during the time frame.

Dan Eggers – Credit Suisse: So, how much headcount reduction goes into this then, because that means a lot of efficiency gains relative to your cost base?

James F. Pearson – SVP and CFO: I’d say Dan, we said that there’d be about 250 positions that would be eliminated. Some were not filled, and that was in addition to the 380 positions that were associated with the deactivation of those plants. I think the bigger cost item will be the elimination of some of our benefit cost. It’s a bigger cost reduction than just staffing in itself, Dan. So, I would say that would be the more significant component of the cost reduction…

Dan Eggers – Credit Suisse: And this is separate from the money you’re saving from Hatfield and Mitchell closing, right?

James F. Pearson – SVP and CFO: That’s right, that’s right. What I would say the O&M savings associated with Mitchell and Hatfield that would align with the several cent incremental earnings per share.

Dan Eggers – Credit Suisse: Then, I have just maybe one more question on this – is it – if you think about kind of from an O&M inflation perspective your net of these benefits, what should we think about from a ’13 baseline will be the O&M inflation for FirstEnergy on a consolidated basis?

Anthony J. Alexander – President and CEO: I guess Dan, we’re going to wait and give you that next year or later this year when we give you 2014 guidance. Obviously, we look at all of our cost, not just the ones that we’ve dealt with here, but fundamentally each and every time we go about developing what our game plan is for the upcoming year. We’ll scrub all of the numbers and determine where best to spend our available cash.

 

Transmission Rights

Brian Chin – Bank of America Merrill Lynch: Question you have in the press release a reference to net MISO and PJM transmission costs, what is that? And can you talk about whether transmission rights and underfunding is that the issue that you’re referring to in that, similar to one of your peers earlier this earnings season?

Donald R. Schneider – President, FirstEnergy Solutions: Brian, this is Donny. Let me talk about the FTR’s first because that seems to be a hot issue. Like many of the other PJM market participants, we also have experienced FTR underfunding. However, as we went into this year, we had adjusted our hedging strategy to be less dependent on FTR’s, so versus our expectations the impact has been very minor. If you think about what’s going on there, what’s driving this underfunding there is a whole myriad of issues, there is the seams issue between MISO and PJM, there is the difference between what you would anticipate from an infrastructure perspective when the FTR’s are allocated versus what actually occurs with outages and that sort of thing. Then obviously, differences between how to day ahead in real-time congestion is settled. I think we also released that we in fact filed a complained with FERC back in 2011 to try and address these issues and that case is still pending. We are seeing funding coming in about 75% to 85% of what we feel we’re entitled to, so we believe we’re being short at somewhere in the neighborhood of 15% to 25%, while versus expectations it’s a very minor impact to us, on a year-to-date basis, we believe our revenue was off about $6.5 million, about $0.01.

Brian Chin – Bank of America Merrill Lynch: So that’s not the MISO PJM transmission issue, it’s a separate issue understood.

Donald R. Schneider – President, FirstEnergy Solutions: That’s correct.

Brian Chin – Bank of America Merrill Lynch: Then with regards to the cost cuts, just jumping back on Dan’s earlier question. Is there a breakdown you can give to what extent those cost cuts are related to deregulate operations versus regulated operations?

Donald R. Schneider – President, FirstEnergy Solutions: No, right now, we don’t have that breakdown and as Tony said, we’re going to incorporate that into our 2014 plans and we’ll probably be able to give a little more clarity then.

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