METROPOLITAN EDISON COMPANY - Pennsylvania Public Utility ...

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management. Other potential uses of these funds are considered (e.g., operations &maintenance and capital expenditures). Prior to paying dividends, FirstEnergy willreview financial metrics such as the debt/equity ratio (i.e., total liabilities divided byshareholders equity), earnings, cash generated, and cash position. Cash is monitoreddaily, while the other metrics are monitored monthly.The FE-PA Companies claim that their dividend payouts over the last severalyears have been based on debt issues and optimization of the capital structure. Theystate that their articles of incorporation, bond indentures, and various other agreementsrelating to long-term debt must be considered. For example, a first mortgage bondindenture may require a certain retained earnings balance before dividends can bedeclared. The debt/equity ratio is a measure of a company’s financial leverage, with ahigh ratio generally indicating that a company has been aggressive in financing itsgrowth with debt. This can result in volatile earnings as a result of the additional interestexpense. The regulatory debt percentage, which includes long-term debt but excludesshort-term debt, for Met-Ed, Penelec, and Penn Power for 2005 through September 30,2010 is shown in Exhibit III-2.Exhibit III-2FE-PA CompaniesRegulatory Debt Percentage2005-September 30, 2010Regulatory Debt PercentageMet-Ed Penelec Penn Power12/31/05 Debt % 31% 26% 31%12/31/05 Equity % 69% 74% 69%12/31/06 Debt % 41% 33% 24%12/31/06 Equity % 59% 67% 76%12/31/07 Debt % 34% 42% 20%12/31/07 Equity % 66% 58% 80%12/31/08 Debt % 35% 45% 20%12/31/08 Equity % 65% 55% 80%12/31/09 Debt % 44% 55% 36%12/31/09 Equity % 56% 45% 65%9/30/10 Debt % 40% 54% 32%9/30/10 Equity % 60% 46% 68%Source: Data Request No. AI-8Met-Ed’s debt percentage increased from 31% as of December 31, 2005 to 41%as of December 31, 2006 after it paid a dividend of $25 million during a year it incurreda net loss of $240.2 million. Penelec’s debt percentage increased from 42% as of- 24 -
December 31, 2007 to 55% as of December 31, 2009 after it paid dividends equal to102% of its 2008 net income and 130% of its 2009 net income. Penn Power’s debtpercentage increased from 20% as of December 31, 2008 to 36% as of December 31,2009 after it paid dividends equal to 249% of its 2009 net income. FirstEnergy indicatedthat Met-Ed, Penelec, and Penn Power do not match debt issues with specificexpenditures, including dividends paid. The Audit Staff attempted to determine to whatextent, if any, the FE-PA Companies borrowed money in order to facilitate the paymentof dividends to its parent, FirstEnergy. However, FirstEnergy indicated that Met-Ed,Penelec, and Penn Power do not specifically identify or track the use of funds acquiredfrom its debt issues, including dividends paid; and therefore we were unable to identifythe specific source of the funds used to pay dividends.There is no evidence which indicates that service, reliability and/or safety hasbeen affected by these past dividend practices and payouts. Nonetheless, it would be apreferred practice in the future that the FE-PA Companies provide the Commissionadvanced notice and an explanation of the circumstances which warrant annualdividend payments that exceeds 85% of net income.Staff’s Follow-up Recommendation – Submit a detailed, written explanation foreach dividend payout that has exceeded 85% of net income to the Commissionwithin 60 days after public release of this audit report, and ensure that advancenotice and explanations are submitted to the Commission when such dividendpayouts occur in the future.- 25 -
Page 5: METROPOLITAN EDISON COMPANYPENNSYLV
Page 8 and 9: • Support Services• Human Resou
Page 10 and 11: • Developed and implemented forma
Page 12 and 13: FIRSTENERGY PENNSYLVANIA COMPANIESM
Page 24 and 25: III. AFFILIATE INTERESTSBackground
Page 26 and 27: In addition, subsidiary or related
Page 28 and 29: BWG recommended that a detailed, wr
Page 32 and 33: IV. CORPORATE GOVERNANCEBackground
Page 34 and 35: V. FINANCIAL MANAGEMENTBackground -
Page 36 and 37: the internal audit was to determine
Page 38 and 39: Committee citing the internal contr
Page 40 and 41: VI. ELECTRIC RELIABILITYBackground
Page 42: Exhibit VI-1Metropolitan Edison Com
Page 45 and 46: provide additional details to the C
Page 47 and 48: Exhibit VI-6FirstEnergy Pennsylvani
Page 49 and 50: All three FE-PA Companies have had
Page 51 and 52: FirstEnergy is following the right
Page 53 and 54: Company, and The Toledo Edison Comp
Page 55 and 56: technicians. These strategies are u
Page 57 and 58: VIII. EMERGENCY PREPAREDNESSBackgro
Page 59 and 60: Routine periodic updating of the em
Page 61 and 62: Follow-up Finding and Conclusion No
Page 63 and 64: old excess inventory. Spare invento
Page 65 and 66: controls were automated. Moreover,
Page 67 and 68: Exhibit IX-6FE-PA CompaniesPercenta
Page 69 and 70: FE-PA Companies were unable to iden
Page 71 and 72: Staff’s Follow-up Recommendation
Page 73 and 74: Exhibit X-6Metropolitan Edison Comp
Page 75 and 76: Prior Recommendation - Develop a co
Page 77 and 78: Therefore, BWG suggested that First
Page 79 and 80: XI. CUSTOMER SERVICEBackground - Th
Page 81 and 82:
Exhibit XI-2FE-PA CompaniesPercenta
Page 83 and 84:
Exhibit XI-5FE-PA Companies Compare
Page 85 and 86:
Exhibit XI-7FE-PA Companies Compare
Page 87 and 88:
Follow-up Finding and Conclusion No
Page 89 and 90:
uilding, in an effort to protect re
Page 91 and 92:
Companies would submit a supplement
Page 93 and 94:
3. The "four-fifths" rule (underuti
Page 95 and 96:
Met-Ed has female underutilization
Page 97 and 98:
Exhibit XII-4Page 1 of 2FirstEnergy
Page 99 and 100:
The number of years that FirstEnerg
Page 101 and 102:
FE-PA Companies do track purchases
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