第一能源 (FE) 2002 Q1 法說會逐字稿

Thank you for standing by. Welcome to the FirstEnergy Corporation first quarter 2002 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'll need to press the 1, followed by the 4 on your telephone.

As a reminder, this conference is being recorded Wednesday April 24th, 2002. A postview replay of this conference will be available beginning at 3:30 p.m. eastern time today through 5 o'clock p.m. eastern time on Wednesday, may 1st. To access the postview replay you will dial 800-633-8284 and enter reservation number 20497746.

I would now like to turn the conference over to Mr. Kurt Trowski, director of investor relations for FirstEnergy Corporation. Please go ahead, sir.

Thank you, Jason.

Good afternoon everyone. 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 the business of FirstEnergy Corp are based on current expectations that are subject to risks and uncertainties. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please see our management discussion and analysis of financial condition and results of operation included in our most recent annual and quarterly reports 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 senior vice president and chief financial officer, Rich Marsh.

Thanks, Kurt. Good afternoon, everyone. Joining me today are Harvey Wagner, our controller; Tom Navin, our treasurer; and Terry Hausenand Kurt Trowskifrom our investor relations group.

We faxed out our consolidated report to the financial community earlier today, and it might be helpful to refer to this as we discuss our results.

The report is also available on the investor relations section of our corporate website, and the address for that is www.FirstEnergyCorp.com. Please note that our consolidated report includes this year's first quarter financial results compared to both 2001 actual and 2001 merger pro forma results. Consistent with the highlights page of our consolidated report, our discussion today will compare first-quarter 2002 actual results to first-quarter 2001 pro forma results.

The 2001 merger pro forma financial statements, by quarter, are available on our website as well.

The merger pro forma financial statements reflect 2001 actual combined financial results for FirstEnergy and GPU as if the acquisition of GPU had been completed at the beginning of 2001. The 2001 pro forma statements include the $2.2 billion of acquisition debt financing and the 73.7 million shares of FirstEnergy common stock that were issued in connection with the GPU acquisition. These statements exclude amortization of goodwill for FirstEnergy and GPU, the $300 million deferred energy expense write-off of Jersey Central Power and Light Company, earnings from GasNet which we divested late last year, and earnings from Avon Energy Partners and Indursa, which is our distribution business in Argentina. Net income for the first quarter was $116 million or 40 cents per share. These results include 11 cents per share of income from the cumulative effect of an accounting change for the company's 20.1% retained ownership of Avon Energy Partners and 16 cents per share of onetime costs. First quarter 2002 earnings, excluding the accounting change and onetime items, were 45 cents per share. The cumulative effect of the accounting change reflects the addition of a hundred percent of Avon Energy's earnings from the merger consummation date of November 7th, 2001 through the end of January, 2002. We'll discuss the details of the onetime items later in this call. On a merger pro forma basis, first quarter 2001 earnings were 45 cents per share after the cumulative effect of an accounting change related to the adoption of FAS 133 and also a onetime charge related to an early retirement program. First quarter 2001 earnings, excluding the accounting change and the onetime charge, were 51 cents per share Major drivers of first-quarter results included lower electric sales, higher nuclear operating expenses, increases in general and franchise taxes, and increased pension and employee benefit costs. Partially offsetting these items were improved margins from our unregulated businesses and higher income from our international operations.

Additional information on the major earning variances for the quarter is included on the first page of our consolidated report to the financial community.

I'd now like to turn the call over to our treasurer, Tom Navin, who will discuss the details of our financial results.

Thanks, Rich.

First quarter results were negatively affected by one of the mildest winters on record. Our service territory experienced heating degree days that were 14% lower than the same quarter last year, and 13% below normal. The weather, coupled with the continued softness in the economy, resulted in a 8% decline in distribution throughput, which is the measure of all energy delivered to our distribution customers, regardless of their supplier generation.

Residential deliveries fell by 6%, while commercial and industrial deliveries declined by 9%. The lingering impacts of the post-September 11 economic slowdown continue to be reflected in sales to our industrial customers. We note that the U.S. industrial production index has increased slightly in each of the last two months, following 18 consecutive months of decline, and we hope that this signals an improvement in our regional economic activity. Overall, electric generation sales declined 4.6%, compared to the same period last year. Retail electric generation sales decreased by 10%, which was partially offset by a 25% increase in wholesale sales. The decrease in retail generation sales was due to mild weather, restrained economic sales reflected increases in both opportunistic sales and in market support generation sales offered to other retail providers in our Ohio service territory. The overall impact of reduced sales lowered electric revenues by $135 million, or 6%, after adjusting for a 28 million-dollar increase in deferred shopping incentive deferrals. Net fuel and purchased power expense for the quarter was $112 million, or 13% lower than pro forma first-quarter 2001. Fuel expense increased by $28 million because of a 9% increase in generation output and a higher proportion of coal output in the generation mix.

The net increase in generation output reflected a 16% increase in fossil production and a 3% decrease in nuclear production as we had two nuclear refueling outages during the quarter. Purchased power expense declined by $140 million due to a steep decline in average wholesale prices and lower overall generation sales. In addition to lower electric margins, two other expense categories that negatively impacted earnings this quarter include nuclear operating expenses, which were $33 million higher this quarter, and higher pension and employee benefit costs. The increase in nuclear operating expense was attributable to having both Beaver Valley II and Davis Bessie down for refueling outages this quarter, compared to having only Perry down for refueling in the same period last year. The increase in pension and employee benefit costs during the quarter reduced earnings by two cents per share. As discussed on our April 11th conference call, although our proposal to the SEC to conform our pension accounting to the smoothing approach has not been fully resolved, we are recognizing pension expense based on conforming GPU's pension assets to the fair value methodology. Please note that although adopting a fair value method has a negative impact on earnings in 2002, both accounting methods will produce the same result over the long term. Also, please note that this change will not have an impact on cash earnings. Another expense factor that negatively impacted earnings was a 27 million-dollar increase in general and franchise taxes over the same period last year. The 15 million-dollar increase in general taxes was attributable to higher Pennsylvania gross receipts tax, while the 12 million-dollar increase in franchise taxes was due to a timing difference in the implementation of tax changes associated with fee regulation in Ohio in 2001. One of the factors that positively contributed to earnings was the reduction in total depreciation and amortization expenses. During the quarter, total D&A expenses decreased by $21 million, excluding a 28 million-dollar increase in shopping incentive deferrals. The 21 million-dollar decrease is comprised of two items: Tax deferrals of $12 million associated with Ohio restructuring agreements; and the elimination $9 million in depreciation expense associated with the pending sale of four coal plants to NRG Energy.

Now I'd like to discuss the performance of some of our nonelectric, unregulated business units. Overall, the gross margin contributions from our nonelectric business units increased by approximately $17 million during the quarter, as a 20 million-dollar increase in natural gas gross margin was partially offset by a 3 million-dollar reduction in our facility services and MYR operations. Improvement in the natural gas business segment related to reduced sourcing costs compared to the first quarter last year. For the quarter, net income from our international operations was $11 million, or approximately 4 cents per share, and this includes earnings from our Avon Energy Partners holdings for February and March. Now I'd like to discuss the 14-cent-per-share increase in onetime charges that occurred during the quarter and these items are listed on Page 6 of our release and reflect the net of 16 cents per share this quarter compared to 2 cents per share in the same period last year.

The first quarter 2002 onetime charges include an 18 million-dollar mark-to-market adjustment on a long-term purchase power contract resulting from FirstEnergy updating its long-term electricity price forecast. Also, a 13 million-dollar unregulated equity investment write-off related to a bankruptcy, a 13 million-dollar write-down of telecommunication investments, and a 17 million-dollar charge related to a generation project opportunity that we decided not to pursue. I'd like to spend a minute providing an update on our debt reduction activities. During the first quarter, we redeemed long-term debt and preferred stock totaling $168 million, which will reduce annual financing costs by approximately $15 million dollars. We remain committed to reducing our debt, deleveraging our balance sheet, and improving our credit profile. Free cash flow and cash proceeds from asset sales will be used to meet mandatory redemptions totaling $792 million for the remainder of the year. The balance of cash proceeds will be used to fund optional redemptions of approximately $1.2 billion, and together these redemptions will reduce interest and preferred dividends by approximately $150 million. In addition, we expect $1.8 billion of debt to be deconsolidated as a result of closing the Avon Energy and Lake Plant transactions, resulting in a total debt reduction of $3.9 billion this year.

Now I'll turn the call back to Rich for a brief update on the progress being made on several key initiatives.

Thanks, Tom. I'll start with an update regarding our pending asset sales, and some other recent events. Yesterday, the Missouri Public Service Commission approved Aquila's acquisition of a 79.9% ownership interest from FirstEnergy and Avon Energy Partners. We anticipate an expedited close to this transaction, with completion occurring during May.

We continue to make good progress regarding the sale of our four Lake Plant facilities to NRG Energy, and we remain on track to complete this transaction by midyear. NRG has recently received exempt wholesale generator status from both Ohio and Pennsylvania and is awaiting approvals from New York and New Jersey. They also continue to make good progress regarding receipt of the necessary FERC approvals. In February, the Pennsylvania commonwealth court ruled that Metropolitan Edison and Pennsylvania Electric could not recover, either on a current or deferred basis, energy costs related to their provider of last resort obligation in Pennsylvania beyond those already reflected in rates. Purchased power costs in Pennsylvania that have been deferred through the end of the first quarter of 2002 total approximately $199 million. The court also remanded the matter of merger savings back to the commission for review. On March 25th, FirstEnergy, as well as the Pennsylvania Public Utility Commission, filed motions with the Supreme Court of Pennsylvania arguing that the Commonwealth court incorrectly treated the deferral of energy costs as a rate increase, and also improperly applied Pennsylvania law regarding exceptions to the cap on generation rates.

Also on March 25th, Citizens Power filed a motion seeking an appeal of the Commonwealth court's decision to affirm the merger.

We expect that the Supreme Court will decide whether to hear any of these appeals sometime later this year.

On March 13th, the company announced that the refueling and maintenance outage for the Davis Bessie nuclear power plant would be extended. The plant had begun its 13th refueling outage on February 16th, and was originally expected to return to service at the end of March. However, an area of corrosion was found in the reactor vessel head near a nozzle penetration hole. On April 19th, the company submitted a comprehensive root cause analysis report to the NRC regarding the cause of this corrosion. The report's conclusions were consistent with the probable cause summary report that had been filed with the NRC on March 22nd.

We held a public meeting with the NRC on April 10th to discuss our planned repair to the reactor vessel head. We've continued to document this repair plan and expect to file it with the NRC in the next few days. The plan involves removing the corroded area and sealing the opening with a robotically welded Inganelsteel section. The NRC must thoroughly review and approve all aspects of our proposed repair plan before work can begin.

As the company has progressed with their engineering and technical studies, we now expect that with the NRC's approval of this repair, the unit could return to service during the third quarter of this year.

Based on this revised time frame, we've secured our on-peak replacement energy supplies for Davis Bessie through the end of August. The net replacement energy costs on a pretax basis average 10 to 15-dollar -- 10 to $15 million per month for the nonsummer months, and 20 to $25 million per month for the July and August period.

In resolving this issue, safety remains FirstEnergy's top priority. Davis Bessie will not restart until the NRC and the company are fully satisfied that the corrosion is appropriately repaired and plant operations will be safe.

The company continues to work with the NRC very closely on this matter, and we view their priorities as being the same as ours. On April 10th, we revised our 2002 earnings guidance to a range of $3.30 per share to $3.45 per share, excluding the repair and replacement power costs associated with the Davis Bessie reactor head corrosion. At that time, we also provided a range for our anticipated 2002 quarterly earnings pattern. This is detailed in footnote 8 of the supplemental schedule to the news release of April 10th that is posted on our website. Looking ahead to 2003, we believe that our annual earnings growth target of 7 to 8 percent will continue based on our previous 2002 earnings guidance of $3.45 per share to $3.65 per share, as many of the items impacting 2002 results are confined to this year.

There are certainly many unique events during the first quarter of 2002, and while it wasn't the start to the year that we had anticipated, we have put into place actions that will improve results during the remainder of the year. As discussed in our April 10th conference call, these include cost-saving initiatives that will provide earnings benefits of 15 cents to 25 cents per share. These reductions will be incremental to the estimated $15 million of net merger savings that will be captured this year, and those are comprised of $70 million of cost savings net of $55 million of costs to achieve.

This also marks completion of the first full quarter of operations following consummation of the merger with GFU on November 7th of last year. We're very pleased with the process of our integration activities and owe a very large thanks to all of our employees for their hard work in making this transition successful. Finally, we're gratified that our sale of the majority interest in Avon Energy Partners to Aquila and the sale of our four lake plants to NRG are nearing completion. These transactions will allow us to reduce debt by approximately $3 billion, and therefore play a major role in our continued commitment to reduce leverage and improve our credit quality. Thank you very much for your time and interest in FirstEnergy and I would now like Jason to open the call to questions from the analysts.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the 1, followed by the 4 on your telephone. You will hear a 3-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw or pull in your request, you may do so by pressing the 1, followed by the 3. If you're on a speakerphone, please pick up your hand set before entering your request. One moment, please, for the first question.

Paul Fremont from Jeffries and company, please go ahead with your question.

I just want to confirm that the -- if 45 cents is sort of the operating number excluding the accounting change and excluding the onetime items for '02, would the comparable number in '01 be 54 cents?

51 cents, Paul.

Okay. Because I'm looking at -- on a pro forma basis, before the accounting change, it looks to be 52 cents, and then there were 2 cents of extraordinary charges, so what am I missing?

Sorry, Paul. We were giving that on the actual basis. You're right. 53 cents on a pro forma basis.

Okay. In terms of the third quarter restart assumption, on Davis Bessie is it assuming that the NRC approves whatever plan you're about to submit?

Yes, that's correct.

Okay. And if the NRC were not to approve that plan, can you give us a sense of what the time frame might be in that event?

I really can't, Paul, with any accuracy. I mean, we've been working very closely with the NRC to let them know what our thinking is in terms of the proposed repair.

It's hard for us to know exactly how long it's going to take the NRC to thoroughly review and hopefully approve that plan, but, you know, if for some reason they were to find that unacceptable, obviously we would have to go to another alternative. But we're focusing on that proposed repair. We think it's appropriate. We think it's the right thing to do. And, you know, we continue to believe that because of that, the NRC will approve it.

And last question. Is there any scenario under which the company would consider a permanent shutdown of Davis Bessie?

No. Not at this point, Paul, no.

Thank you.

Paul RIZEN from McDonald investments. Please go ahead with your question.

Could you clarify the onetime item related to a change in your price forecast and give more detail as to what happened there?

Sure. The -- as you know, we -- well, as you may know, we have one long-term power contract where there were not quoted prices in the out years of that contract, so we have actually just in -- or revised our pricing model, the pricing assumed in the model and the volatility of the movement of those prices in 2002. That hadn't been done for probably about a year. So it's just more or less just updating the forward prices that we're estimating for that contract.

Okay. So you -- a short position?

Pardon me?

No, it's a near purchase.

Right. This contract expires in 2010 so what it really reflects is just a difference in the value indication, the fair value of that contract for the period 2004 through 2010.

In your purchasing power.

But as Harvey said, there's no obvious reliable market indicators between that 2003 time frame so periodically the company updates it's long-term power price forecast and that occurred recently and that's what triggered this adjustment.

Back to Paul (inaudible) question. In the event that NRC, you know, can't agree with the repair plan, what do you view your next best alternative to be?

Well, you know, we continue to focus on that repair, Paul. I mean I think it's prudent always that we look at alternatives and there are some alternatives that we'll continue to look at, but we think that the repair that we're submitting is the right thing to do at this point in time.

And are you kind of -- is there any parallel path being pursued, just as a backup?

Well, I think we mentioned on the call, or I think Pete may have mentioned on our last call, that while we're focused on this repair, as I said, it's prudent to look at backups and in a general sense, we've looked at the possibility of, you know, replacing the dome with one of the other existing domes that exist or, you know, potentially accelerating the dome replacement that was going to take place in several years and so forth.

Okay. Thank you very much.

Steve Fleishman with Merrill Lynch. Please go ahead with your question.

Steve? Not there.

All right. Kim sigh Dell with Deutsche Banc. Please go ahead with your question.

Thanks. Good afternoon.

Hi, Kim.

My first question is a quick one. Did you eliminate the goodwill amortization this quarter, and if so, do you know what that was? Like I think it was about 8 cents first quarter for you.

The goodwill amortization that was in FirstEnergy's earnings in 2001 would have been about 4 cents a share.

Okay. I also wanted to clarify on your restate -- your restart forecast here. Am I interpreting it correctly when you say you've bought power through the end of August that you're now planning for a -- like a September 1 kind of restart, which has been pushed back from a July 1 restart?

We think that the July 1 restart is probably not going to happen at this point, Kim. It's hard to handicap exactly where within the third quarter that restart will occur, and obviously it depends on, among other things, the NRC's review of the proposed fix.

We don't know exactly where it's going to fall. We thought it was prudent to go ahead and secure those supplies through the August time period. Obviously, July and August are typically the months when we have our highest peak loads and we thought it was appropriate to go ahead and lock those into place and so we've done that.

Okay. Fair enough. But I guess what I'm trying to understand is your guidance includes -- I mean, you excluded some costs associated with the outage. What I'm trying to understand is if now the outage is being extended, what costs are included or excluded from your guidance of 3.30 to 3.45.

We had said Kim that that guidance excludes the costs of the Davis Bessie repair and the associated power replacement costs.

Okay. So it always had and excludes everything.

That's correct, Kim.

My last question, I apologize, I know you've gone to great lengths to give us additional information, so maybe it's just a matter of my navigating through here, but I'm still not sure I can reconcile between reported results and then adding back between the cumulative effect of accounting changes for onetime items. How you're getting to 45 cents. That's not what you're showing in your first quarter reconciliation on Page 1 of your release.

Let us grab that real quick here and take a look.

I think part of the difficulty is the onetime charges were actually 16 cents this year.

Yes.

And the little box is comparing to onetime charges of 2 cents last year, so year over year, it was just a 14-cent difference. That may be confusing it.

Oh, that -- took me a while to figure that one out but I got that. I'm still not sure how you got from -- if you look at Page 2, you reported before accounting changes, 29. Then you've got the accounting changes, 11 cents. You get to 40. I guess I'm just confused about where those 16 cents falls into play.

Okay. The 29 cents includes charges of 16 cents per share for the onetime items.

Okay.

They are part of the normal earnings on the income statement. That's the 45 cents.

That's the 45.

Right. And it's before the 11-cent cumulative effect.

Got it. Okay. Sorry for the confusion.

Okay?

Thanks, Kim.

Steve Fleishman from Merrill Lynch. Please go ahead with your question.

Hey, Rich, can you hear me.

Yes, Steve.

Okay. Sorry about that before. Can we just go back in the quarter through these items on the -- on the lower depreciation, amortization, and some of these tax increases, and just talk a little bit about the -- you know, whether these are recurring issues or not? I don't know if Tom wants to do that.

On the D&A, you mentioned lower tax deferrals in the lake road sale.

Right.

I assume the lake road sale, that will be a savings throughout the year.

Right.

The lake -- yeah, those four plants.

That's correct.

And then the tax deferrals?

Yes, those will continue throughout the rest of the year, and then we would have the opportunity to adjust our rates in 2003. So essentially, from an earnings impact, there will be no difference, but from a cash standpoint in 2003, we'll be better off, and we won't need to defer those taxes.

Okay. So that's an earnings benefit this year?

It is an earnings benefit this year, but that benefit will continue next year. It will just be replaced with cash instead of deferrals.

Okay. Okay. But is that essentially then offsetting the higher franchise taxes?

Yes, it does offset higher franchise taxes, yes, Steve, you're right.

And will those continue through the whole year?

Yes.

Okay. And my other question is just these numbers on debt paydown.

Yes.

I wonder if Tom could just go through those again.

Sure.

In terms of the -- you know, how -- you mentioned 150 million of interest and preferred savings. I assume that's kind of 2003 versus kind of premerger or something?

Yeah. Steve, if you look at the amount of just mandatory redemptions that we have remaining in 2002, that totals 792 million. And then you couple that with optional redemptions that we intend to make as asset sales close and those cash proceeds come in.

Uh-huh.

The total of those two would produce approximately $150 million in annual interest and preferred dividend savings.

Okay. And what's the optional amount?

1.2 billion.

Okay. Now, and then the debt that's deconsolidated, that will just come off the balance sheet but it doesn't have any savings, obviously? It's just a -- comes off the balance sheet?

Right. That debt will go with the assets and will become part of the -- the new business for the purchaser.

Okay. All right. Thank you.

Thanks, Steve.

Jonathan Rajewski with Goldman Sachs. Please go ahead with your question.

Hello. Can you hear me?

Yes, Jon.

I've got one, I think, question remaining and I think it's just a follow-up on the nuclear situation.

Yes.

And I'm wondering, based on what you've seen, the additional time that you think the plant's going to be out, incorporating the costs of having to pursue two separate plans for repairing the facility. I'm wondering if you could give us an update on what those costs probably are likely to be through let's assume a September 1 restart.

What we had said before, Jon, was that the proposed repair would incur O&M costs of about $16 million, which would be about 3 cents per share. We also said that replacement power costs would be about 2 to 3 cents per month for the nonJuly and August periods and about 4 to 5 percent -- I'm sorry. 4 to 5 cents for the July and August period. So that was 11 cents per share total.

Now, it is possible that the actual costs of the repairs will be greater than what we said before. We don't know that at this point with certainty, and part of it is going to depend on the final engineering plan, but I would expect that it could be somewhat higher than the figure that we gave before.

Yeah.

Yeah. inaudible) I think for just the power portion it's pretty clear. I was just trying to get at the fact that, you know, it seems as though the anticipated O&M spending is -- has sort of remained at the same level as when we initial -- when this situation was initially announced and it seems like a lot has changed since then and you guys have gathered, I'm sure, much more information in terms of, you know, what it actually is going to take and how many people and the hours and such. And so I was just hoping to maybe get narrowed down on that a little bit further.

I do think there's going to be an increase. The exact amount Jon has not been totally run down yet. I don't think it's going to be, in the grand scheme of things, much different.

Do you think it's 20%? 50%? I mean, if you'd just -- you know, what direction?

You're directionally correct. There are probably -- you know, like I say, I don't know exactly what it's going to be. We had said 3 cents per share impact before.

Right.

You know. Maybe it's a nickel afterwards. Something on that magnitude.

Okay. No, that's very helpful.

Okay.

Thanks.

Thanks, John.

Chris (inaudible) with Morgan Stanley. Please go ahead with your question.

Hi, guys. Two quick questions. We had talked before that you guys were going to be increasing the hedges over the long-term basis to make up for short position in Pennsylvania. Could you give me a status update on that?

Yeah, we continue to go ahead with those activities, Chris. You know, we've been trying to sort of market average our way into these, I guess, because of, you know, the volatility that we've experienced in power prices recently, so we continue to go ahead and buy those on an opportunistic basis when the market is good for us. I don't know, Kurt, if you have any updates specifically within the last few days of some of the activity we've done there.

Actually, the -- I don't really have any update beyond what we talked about a little bit on the time we had our last call. We have, as Rich mentioned, we continue to average in -- there was a little bit of an uptick in the market prices. We kind of backed off a little bit some of our hedging plans but then the market prices have come back down, so we've started accelerating again.

Again, what we were looking at was hedging in somewhere in the neighborhood -- I mean, towards the -- looking into 2003 through 2005 time period, overall I think our short position that we were looking at was maybe about 1500 mega watt, in that neighborhood of a range, and we were starting to market-average in some of that open position.

So it's still the plan to cover that on a -- you know, on an opportunistic basis?

That's right. And as we said the volatility in prices, we haven't gone quite as fast with that program as we might have originally thought.

Okay. The other thing I wanted to ask about was when I was at the NRC meeting on the 10th, they were really harping on the whole mock-up issue, you know, the practice run on the reactor vessel head, and I was curious if the reactor guys have given you an update on how that was going. I know on the last call you said, they said they were going to start the mock-up and I'm wondering how far has it gotten and is the NRC happy with how it's going so far or is it too early to have any feedback on that?

No, I don't really have an update on that Chris. I know the mock-up is being constructed at this point down in Virginia. I don't know exactly how far along it is or if they've actually started to test the repair at this point or if they're still constructing the mock-up, so unfortunately I don't have any new news for you.

All right. I can follow up with Tom and Kurt later on with that. Thanks. Have a good days, guys.

Peggy Jones, with ABN AMRO. Please go ahead with your question.

In terms of Davis Bessie, Peggy, we'll be filing our proposed repair plan in the next several days. Possibly as soon as tomorrow but within the next several days.

The NRC will then thoroughly review that proposed fix. We don't know how long it's going to take them. It could be -- I'm sure it will be a matter of weeks, but I don't know how many weeks at this point, so that will be the -- I guess the next critical path event is how long it takes for them to thoroughly review our documented proposed repair.

In terms of the sale of the four lake plants to NRG, we still target closing of that transaction sometime around the beginning of June.

Can you run through what has to happen between now and then, so that you could go forward with it?

At this point, it's primarily NRG completing all their regulatory approvals, both from the FERC and from EWG status from two more states that have to be obtained.

Okay. And do you expect those in the next couple of weeks?

Yes.

Okay. Great. Thank you.

Yes.

Danielle Sites with Solomon Smith Barney. Please go ahead with your question. Danielle.

Hello. Most of my questions have been answered, but I was wondering as far as the timing of the issues in Pennsylvania, could you give us a bit of a -- an idea of when you will know more about the outcome?

I'll try, Danielle. At this point, the appeals have been filed with the Supreme Court of Pennsylvania. There is no set time frame for the court to review these appeals and decide whether it wishes to hear them or not. We're told it typically takes at least several months, but it depends on the load that the court has at any point in time and so forth.

So it's very hard to handicap that, but I don't expect that we'll hear anything in a period shorter than that.

Should they elect to hear any of those appeals, it could help take possibly as much as a year for them to actually rule on IT. So we're still looking at a fair period of time before we have resolution on these issues.

This is entirely away from any actions from the commission itself, or is there an interaction there?

By virtue of the appeals, I mean everything has been stayed, so the environment that exists today and will exist until the court decides is -- is what it always has been. So there's no impact there.

Uh-huh. On another subject, you were showing about 33 million of additional nuclear expenses and mentioned that it was only because of the additional refueling, is that -- is that right?

That's correct.

It included other things as well?

No. It's the result of having two refueling outages this quarter, Danielle.

Okay. And as far as the expenses that you're incurring now for Davis Bessie, are they all deferred or are they expense as they're incurred.

No. They'll be expense as they're incurred.

Okay. And there was any -- so far in the first quarter, it was not noticeable?

The -- we just announced that the outage would be extended in the middle of the month, so there was not a meaningful impact for the first quarter.

Okay. All right. Thank you.

Thanks, Danielle.

Greg oral from Lehman Brothers, please go ahead with your question.

Thanks. Good afternoon. Hey, I was wondering if you could remind us what the debt to capital looks like at the end of this year and in '03?

Greg, it's Tom. I think with all of the debt redemption that we have scheduled for this year, and also the debt that will be deconsolidated with the closing of the Avon transaction and also the Lake Plant sale, by the end of this year, the end of '02, debt to total capital should be well below 60%. Yeah, fully loaded debt with all of the debt equivalents that are typically added back when we calculate the total capitalization and the individual ratios.

Can you get to 55% by the end of '03?

I think with the amount of debt, mandatory redemptions that are scheduled for 2003, that should be doable. And that compares to about 66% at the end of 2001. Once again, on a fully loaded basis with the sale leaseback equivalents and so forth that the rating agencies would add back.

Gotcha. Thank you.

Thanks, Greg.

Hugh Wynne from Sanford Bernstein. Please go ahead with your question.

hello. I was looking at some of the nonpower revenues generated in the first quarter this year and the first quarter of last year. It appears that there are three product lines here: Natural gas, FE facilities, and MYR, which are generating revenues that are either below or only marginally above their cost of sales. I was wondering if you might expand a little bit on why these businesses are only marginally profitable and also on what you intend to do to enhance their profitability going forward.

Sure. I'll do that, Hugh. Let's start with the gas business. By continue to review the gas business and have made some changes in our target customer mix. Last year, we had gone to sort of what I would call a mass market residential sort of program for a large portion of our gas sales. We have now pulled back from that. We're focusing on a smaller number of accounts, commercial and industrial accounts, in order to get the margin on those gas sales up to a level that we view is appropriate.

So we've already taken some steps to improve the profitability of that line of our business, and there could be other changes as well to come in the future. In terms of facility service group and MYR, those are companies that we use in our bundled product approach. They provide products and services that we sell along with the commodity.

First quarter of the year for these sorts of what I would call HVAC/construction type of businesses is generally the lowest quarter of the year. Typically, a big portion of their business comes, you know, during the summer months, so this is the -- typically the trough of their understandings. We said before, you know, we're continuing to look at these businesses and to see how we can either improve their profitability or deliver these products into our bundled offerings in some other manner, potentially, so that's under review and we'll keep you posted as we go forward in the future on that.

Thank you.

Good question, though. Hugh. Thanks.

Karen Miller with UBS Warburg. Please go ahead with your question.

Good afternoon, Rich. I was wondering if you could just go maybe backwards for us and if you were to make a -- let's pick a date -- an August 1 restart date for Davis Bessie, with when does that mean you need to hear from the NRC by or conversely, how long do you think it's going to take you to get the repair done post receiving NRC approval?

You know, Karen, that's really a hard question to answer because there's two issues that have to be completed. One is that the NRC has to approve the fix. Actually, there's three. They have to approve the fix. We have to physically, from an engineering standpoint, make the repair, and then the third is, the NRC has to approve or release the plant to return to service.

So there's really three things that have to take place before the plant comes on-line and it's -- you know, I really can't speak for the NRC in terms of how long it's going to take them to look at and hopefully approve the repair, and then after the repair is made, to inspect it, you know, review our management policies, procedures, and so forth, and everything that they need to do to release the plant to service.

So, you know, it's an imponderable in terms of handicapping that from our perspective.

Okay. Can we just pick the middle portion of that? How long do you anticipate, once you've received approval of the fix, that it will physically take you to do the work?

Physically do the work. I think we're thinking, you know, several weeks. Three weeks, something on that order.

The original -- the original repair plan or the repair plan that we made the presentation at -- I think Bob Saunders talked about this on our call on the 11th -- was a 30-day repair period. Now, whether they -- you know, whether our final repair plan will, you know, move that a little bit, you know, we'll see when we submit it.

Thank you.

Thanks, Karen.

Once again, ladies and gentlemen, if there are any additional questions, please press the 1, followed by the 4 at this time. Paul Rizen with McDonald investments, please go ahead with your follow-up question.

On the 11th, you gave an outlook for 40 cents for the quarter. I'm just wondering how that fits into the -- the 29, the 45, and the 40 we see here. Were you kind of giving a reported number or were you -- or do we have an up side surprise?

Oh, that's pretty much what our expectations were, Paul.

So you were kind of giving outlook for a reported number rather than operating number.

Right. It was all in. That's correct.

Okay. Thank you.

Thank you.

Once again, ladies and gentlemen, if there are any additional questions, please press the 1, followed I by the 4 at this time.

Why don't we take one more question, Jason, if there is one.

Peggy Jones, from ABN AMRO, please go ahead with your follow-up question.

I just wanted to ask to what degree you think S&P's concerns would be allayed by completing the sale of the plants to NRG, and what might you think their reaction would be to that prior to your being able to completely resolve everything connected to Bessie, as well as, of course, the Pennsylvania matters.

I can't really speak for S&P Peggy. I think when they changed their outlook from stable to negative, they did that, obviously, after the Davis Bessie situation became known, and also following the Pennsylvania Commonwealth court decision. I think number one, they fully appreciate our plans to accelerate that paydown. I think the sale of the lake plants was something that was not included in the models that they had looked at last summer when we initially obtained our rating for the holding company, so I think that's additional debt improvement above and beyond what they had originally based our ratings on, and I think they understand our plans and strategies going forward. So while I can't speak for them, I think obviously as these events unfold after Davis Bessie gets resolved Pennsylvania situation gets resolved and the Lake Plant sale closes hopefully by June 1st, hopefully that would be enough to make them go back and, you know, I would hope reconsider changing that outlook back to stable.

Yeah. Thanks very much, Rich.

Thanks, Peggy. I appreciate everybody's time and interest today. I know obviously there were a lot of earnings calls today. I appreciate you making time for ours. Appreciate your continued interest in FirstEnergy. If you have any follow-up questions, please feel free to give Kurt or Terry or any of us a buzz and please have a good day. Thank you.

Ladies and gentlemen, a post-view replay of this conference will be available beginning at 3:30 p.m. eastern time today through 5 o'clock p.m. eastern time on Wednesday, May 1st. To access the post view replay, you will dial 800-633-8284 and enter reservation number 20497746. Ladies and gentlemen, that does conclude your conference call for today. You may disconnect and thank you for participating.