第一能源 (FE) 2002 Q3 法說會逐字稿

Good afternoon, my name is Carmen and I will be your conference facilitator. At this time, I would like to welcome everyone to the First Energy Corporation third quarter results conference call. As a reminder this call is being recorded and the replay will be available beginning today at 4:30 PM Eastern Time until 5 PM Eastern Time on October 24th, 2002. The conference ID for the replay is 6023505. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad.

I will now turn the call over to Kurt Turosky, Director of Investor Relations. Thank you, Mr. Turosky. You may begin your conference.

Thank you. 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 First Energy 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 conditions and results of operations 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.

Thank you Kurt. Good afternoon everyone, joining me today are Harvey Wagner, our Controller; Tom Navin, Treasurer; and Terry Hausen (ph) and Kurt Turosky from our Investor Relations Group. We are also pleased to be joined today by Gary [Lidek], Executive Vice President of FirstEnergy Nuclear Operating Company, who will provide an update on the activities at Davis-Besse.

We released our consolidated report to the financial community at about 1 o'clock today. Hopefully, many of you have that handy to refer to, as we discuss the results. The report's also available on the investor relations section of our website and the address for that is www.firstenergycorp.com. Also, if you'd like to have a copy e-mailed to you, if you've not received it yet, please feel free to call, Sheila at [Christianson] and Associates and the number there is 1-800-366-9831.

Our discussion today will compare third quarter 2002 actual results to third quarter 2001 pro forma results. Just as a reminder, the entire 2001 merger pro forma financial statements by quarter are available on our website. 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.

Our call today will also provide updates on our efforts to remarket our four light plant units, our rate case filing in New Jersey, our recently announced cost reduction initiatives and the Davis-Besse extended outage.

We have a lot to talk about today, so let's get started. Excluding two one-time earnings, net income for the third quarter was 350 million dollars with basic earnings of 1 dollar 19 cents per share. After the two one-time items, earnings were one dollar and six cents per share. These results compare favorably to our third quarter 2001 merger pro forma results of a dollar 17 per share and exceed the first call of consensus estimate of $1.04 per share. Positive contributors to earnings included increased electric sales, reduced financing costs, improved margins from our natural gas business and lower depreciation and amortization expenses. In turn, these were partially offset by higher fuel on purchased power costs. Incremental expenses associated with Davis-Besse outage and higher general franchise and local taxes. Reported earnings were also negatively impacted by two one-time charges. The first one-time item relates to the deferred energy costs at our Metropolitan Edison and Pennsylvania Electric Operating Companies. Part of the confirmation of our merger with GPU, the Pennsylvania Public Utility Commission had approved that a full accounting mechanism for these two companies provider-of-last-resort obligation in spite of our settlement stipulation.

On February 21st of this year, Pennsylvania Commonwealth Court overturned the commission's decision to go ahead with deferred accounting mechanism for energy costs. The company appealed the Commonwealth Court's decision to the Pennsylvania Supreme Court on March 25th. The Supreme Court has not yet indicated whether it will hear our appeal. However, given the passage of time since the appeal was filed we now believe that it is appropriate to recognize a one-time non-cash charge to reflect the potential adverse impact should the Supreme Court alternately choose not to review our appeal of the Commonwealth Court ruling.

At the time of the merger, on November 6th, 2001 the balance of the FirstEnergy Corp. was $231 million. At the end of the third quarter this year, this amount had increased to $287 million. This one-time non-cash charge of 11 cents per share represents the difference between the cost Met-Ed and Penelec incurred subsequent to the merger to provide power to customers and the amount the companies are permitted to charge under Pennsylvania's deregulation law.

The second one-time charge involved the 2 cents per share charge for severance associated with our cost-reduction initiative. We are very pleased with our strong operational performance in our core businesses this quarter, which helped to offset a 20 cent per share negative impact from the cost of the extended Davis-Besse outage. We experienced outstanding performance on the balance of our generating fleet during the quarter which helped us meet increased retail load including new system wide peak loads and also which facilitated higher wholesale sales. We were able to control our operating expenditures and we are starting to see the benefits of our debt reduction and refinancing activities. We also benefited from improved performance of our natural gas business units.

Excluding the one-time adjustments and the Davis-Besse extended outage costs savings would have been $1.39 per share. Additional information on the major earnings variances through the quarter is included on the first page of our consolidated report for the financial community. I would now like to turn the call over to Tom Navin our Treasurer to discuss some of the details of our financial results.

Thanks, Richard and good afternoon everyone. Electric distribution deliveries which include total kilowatt hours consumes in our franchise service territories regardless of generation supplier, increased by 6 per cent compared to the third quarter of 2001. Residential throughput increased by 13 per cent while distribution deliveries to our commercial and industrial sector were up 1.5 percent. Much higher than normal temperatures in July and August helped increase residential demand for power and was the primary factor for the increased consumption. Cooling degree days for the quarter was 34 percent above normal and 42 percent above the same period last year. During August, we set system controller at peak load records in our service territory. On August 1st the Ohio companies and Ten power recorded an all time high of 13,749 mega watts while the Pennsylvania and New Jersey service territory set a new record of 10,939 mega watts on August 14th.

Overall, electric generations sales during the quarter increased by 22 percent primarily due to a 98 percent increase in wholesale, sales. Retail generation sales increased 3 percent. Electric sales revenues increased by 262 million dollars after adjusting for Ohio shopping incentives and GPU transition costs recovery. Increased total sales revenues of 237 million dollars accounted for the majority of this variance. The increase was primarily driven by BGS auction sales in New Jersey and higher contracted and spot sales primarily in PJM.

With respect to customer shopping, I am pleased to report that we have achieved the 20 percent shopping target established in the transition legislation for all customer classes of all three Ohio operating companies. This totally eliminates the risk of losing up to 500 million dollars of our transition cost recovery from our Ohio restructuring agreement.

Fuel expenses increased by 34 million dollars as a result of the 7 percent increase in total generation output coupled with a greater proportion of fossil production in the generation mix.

We are very pleased that the performance of the balance of our generating fleet was able to more than offset the loss of the Davis-Besse output during the summer quarter. Our fossil plants were able to increase output by 19 percent compared to the same period last year. The increased fossil production was primarily attributable to our Mansfield and [Sannis] plants whose capacity factors exceeded 80 percent during the quarter. Our Beaver Valley and Perry Nuclear units also continue to perform well having achieved year-to-date capacity factors of 94 percent and 89 percent respectively.

Purchase Power expense increased by 238 million dollars after adjusting for 92 million dollars in deferred energy cost amortization and a 56 million dollar reserve for the Pennsylvania Supreme Court appeal. This variance was attributable to a 35 percent increase in Power purchases and Davis-Besse's loss output.

During the quarter nuclear expenses increased due to the Davis-Besse extended outage. Excluding the 40 million dollars of incremental expenses associated with the Davis-Besse outage, nuclear expenses would have been 36 million dollars lower compared to the same period last year primarily due to our Beaver Valley unit 1 refueling outage this quarter last year. Fossil expenses were comparable with the prior year.

During the quarter we also recorded approximately 11 million dollars as employee severance cost associated with our cost reduction initiatives recently undertaken, these cost are identified as a one-time charge to earnings. Also negatively impacting earnings was an increase in taxes other than income tax. Property and gross received taxes increased by 21 million dollars compared to the same period last year, while franchise and local taxes were up 9 million dollars. Total depreciation and amortization decreased by 12 million dollars during the quarter excluding changes in transition costs amortization. Reduction was attributable to a 10 million dollar decrease in depreciation expense associated with the plant sale of our four Lake plants.

Now I would like to discuss the performance of our natural gas business unit. Gross margins from the gas marketing business unit improved by eleven million dollars due to reduced sourcing cost compared to the same period last year. Additionally, our investment in Great Lakes Energy Partners contributed about 6 million dollars for net income, an increase of 2 million dollars compared to the same period last year.

Moving now to financing activity, I will provide an update regarding our continued efforts to reduce interest cost and improve our financial flexibility. During the quarter, we completed 548 million dollars of long-term debt redemption, 18 million dollars of preferred stock redemption and we re-financed 418 million dollars of debt. Together these actions will reduce annual financing costs by approximately 57 million dollars or 12 cents per share. For the fourth quarter, we plan to redeem approximately 58 million dollars of mandatory redemption, which will produce annualized savings of about 5 million dollars. Our debt reduction efforts will reduce our consolidated leverage to about 62 percent by the end of the year. Because of the strong cash flow resulting from our recovery on transition costs in all three states along with proceeds from the sale of non-core assets, we expect to reduce our consolidated leverage to about 57 percent by the end of 2003.

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

Thank you Tom. I'd like to start with an update on our efforts to remarket what we call our late plans for Fossil-fired generating stations located along Lake Garry that have been previously contracted for sales NRG Energy. We are actively pursuing sales opportunities for these units with other interested parties. We have executed confidentiality agreements, held management meetings, and conducted plant tours. We expect to conclude the bid process with interested parties in mid November with the objective of executing a sales agreement by year-end if the bids are deemed acceptable.

We are also continuing in our efforts to divest Emdersa, which is our distribution company in Argentina. We are hopeful that our current negotiations will progress with success from untimely closing. However, as we discussed during our second quarter earnings conference call, if we are not able to complete the sale of Emdersa or achieve a definitive agreement to do so by year-end, several actions would be required. First this asset would no longer be reflected as an asset pending sale and we would have to recognize a one-time non-cash cumulative affect of the change in accounting.

Based on results due September 30th, the amount of this adjustment would be approximately 94 million dollars or 32 cents per share. The 94 million dollar charge would be comprised of a 109 million dollar currency devaluation adjustment offset by 50 million dollars of operating income since November 6th, 2001. Also like to give you a brief update on the status of our Jersey Central Power & Light rate case proceedings.

We are actively into discovery stage at this point and we anticipate that hearings will be scheduled in the January or February timeframe. The New Jersey Board of Public Utilities has directed the office of administration, the administrative law to have the administrative law judge issue his initial recommended decision by May 1st of 2003. The rate established in this proceeding will become effective August 1st, 2003.

Consistent with our commitments that we made in April when we revised our 2002 earnings guidance we have been aggressively pursuing cost reduction initiatives across the organization. One of our primary areas of focus has been on our corporate support services function including support services for our generation and distribution businesses.

We've identified numerous opportunities to reduce our cost structure. When the program is fully implemented, we expect to save approximately 135 million dollars per year, with slightly more than half of the savings being from labor reductions. Thus far 170 severances have taken place and 200 previously open positions have been permanently eliminated; another 350 positions will be eliminated in the 2003, 2004 timeframe with most reductions taking place in 2003. Also like to give you a brief update on our provider of last resort hedging status over the next several years. Given favorable market conditions, we've continued to make systematic purchases for our 2003 to 2005 provider of last resort obligations. This effort is prudent as it minimizes our commodity market exposure and reduces the degree of uncertainty associated with the pending Pennsylvania Supreme Court appeal on the Met-Ed and Penelec differed energy mechanism.

For our estimated on Peak energy requirements, we are now a 100 percent hedged for 2003 and 2004 and 95 percent hedged for 2005, which is a great accomplishment. With respect to our provider of last resort supply in Pennsylvania effective September 1st, Metropolitan Edison Company and Pennsylvania Electric Company assign their holder responsibility to FirstEnergy solutions, which is our non-regulated business to our wholesale power transaction. Term of the assignment runs through the end of this year and will automatically be extended each successive calendar year unless any party elects to cancel the assignment by November 1st of the preceding year. Under the terms of this wholesale transaction, FirstEnergy Solution assumes to supply obligations in the energy supplied profit or loss risk. With a portion of the power supply requirements, not self-supplied by Met-Ed and Penelec under their non-utility generation contracts and other existing power contracts with third-party suppliers.

This arrangement reduces Med-Et and Penelec's exposure to high wholesale power prices by proving power at or below the shopping credit for the uncommitted holder energy cost during the term of the assignment with the FirstEnergy Solution. In turn, FirstEnergy Solutions will have the opportunity to create a positive supply margin depending on their ability to secure attractively priced energy.

As I mentioned before we are joining this afternoon by Gary Lidek, Executive Vice President of FirstEnergy Nuclear Operating Company, we appreciate Gary taking time out of his busy schedule to be with us today and we would like to have Gary talk for a few minutes to provide an update on activities of Davis-Besse, Gary.

Thank you very much Rich and good afternoon everybody. I'd like to give you a brief status on the restart effort at Davis-Besse in terms of regulatory activity and our fieldwork activities. In fact on the regulatory front the nuclear regulatory commission held one of its monthly '03 fifty panel meeting yesterday at Oak Harbor Ohio to discuss the restart activities. Those included not only the hardware but the management and human performance issues as well and from my own perspective this is one of the most productive meetings we had with the NRC.

One of the things we reported was that the restart effort includes a total of over 24,000 work activities, about 14,000 of those were completed and that's about 60 percent. As you can see we still have a lot of work to do, but we made a tremendous amount of progress, especially when you consider that a typical refueling outage entails about 6000 work activities. So, we are into a very extensive amount of work at Davis-Besse.

Of those activities that we have completed one of the most significant is the opening of the containment structure in shield building, the removal and replacement of the original rack to head, and a complete restoration of the containment and shield building. So that important project is complete, the primary contractors have demobilized and left aside so that piece of work is behind us. Additionally we've installed a service structure which fits over the top of the reactor head, and we'll begin reinstalling the Control Rod Drive mechanisms this week in preparation from mounting the head back on the reactor vessel.

We've completed our walk downs in the containment area and noted that there are number of maintenance activities yet to be done as well as some in-depth inspections. For example we are refurnishing numerous valves in containment along with containment air coolers and we are preparing the containment dome for a new patent job.

This latter project is very significant in scope that we're talking about covering about 40,000 square feet, which is nearly an acre of surface area in our containment drum. In that paint remove was about 50 percent complete as we speak. Those in-depth inspections included the bottom of the reactor vessel, where we did find some rust stains and of course that's been the topic of a fair amount of media coverage of late. Let me address that address that issue.

The rust stains have apparently resulted from boric acid that dripped down when we cleaned the top of the original reactor head with high-pressure water system. And what we did was a detailed chemical analysis of those stains, which propagated down through the bottom of the reactor head. That detailed analysis of the chemistry of those stains includes some variations and some lithium, which caused us to question whether or not there is any additional leakage. We don't believe there is. In fact if you physically look at it, it appears as if all of this is just staining from the upper cleaning activity that we did do. But nonetheless, I'm working with our supplier and inspector on the issue. We conservatively identified it and we're going to do additional testing and analysis which is in progress right now I have verified that indeed we do not have any evidence of any leakage. The safety analysis for this activity is pending with the vendor which is [Franatome], we have communicated the issue with the Nuclear Regulatory Commission and in fact yesterday, at the public meeting with the Nuclear Regulatory Commission, we were very highly praised by the NRC for taking a very conservative approach on identifying some of these discrepancies that we have identified in the chemical analysis.

So we have got more analytical work to do, but we do not expect any big difficulty coming out of this. Some possible options going forward on this if the chemistry continues to prove inconclusive would be to do additional inspections underneath the reactor vessel, using non-destructive examination techniques, so that is an option. We could do additional more detailed visual inspections, again our visual inspections have determined there is no leakage that's identifiable at all at this point. Then finally and this probably really represents the worst case is that when we pressurize the reactor, towards start up that we would do a serious of detailed inspections to ensure again that once again we do not have any leakage.

So the bottom line on this is we are taking a very conservative posture in identifying any possible issues that we may have with our reactor vessel.

In addition there is some other hardware issues that we are working on inside containment, this includes the modification of our containment sump to increase the margin there from we got about 50 square feet now, our filtering capability we are going to up to over 1300 square feet of filtering capability and again on our containment sump modification we got good praise from the NRC that we are taking a very conservative approach there as well. We are refurnishing reactor coolant pumps and working on the containment decay heat valve pits. Additionally we are in the process of reviewing 31 major plant systems as well as reviewing programs and procedures, and testing our equipment to ensure reliable and safe operation. The restart effort of course involves more than just replacement of the reactor head, we are working on plant equipment.

Based on the findings of our root cause analysis, we have designed a detailed checklist to ensure that we have made the necessary management and human performance changes as well. To make sure that we have effective leadership and oversight in place and we have established the proper safety culture throughout the workforce at Davis Besse. We have identified the need for additional changes in our technical procedure and process improvements necessary for restart. Those have been included in our restart schedule.

Some examples of the this, human performance and management changes, includes such things as our new executive team at FirstEnergy Nuclear, the new senior management team at the Davis-Besse Station. The restructuring of our organization to assure more stringent oversight of plant operations, the completion of a recent employees survey on safety conscious work environment and our improvement plan to improve safety focus at the plant, revised expectations and standards for engineering staff as well as all [Inaudible] management and the list goes on.

An interesting example that I would offer is that last week we took a significant step in reshaping the culture at Davis-Besse by conducting a [Inaudible] training session on a case study with the reactor head degradation issue. This training covered the detailed chronology of events that caused the problem and it explained how we got there, why it happened and what we need to do differently as an organization and as individuals to prevent a reoccurrence of a situation like this in the future. It was mandatorily attended by every employee, and manager, and senior executives participated as well, and we went as far as testing everybody on the results of the case study.

So, as you can see, we have been very busy. We have made a lot of progress, and we know we have a lot to do before we can restart. Continue to believe however, that the physical work activities can be completed in time to support our plant restart by early next year. And have to say that we also recognize that the NRC, of course, will have the final say on when we can put the plant back in service. So, with that I'll turn it back to Richard Marsh.

Thank you Garry. Garry will be available to participate in the question and answer session as well. So, in closing, let me say that I am delighted, and I don't use that term lightly, delighted with our operational results during the quarter. I would like to express my thanks to all of the hardworking employees of First Energy who contributed to this very positive result.

Excluding the cost of the extended outage to Davis-Besse, any potential impact from Emdersa and the reserve for potential adverse impact from the Supreme Court appeals that I mentioned. We continue to expect earnings to be at the high end of our guidance range of 3 dollars and 30 cents, and 3 dollars and 45 cents per share. For 2003, we continue to target 7-8% earnings growth from our previous 2002 earnings guidance of 3 dollars and 45 cents, to 3 dollars and 65 cents per share. This guidance excludes any incremental expenses associated with the Davis-Besse restart effort, which we recently announced would include approximately 50 million dollars of O&M expense next year.

In addition to being pleased with our strong operational performance in our core business during the quarter, we are also very happy with our continued progress to aggressively improve our credit profile through the redemption of refinancing activities that Tom outlined. We are confident that we have a blueprint in place to continue the successful capture of the identified merger and cost reduction savings, which will add to earnings in the future.

I very much appreciate everybody's time and interest in First Energy today. We look forward to seeing many of you next week at the EEI Conference in Palm Desert. Just like to remind all our listeners that we are hosting and will be Web casting or luncheon presentation on Monday, October 21st at 1 p.m. Pacific Standard Time. I would also like to remind everyone that we will be hosting our Annual Analyst Conference in New York on December 4th at the Pier Hotel. Thank you very much for your time and attention today, and I would now like to ask the operator to open the call to questions from analysts.

At this time, I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Steven Fleishman of Merrill Lynch.

Hi Rich, can you hear me?

Yes, Steve, I can.

Okay thanks. First on the, if the degree that EMbass that comes back into operational earnings, what would you expect to be the ongoing loss there?

This is Harvey Wagner, Steve. The losses really are resuming from de-valuation issues from the dollar and peso were decoupled earlier in the year. On a going forward basis they are generating operating income.

Okay, so, it's the pretty much modest income.

Yeah, it will be modest, Steve, correct.

Okay. Secondly, Tom gave the year-end debt-to-capital of 57 percent, could you clarify what is included or not included in getting to that number, does that include or exclude the Lake Plant sale? Also did that assume the current cost, all the cost of Davis-Besse outage has known right now?

Steve, this is Tom. Yes, actually it does include the additional expenses for Davis-Besse that Richard mentioned earlier on the call and we are also making assumptions regarding sale of the Lake Plant that would probably close sometime in the third quarter of 2003. Cash proceeds from that sale along with cash proceed from other non-core asset sales would be used to redeem debt. So, that's pretty much how we get to the 57 percent area.

What would that number be, would you think, if you didn't include the asset sale?

Well, we have, we have mandatory debt redemptions scheduled next year of about 710 million dollars. We should be able, we are planning on having enough free cash flow from operations should be able to redeem all of that, most of that debt, there are some preferred stock redemptions then there are as well, but we believe we will have free cash flow available to take out all 710 million of mandatory and also hope to be able to complete a securitization transaction that would allow for some additional optional redemptions on top of that.

Is that in New Jersey?

Yes.

Okay. Rich can you, I guess just comment given that these include these asset sales, just how confident are you based on what you have seen so far that you can sell the Lake Plant.

Well, we remain hopeful, Steve, obviously, we won't know for sure till we get the [Inaudible] and see whether the numbers are acceptable, but I can't say that we have a number of parties that are very actively engaged in the process and are working very hard. So, I know they are taking it very seriously and we remain, you know, optimistic that we will be able to do, but as I say, the proof of the pudding will obvious when the bits come in.

Okay thank you.

Thank you.

Your next question is from Tom Hamlin from Wachovia Securities.

Good afternoon Rich.

Hey Tom, how are you?

Good, the one-time item that went by pretty quick on the reserve for the Supreme Court appeal. Are these power charges that were incurred in 2002 but you are and you would have deferred them, I mean you did defer them but now you are saying we are going to expense them or are you going to hold them in reserve, I am trying to figure whether I should you know, whether these are going to be representative of ongoing mismatch of costs and revenues from here on out?

Tom this is Harvey. The 32 million sorry the 56 million goes back to the date of the mergers so, it includes a little bit of time in 2001. Going forward with the assumption of the polar obligation of Menad Empanelactifer by our unregulated subsidiary, we don't anticipate that even assuming that we were able to continue the deferral accounting that further deferrals would build up.

So, these are carry-overs of contracts that Menad Empanelactifer has signed before you acquired them and they were sort of running out?

Those are impulsive. That is correct.

Okay, so they were sort of in their profit and loss for them for this year but we you know, you fixed that but probably we are a part of the actual results for the year and we don't expect them to come back again?

That is correct.

Okay that is all I had, thanks.

Thanks Tom.

Your next question is from Greg Oro from Lehman Brothers.

Good afternoon.

Hey Greg.

Hey. Just following on up on that one time item regarding the Supreme Court appeal in Pennsylvania, you know, assuming that the court decides not to hear your appeal, as I remember, correctly if I am wrong, the next step is back to the Pennsylvania public utility commission to decide, about whether they want to change their initial decision on the merger?

Greg our understanding would be that, that would be the last step and if the Supreme Court chose not to review the decision, the Commonwealth Court decision will be upheld and the deferral will not to be able to take place.

Yes that would be the last step here.

Ok. That would be the final step?

Yes.

Ok. Maybe you could remind us then what the average credit, average shopping credit is at Menad Empanelac?

Four and half cents roughly.

Ok. Thanks.

As we mentioned, we have the lion share of the on peek energy already contracted for the 2005 period.

Okay thanks.

Thanks Greg.

Your next question is from Paul Ridzon of McDonald Investments, Inc.

Good afternoon.

Hi Paul.

[Inaudible] .

Hey man, thank you. We appreciate the help.

Just wondering where you guys Davis-Besse hedged in into '03 at this point.

We are fully hedged for the first several months of 2003. We thought that was a prudent thing to do. We have additional supply secured for some of the following months instead of decreasing amount. Obviously we [Inaudible] as Gary mentioned we were focused to restart the unit volume (ph) in 2003. We thought that was a prudent thing to do and if the plan comes back online as we expect to be able to use that power elsewhere. So, obviously the market [Inaudible] weak with pricing [Inaudible] pretty attractive we have been able to do that in an economical manner.

I still think the market is approaching you pretty aggressively trying to sell power as much as you want.

We have not have any problem with secure and supply. Then we have been trying to do this in small pieces for, you know, [Inaudible] to the market so forth, but the market remains pretty liquid and favorable.

And this, you know, if you get the plans back up in your, you are saying [Inaudible] didn't buy appliances (ph) that are going to I heard you [Inaudible] .

No, that's correct Paul.

Okay, thank you very much.

Thank you.

Your next question is from Paul Fremont of Jefferies & Co.

Thank you very much. Really questions on two fronts. The first is you sort of given us an idea where your debt-to-total cap is likely to be at the end of next year. Can you update us on funds from operation to debt and funds from operation coverage where you would expect to be at the end of the year?

Yeah Paul. This is Tom. I think the FFO to debt number by the - I am sorry, in your question were you asking by the end of this year?

No, by the end of next year.

End of next year. Okay. The FFO to debt number should be approaching the high teens by the end of next year if it's not breaking through the 20 percent range and we expect FFO interest coverage by the end of 2003 to be some more in the neighborhood of 3.3 times.

Okay and since those numbers are, I guess somewhat below at least the S&P targeted range for DDD. Is the basic argument here is that overtime the surplus cash flow from the amortization of standard costs brings these numbers more in line with those standards, it just takes a little bit longer?

Yeah. I think that's true, Paul. We've presented a very aggressive trajectory to the rating agencies in terms of our credit improvement. I think we're well along on that. I think they understand it, some times these things cannot totally be accomplished over night, but we have a very aggressive game plan and we are going to continue to work better, just as hard as we can.

And then the other question that I have is really sort of related to the NRC decision-making process on restart, when, what should we look for as, you know, the time frame or the key [meetings] to watch that will give us some indication after the NRC's comfort level with the work that you have done so far?

Yeah. Paul, this is Gary Lidek. I think there is couple of pieces to that. The first is, it's clearly an additive process already that is their inspections of our work continue to increase as we get closer to restart they are putting more inspector hours into the plant very single week out there. As we finish more things they come in and look more. As they look more they have additional questions and some times that creates additional work to do if you will. So, that's one part of it, is just getting through that interview process.

In terms of a formal mechanism with the NRC we would remind every body that there is no commissioner ordered that's required here at this point and we don't expect any necessary third party review by any outside agency, these are things that have happened on other extended shutdowns, regulatory shutdowns. So, we continue to believe that there won't be any formal process there at the commissioner level, at the Washingtons level. Suddenly what that boils down to is that the old 350 processes which is controlled by the region is the process whereby we will get our permission to restart and of course within that old 350 process are all these inspections we are talking about. So, what we'll see is an accumulation of inspected hours, accumulation of satisfactory check marks on those checklist by the NRC and this is just an acknowledgement done by the old 350 panel which is chaired by Jack Rowe (ph) that he's comfortable the plants ready to run. So, that's the process -- so we would look for improving feedback from the NRC with each the meetings. I think yesterday was a very positive sign for us not withstanding some of the --- some of the media rhetoric if you will. We had a very good session with the NRC and they gave us a lot of credit for the progress that we were making. So, those are the signs I look for along the way and if that all comes together accumulatively by then, there shouldn't be a big delay after the plans physically ready.

Thank you very much.

Thank you.

Your next question is from Chris Melendez of UBS Principal Finance.

Hai everybody.

Hai Chris!

Gary, I have one quick question. How comfortable are you now with the cost associated with the average given the revised estimate that they reflect and also with the timing when we started [Inaudible] do something where we safely say that this was flat but in terms of cost and timings. I know that everything is [Inaudible] on the NRC in the end but based on the personal thing.

Yes this is certainly, Chris everything that we know at this point in time and as you can tell up on those previous answer that there is a lot iteration with the NRC and of course that iteration can modify the scope, it can decrease the scope but it could also increase the scope. But, based on it and we will see it right now, this is very well projecting. The physical work in a plant is much more straight forward to project and has a pretty high confidence factor at this in point in time and again we are targeting to get that, the most of that physical work done by the end of the year. The human performance in management issues, of course that's a little more ambiguous in terms of when do you reach a point of successful change, if you will, with the work force and those kinds of things. So there is some ambiguity in that. But I believe that as we get into part of the next year and the physical work is done, I think there will be a fare amount of enthusiasm by the part of the work force and with that will come a lot of, I think positive attitude by the work force and people will line up behind whether we need to restart the plan. That's the kind of way, I see it right now.

Okay. Tom I wanted to ask one question. Could you just give us an update on the roll over the bank line?

Sure Chris. The syndication process is proceeding very well. We expect all the final commitments to be in by early next week. At this point I am very confident that we are going to have a successful syndication and you know we actually announced the revolver renewal back in third week in September and we announced it as billion dollar renewal would be the option reserved actually upside the 2 billion 250. Right now as I said I am still confident that we are going to have a successful conclusions of syndication. We had scheduled commitments to be end by actually tomorrow but as it is typical and these renewal processed this commitment starts due time the lag maybe a day or two. I think by Monday and Tuesday and next week we should know for sure but again I am confident that we are going to get there.

Okay great. Thanks for.

Thanks Chris.

Hi.

Would it be possible to take us through the sources and uses cash for 2002 and 03?

Yeah, we would be glad to do that offline, that will probably be a little more lengthier answer to the question, so, we will have Terry or Kurt give you a buzz back and make sure we do that.

Okay and then this is sort of longer-term question, but do you see any possibility for getting bundled rates extended in Ohio?

That was 2005 when the transition period ends?

Yes.

I think it is unclear at this point how, you know, they could play out, I think one litmus test could be next year when the transition period for DPL is scheduled to expire at the end of 2003, but at this point it is speculative, I mean [Gap In Audio] still now.

Okay, thank you very much.

Thank you.

You next question is from Raymond Luang from Bear Stearns.

Hi, guys. Most of my questions have been answered but just if you can help me on securitization, how much were you guys expecting there?

Securitization in New Jersey looking at somewhere neighborhood of 400 million dollars based on the expected deferred balance level in August of '03.

Okay great. Thanks Tom.

Thanks Ray.

Your next question is from Paul Patterson of Glenmark Associates.

Hi guys.

Hi Paul.

Most of the questions have been asked, but let me ask a question on, for Gary, with respect to the additional rusting and what have you, you mentioned that there are lot of ways of checking whether there will be leak, in the last methodology you mentioned was, you know I guess [Inaudible] start up you [Inaudible] the platform and that would be through a sort of the competitive test as to whether or not there will be a leak. Is any way, could you just give us an idea about what the chances would be that, the additional leaks would, you know that last test before the other test that you showed did it come up with anything that that last test would actually indicate something, do you know anything?

Yeah , I think and I was just saying I think there is a lot of, a lot of speculation on here, you know what it is was trying to demonstarte, what it is we are trying to go after, there is no question that we don't have, you know, we currently do not have any visible signs of any leakage or any evidence of leakage at this point in time. We've had a chemistry change in the material around the outside of the lower part of the vessel that has caused us to ask a question what's going on. So any indications that there are visually would be very difficult detect, we are also blieved that any non-destructive examinations are very difficult, it was attacked so, I think the final piece of this would be, well it's put the vessel under pressure and monitored in detail until you forgot anything going on there, you know again, certainly this would not be something that, you know, would have just to be blunt about water spring alternating (ph) like that, that's not what we would be talking about, we probably we didn't have a drop. So it's very hard, chase this if you will, but nonetheless we are going to chase it to ground and get a sense on whether or not we've got any material problems under the vessel.

Another approach of course is over a period of time as we take each refilling on it just to do a detail inspection. And we think that's a possible outcome out of all of this, just to reassure ourselves that nothing is going on underneath that reactor vessel. So, that's certainly, if there is any thing there we tend to propogate over a long period of time and slowly over a long period of time. So, I know a lot of people are saying, hey this is kind of LIFO (ph) we had on top of the head and so forth and rest assured right now we are chasing some chemistry indications as a post-even, having an, any notion, if there is any leak or any facts or any - -anything at this point.

Would it be safe to say that, it would be highly unlikely that you probably come with any leak after the specialization considering all the work that you're doing would have you to, you porbably have something to lay before last minute kind of a specialization would happen?

Yeah, I think that's right Paul, I think we are in the most [Inaudible] as early as possible detection of any news going on there as can and that is gone after this at this poing even before we pressurize the vessel.

Okay and just one final clarification, I didn't get how much warm weather actually contributed to cents per share, earnings per share, how of the benefit did you guys get from warmer weather this quarter?

You didn't hear it because we didn't mention it Paul.

Okay.

[Laughter] We don't quantify that typically.

You don't ? It sounds like it was pretty strong summer down there ?

It was a good summer for us, it was a good for all ...

..abnormally warm.

Hi, Paul Kurt Turosky, we did indicate cooling degree days in quater were up 34 percent above normal and 42 percent above the same period last year and kind of on a year-to-date basis on [Inaudible] on page 9, actually on 12 months ending basis. To indicate what's it going to be a cooling and heating degree for the year. Like I said it was a strong summer but we don't try to take that next step and convert it to earnings.

Okay, well then going forward for next year, will you become close to your confidence at this, this could be achieved regardless of more normal weather?

Paul, we also presume normal weather when we make our earnings forecast proper.

Okay,thanks a lot.

Thank you.

Our next question is from Lesly Rich of Banc of America.

Hi, I wonder if you could on just briefly go over sourcing assignment?

I'm sorry I couldn't hear the question madam.

If you could briefly go over the sources you use, going to it detailed summary but it would be helpful if I could know, you know, for your cash flow projections are, CAPEX at [Inaudible]?

This is Tom. We can give you call back and actually go over a detailed source of use for 2003 and that's the period that you are interested and I think, that will take a little bit more time, we can do that offline if you are okay with that. The cash flow projections looking ahead of 2003 are obviously going to be much stronger that what we are seeing in '02 as a result of a number of factors significant increase I would expect in the electric commodity margin with the absence of some of the significant Davis-Besse expenses that we have incurred this year. We would also expect capital expenditures to be quite a bit lower in 03. The ramp up of merger savings and the cost reduction initiatives that we talked about a little bit earlier on the call will also be a key contributor. Reduced financing cost in '03 will be another contributor. So, I would expect pretty significant increase probably in the neighborhood of 625 to 650 million dollars of free cash flow from operations 2003 over 2002 as a result of those factors I just mentioned. I will give you a call back to go over the source and news details.

Okay and then separately I wondered if you had any additional information in terms of the 22 percent increase in wholesale this quarter?

Sorry Leslie?

There was the 22 percent increase in wholesale sales in the quarter and I just wondered if you had any information on what was driving that?

Just hang on, one second.

Talked upon talking some of the BGS auctions and sales from the PJM additional available sales.

And with overall electric generation sales were up 22 percent. Wholesales sales were actually up 98 percent.

Oh, I am sorry.

And the, again it was driven by the BGS auction sales into New Jersey activities and higher contracted and spot sales primarily in the PJM.

Okay thank you.

Thank you.

So our next question is from Daniel Sietz of Solomon Smith Barney.

Hi, I was just wondering, you were talking about 6000 work orders to be completed, is that part of the physical work or does it include everything?

This is Gary Lidek, Daniele and I think the 6000 work activities that we referred to earlier represent a typical refueling outage and actually we're in the mode right now where we've got over 24,000 activities identified and we're a little over half done with that at this point.

I was just wondering if in your mind there were some sort of a, may be some sort of a schedule for those. When did you anticipate those to be done and I thought, that these were associated to the physical work that would be the one that could be done by year-end?

Yes, certainly the comments that we've made with respect to the schedule and the completion of the work is consistent with these numbers of activities. I'd also add that a work activity that is in our schedule may be a piece of office work activity that is required for restart too, not just necessarily field work.

So it has nothing to do with the other more administrative reviews and surveys and all that, that is not part of the work activity, they are more physical issues?

Most of the activities that we talk about in the 24,000 number are physical field activities but again there are some in office activities that they affect the schedule. For example, if we need to design modification before we go into the field to perform a modification and that design modification activity in the office would be an activity.

Most of the activities that we talk about in the 24,000 numbers are physical field activities but again there are some in office activities as they affect the schedule. For example, if we need to design modification before we go into the field to perform a modification and that design modification activity in the office would be an activity.

No I understand. I was just trying to relate the number of work orders and some sort of a schedule in your mind of when they will be completed and that was the idea.

Okay.

As Gary said, Daniel you know we expect the plant to be ready. From an engineering standpoint to be restarted very early next year. You know some work activities may not have to be completed by the time the unit restarts. As Gary said some of these things are more administrative and office and what not but the schedule continues to be that we'll have this plant ready to be restarted from an engineering standpoint very early 2003.

The point of the numbers was just to demonstrate the magnitude of work that we really have going on here, which is substantially greater than any typical refilling outage.

Oh definitely I appreciate that. Thanks a lot.

Thanks Daniele. Operator why don't we take one more call, please, if there is one.

Your final question comes from Paul Ridzon of McDonald Investments.

The pressure testing. In the event of chemical or ultrasonic test are in conclusive, would you pressure test ahead of a restart or heat up or is that something you have to do in conjunction with the heat up to bring the plant up. It seems like in the event that something did come out of that, you have to, you know shutdown and then address the issue, as oppose to, maybe during the pressure test early, prepare yourself for more time that you could do in parallel over with other works?

Yeah. We are exploring all our options, Paul. We have in process right now, review going on at the plant about the feasibility of during an early pressure test. We are in fact considering the possibility of that before or even put the fuel back in the reactor. Again, just as you pointed out, to be sure that we identify anything as soon as possible. But, again, we are not even close to a decision yet on whether even such a test would be necessary or meaningful. We are in the exploration phase of some chemistry anomalies based on the indications that we have on side of the vessel and underneath the vessel and we have got to get that chemistry sorted out, get that analysis in better shape before it starts on any next steps.

How long do you think this current round of chemical testing is going take, is it one or two weeks?

We right now are projecting mid to next week to get additional analysis work complete. We may do another round of testing in the field depending on what it says.

Okay thank you.

Thank you Paul. And again, I appreciate everybody's time today. We appreciate the opportunity to talk about our continued progress as reflected in our third quarter results. So, we appreciate everybody's time and we hope to see many of you next week in EEI in California. So, thank you very much and please have good day.

Thank you for participating in today's FirstEnergy Corporation third quarter results conference call. This call will be available for replay beginning at 4:30 p.m. Eastern Time today till 5:00 p.m. Eastern time on October 24th, 2002. The conference ID number for the replay is 602-3505. Again the conference ID number for the replay is 6-0-2-3-5-0-5. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. This concludes today's teleconference. You may now disconnect.