第一能源 (FE) 2001 Q1 法說會逐字稿

FIRSTENERGY CORPORATION FIRST QUARTER EARNINGS RESULTS CONFERENCE CALL

Ladies and gentlemen, thank-you for standing by. Welcome to the FirstEnergy Corporation first quarter earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the '1' followed by the '4' on your pushbutton phone. As a reminder, this conference is being recorded, Tuesday, April 17th, 2001. A posted replay of this conference will be available at 3:30 Mountain Time on April 17th, and that conference will run through 3 o'clock mountain time on April 24th. To access the posted replay, you will need to dial 1800-633-8284 and then a reservation number 184-60-928. I would now like to turn the conference over to Mr. Kurt Turosky, Manager of Investor Relations. Please go ahead Sir.

Thank-you Robert. During this conference call, we will make various forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects, and other aspects of business of FirstEnergy Corp. are based on current expectation that are subjects to risks and uncertainties. A number of factors could cause the actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please see our management's discussion and analysis of financial conditions and results of operations included in our most recent Form 10-K Annual Report filed with the Securities and Exchange Commission for a detailed description of these factors. I'd now like to turn the call over to our Vice-President and Chief Financial Officer, Rich Marsh.

Thank-you Kurt. Good afternoon everybody and thanks for being with us today. Joining me on the call are Harvey Wagner, our Controller, Tom Navin, our Treasurer, and Kurt Turosky, our Manager of Investor Relations. We faxed out our consolidated report to the Financial Community earlier today and it might be helpful to refer to that as we discuss our results today. This report is also available on the Investor Relation Section of our website and the address for that is www.firstenergycorp.com. Before I get started with our discussion of first quarter results, I would like to briefly mention two items that impacted our results during the quarter. The first being the adoption of FAS 133, and the second being a change to our quarterly earnings pattern. Beginning with the first quarter of 2001, our results reflect the adoption of FAS 133, which of course is the market-to-market accounting standard for fair valuing derivative instruments. We now report derivative assets and liabilities representing the difference between their previous carrying amount and their fair values, the derivatives that had been previously treated as hedges of forecast transactions. The difference was recorded as a $44 million increase to common stockholders equity. For derivatives not previously designated as hedges, the difference was an adjustment to net income and was reported this quarter as accumulative effect of a change in accounting principle, which reduced net income by $8.5 million to ¢4 per share. I'd also like to remind you of the change in our pattern of quarterly earnings for 2001, which we discussed on the conference call for last quarter. At that time, we mentioned that the first quarter 2001 earnings before the cumulative adjustment would contribute about 17% of our anticipated total earnings for the year, and that's in contrast to a 23% which the first quarter would typically be expected to contribute on a historical basis. We also mentioned that we expect the remaining three quarters earnings contributions to increase by about 2% each quarter, compared with prior year's proportions. One of the primary reasons for this shift in the earnings pattern was the initiation of transition cost accelerations and the cessation at the end of 2000 of accelerations under our prior rate agreement. Financial results for the first quarter were in line with our expectations and in line with first call consensus estimates. Net income in the quarter before the cumulative effect of the FAS 133 change in accounting was $106 million or ¢49 per share of common stock. Earnings in the first quarter of 2000 were $141 million or ¢63 per share of common stock. Favorable contributors to earnings during the quarter included improvements to electric gross margins resulting from higher electric sales, reductions in general taxes, and continued reductions in financing cost. Factors which negatively impacted earnings during the period included, increased level of depreciation and amortization, higher employee benefit and pension expenses, lower contributions from our unregulated businesses, and higher fossil in purchase power expenses. Additional information on the major earnings variances for the first quarter is included on the first page of our consolidated report to the Financial Community, and I'll highlight several of these in my comments. Regulated retail electric generation sales during the quarter reflected growth of about 1.5% and that included 5% growth in residential sales, and 2% growth in industrial sales. Regulated commercial generation sales declined 3.6%, which is partly attributable to customer shopping in Ohio. Regulated retail electric sales revenues increased by about 2% or approximately $25 million over the same period last year. We estimate that weather accounted for approximately 40% of the increase in regulated revenues. Although weather during the period was slightly warmer than normal, it was colder than during the first quarter of the prior year. One factor that negatively impacted regulated revenues was the implementation of the 5% reduction in generation charges on all Ohio residential customers as a result of the restructuring law. For this quarter, this reduced revenues by approximately $7 million with the change becoming effective in February. We estimate that the annual impact will be in excess of $50 million this year. Wholesale sales during the quarter increased by 128%, with revenues increasing $84 million. The increase in wholesale sales reflected increases in both opportunistic sales and then the market supported generation sales we offer to other retail providers within our service territory. Unregulated retail generation sales decreased by 2%, compared to the first quarter of 2000 with revenues increasing by $4 million or 7% due to higher prices. The slight decrease in our unregulated retail sales was a result of the diminishment in out of state territory sales due to conditions that didn't favor customer shopping in those areas. This was partly offset by sales to in-territory Ohio retail customers who switched during the period to our unregulated affiliate FirstEnergy services. I also wanted to mention that as a result of these near-term market conditions, which have limited our opportunities to sell to customers in our targeted 13-state region, FirstEnergy services implemented a reduction in staff of approximately 30% of the sales and marketing staff, effective April 2001. This resulted in a reduction of approximately a 100 positions. Given that the pace of customer shopping as well as a result of higher market prices, and with the growing popularity of customer aggregation, it was determined that fewer sales representatives would be needed to effectively compete in today's marketplace. Net fuel and purchase power expense for the quarter was $80 million, 33% higher than in the same period last year. Fuel expense for the quarter decreased by 5.7% or $9 million, this was a result of a $1 million megawatt-hour reduction in generation output, which encompassed to 7.4% decrease in fossil and a 3.6% decrease in nuclear. Reduction in fossil generation output was due to an increase in plant maintenance outages compared with the first quarter of 2000, as well as some coal supplying delivery problems that we experienced with some of our river plants on the Ohio River. The weather in December and January was unusually severe and created some significant transportation and unloading problems for barge shipments to those units, and as a result, we had to reduce load at our Sammis and Mansfield generating plants in an effort to stabilize inventory levels. The reduction in nuclear generation was primarily result of the refueling outage at the Prairie Nuclear Power Plant, which is our largest generating unit. The refueling outage was completed in 34 days, which set a record for the shortest refueling outage in the plant's history. While the plant was down for this refueling, we also completed all the work necessary to increase that unit's output by an additional 5%. Purchase power cost in the quarter were $88 billion higher than in the first quarter of 2000 reflecting a combination of higher volumes to support the increased sales and higher prices. I'd now like to turn the call over to our treasurer, Tom Navin, to discuss the remainder of our financial results. Go ahead Tom.

Thanks Rich. Electric operating expenses for the quarter excluding other items were $29 million higher than the first quarter of 2000. The primary contributing factors for this increase included $22 million of higher fossil operating expenses, as well as anticipated increases in both employee benefit cost and pension expenses totaling $16 million. These costs were partially offset by lower nuclear operating expenses of about $8 million. As I mentioned on last quarter's earnings call, our fossil expenses this year will be higher than last year as we are undertaking an availability improvement program which will result in additional plant outages for several of our larger units in the "shoulder" months. We will also be experiencing higher non-cash pension expenses this year as a result of several factors including pension plan enhancements implemented last year, reduced credits to pension expense due to a reduction in market value of the pension plan assets, and last year's completion of the amortization of so called transition assets, which were recognized over a 15-year period. These items contributed to an $11 million increase in pension expenses over the first quarter of 2000. Now, I'd like to address a few other factors that affected both revenue and operating expense variances during the quarter. We identified these as other items on the consolidated report to the Financial Community. One item that negatively affected revenues was the absence of nuclear contract settlement payments that ceased last year. A few other items that affected electric operating expenses included about $9 million of cost associated with last year's early retirement program, an increase in the reserve for uncollectable steel accounts of $3 million, and $1 million increase in the amount of gains on mission allowance sales. The net affect of these others items reduced earnings by $17 million or ¢5 per share during the quarter. Total depreciation and amortization increased by $25 million for the quarter. Approximately 18 million of this increase resulted from the increase of transition cost accelerations over the rate plan accelerations, which ended last December. Including associated income tax amortization, we recorded $79 million in transition cost accelerations compared with $57 million of accelerations in the first quarter of 2000. Consistent with the guidance, we provided on the fourth quarter earnings call, we expect that total transition cost acceleration during 2001 will be about 15% lower than the rate plan accelerations taken last year. We have added a table on page 3 of the consolidated report where we will track the differences throughout the year, and we expect that the level of transition cost accelerations in the next few quarters will be less than the amount of accelerations recorded during the second, third, and fourth quarters last year. General taxes were down $22 million during the quarter, primarily due to timing differences in the implementation of state tax changes associated with Ohio restructuring. Specifically, Ohio property tax changes became effective on January 1st, while certain replacement taxes, such as the kWh tax and the franchise tax, do not become effective until May 1st. Although we expect that the overall net effect of the Ohio restructuring tax changes to be somewhat neutral once the replacement taxes kick in, the primary replacement tax for the reduction in personal property taxes will show as increased state income taxes in future quarters. With respect with financing cost, net interest charges for the quarter declined $9 million compared to the same quarter last year. Financing activity was extremely light this quarter with only $3.3 million of debt redemption, for the year mandatory redemptions will total $186 million. In addition, we will continue to look for opportunities to refinance callable debt to further reduce our financing costs. Now, I would like to discuss the performance of some of our non-electric, unregulated business units. The margins from these business units were approximately $20 million lower than the same period last year. This reduction was entirely attributable to the results from our natural gas marketing business. In spite of the 210% increase in our natural gas marketing revenues, this business segment's contributions negatively affected earnings. The unfavorable performance was primarily attributable to timing issues associated with the implementation of our natural gas choice program. As our sourcing cost, this winter exceeded our annual fixed rate contract prices. Also negatively affecting gas margins, were the greater than anticipated customer enrolments and consumption, both of which necessitated additional spot purchases in a rising price market. Our natural gas programs began in November of 2000, and our initial customer offering had a date deadline but no customer cap. Given some extensive press coverage in our local communities, customer enrollments far exceeded our expectations, resulting in usage for which we were not adequately hedged. Over the course of the remainder of the year, we expect to be able to offset a large portion of the negative contributions experienced in the first quarter. With respect to our investment in the natural gas exploration and production assets via the Great Lakes Energy Partnership, the rising market price conditions helped to increase FirstEnergy net income by $4.6 million compared to the first quarter of 2000. Moving now to our facility services group, revenues were up $22 million or 19% during the quarter compared to the same period last year. In spite of this favorable revenue growth, gross margins were relatively flat due to significant price competition in this industry. We expect net income for the year to be slightly improved compared to last year. Now, I'll turn the call back to Rich for an update on the merger and our summer supply preparedness.

Thank-you Tom. The merger of FirstEnergy and GPU remains on track to be completed by mid summer. Regulatory has been obtained from FERC, NRC, FCC, Hart-Scott-Rodino Walls, New York, and Argentina. We need only approvals from Pennsylvania, New Jersey, and the SEC at this point. If the remaining two states approvals are obtained through schedules laid out for litigated decisions, we would expect to receive approval on Pennsylvania during May and approval on New Jersey in July. However, we continue our efforts to try to reach a settlement with the major interveners in both of those states, in order to help expedite the merger closing. Final approval by the SEC would be expected within 30 days of receipt of the last date approval. In the Pennsylvania proceeding, GPU's request for regulatory relief from the provider of last resort obligation is being consolidated with the merger approval proceeding. Company's preferred position, on the PLR obligation, includes an immediate rate cap exception combined with a deferral tracking mechanism. Perhaps immediate cash cash rate relief, the companies must be permitted to implement the deferral tracking mechanism to ensure ultimate recovery of the deferrals. Turning to New Jersey, intervener testimonies were filed yesterday, and the company's reply testimony is due on April 23rd. The evidentiary hearings are scheduled to begin on April 30th, and a date of June 29th has been set for the ALJ to make his recommendation at the latest. And, of course, while it's hard to predict such things with certainty, we continue to target the summer of 2001 to close the merger. We're working hard to make that happen and are confident that it will be closed within that general timeframe. I'd like to just briefly also give you just a few insights in our preparedness to meet our summer supply loads. We now have our summer supply plan in place, and we're going to enter the season in a slightly long generation position. Since early last summer, we have added three 130 MW combustion turbines to our Richland station, and we'll complete installation of five new 85 MW units at our West Lorain site by June 1st. Another part of our plan includes the leasing of a 144 MW of portable diesel generators, but we will fight at various substations around our system. We also have approximately 700 MW of interruptible contract load that will help us facilitate our summer capacity planning. The combination of these efforts will provide us with adequate capacity reserves for the summer, and hopefully, also enable us to take advantage of some opportunities to solve generation in the wholesale market as well. In summary, for today's call, I am pleased that we're able to meet the Street's consensus estimates for the first quarter, and I am very comfortable that we're on track to meet consensus earnings estimate for the year of $2.85 on a stand-alone basis. I believe that 5% earnings growth though slightly higher, is reasonable for FirstEnergy prior to the merger close with GPU, with the opportunity to increase their growth rate 7% to 8% post merger closing. As always, we very much appreciate your time and continued interest in FirstEnergy, and I now like to ask Robert to open the call to questions from the analysts. Thank-your for your time.

Ladies and gentleman if you do have a question you will need to press the '1' followed by the '4' on your pushbutton phone. You will hear a 3-tone prompt acknowledging your request. If your question has been answered and you do you wish to withdraw your polling request, you may do so by pressing the '1' followed by the '3'. If you are using a speakerphone, please pick up you handset before entering your request. Once again ladies and gentlemen if you do have a question, please press the '1' followed by '4'. One moment please before the first question. The first question will come from David Reynolds from Morgan Stanley. Please go ahead with your question.

Good afternoon gentlemen.

Hi! David.

Just two quick questions. Can you talk a little bit more about the natural gas marketing program? It's been a couple of months now of higher than expected participation. I am assuming that there is no form of fuel recovery that you have complete commodity risk here and just how you're going to handle that going forward, and if you could just spend a couple of minutes talking about the timing on the shift of the amortizations?

Sure, let me answer the first part of your question David. There was an unusual series of circumstances, I guess, that led to the result that came out in the natural gas program. As Tom had mentioned, we rolled this out in the later part of the year, last year. Our market research indicated that we would probably get about 20,000 customers that would take advantage of our rate, which was at about $4.90. The [_______________] of front-page series of articles in the Beacon Journal, which is the Akron newspaper, that probably would have been our result. However, because of these articles, it really stimulated much more customer interest than we had anticipated. So, as Tom mentioned, there was not a cap in terms of the number of customers that we had accepted, and rather than add 20,000, we ended up getting something, I think total now over 100,000, customers. At a period when we were going out with the 490 contract rate, as you remember, gas prices were escalating very rapidly at that point in time, and as well as new customers came out, we had to go out into the market and hedge them as they were added. So, that's what caused that situation, it was a one-time event, it is not going to have a negative impact going forward, but certainly it did have an impact this quarter. As far as the second part of your question David, Harvey, would you like to address David's question about the pattern of amortizations?

Sure, in the past, I think we've talked about the rate plans that were in effect and the amortizations were actually determined based on the 12 months rolling earnings as they were related to earnings caps that were included in the rate plan. Subsequent to that was our transition plan. We are getting specific cost recovery of those transition costs. The rate is unbundled and the actual recovery of those cost is based on aggregate kilowatt-hour sales over the entire transition period. So, the cost now will be totally linked. The amortization of those cost is linked directly to the kilowatt-hour sales as they happen. So, going forward, we're going to see for the last three quarters of year 2001, significant reductions and amortization compared to last year.

Right, Harvey. I'm sorry, I must have missed the first part. What was the basis for determining the accelerated amortizations prior to the current plan?

Under the regulatory plans that we had before, we had an earnings cap, and the actual amortization was based on earnings on a 12-month rolling basis. So, the earnings were roughly around 12% of the PUCO formula for Ohio Edison.

Right, right. Okay, now that makes sense. Thanks guys.

Thank-you, David.

The next question will come from Andrew Levi from Bear Hunter. Please go ahead.

Hey guys, could you just give us a little flavor on what the intervener said in New Jersey?

Kurt, would you like to take a crack at Andrew's question?

Hi! Andy.

Hey, how are you doing?

Pretty good. With respect to New Jersey, we've had testimony, which was filed by just a handful of parties yesterday. Included was PJM, which filed essentially the same type of testimony that was filed in Pennsylvania on behalf of PJM, requesting GPU to remain a member of PJM. We had testimony filed by the division of ratepayer advocate, which dealt with issues such as service reliability, merger synergy studies, and the some other type issues that ratepayer advocates deal with typically, and we also had a testimony filed by our Jersey Central Power Light's largest customer which is Co-Steel Inc., and then we also have testimony filed by the independent key producers of New Jersey.

Okay, was the ratepayer advocate, was there any numbers associated with their testimony that would be of any interest of us?

Actually, I got an update or an overview of the testimony. I have not had a chance to read it myself yet, just got it this afternoon. If you'd like to followup offline, I'd be happy to go through some of that with you.

Okay, I'll give you a call. Thank-you very much.

Thank-you, Andy.

The next question will come from Tom Hamlin from First Union Securities. Please go ahead.

Yes, good afternoon.

Hi! Tom.

Just a couple of things on the merger case in Pennsylvania and GPU's position. Do you have any feel for the dollars that we're talking about here and what kind of, what an exception to the rate cap means for them? And the second question has to do with the 700 MW of interruptible load. Is it the kind of interruption that allows you to make opportunistic sales with that or is that only in some kind of well-defined emergency?

Okay, let me take a crack at the first part of your question, Tom. I am sorry I don't remember the exact number, but if they were to receive full rate recovery for the maximum position that they talked about when they released their press release several months ago, I think it would equate to something around, I believe, 10% to 20% rate increase, that's just off the top of my head. At this point, we're looking at, potentially, an exception or a deferral mechanism or some combination of the two, and obviously, the actual result is going to depend on market prices and the number of customers that return. But, I don't know Kurt if you can remember any more precise numbers, but off the top of my head, that's what I recollect.

Yeah, I've got the copy of our brief in front of me here. The requested rate release in Pennsylvania for MetEd was a $162.5 million and for PennElec was $154.2 million.

Do you have an estimate, if you were to acquire them, what your ongoing exposure would be to them before you would cover this short fall of capacity through your own means?

We've continue to say either a rate cap exception or a deferral Met-tracking mechanism is really essential Tom, I mean for the merger to go through we need that, and I think, hopefully we made that point clear in the testimony that we filed in the proceeding. So, we need that sort of mechanism. Obviously, the situation exists without the merger, and the merger does help alleviate it to some degree. So, the situation would be there with or without the merger and it's essential for us to get some sort of mechanism in place. Going to the second part of your question, about the customers that we have, Kurt, did you want to take a shot in answering that for Tom?

Sorry, Tom, could you follow up with that question again?

Yeah, let's just say we're in one of these, let's say you have a real hot summer and then some units are down and there are some very attractive pricing out there, do you have access to this 700 MW, you know, pretty cleanly or is it only have to be in some kind of defined emergency? I mean, can you shut them off opportunistically?

Okay, we would not plan on curtailing our retail customers to make opportunistic wholesale sales.

Okay.

It would only be in excess beyond what we can provide to our retail customers.

Thank-you Tom.

Thanks.

The next question will come from David Frank from Zimmer Lucas Partners. Please go ahead.

Hi! it's actually Craig Lucas. Good afternoon.

Hi Craig.

A quick question on the staff reduction in terms of the marketing effort, what type of annual savings does that produce?

I don't know the exact figure. It's about a 100 positions, Harvey, do you have an estimate of what the annual savings would be?

Net of the cost that I believe, it was about 4 million in 2001.

It's 4 million gross?

Yes.

Okay, and the other thing, is this $11 million non-cash expense, I guess, there was some higher pension benefits 11 million?

Yes.

Can we annualize that? What should we assume there?

Much of that is the result of accounting treatment under FAS 87 Craig. Big portions of that, two things - number one, like most plant sponsors, the area of the plant assets were lower at the beginning of this year as we're heavily invested like most pension funds. So, that was one impact. And the second, as Tom mentioned, was the elimination of the transition obligation which began 15 years ago when FAS 87 started, that was a credit to pension expense or produced additional pension income in essence over the last 15 years, that amortization period ended. So, there are two elements, one was the cessation of the amortization, and the second being the lower asset values in the...

Well, what was the amortization component? Was that 11?

No, both of those were in the $11 million figure.

And how much was the amortization component?

Harvey, do you know?

About $6 million. To specifically answer the question, yeah, I think you can annualize that by comparing 2001 to 2000.

Okay, and then going forward into '01?

That's correct, for this year, for 2001.

That's very helpful, and also, I had a question, when we look at the staff position in Pennsylvania, where you are recommending some 200 million hike for GPU, what does that do to the generation component of their tariff? If that were implemented, what would happen to their generation component in Pennsylvania, for the unbundled rate?

Kurt, do you have that information?

Yeah, I assume Craig you're talking about what kind of a percent increase in their shopping credit or generation rate? I do not have that magnitude of what that would be. I know the trial steps position if the rate increase in the magnitude of around $200 million a year.

Right.

I'm sorry, I don't know that number either Craig, but we can certainly check into that and followup with you.

Okay. Okay, thanks again.

Thank-you Craig.

The next question will come from Susan Chapman from Chapman Research. Please go ahead.

Thanks. Yeah, I'm wondering if you can tie in for me the problems of getting coal in the first quarter with respect of the summer generating supply. To what extend are your coal stockpiles now back at normal levels and to what extent are there continued problems getting either coal from mine suppliers in the East or coal transportation from Western mines like Powder River Basin?

Thank-you Susan. For the most part our coal inventories are back at traditional sort of levels, and we don't anticipate that that should be a problem going into the summer months. Much of the situation that existed in the first quarter was a result of a very severe weather and some of the freezing that we had down along the Ohio River, that plus some severe winter weather in other parts of the country disrupted rail transport of the supplies in. Well, it was primarily a winter situation, we have been building those stockpiles up, and we don't anticipate that that will be a problem going forward into the summer.

Okay, but let me just ask a little bit further. If any of that coal comes from the Powder River Basin, as rail delivered from Powder River Basin in the barge, I'm assuming there could potentially be some problems with the flooding that we're seeing in the Midwest, which caused some problems with delivery; the last time this happened in 1993. Do you want to reassure me on that point?

We do use some Powder River Basin fuel. It's not the predominant source of the coal that we use, it is certainly one of those, but at this point anyhow, our generation people don't see that there should be any significant problem unless there is really a severe change in the situation in the shipping mechanism between here and the Powder River Basin. But at this point, they feel pretty comfortable that our supplies will be at a level this summer, that it should not impede our generation efforts.

Okay. Thank-you.

Thanks Susan.

The next question will come from David Reynolds. Please go ahead with your followup.

Yeah, just a quick followup to the Pennsylvania situation. Without getting into a full-blown reconciliation, what are the basic differences between what the staff is recommending for recovery, and what you thought GPU has filed for in terms of what should qualify for rate hike and/or deferral?

Kurt, would you like to take a shot at that?

Sure, I'd say that in a magnitude, I'll start out with the magnitude of recovery that the companies are asking for rate increases, I think, I mentioned in the neighborhood of about $310 million, and the offset trial staffs position, I'd stays if about two-thirds of that, it's about $200 million, that's the primary difference, but secondly, hello, the next part of that is that the offset trial staff recommends that there be some merger synergy offsets, which we, in our testimony, recommend no adjustments for mergers synergies, and then the third position is that there is some pulling of some of the rate increase from the T&D rates, which we indicate that the unbundled rate components of T&D should not be mixed with the generation component. So I would summarize that as the major differences.

Thanks Kurt, I appreciate it.

Thanks David.

The next question will come from Bruce Knudsen from the First American Asset Management. Please go ahead.

Yeah, I just wanted a clarification on the gas customers. There are 100,000 customers that you have fixed at 490 then, that continues?

We have in total about a 150,000 customers Bruce, but those came in on various programs. The first offering that we had, I think, at that 490 rate, I think in total we have just about a 100,000 customers on that $4.90 rate.

Okay. Thank-you very much.

Thank-you.

The next question will come from Greg [_______________] from Lehman Brothers. Please go ahead.

Hi! Rich, how are you doing?

Good, Greg. How are you?

Pretty good. Hey, on the HVAC business, just wondering, kind of what are the goals for this year in terms of contribution curve for FirstEnergy, and just thoughts on how the business is performing?

Sure, let me answer the second part of your question first. As you know, we have 11 companies and that portfolio Greg, 9 of them continue to perform at a level that I think is consistent with our expectations and are doing well. Most of our remediation efforts have been focused at two of the Units, Roth Brothers and Edwards, and those tend to be the two largest units, they are the two largest units. We have replaced the CEOs of both of those units and have a profit enhancement plan in place. So, we have been focusing a lot of our activity in turning those two units around and they were the ones that held back earnings last year. For this year, we expect that they will probably contribute somewhere in the range, hopefully, ¢3 per share at the end of the year, however, you might remember that earnings for this group are back-end loaded, about 70% of the total earnings for the year come in the third and fourth quarter, that's the nature of the business. We continue our efforts to increase the percent of revenue derived from service as apposed to construction business. Right now, construction still makes up a bulk of the revenues. We're working on a plan to get that back, so, about 50% of the revenues would be from service, 50% would be from construction. That will add stability to those earnings and also the margins on that piece of the business are of course higher. So, I would say that most of the companies in the portfolio we are pleased with the results and they are in line with expectation but clearly, Roth Brothers and Edwards will continue to work on them. Have a ways to go, but as I said, we've taken some aggressive steps and are hopeful that it'll be paying dividends as we go through the year this year.

Thanks Rich.

Thank-you Greg.

The next question will come from [_______________] from SAC Capital. Please go ahead.

Good afternoon Rich.

Hi! [_______________].

Let's see, to kind of backtrack to the GPU merger.

Okay.

If the staff is recommending 200 million and then wants to use some merger synergies and some reallocations to filling the gap as opposed to the deferral, what is the next piece here? Should there be like a trial judge or something like that here fairly in the near future?

If it goes well [_______________], the ALJ recommendations is due on April 27th, which is not that far away now, less than 2 weeks away, and then the commission decision would be in May. However, we are hopeful and certainly open to the idea of a settlement with the major interveners in Pennsylvania. Well, that's a possibility as well, but if that were not to happen April 27th, is when the administrative law, judge will come out with his recommendation.

And at this point, what if the trial staff recommendation were to be ultimately upheld by PPUC and that were to be a final order? Should we assume that that would be inadequate with respect to closing the merger?

I don't know whether you should assume that [_______________], I can't really give you a specific answer. It's going to depend on the order of the whole, and obviously as you know, there is going to be lots of bits and pieces. There is the merger synergies and how they're treated, there is a provider of last resort obligation and all the other things that go under that order. So, we would have to evaluate that taking as a whole. There is no specific benchmarks that I can offer in terms of, this is a goal or this would not be a goal. We're going to have to assess the order as a whole and then go for it from that point. So, that's about the best response I can give you on that.

I mean, obviously, since we are on top of the ALJ, it should be fairly shortly here. Can you give us a sense as to given that, I think you've indicated in the past in various forms that you were looking to try to settle these issues and trial staff obviously recognizes that there is a problem here. At this point, how likely you consider a settlement versus having to run the rest of the schedule here?

I think the main issue here [_______________], is the clock is running down because there isn't much time left. We're hopeful that we can strike a settlement, certainly, we're open to that, but now time is waning here. So, hopefully we'll be able to have a spark and something will happen, but it's hard for me to handicap it at this point. There is less than two weeks left, so, time is going by quickly, and when you have a lot of parties trying to strike a settlement, sometimes discussions take a little period of time. So, we're getting close to the wire but, hopefully, something can happen, and certainly as I say, we're open to that possibility.

Okay, and I just wanted to, just make sure I heard you properly that you're on track to meet the 285 outlook on a standalone basis, and that we're talking about 5% on standalone and the growth rate accretion up to 7 to 8, you know, post-merger with GPU.

That is correct [_______________].

Thank-you.

Thank-you.

If there are any additional questions, please press the '1' followed by the '4' at this time. David Frank, please go ahead with your follow up question.

Hi, it's Craig Lucas. I have just a little question. Have you got numbers in terms of those Pennsylvania subsidiaries of GPU? If you were to get this anything near this type of rate hype, what kind of ROE would they be earning?

I can't remember that number off the top of my head Craig, but we can...

Would this take something like a 6% ROE to something like 10 or 11. Is that kind of like a range of what we're talking about?

I think that sounds approximately correct. Certainly, we can double-check that and check back with you afterwards.

Right.

I think that would be in the ballpark.

So, this would take us just something resembling, some part type of normally distribution utility return, if it were to be implemented.

If those are the correct numbers, yeah, let us check that, and we can be back with you on that.

My other question has to do with your vision of sharing. Is your vision of sharing basically that if you could somehow run a normal type of return that you would share above that or some kind of a mechanism or something?

When you say sharing Craig what do...

Merger savings, if there are any?

There will be merger savings, and as you know in the filing, we did not propose sharing that, but it would depend on the context of the order as a whole, and all the items that went into it. As you know, we didn't do this deal or the synergy. This is not a synergy-driven deal. So, you know, the synergies we believe are in the grand scheme of things relatively modest. We set about a $150 million.

And my last question is, I was really surprised to see the trial staff position. Is there any reason why they would be supportive of GPU at this time where they haven't been before? Is there some realization or something that's going on there in Pennsylvania? Is there something you can share with us in terms of the sentiments?

I don't know if I can share their sentiment. I can give you, I guess, my read on that I think, you know, people understand that this is a significant issue for the ratepayers of Pennsylvania. Certainly, they understand that this would be there with or without the merger. I think they understand the change in the dynamics of the environment that led to this situation, and I think they understand that under Pennsylvania's restructuring law, this is something that warrants potential exception to the rate gap. So, I think they understand the situation, and I think they're supportive of coming to a conclusion that makes sense.

Realization they don't want another California on their hands or something like that?

Well, hopefully nobody would want another California on their hands, that's for sure.

All right. Okay, thank-you.

Thanks Craig.

If there are any additional questions, please press the '1' followed by the '4' at this time. Once again ladies and gentlemen, if you do have a question, please press the '1' followed by the '4'. Allan Septimus from Oscar [_______________], please go ahead.

Thank-you. You've answered most of my questions. Do you mind repeating what the 3rd of the three issues were that remain between the trial staff and position of the company, the first being the difference in the rate release, and the second, in the sharing of the synergies, what was the third item?

The third was, in commingling the T&D rates and generation rates essentially suggesting that T&D part of the business might be over earning and if they could pull some of the rate from the T&D rate and utilize that to offset some of the provider last resort generation cost, and I had also like to throw in, I guess, the fourth issue that I failed to mention earlier and that is the rate of return, a return on equity component difference, believe in the company's proposal, it's about 12% return on equity proposal, and I believe in the offset trial staff to about 10.5%. So, that will be a fourth difference.

And ultimately, you don't have a bottom line on any one of these, but rather you would take the entire position as a whole?

That's correct.

Thank-you.

Okay, I am sure there are no further questions at this time, please continue.

Okay. Thank-you Robert. I appreciate everybody's time today. I understand that there were a number of earnings releases, so, we appreciate you making time to join us on the call. Hopefully, by the time we have our conference call for the second quarter earnings release, which will be in July, hopefully, at that point in time, we'll have both the Pennsylvania and New Jersey approvals for the merger in hand, and hopefully, we will be reporting on that at that call. We remain committed to the merger and look forward to getting it closed within the timeframe that we've outlined. So, look forward to that. I appreciate every body's time today. If there are any followup questions, please feel free to give Kurt Turosky a call, and we'll certainly be glad to look back and answer any questions everybody had. So, I appreciate you time. Have a good day. Thank-you.

Ladies and gentlemen a posted replay of this conference will be available at 3:30 Mountain Time on April 17th, and will run through the 3 o'clock Mountain Time on April 24th. To access this posted replay, you will need to dial 800-633-8284 and then a reservation number 184-60-928. Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect and thank you for participating.