第一能源 (FE) 2002 Q4 法說會逐字稿

Good afternoon. My name is Carmen, and I will be your conference facilitator. At this time, I'd like to welcome everyone to the FirstEnergy fourth quarter 2002 year end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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'd like to withdraw your question, press star, then the number two on your telephone keypad. Today's call will be available for replay beginning at 4:30 p.m. eastern time today through 5:00 p.m. eastern time on February 20th, 2003. The conference I.D. number is 7430501. Again, the conference I.D. is 7430501. The number to dial in for the replay is (800) 642-1687 or (706) 645-9291. Thank you.

Mr. Turosky, you may begin your conference.

Thank you, Carmen.

During this conference call we will make various look forward-looking statements within the meaning of safe harbor provisions of the United States Private Security's 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 our 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's discussion and analysis of financial condition and results of operations included in our most recent annual and quarterly reported and the S.E.C. for a detailed description of these factors.

I'd like to turn the call over to the Senior Vice President and Chief Financial Officer, Rich Marsh.

Joining me today in Akron are Harvey Wagner, Controller, Thomas Navin, Treasurer, and Terry Hausen and Kurt Turosky from our Investor Relations Group. We are also please to be joined by Gary Lidek(ph) who is Executive Vice President of a FirstEnergy Nuclear Operating Company; he'll provide an update regarding Davis-Besse restart activities.

We released our consolidated report to the financial community earlier today, and this might be helpful to refer to as we discuss our results. If you don't have that than handy it's also available in the investor relations section of our website and the address for that is www.FirstEnergyCorp.com.

We have a lot of ground today so why don't we get started. Our discussion is to compare fourth quarter results to '01 pro forma fourth quarter results. And the merger pro forma reflect '01 combined financial results for FirstEnergy and GPU as if the acquisition had been completed at the beginning of '01. Net income in the fourth quarter before unusual charges was $149m or $0.51 per share. Also excluding costs associated with the Davis-Besse extended outage, earnings were $0.70 per share. Including the Davis-Besse incremental expense and unusual Charges, we posted a net loss of $31m or $0.10 per share for the quarter.

Merger pro forma 2001 net income for the period was $140m or $0.48 per share. Unusual charges during the quarter most of which related to planned asset sales that were not consummated included $0.30 per share cumulative effect of accounting change related to our investment in Emdersa. A $0.12 adjustment relating to our decision retain our lake generating plants, and $0.11 per share impairment on our investment in Avon Energy Holdings, and an $0.08 per share of one-time other items detailed on Page 9 of our consolidated report. Incremental expense related to Davis-Besse during the quarter you was $97m or $0.19 per share included $35m replacement power costs and $62m in operation and maintenance expense.

For the year 2002, net income before unusual charges was $863m or $2.95 per share. Excluding the costs associated with the Davis-Besse extended outage, net income was $1b, or basic earnings of $3.42 per share. This result compares favorably with our earnings guidance for 2002 of $3.30 to $3.45 per share. Including the unusual charges as well as the Davis-Besse incremental expense which was $234m during the year or $0.47 per share, net income in 2002 was $629m or $2.15 per share.

I'd like to briefly touch on the unusual charges we recorded during the year, most of which we've already discussed in our private prior calls with the investment community. The first of these is an $89m charge or $0.30 per share associated with our retention of Emdersa an electric distribution company in Argentina acquired when the merger with GPU was completed in November of 2001. FirstEnergy classified Emdersa's assets and liabilities as being held for sale on our BS. Additionally, the earnings contribution from this asset excluded from our guidance. Since we hadn't Emdersa is a by the end of the year it can no longer be classified as held on the BS. As of November 1st we began consolidating the results of Emdersa's on the financial statement. As a result, FirstEnergy recorded a one time non-cash, cumulative effect of accounting change of $89m or $0.30 per share in the fourth quarter to reflect Emdersa's cumulative results of operations from the date of the merger through 2002. This charge results from a $104m currency translation loss offset by $50m of Emdersa's operating income.

The second charge stems from our decision to retain our four lake plant fossil generating units following the conclusion of our sales process in December. Depreciation had not recorded for units since November 2001, which was when we announced that they were being held for sale. Following the decision to retain these units, we recorded a charge of $74m which consists of $57m depreciation adjustment covering the period November 2001 through December '02 as well as $17m of transaction expenses.

The third charge of $50m or $0.11 per share reflects expense reduced to carrying value of our 20.1% equity investment in Avon Energy Partners. The principle asset of Avon is the midlands electric distribution business in United Kingdom. As we've previously discussed, we've been pursuing a sale of this property these activities continue. However, it appeared that the caring value of Avon would be greater than the proceeds so it became appropriate to record this charge.

There were also $170m or $0.35 per share of other one-time items, and these are detailed on page 9 of the release. Charges in the fourth quarter included a $17m claim settlement reserve with the counter party and an $8m impairment to our investment in an environmental control technology. These one-time, largely non-cash charges are now behind us and will allow us to continue to focus on the execution of our business plan.

As I said before, earnings excluding these unusual charges in the cost of the Davis-Besse extended outage were $3.42 per share during the year, which I think clearly indicates the strength of our core business franchise during the period. We also recorded a number of important operational accomplishments during the year. We achieved a record generation output of 71.3m megawatts a 6% increase over production levels of '01. This is especially note worth think given the 883-megawatt Davis-Besse unit was out of service for much of the year. The fossil generation fleet posted an outstanding performance with total 846 megawatts or an increase of 19% over '01. Fossil capacity factor during '02 was 70% compared to 58% during '01. We believe that this level of performance establishes a new baseline for our fossil generation portfolio going forward.

We also continue to make significant progress towards our debt reduction goals. During the year, we removed over $2.6b of debt from our BS, including the deconsolidation of $1.7b of debt following our sale of a 79.9% interest in Avon Energy Holdings. During the period, we also refinance refinanced $1.2b of our higher cost debt, combined these activities lowered our annualized financing cost by about a $105m or $0.25 per share and reduced outstanding debt and preferred equity of ability 14%.

This was the first full year following the combination of GPU. We made considerable progress in achieving the targeted savings from the merger and our shared service cost reduction initiatives. We remain at or above or targeted net savings levels of $75m, and expect additional continued capture during '03 of $125m. Although 2002 will certainly long be remembered as a an extremely turbulent period for the entire industry, we're proud of the strong performance of the core business and the achievements we achieved. I believe this continues to validate the fact that the business strategy which focuses on a regional retail model built upon our regulated energy delivery business is one of enduring value that can produce favorable results for investors in many different kinds of market conditions.

I'd like to now turn the call over to document Thomas Navin who will provide more details regarding the financial results.

Thanks. First I'd like to remind you that the additional details on the earnings for the quarter are included on the first page of the consolidated report of the financial community.

I'll start with the key drivers of earnings during the quarter. Primary positive contribution to earnings included higher electric sales, lower financing costs and improved performance from our distribution operations. These were, in turn, partially offset by incremental expenses associated with the Davis-Besse outage, higher fuel and purchase power costs, increased employee benefit costs, and higher depreciation and amortization expense. Starting with the sales and revenues, electric distribution deliveries which include total kilowatt hours consumed in the franchise territories regardless of generation supplier increased 6% compared to the fourth quarter '01. Residential through point increased by 12% resulted from cold than normal weather with heating degree days for the quarter 9% above normal and 32% above the same period last year. Distribution deliveries to our commercial customers increased by 7% while industrial deliveries were up slightly.

We expect the total FE system electric sales growth in '03 will be about 2% over '02 on a weather normalized basis, and slightly under 1% on an actual basis. Most of the sales increase will be in the residential and commercial sectors. Industrial sales are expected to gain only slightly in '03 due to the continued tepid economic climate. Electric generation sales during the fourth quarter increased 21% due primarily to an 83% increase in wholesale sales and a 5% increase in retail generation sales. Electric sales revenues increased by $234m after adjusting for increasing in Ohio shopping incentive and the former GPU company's transition cost recovery. The increase was due largely to a rise in wholesale revenue which was primarily driven by BGS auction sales in New Jersey and higher contracted and spot sales mostly in the PJM market. Associate with the rise in generation sales purchase cost increased $179m after adjusting for an $81m increase in deferred energy cost amortization and $35m of Davis-Besse replacement power. Fuel expense rows $11m due to the greater proportion of fossil production in the generation mix. During the quarter, we achieved a 19% increase in fossil production, which nearly offsets the 23% decrease in nuclear output stemming from the Davis-Besse outage. I should note that the Beaver Valley and Perry Nuclear units continue to perform well achieving capacity of 94% and 90% respectively during the year.

Moving on to operating expenses items of note include an increase of $61m in nuclear operating expenses which was entirely attributable to the Davis-Besse extended outage. A $36m rise in employee benefit costs due to increased health care and pension expense. $17m of transaction fees related to the attempted sale of the lake plant and a $10m reduction in distribution expenses in part attributable to our successful capture of merger savings opportunities. Total depreciation and amortization increased by $38m excluded a $57m depreciation adjustment associated with the lake plant. $9m increase in Ohio shopping deferrals and a $4m increase in the former GPU company's transition cost amortization. Contributing factors were an $18m increase in the amortization of Ohio transition costs as well as higher based depreciation.

Now I'll briefly discuss the performance of our natural gas business unit. The gross margins from our natural gas marketing business unit improved by $11m compared to the same period last year as a result of reduced sourcing costs. For the year, the gross margin from this business rows by $48m. Additionally, our investment in Great Lakes Energy Partners contributed $20m of income for the year. An increase of $8m over last year's results.

Moving on to financing activities, I want to amplify the comments made by Rich regarding the accomplishments in '02 to reduce debt, lower the financing cost and strengthen the credit profile. During the fourth quarter we completed mandatory retirement of $40m of long-term debt and $18m of preferred stock. In addition, we refinanced $50m of debt. For the year, we retired $1.4b of debt and referred stock securities, including $877m of mandatory redemptions. We also completed $547m of optional redemptions including $157m of long-term debt and $390m of preferred stock. These optional redemptions were funded primarily with $310m of proceeds from last June's Jersey Central Power and Light transition bond issuance and proceeds from asset sales.

In addition to the significant amount of debt and preferred stock redemptions, we refinanced $1.2b of long-term debt during the year. These actions will reduce annual financing costs by approximately $105m or $0.25 per share. As Rich mentioned, we also deconsolidated $1.7b of debt following the sale of the majority interest in Avon Energy Partners to Acquilla(ph).

Looking forward, we anticipate free cash flow from operations after capital expenditures and common dividend payment of approximately $730m during '03 which will allow us to redeem the $670m of long term mandatory debt redemption during the year. During the quarter we recorded several non-cash charges to equity. Like all sponsors of defined benefit pension plans, we were adversely impacted by the combination of depressed equity values and low interest rates to a degree that hasn't been experienced since ERISA was enacted in 1973. As a result the net pension asset existed at the end of '01 was reversed and a $441m charge to equity was recorded to recognize the minimum pension liability FAS87. We recorded a charge to equity of $92m; reflecting a currency translation adjustment which stems from the impact of converting Emdersa's financial statements from pesos to dollars.

These equity charges partially offset by adoption of FAS No. 143 dealing with asset retirement obligations. As of January 1st, the BS will reflect an increase of $186m in common stockholders' equity under this standard. The related earnings benefit of $0.59 per share from the cumulative effect of this accounting change is not included in the earnings guidance. Combining the two charges to equity recorded in the fourth quarter with the FAS 143 adjustment the net reduction to equity on January 1 will be $347m. The resulting net decrease to equity is a reduction of approximately 100 basis points to the equity capitalization ratio. One of the major focal points of the company, the investment community, the NRC, and many others remains our activity to safely and return the Davis-Besse nuclear unit to operational status following its shutdown that began last March.

I'll now turn the call over to Gary Lidek who will provide an update on the Davis-Besse plant.

Thank you, Tom, and good afternoon ladies and gentlemen.

I'd like to cover this afternoon is the plant status at Davis-Besse in terms of completed and ongoing work. The restart schedule and our progress on addressing the management and safety cultural issues at the facility. First in terms of plant status, we are in the process of doing a comprehensive cleaning of the reactor pressure vessel. All other fuel odor restraints are complete and we expect to be loading fuel sometime early next week. That comprehensive cleaning is really designed to ensure that there aren't any debris or any particular items in the reactor pressure vessel that could impede future operations. So we're taking a very conservative approach there in that cleaning process. Following that we'll replace the reactor head, install the refurbished service structure, make sure the reactor head fit test is completed and begin preparing for the containment pressure testing at the facility. The upper section of the containment emergency sump strainer is completely installed and the rest will be completed the March. The most difficult part of the dome painting which is the top portion is completed with the rest to be completed in April. We've completed major refurbishment of the two reactor coolant pumps and other minor maintenance in a variety of systems is well along. We've also completed installation of the permanent reactor cavity seal plate and refurbishing of two of the three containment air coolers is completed and the third expected to be completed towards the end of February. We finished the safety systems health review and the design basis functionality reviews. We've done 100% re-inspection of all fuel that will go back into the reactor vessel, and earlier this month we completed the safety feature, actuation system test which is a comprehensive equipment test covering more than 130 components, and that was successfully conducted showing we have completed a significant amount of work to date at Davis-Besse.

Turning to our improvements in the management focus on safety and employee standards, that is our safety culture issue, of course, as you're well aware, we've got a new and very strong technically competent team in place with proven leadership. 20 of the 23 senior managers have senior reactor operating licenses with over 450 years of operating persons. Substantially improved the employee's concern program for Davis-Besse and really we have done it fleet wide across the FirstEnergy Nuclear Energy Operating Company. The ownership of this program has been assigned to our Vice President of Oversight to ensure we have independence and consistency. We have hired experienced investigators to conduct inquiries into employee concerns and have much more through investigations and timely feedback and follow up on concerns raised by employees. A much greater confidentiality in the overall process. Also on the safety culture front, issued new detailed policies for safety culture at the corporate level, that includes a safety conscience work environment policies and all employees in FirstEnergy Nuclear Operating Company have been trained to the new policies. We've initiated several communication initiatives, employee concerns programs, meeting with senior executives, town haul meetings and the like to ensure the communication is as good as it can be. As you're also probably aware we've hired an outside industry expert in organizational psychology, Dr. Sonya Agar(ph), who is independently accessing the current state of our safety culture here at Davis-Besse. And validate what we have in place to improve the culture of a variety of surveys and other instruments and make additional recommendations for further improvements. I might add that the feedback on her involvement and the process at Davis-Besse from the NRC is very positive. Got good feedback in public meeting on Tuesday from the NRC.

On the regulatory front, there are two paths to regulatory approval for the restart of Davis-Besse, the old 3/5 of the panel requirements and also the confirmatory action letter issued in March 2002 by the NRC. Confirmatory action letter includes six specific actions to be completed prior to restart, two of those replacing the head and the safety significance assessment report have been closed. When we provided the NRC with the requested samples from the old head and get final approval of the root cause investigation and address authentic reports on containment extend condition review those items will be closed as well and the final item would be the NRC approval for restart which would come after we've demonstrated and addressed their requirements.

A couple of other additional items, we don't believe any of these will impact restart. First of all, the [Kesinich] petition should not impact the schedule because it really raised no new issues, and those that it did raise have either been already raced, as I said, or are being fully addressed. And as you are aware, we believe it contained numerous examples of factual errors, unsupported allegations and, really, opinion. The office of investigation inquiry is still underway with no official end date released by the NRC, although they have indicated that will not be a restart restrain. Government Accounting Office inquiry began several weeks ago their report is expected this summer.

And finally I'd add that the Senate Environment and Public Works subcommittee on clean air climate change and nuclear safety had a hearing this morning began at 9:30, that hearing is completed and the purpose of it was to review NRC oversight activities at a variety of facilities including Davis-Besse. And our reading on that hearing is we didn't hear any new issues that would impact the restart of Davis-Besse. The community support also continues to be very positive as they have support of the public meetings up here in the Oak Harbor area. So the community support, we believe, will not be a restraint to restart.

So overall, where we are in terms of the schedule, we are shooting for a restart in early to mid April. As I said, the restraints to fuel load are all resolved except the cleaning of the vessel. We expect that to be completed this weekend and should be reloading fuel early next week. The integrate containment vessel leak rate test is currently scheduled for the end of February. The reactor vessel pressure test is slated for March. And we expect to be seeking NRC approval for restart sometime in early April.

So thank you for your attention. I'll turn the program back over to Rich Marsh. Rich.

Thank you Gary. Although opportunity fortunate situation at Davis-Besse certainly dominated news coverage of the company in the year, we continued to execute the regional retail business plan and recorded significant progress during the period. We produced strong results in our seven operating company energy delivery business in '02 and that included the field integration of the three former GPU operating companies.

We met all the customer shopping targets under the Ohio restructuring plan which secures the recover of transition costs under that plan. We also launched major effort to increase the capacity factor of the fossil generating plants and achieved direct output levels from the fleet even though Davis-Besse was out of service for much of the year. We exceeded the merger cost savings targets and implement additional cost savings initiatives focused on reducing our headquarter and back office costs. When these two programs are fully implemented, we expect to save over $285m annually in operating to costs.

We've had virtually all of our providers last resort obligation on peak energy supply through '05 which coincides with the end of the competitive transition period in Ohio. Our hedge position allowed us to lock in a positive margin Polar obligation in Pennsylvania. And importantly we significantly reduced outstanding debt to partial sail of Avon and continued aggressive debt retirement program. We refinanced $1.2b of debt and taken according together these activities improve our credit profile at $0.25 per share annually to future earnings.

While we're proud of our progress during the year, there was certainly no short tam of challenges and none was larger than the Davis-Besse issue that tested our company in many different ways. I'm proud that our employees responded to this difficult situation in a dedicated and a professional manner. As Gary indicated, we made significant process toward restart and hopeful the unit will be back in service this spring.

Finally, difficult market conditions prevented us completing the asset sale program at the pace we had intended. The strategic rationale for selling these assets still remains and we'll look for opportunities to complete the program as conditions permit.

I'm pleased with our strong operational performance during 2002, the success of our cost reduction initiatives and our continued progress in improving our credit profile. We fully intend to extend these gains in all of these areas during '03. Our earnings guidance for the year '03 remains at $3.35, $3.55 per share excluding costs related to Davis-Besse and any nonrecurring charges. During the '03, our key areas of focus will include returning Davis-Besse to safe and reliable operation, continued improvement to our generation fleet, status factor resolution of the New Jersey rate proceeding. Successful continued capture of cost reduction initiatives and continued even enhancement of the credit profile and financial flexibility. I appreciate your interest in the continued success of FirstEnergy, and also your time today. We look forward to meeting and indeed exceeding your expectations during the year.

I'd like to ask Carmen our operator to open the call to questions from our analysts and investors. And again, thank you for your time today.

At this time, I'd like to remind everyone that if you'd like to ask a question, press star and then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster.

Our first question is from Paul Fremont of Jefferies.

Thank you very much. Really, two questions: One having to do with tax rates. It looks as if, for the past couple of quarters, you have been running closer to the mid 40s in terms of effective tax rate. Could we be incorporating a higher tax rate number for company going forward? And second question would be there's a very significant variation between what the company is requesting in Jersey Central Power & Light and I guess what the staff is recommending. How should we think of that rate proceeding in terms of your overall guidance for the year?

I'm going to is Harvey Wagner to answer your first question concerning tax rates.

I'll take the easy question. 41% is roughly our effective tax rate and that's what you should be using going forward.

Great.

The next question is --

I'm sorry. I need to address Paul's second question.

Thank you.

Paul, your question was really the difference between the rate payer advocate's testimony in our case for Jersey Central Power & Light and our filed position.

Right.

There was a difference, I think you would expect it to be relatively wide at this point in the proceeding, and it is. We filed a case that we think is reasonable and supportable and, you know, this is a litigated distribution rate case kind of process, and we have to have it run through the course to see where we come out. But I don't think anyone should be surprised by the fact that there is that big [inaudible] spread at this point in the process.

And in terms of the -- in terms of annual guidance, is that -- how should we think of your annual guidance relative to, you know final outcome of the rate case?

You know, we set that guidance for the year and, you know, that's the guidance that's going to be. You know, we're not expecting to change that guidance as we go forward regarding the Jersey Central Power & Light rate case.

Thank you.

Our next question is from Vick Kayton(ph) from Deutsche Asset Management.

Two questions, regarding the start of Davis-Besse in mid April. How con conservative or realistic that date is given the many things you have to accomplish, and what might cause this plant to not even to run?

Two parts to that question, Vick. First of all, in terms of how realistic is the date? Well, we put a schedule together of the activities and the expectation is to meet the schedule. I think as you recognized in my prepared remarks, we completed a tremendous amount of work in the last several months at the facility, and while there is a lot of work to go, our expectation is to push to get that work completed. But let me also add that it's very important we do the job right the first time. And these few days that we are taking to ensure that we've got good reactor pressure vessel cleanliness, good water conditions, we're taking that time even though there's a modest slip in our fuel load [inaudible]. So we'll work our best that you the schedule and make sure the plant comes on as safely and reliably as possible. So that's really where we are with the schedule at this point in time.

The only thing I did add to that is the NRC inspections are integral to our schedule right now. There is a tremendous amount of inspection activity that has to be done. They've indicated to us that those inspections dovetail into our schedule. Again, they take what time they need to go their inspections, but that creates a workable plan at this point.

In terms of whether the plant will run or not run at all, we don't have any belief right now that Davis-Besse shouldn't be a good long-term performer for the company. We've taken a tremendous number of steps to improve the material conditions of the plant, and we're working on the safety culture and the management aspects of the facility as well. We're very committed to that. And quite frankly, we're well into that. So the bulk of it's behind us, and we're looking forward to a safe and reliable restart here as soon as possible.

Thank you, but what I was really alluding to that some politicians are still open opposing that plant startup. So that was what I was getting to.

Yeah, I'm sorry if I didn't answer your question, but certainly there is some political activity on the restart. I'll characterize that in two fronts.

First of all, there's issues surrounding an interest in the NRC's oversight, and that was really the purpose of the Senate hearing this morning was to talk about the job that the NRC does in terms of its oversight of the nuclear facilities, really, throughout the country. And from my understanding of that, Davis-Besse was certainly discussed, but several other plants were discussed as well. So that's a general proceeding that really is a Congressional activity around the NRC and really isn't expected to directly impact any of the facilities, certainly not Davis-Besse's restart.

There have been some political activities calling for the long-term closing of the plant, and we're working our way through those issues. But again, we don't see those as necessary substantial in the next several months we're dealing with that.

And Vick this is Rich. Don't lose saying to sight of the fact that unfortunately, the voices that oppose the restart get prominent coverage in the press, but at the same time there's also very strong support locally within Ohio and at the federal level for restarting the plant. And unfortunately you don't read those in the headlines quite as often, but that strong basis support is very much there.

Rich if I could ask one more question about the cash flow and you're anticipating almost $1b of free cash flow this year to be used to retire debt. Could you update on that?

This is Thomas Navin, actually, what I indicated on the call was that we were looking forward to a little bit over $730m of free cash flow from operations this year, and that would be free cash flow after capital expenditures and payment of the common dividends.

Okay. Thank you.

Thanks.

Your next question is from Scott Pearl from Credit Suisse First Boston.

Good afternoon.

Hi, Scott.

Could you remind us on the New Jersey rate case what your updated request is as far as a reduction and just take us through the time frame as far as the steps from here, you know, when there might be rebuttal testimony filed and sort of, I guess, working toward a decision date around the end of July or early August, I think?

Yeah, the end date for the entire process is when the new rates get implemented on August 1st. Right now where we are, hearings are scheduled to begin, I believe, on February 18th, and they'll probably go for a little over a month, a slight delay from the original schedule. Briefs due April 11th with reply briefs on May 2nd. We expect the administrative law judge's decision sometime in mid June, the board's decision sometime in July. And as I said, rates effective August 1st. Discovery in the case is largely completed at this point. We've responded to over 1100 discovery requests. The auditor's report on accounting and procurement prudence issues associated with the deferred balance and some related items, we're expecting that to be entered into the case and, therefore, made public anytime, any day now. We conduct discovery and cross-examination of the auditors during the hearings. And that the sort of an overview of where we're at. If settlement discussions should we begin, we expect that not to happen till the spring.

What was your related request as far as increase.

Scott, you recall from, if you look at our investor ledger we put out, we actually requested a reduction in the delivery charge of $11m. That was with a 2002 test year that was fully forecasted at that point. The update to the third quarter because of our cost reduction, we had increased our reduction request from $11m to $48m. We still have to revise the filing for the fourth quarter actuals. We have not yet made that update but will very shortly.

Okay. Also was wondering if you could just -- on -- I guess there's a little bit of statement about other revenue, but just sort of talk about the -- there's a lot of items moving around, but the increase in other revenues this quarter over quarter as well as for the year and sort of separating out some of the, you know, nonrecurring items.

Sure. Do you want to take a shot at that, Harvey?

Well, we were successful with some of our venture capital funds. I think some of the items may have been put on the earnings highlights on the release that the investor relations folks put out this morning. But there was investment income from some of our venture capital funds. We had a lock-term lease arrangement with some of our dark fiber that we were able to capitalize an opportunity on.

I guess my question just sort of gets to -- so the, you know, I guess other than, I think, the $29m or so that you specifically identified, you know, the remaining amount in there, is there anything else that we wouldn't just think about as sort of base level in that other that doesn't get allocated out to any other segments in your segment breakout?

There's nothing that would be significant there.

Okay. Thank you very much.

Thank you, Scott.

Your next question is from Paul Ridzon from McDonald Investments.

Hi, Paul.

Can you hear me now?

Yes.

Do you have a you have a free cash flow of $730m. What's your estimate of extraordinary Davis-Besse costs embedded in that?

Paul, this is Tom, what we've got included in the '03 cash projections is $50m of O&M for Davis-Besse and $25m of replacement power costs.

A total of 75m.

Could you give anymore flavor of what could have come out of the Senate subcommittee hearing today? I think there's a lot of -- I think people are reacting defense I'm over the past couple of days in regards to your stock in the expectation something ugly might come out of that, expect NRC to get dragged through the mud and thought you couldn't come out favor bring on that have you heard anything other than what we've heard.

No, Paul, nothing other than we don't believe the sum and substance of that proceeding will have any bearing on the Davis-Besse restart and we didn't hear anything new today that would cause us to change that believe.

And I guess just an update, on the temper of the latest talks with agencies.

You're talk about the rating agencies, Paul?

Yes.

You know, certainly, we continue to have those discussions. I think they remain aware of the solidity of our basic business model, the stable cash flow coming from the regulated businesses are certainly a continued commitment to use the substantial cash flow to pay that down as rapidly going forward, and to the degree we can jump start that by asset sales we plan to do that. So I think they understand those issues clearly. They're tracking the progress of Davis-Besse as we all are, and we think we'll have good news to show them as we head into the spring time there.

We've had discussions with Standard & Poor's regarding our business position and whether that should be increased, raised, basically, and they are considering that at this point in time. So, you know, certainly, the agencies continue to spend a lot of time understanding our story, I think they understand the stability and the strength of the cash flows and our plans to pay down debt. So those are all positive things and we look forward to continuing those discussions with them here in the first part of the year.

Thank you. Just to double-check, raising your business profile means you have a more conservative and less risky business, correct?

Yes, actually, right now, we're at a business position six. So if we're successful, it would be a smaller number, potentially a five.

Okay. Thank you very much.

Your next question is from Dan Jenkins from Wisconsin Investments.

Hi, Dan.

Hi. I have a couple of questions. First, on Davis-Besse, you said you had, I think, about 62m of O&M and 35m of replacement power costs --

Yep.

-- in the quarter. So are you saying that should be less than in the first quarter and then tapering off a minimal amount in the second quarter? Would that be correct?

Yeah, what we're saying, Dan, is that our O&M expense for the Davis-Besse out tam in '03 we're estimate estimating about $50m. Most of that's obviously going to be expended in the earlier months of the year. It's also about roughly $10m to $15m a month, roughly, for replacement power each month that the unit is out. That's, you know, roughly a couple cents a share or thereabouts. So that's sort of where we're coming in on that, you know, the $50m is what we think it will take to get the unit buttoned up and ready to go online. If we're able to do that in the time planned frame that gets us to the $75m expenditure to get the unit back on line.

And I think you mentioned as far as the NRC's confirming action letter, they've closed two of the six section items.

That's correct, two of the six, so far, are closed. And they are actually at the facility closing all but the last, which, of course, is the final approval. So they're in the process of doing inspections on all of the others.

What has to happen -- you know, what are the actions that still haven't been closed that they're looking at?

In terms of the confirmatory action letter, we have to provide some additional samples from the old reactor head before they can close one of the items out. They immediate to do a final approval on the root cause investigation both technical and non-technical, and then we have some outstanding condition reports based on containment, extend of condition. And what that really means, Dan, is that we've done inspections and refurbishment of components inside containment, and we've closed much of that paperwork out, but not all of it. So the NRC will inspect that closed-out paperwork when that is completed probably within the next two to three weeks.

Have you completed your root cause analysis and submitted that?

Yes, we've completed ...there's two root causes -- actually several, but two achieved a lot of notoriety, one is the technical root cause that surrounded the technical event itself, and the second is the management and human performance cause, both of those root causes were completed some time ago. And what the NRC is doing is reviewing the root causes and more importantly reviewing our corrective actions on those root causes to make sure we've dealt with the issues from the root cause reports. So that's the essence of the inspection activity that's going on now is to be able to position them to they can close those items out.

Okay.

And again, I'd also add, just so there's complete discussion here, that the 0350 panel within region 3 and the process that we go through there which involves a variety of items is required as a checklist completion as well. So there's both the confirmatory action letter and the 0350 panel check list. That's the way it's been all along and that's the way it's been today .

Then on the items or the assets you still are looking to sell, I assume the Emdersa, you're expecting to sell that.

Yes. If possible we're looking at our options for Emdersa.

And are you looking to sell the remainder of the Avon holdings?

Yeah, we've been engaged in that process for sometime and will continue to remain engaged.

Is there anything else that you're still in the process of trying to find a buyer for? Or are those the main items?

In terms of international assets there's two small ownership stakes and some IPPs in Latin America, those are very small scale. And also we continue to leak at the total base of assets including domestic assets, and I'm talking primarily about heating, ventilating and air-conditioning type companies and infrastructure construction companies, some of which we had prior to the merger, some we acquired in the merger with GPU. To look at that portfolio, match that up against the business plan going forward, see whether there's any additional pruning that we need to do there. Those are our two main areas of focus in terms of selling assets. In terms of the lake plants, the strategic rationale for selling those plants still exist. Obviously, market condition rings not favorable. We said at the time that it was not a fire sale; we would only sell the assets if we got what we thought was a reasonable market price. And our view has not changed on that. If conditions change or somebody comes to us with an offer we think is reasonable for the quality of the assets, we'll listen to that. But for the time being, we're going to own those plants, retain those plants and run them as part of our generation portfolio.

As far as the international assets, following the write downs, what's the book value that you have on those right now? Do you have a ballpark for that?

Sure. The book value of our Avon investments is 14m, Emdersa is essentially zero.

The other two are very, very small.

Very insignificant, right.

In the low double-digit range.

Yeah.

Very low.

And then, final, you know, you talked about using some of the free cash flow to redeem debt. How much debt do you have maturing and do you anticipate all that will be redeemed to free cash flow?

Yeah, this year, Dan. It's roughly $670m of mandatories, and we do plan on taking all those through free cash.

Thank you.

Your next question is from Daniele Seitz from Salomon Smith Barney.

Hi Daniel.

Hi. You mentioned that you included the impact of FAS 143 in your estimate. Do you have a sense of what that would add to earnings.

Yes there's a one-time cumulative effect that is $0.59 per share that will be recognized in '03. That is not included in our guidance.

And this is a one-time number? It would not be ongoing? There is no ongoing impact.

There are very insignificant ongoing impacts, maybe to the extent of a penny or two, but that's it.

Okay. And your debt to cap ratio in '03 and what you anticipate for '04 just to get a sense of the progress you're making.

This is Tom. On the release, we had a table that shows the cap structure. And if you look at all the components of debt on that table, we ended the year 2002 -- Page 9 -- with about 65%, if you add up all the components. A couple of things I'll point out, number one, that cable actually includes $320m of transition bonds that were issued for Jersey Central Power & Light which, while they're consolidated, as far as our capital structure goes, we really do consider those transition bonds to be off credit as a result of being, you know, held by a AAA rated special purpose entity. Looking forward to this year and all the debt pay down that we anticipate, we're looking forward to about a 300 basis point improvement in the debt total capital ratio throughout.

Thanks.

Thank you.

Your next question is from Paul Debbas from ValueLine.

What are your capital spending for this year and how much debt do you plan to pay down besides the $670m that is mandatory assume no asset sales.

Let me start with your first question, Paul. Our cash capital expenditures this year targeted about $715m, a substantial reduction from the $900m level in '02. Now, obviously, that was impacted by Davis-Besse. But a substantial decline, and that's being driven by a couple factors, one of which are some of the cost-savings initiatives that we mentioned, they have capital implications. Also the completion of the program to build peeking generation facilities which basically rapped up during the '02. So those are the prime contributors to that almost $200m declining cash capital expenditures '03 versus '02.

The second part of your question, optional redemptions. Tom.

Sure, depending on the outcome of the Jersey Central rate case and our petition to seek approval from the BPU to do a follow on securitization transaction. We could have up to $420m of funds available to optionally redeem debt during '03. We haven't included any of that in our cash know from operations projections, but that would enable additional debt to come off of the BS for credit purposes.

Okay. Thank you.

Thank you, Paul.

Your next question is from Paul Patterson from Glen Rock Associates.

Good afternoon .

I want to ask you about the investment gain. Are you guys planning on or any expectation that you might be able to get anymore gains than you got in '02, such as the fiber optic sale? The second question is in relation to MYR and FE it's a small contributor but it went down and I was wondering if you could elaborate on that and what your outlook for '03 is on that. And finally I wanted to ask about the generation output which very impressive. I was wondering what the outlook in the future is. Can you continue to do that, or, you know, what might you be able to do with respect to increasing your [inaudible] output.

Thanks, Paul. Let me answer your second and third questions first, then we'll go back to the first question.

In terms of MYR which is one of the infrastructure construction companies, their results during the year were meaningfully impacted by the economic conditions, obviously. A piece of that company's business depends on the construction cycle. Obviously, the economy was not favorable for those businesses during the year, so they had an adverse impact. In terms of the HVAC portfolios, both MYR and the companies owned by FirstEnergy prior to the merger, we expect '02 results to be -- I'm sorry -- '03 results to be favorable relative to '02 results, although there are not going to be a significant driver of earnings going forward, but maybe $0.01 per share favorable relative to the prior year, which is a good accomplishment given that the economy has not bounced back in a meaningful way.

In terms of the generation output, Paul, that was a very big initiative for us and really fundamentally redefined how we run our fossil units. One of the issues we had in the past and how we manage our power supply needs is we're having to cycle those units more than we would have like to in order to meet chafing load, I guess as the engineers would call it. We really looked at how we manage our power supply and we've been able to reason the units basically flat out in the year which is nor efficient thermally, reduces O&M expenses. This is how they were really designed to operate. So we think we can continue to extend the gains into '03 and I think the fossil guys think there are more benefits to pursue as well. It's a very impressive accomplishment and there's more upside this year.

You were asking about investment gains and, you know, we take advantage of opportunities that make sense for us particularly with our telecommunications assets. That's not core to our business. And we continue to assess things that are brought to us there. As far as the venture capital types of investments, the tax-motivated investments we have in some of our low-income housing, those are pretty much ingoing in nature, nothing out of the ordinary. Actually look forward to something that hurt us in '02 were obviously the markets and how they affected the investments in some of our life insurance programs that actually are used to fund some of the compensation programs, so we expect that to turn around as well .

Just a follow-up on the generation, it sounds like the amount of Capex that you invested, the amount of capital you invested in the generation increase and output, that that's relatively small, and I was wondering if there was any metric you could give us that would suggest what the ROI is or just in general how much output per dollar, I guess, invested or anything like that. Do you have anything like that? I mean, I don't know if you have it right off the top of your head.

Yeah, I'm not sure I have anything like that in my hip pocket. Certainly the fossil guys look at those numbers carefully and we'd be glad to have that discussion with you, Paul. You're right, this is not driven by investment in capital. That wasn't the driving factor. It was operationally how we run the units as a portfolio as over all power supply, more a seen I can initiative. We'd be glad to extend that dialog with you.

Thanks a lot.

Thanks Paul. Since we're at the one-hour mark, why don't we take a one more question and we'll be available after the call for follow-ons. Carmen, could we have one more question, please.

Yes, the next question will be from David Frank from Zimmer Lucas Partners.

Hi David.

Question regarding your comments on the operating savings, $285m annually.

Okay.

Is that all O&M .

No.

Can you tell us what percent is O&M and what percent is Capex.

As a rough rule of thumb, you can assume two-thirds O&M, one-third capital.

Okay. And how much of that would you expect to achieve in '03?

You know, this is -- this is a ramping up process. Obviously, it takes a few years. It will probably be '04 before we're throwing in our total run rate. But 2003, we expect additional an sure of about $125m.

Thanks a lot, rich.

Thank you, David. Thank you everybody for your time today. We appreciate your ability to join us for this call, certainly, we look forward to, as I said before, not only meeting but exceeding your expectations for 2003. So we appreciate your time today and look forward to continuing our dialog with you during this year. So thank you very much, and hope everybody has a good day. Thank you.

Thank you for participating in today's FirstEnergy fourth quarter and year-end conference call. This call will be available for replay beginning at 4:30 p.m. eastern time today through 5:00 p.m. eastern time on February 20th, 2003. The conference I.D. number for the replay is 7430501. Again, the conference I.D. number for the replay is 7430501. The number to dial in for the replay is (800) 642-1687. or (706) 645-9291. Again, thank you for participating in today's conference. Now may now disconnect.