第一能源 (FE) 2003 Q2 法說會逐字稿

Good afternoon my name is Nicole and I will be your conference facilitator. At this time, I would like to welcome everyone to the First Energy Corporation earnings conference call. All lines have been placed in mute to reduce any background noise. After the speakers' remarks there will be a question-and-answer period. If would you like to ask a question, press star and the number one on your telephone keypad. If would you like to withdraw your question, press star and the number two on your telephone keypad. Thank you. I would now like to turn the call over to Kurt Turosky, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Nicole. First I would like to thank everyone for their patience, waiting the start of this call. We experienced some technical difficulty with the issuance of our earnings release which, necessitated the delayed start. I would also like to mention that our consolidated report to the financial community and investor letter were emailed to the investment community about five minutes ago.

Today's conference call includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to the terms, anticipate, potential, expect, believe, estimate and similar words. Actual results differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, replacement of power costs being higher than anticipated or inadequately hedged, maintenance costs being higher than anticipated, legislative and regulatory changes including revised environmental requirements, the availability and cost of capital, the inability of the Davis-Besse nuclear plant to restart in the fall of 2003, including, because of an inability to obtain favorable final determination from the Nuclear Regulatory Commission. Other factors could cause actual results to differ materially from those indicated in the forward looking statements.

Please see your management discussion and analysis of financial condition and results of operation, included in the most recent annual and quarterly reported filed with the Security and Exchange Commission for a detailed description of these factors. In addition, where applicable, the financial measures to be discussed include adjustments expected to result from the announced restatement of the 2002 financial statements for First Energy and of the restatements for 2001and 2002 for Cleveland Electric Illuminating and Toledo Edison. There can be no assurance these measures will not change materially as the result of the completed statement process.

Participating in today's call are Chairman and Chief Executive Officer, Pete Burg and Senior Vice President and Chief Financial Officer, Rich Marsh. Also in attendance, our Controller, Harvey L. Wagner, our Treasurer, Tom Navin and Terry Howson, Vice President of our Invest or Relations Group. I will now turn the call over to Rich Marsh.

Thanks Kurt and good afternoon everybody. We have a lot to talk about today, so why don't we go ahead and get started.

As Kurt mentioned we released our consolidated report to the financial community. It might be handy to refer to that as we discuss our second quarter results. Please note that during the call I will make reference to various non-GAAP financial results. A reconciliation to the corresponding results on a GAAP basis are contained on page 1 and 4 of the consolidated report. The report, which includes information required by Regulation G is also available on the investor relations section of our web site and the address for that is www.firstenergycorp.com.

Non-GAAP earnings for the second quarter, before loss on discontinued operations and unusual charges, were 39 cents per share, excluding incremental costs associated with the Davis-Besse outage, normalized non-GAAP earnings were 52 cents per share compared to the restated second quarter 2002 normalized non-GAAP earnings of 84 cents per share.

During the quarter, the Davis-Besse outage resulted in incremental O&M expense of $22 million and replacement power cost of $41 million and these reduced earnings by 13 cents per share. Also during the quarter, we recognized a one-time non-cash charge from discontinued operations of 67 million or 23 cents per share, from the abandonment of our ownership in Emdersa, a company in Argentina acquired with GPU.

We also incurred three unusual charges during the quarter. The first reflects the New Jersey Board of Public Utilities July 25th decision in the New Jersey Central Power & Light Rate Case. In this ruling the board disallowed the recovery of $153 million of deferred energy cost, as well as approximately $6 million of other costs. As a result, we've taken a charge of $159 million or 32 cents per share to recognize the non-recoverability of these items.

The second charge concerns our sale of a note receivable from [Aquilla]. This note relates to a Aquilla's acquisition of a79.9% ownership of Avon Energy Partners. The curing value that we had on that note was approximately $75 million on our books and we sold this recently to a third party for $63.25 million. So accordingly, we recorded an impairment of $12.6 million in the second quarter.

The third unusual charge of $6.2 million relates to the sale of Northeast Ohio Natural Gas Company, a small natural gas distribution business that we had acquired in 1998. Including these charges, which total $177 million or 36 cents per share, the company recorded a net loss in the second quarter of $58 million or 20 cents per share. This compares to restated net income of $216 million or 74 cents per share in the same period last year.

Normalized non-GAAP earnings for the quarter were about 15 cents per share below our guidance. About 13 cents per share of that shortfall was attributable to costs of extended refueling outages at our Beaver Valley Unit 1 and Perry Nuclear Plants, which I will discuss in a minute. Other factors that contributed to reduced earnings relative to the second quarter of last year included, the fact that we had two nuclear refueling outages this year while we had none last year, increased non-cash pension in OPEB expenses, higher non-cash Ohio transition cost to amortization expense and reduced income from international operations. Partially offsetting these items were lower financing costs due to our continued aggressive debt reduction program and our other refinancing initiatives, and the continued strong performance of our fossil generation fleet.

Let me take a minute to discuss the details of our financial results. Electric distribution deliveries were 3% lower in the second quarter than in the second quarter of last year, primarily due to the very mild spring weather we experienced. Cooling degree days were 31% below the levels of the prior year and fully 25% below normal.

Residential distribution sales decreased 6% while commercial distribution sales were relatively flat compared with the same time period last year. Industrial sales were down 3%. Electric gross margin, which reflects electric revenues, less fuel and purchase power costs, declined $75 million after adjusting for changes in regulatory deferrals, the write-off of $153 million in JCP & L deferred energy costs and the Davis-Besse replacement power costs. This resulted from increased purchase power expense, attributable, largely, to the lower than anticipated availability of our nuclear fleet during the quarter.

Generation output reflects a 12% decrease from the levels achieved in the second quarter of last year. Although the fossil generation fleet continued to perform strongly, nuclear output was 34% below the level of the prior year, due primarily to refueling outages at Beaver Valley 1 and Perry. The Beaver Valley outage was completed in 52 days. The outage was extended by, approximately, two weeks to repair minor surface flaws on four of the 65 control rod dry mechanism nozzles. The period refueling outage was completed in 56 days and was extended by about 4 weeks to make various reliability and performance improvements to the plant systems. As a result of these outages, total nuclear operating expense, splitting those associated with the Davis-Besse outage, increased by $52 million and about $28 million of that amount reflects repairs and improvements conducted during these extended outages.

Net income from international operations, before loss and discontinued operations in the impairment resulted to Aquilla's note, decreased $10 million versus the prior year. [INAUDIBLE] energy partners during the second quarter. During the quarter we abandoned our ownership interest in Emdersa, which is an electric distribution company in Argentina, and recognized a one-time non-cash charge of $67 million or 23 cents per share, as a loss on discontinued operations. First Energy's cash income tax payments will be reduced by $129 million, as a result of the abandonment. The company has reserved the full amount of the estimated tax benefit.

During the period, we continued to make favorable progress on our aggressive debt reduction program. Compared to the second quarter of last year, the net financing costs decreased $44 million. Financing activities completed during the quarter included mandatory debt retirements of $293 million, repricing of $50 million of pollution control debt, and refinancing of $422 million, of callable long-term debt, which we achieved through the issuance of $150 million in JCP & L senior unsecured notes and $325 million in Ohio Edison senior unsecured notes. These and other actions will further reduce our annualized financing costs by $35 million.

Free cash from operations in the first half of the year was impacted by some of the same factors that affected earnings, however, these in large part, will be offset by non-operational cash inflows that we had not anticipated or considered in our original projections. These include the $129 million cash tax benefit that results from our abandonment of Emdersa. The sale of the note receivable that we had from [Aquilla] and $14 million in proceeds that we expect from the sale of our remaining interests in Avon Energy Partners.

We'd originally forecasted free cash generation of about $700 million this year. With the changes experienced in the first half of the year we now believe that free cash generation will total about $575 million. In addition, we retain the potential for a securitization of the deferred energy balances in New Jersey, later this year. Such a transaction might be in the size of about $275 million and would be considered off balance sheet from a credit perspective. When coupled with the $575 million cash generation, that will be used to reduce debt, this will result in total decrease in debt leverage from a rating agency perspective of about $850 million.

In the first half of the year we completed $414 million of our targeted $670 mandatory debt retirement program, all be it with an increase in our short-term borrowings. In the second half, we'll retire the remaining $256 million of mandatories and there by largely achieve our credit reduction goals for the year. Our commitment to remain on the credit improvement trajectory, we've outlined to the investment community remains undiminished.

I would like to provide an update on the recent decision by the New Jersey Board of Public Utilities regarding the Jersey Central Power & Light Rate Case. On June 27, the company announced a settlement with parties to the case, other than the staff of the board and rate payer advocate. The settlement provided for an $80 million decrease in the delivery charge and would have preserved the full recovery of $618 million of deferred energy costs. In its ruling of July 25th, the board elected not to adopt this settlement and, in fact, took a position similar to that laid out in the filing previously made by the staff. This would have the net impact of reducing JCP& L's revenue by about $62 million.

The new rates became effective August 1st and reflect the $223 million reduction in the delivery charge, partially offset by the elimination of $111 million in annual customer credits, and a $49 million, excuse me, increase in the market transition charge associated with the recovery of the deferred energy balance. The BPU decision provided for an interim allowed return on equity of 9.5% during the next six to 12% and that compares to the %10.6 return on equity that was contained in the settlement. During that period, JCP & L can initiate a proceeding to request recovery of additional expenses incurred to enhance reliability of the JCP & L system. The BPU could increase the equity to 9.75% or decrease it to 9.25%, depending on its assessment of the reliability of the company's service.

The BPU also disallowed 153 million of the $618 million of deferred energy costs requested by the company. Recovery of the remaining $465 million balance will be made over the next ten years. The company's request to securitize these deferred costs will be determined later this year in a separate proceeding.

We estimate that the BPU order will reduce annual after-tax earnings by about $121 million or 41 cents per share, not including a one time unusual charge, to reflect the deferred energy costs. We're very disappointed with the BPU's decision, and continue to review our options including possibly request for reconsideration with the BPU for an appeal to the appellate division of the Superior Court of New Jersey.

In terms of our asset sales, we continue to pursue our strategy of divesting the international assets acquired in our merger with GPU and on May 22nd we reached agreement to sell our remaining %21 ownership of Avon Energy Partners to Scottish and Southern Energy. Under the terms of the agreement, which is subject of the bond holder approval, First Energy will receive approximately $14 million of consideration for its equity position.

Earlier today, we announced a restatement of the 2002 financial statements in the first quarter 2003 financial statements of First Energy and the 2001 financial statements for Cleveland electric and Toledo Edison. We also issued a letter to the investment community, that addresses this matter in some detail, as well as the associated financial impasse. Since the letter is quite detailed and is available on the company's web site, I won't spend a lot of time on this but did want to summarize a few key points.

The restatement involves the accounting treatment for two items. The first is the recovery of transition costs in Ohio and the second is the treatment of the above market generation leases that were in place at the time of our merger with [Centerior] in 1997. As mentioned in that letter to the investment community, the treatment of these items was reviewed in the context of a possible expansion of our Ohio transition plan. It includes arcane and technical and revolves around the unique and complex transition plan for First Energy though as approved by the PUCO in 2000.

In terms of the recovery and amortization of transition costs in Ohio the review considered the means by which the effective interest amortization method is applied to the recovery of transition costs that appeared both on the company's GAAP balance sheet, as well as those that appear on the company's regulatory books. There's a sizable difference between these two amounts, due to the allowable recovery of items not on the accounting books, such as sale leaseback balances and balances that have been reduced due to purchase accounting adjustments at the time of the merger with [Centerior].

The net impact of this change will be a somewhat accelerated amortization schedule, relative to that previously used. Amortization will be increased by an expected $227 million during the 2001 and 2005 period and decreased relative to the original methodology by the same amount over the 2006 to 2009 time period and that is a non-cash item.

In regard to accounting for lease costs, when Ohio Edison and Centerior merged in 1997 there was no fair value purchase accounting adjustment recorded to reflect the above market leases for Beaver Valley and Bruce Mansfield generation facilities. This treatment had, of course, been identified and discussed with our independent auditor at that time.

Our review concluded that the above market lease cost for Beaver Valley should have recognized the fair value purchase accounting adjustment at the time of the merger, since regulatory accounting for those nuclear assets was discontinued at that time. Accordingly, the amortization of goodwill will be increased by about $64 million, which would have occurred through 2001, when goodwill amortization ceased following the issuance of SFAS 142. On the going forward basis, an expected $722 million of lease liability will be reversed through the end of the lease obligation in 2017.

In terms of the Mansfield lease, it's been determined to account for the above market lease costs as a regulatory asset at the time of the merger, since regulatory accounting had not been discontinued, at that point, for fossil-generating assets. Through the end of 2000, this regulatory assets would have been amortized at the same rate as the lease obligation. Beginning in 2001, the time of the adoption of the transition plan, the remaining unamortized regulatory asset, would have been include in the amortization calculation for on the book GAAP regulatory assets. Accordingly, the $755 million unamortized lease balance will be amortized through the end of the lease, which occurred in 2016.

Our letter to the investment community quantified the anticipated annual impacts of these changes over the 2001 to 2017 period, which is impacted by these adjustments. Net income will actually be increased by $381 million as a result of these changes. These adjustments are non-cash and have no impact on cash flow in any year. In 2002 earnings were reduced by approximately 23 cents per share, while in 2003, earnings will be reduced by about 17 cents per share.

Finally, I would like to address our revised earnings guidance for the remainder of the year. As reported in our press release this morning and as noted on page 3 of our release, we're changing our non-GAAP earnings guidance for 2003 to $2.68 to $2.88 cents per share from the original value of $3.35 to $3.55 per share. The resized guidance continues to exclude the incremental costs associated with the outage Davis-Besse outage and any unusual or nonrecurring charges.

It might be helpful to refer to the schedule on page 3 as I discuss these changes. A number of factors, most of which were contained in the first half of the year, resulted in the 67 cents per share reduction in our annual guidance. The first is the extended nuclear refueling outages at Perry and Beaver Valley Unit # 1. The replacement power costs and increment O & M expense for the extended portion of these outages, reduced earnings during the quarter by 13 cents per share.

The second factor relates to higher than forecast costs in the PJM market. During the first quarter this year, off-peak whole sale prices in PJM rose quickly, driven in large part by rapidly escalating gas prices. The company has a net short supply position in the PJM and a net long in ECAR.

Our hedging strategy for PJM has been before we hedge our on peak energy needs and to rely on the spot market for our off peak requirements. This is typically achieved through the sale of surplus off peak power in ECAR with those proceeds being used to purchase our off peak needs in PJM. Before the first quarter this year for many years off peak prices in PJM had been low and highly correlated to those prices in ECAR, however, the rapid run up in peak prices in the first quarter disrupted this relationship, and resulted in significant unanticipated costs. The net impact of which was to reduce our electric gross margin by about 9 cents per share.

In addition our electric gross margins were also adversely impacted by 13 cents per share, relative to plan in the first half of the year, due to lower than expected generation output from our nuclear fleet, coupled with higher wholesale power prices that resulted in substantial replacement power costs and lower than forecast prices paid by our retail customers, due to the sales mix.

Guidance is also being reduced by 3 cents per share to reflect increased nuclear operating and maintenance costs expected for the second half of the year for items such as, increased nuclear security. We've committed to accelerate spending of $60 million over the next two years to improve service reliability in the JCP & L territory. Some is reflected as capital and some will be O&M expense. This commitment largely involves expenditures that would have been incurred in the future. We expect to incur about $20 million in O&M expense during the remainder of this year to fulfill this commitment, which reduces earnings guidance by 4 cents per share.

An obvious factor impacting our guidance is the disappointing out come in the JCP & L rate case. This reduces annual earnings by about 41 cents per share, excluding the one-time charge booked in the second quarter to reflect the deferred energy cost disallowance. Our original earnings guidance, for the year, had been predicated on a reasonable outcome in the case similar to that represented by the settlement. Relative to the settlement, the board's ruling negatively impacts annual earnings by $59 million or 20 cents per share. Since the new rates will be effective for the last five months of the year, beginning August 1st, we are lowering 2003 earnings guidance by 8 cents per share. Finally the restatement, that I just mentioned, will reduce earnings in 2003 by 17 cents per share, but would have no impact on cash flow.

Now I would like to turn the call over to our Chief Executive Officer Pete Burg.

Thanks, Rich.

Let me begin by saying that, obviously, I'm disappointed that we're lowering earnings guidance for 2003. The first part of the year was filled with unique and unanticipated challenges and I regret that these are being reflected in earnings that will be below our original expectations. The board and management team at First Energy remain committed to delivering the high level of value expected by our investors and customers. Those of you who buy our securities or loan us money, have done so with the expectation that we'll continue to achieve our performance objectives. We appreciate and value that trust and I assure you that we will take all actions necessary to warrant your continued confidence in the future.

If you look at the elements of the reduction in earnings guidance that Rich has given you, I can identify three primary areas, actually, that he already has. We should have done a better job be during the first half of the year. I want to you know the steps are already being taken to ensure that our execution in these areas will improve markedly during the remainder of the year.

First, we needed to improve the planning and execution of our nuclear refueling outages this. This would have reduced the length and the cost of outages at Perry and Beaver Valley Unit # 1,during the second quarter. We have an additional refueling outage scheduled at Beaver Valley 2, later this year and I expect it to be completed on time and within budget and, of course, done in a very safe manner.

Secondly, we needed to do a better job hedging our power supply costs, as Rich has mentioned. A cross pool exposure between PJM and ECAR were not fully hedged during the unusual market conditions of the first quarter and as he said, that cost is about 9 cents in earnings per share. Since that time we've taken steps to more effectively hedge our supply costs and reduce our exposure to cross pool energy cost variations. One of the steps has involved the increase use of options to hedge against cross pool exposure and variations in customer usage, specifically we're buying more call options in the PJM market and put options in ECAR, where most of our assets re-side. We have also purchased some long-time options in the PJM market.

Third, we need to improve service reliability everywhere, but particularly in the New Jersey franchise. Our customers deserve predictable and reliable service and it's our responsibility to deliver it to them. We've committed to accelerate our investments in the T&D system and numerous reliability enhancements initiatives are already underway.

I know that many of you, probably, are wondering if the events so far in 2003, will impact our ability to achieve our earnings growth targets in 2004. While it's premature to discuss 2004 expectations in any detail, I'm confident of our ability to continue to grow earnings in 2004.

Of the $67 cent per share reduction in earnings guidance for 2003, approximately 25 cents of that amount is really contained in 2003 and will not impact 2004. Initiatives that are important in contributing to our earnings growth over the intermediate term, remain successfully in place and include our merger savings and other cost reduction programs. We really remain on track to meet or exceed our original expectations for these initiatives and expect them to achieve an annualized savings level of some $200 million by the end of this year.

Our aggressive debt reduction and refinancing activities, also remain largely on track. In addition to improving our credit profile, these activities contribute to earnings growth through substantial reductions in financing costs. Importantly, we look forward to the return of our Davis-Besse plant to safe and reliable service this fall. We will have two less refueling outages in 2004, versus 2003, which will help our expense level next year and also give us additional generation output.

It's important that I clearly articulate our commitment to continuing improvement of our credit profile, and the maintenance of our investment grade credit rating. The best way we can achieve these objectives is to stay on the credit improvement trajectory that we have laid out for the investment community.

As Rich indicated our operational cash flow in the first half of the year was impacted by some of the same factors that affected earnings. However, we worked very hard to produce other cash inflows that in large measure offset this short fall. Total free cash generation in 2003 is now forecasted to be about $575 million, below our original projection, but still very substantial and of a magnitude that will allow to us largely meet our debt reduction objectives for the year.

We anticipate further improvement in 2004 as we expect a significant increase in cash generation enabling a substantial portion of our $920 million of mandatory redemptions to be funded with cash from operations. Nonetheless, some slippage has occurred, and we'll continue to work hard in the second half of the year to get back on our credit enhancement path, if you will. We will remain open to the possibility of an equity issuance, if that should become appropriate, in continuing to meet our credit improvement objectives.

Although the first half of the year contained many challenges for First Energy, it's important that we don't lose sight of the significant progress that we did make in a number of areas of our operations. As I already said, we continue to meet or exceed our merger savings and other tax reduction targets. For 2003 we are on track to realize about $110 million in merger savings and $90 million in other cost reduction initiatives.

On June 2nd, we successfully went live, if you well one of the largest and most complex SAP implementations ever undertaken in our industry. This is a computer software system. Over 100 Legacy computer systems were replaced at one time in our approach to this implementation. Our customer care, our work management, finance, human resources and others are fully integrated within a single system. SAP will be critical in terms of enabling some of the cost savings and additional efficiencies that we have in our game plan. It really was a major milestone for our organization. We incurred about $17 million in O&M expenses in 2003, implementing this project and, of course, those expenses will be absent in 2004.

Our fossil fleet performance, thus far, in 2003 is on track to repeat the record output we achieved last year. The Lake Plants are now being utilized as load following units and have contributed to our overall good performance this year. The reliability of our fossil fleet has improved by 20% in 2003, if you measure it by the forced outage rates.

Progress achieved in the first half of the year with respect to long-term debt redemption and refinancing activities, will produce about $53 million in annualized savings. Finally, we've made substantial progress, really as Rich said, in our efforts to divest our remaining ownership interest in various international assets acquired through our merger with GPU.

We also continue to make substantial progress in our efforts to return Davis-Besse to safe and reliable service. I would like to touch on a few of those activities now. We recently updated our cost estimates and restart schedule to reflect the outcome of the high-pressure injection pump review and other enhancements being made at Davis-Besse. We had previously estimated incremental operating for Davis-Besse to be about $50 million and a few weeks ago we changed that estimate to $80 million and also announced that we expect the unit to restart in the fall time frame. We continue to project replacement costs at $15 million a month for the non-summer months and $20 to 25 million per month for July and August. Our on-peak replacement energy needs for the remainder of the expected outage are fully hedged.

We continue to conduct testing of the modified HPI pump design at Wyley Labs in Alabama. We'll use the data from these tests to refine and validate the final modification, which is intended to prevent the pumps from clogging or experiencing significant wear as a result of debris in the water supply.

The modification includes three elements, first install strainers on the pump to filter debris from the water, we'll replace some internal parts with harden ware services and replaces the bearings with units that are better able to cope with impurities in the water supply this. This approach, we believe, will significantly increase the reliability of this equipment and further enhance the safety margin of plant operations.

In a related project we've also removed a majority of fibrous insulation from the reactor containment building. Our analysis of the HPI bumps indicated that under certain conditions this insulation could potentially become dislodged and washed into the containment building emergency sump, where it can interfere with the operation of the pumps. By replacing the vast majority of this insulation with steel mirror insulation, we've increased the equipment reliability and plant safety margins even further.

Another important milestone on the near term horizon is the full pressure test of the reactor cooling system, slated for later this month. This involves increasing pressure in the reactor coolant system to operating conditions for up to seven days and then inspecting the system for leaks. This test will enable us to validate the integrity of the reactor cooling system and also permit us to close out numerous items on the restart check list, relying on the successful completion of the test.

Another very important area for Davis-Besse and throughout our First Energy Nuclear Company is our effort to further strengthen the safety culture. We've completed numerous training sessions for each employee on site and more training is planned. We've also conducted several employee surveys to assess the safety culture and the safety conscious work environment at the plant and all of our plants. These surveys show we have some additional work to do in certain areas, they also demonstrate significant improvement and validate that we are on the right track. As we continue to move through the various modes to restart, we'll conduct more assessments and continue to use the results of these assessments to further refine our employee safety culture training, as well as communications.

I always refer to further improvements in the safety culture as an ongoing effort, because it will be. We have created a new organization development unit that will craft a long-term path to both assess and continue to improve the safety culture at Davis-Besse, as well as all of our First Energy generating sites. We're looking forward to the successful completion of the full pressure test at which time we can address any other related issues and wrap up the remaining projects. At that point we'll request NRC approval for start-up.

We've, obviously covered a lot of ground here today in a short period of time and Rich and I appreciate your time and continued interest in First Energy. Despite the challenges we've encountered in the first half of the year, we believe the investment fundamentals of our story remain sound and we look forward to demonstrating continued progress in the second half of this year and beyond.

We now would like to ask the operator to open the call to investors and analysts.

At this time I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Paul T. Ridzon of McDonald Investments.

Good afternoon, can you hear me he.

Hey, Paul. Hardly, but I can hear you.

Okay. Just wondering with the resolution of the accounting issues and the restatement, what we might be able to infer from that, with regards to any developments in Ohio.

None really, I think Paul, as I mentioned on the script, & adjustments really came up in the context of our consideration of a potential extension, but those are really two separate issues.

As far as the possibility of an extension of the existing rate freeze in Ohio, let me just say, you know, I think the dynamics in Columbus remain favorable for that, so that's, obviously, an opportunity we'd like to explore.

Okay, thank you.

Thanks, Paul.

Your next question comes from Steve Fleishman of Merrill Lynch.

Yeah, hi, gentlemen.

Hi, Steve.

Could you clarify whether PWC is still doing further review and reaudit of your results?

At this point, I mean, we've completed our process and we're starting to implement the changes of those changes, Steve.

Okay. So, asking the question maybe in another way, could this impact your ability at all to access the capital markets if they have -- if you do not have kind of reliable audited results.

I see where you are going, I mean, obviously, the critical path of that, as it is every quarter, is our ability to timely file the 10-Q in August, later this month. So, you know, we anticipate that we will be able to do that and we're working hard to make sure that that happens.

Okay. But you don't need -- for example, I think you said that the -- I guess it's the '01 statements.

The reaudit of the '01 statements for Cleveland Electric and Toledo Edison would have to be completed prior to that time and we think that that's achievable and we've already, in fact, begun that process, Steve.

Steve, this is Harvey L. Wagner. Just to amplify a little bit on the reaudit of 2001, there always could be a possibility that something would be out there that could impact First Energy on a consolidated basis, that could trigger a reaudit of 001. We believe something like that is remote. Obviously, we have a pretty good handle on what our expectations are there. Clearly, that is a possibility.

Okay. Well, I guess I'm not making my question clear. You need to restate the '02 financial statements. Rich, are you saying that will be done by the 10-Q filing.

Yes that's our understanding.

Okay. Then once that is done, then you obviously have the statements necessary to access the capital markets.

Right. Correct. That's correct, Steve.

Steve, yes, the financial statements that you see that were released today reflect those restatements as we know of them today.

Okay. Then secondly, I guess I'm still having trouble understanding this generation margin reduction.

Okay.

And outlook. What that really is and I guess Pete mentioned 25 cents of issues this year that he views as contained to this year, if you could kind of clarify what you view as those issues.

Let me start with the second part of your question first, Steve, and I kind of maybe presented it a little bit differently than we did during the call. Essentially, our earnings guidance for the remainder of this year for all of 2003 is being lowered by 67 cents per share. A couple of those items will carry over into future years. Those being the decision of the JCP & L Rate Case, which on a four-year annualized basis is 24 cents per share and the revised accounting that we talked about which in 2004 we would expect to reduce earnings from what they otherwise would have been by about 15 cents per share, which is a non-cash item.

So, you add those two up, it's about 35 cents per share, those are things that will impact 2004 earnings, presumably. The other items that were contained in that amount were things that impacted 2003, that we would not expect to carry over meaningfully into 2004, such as the additional cost of refueling outages that took place in the second quarter.

The issues with the PJM off-peak pricing, particularly in the first quarter of the year, when Pete mentioned what we've done to contain that. Some of the unusual circumstances we had in the first quarter, and somewhat in the second quarter as well , with a sales mix that was a lot different than our expectations, which resulted in customers paying significantly lower unit costs. In the first quarter, although demand was high usage was high, because of the cold weather. These customers were pushed down into lower unit pricing, such that tote total revenues were less than we expected.

Those were unique one-time things that will impact 2003, obviously, but should not be present in 2004. I'm sorry what was the first part of your question, Steve?

Well, I think you pretty much answered it.

Okay. Thanks.

Thank you.

Your next question comes from Paul Fremont of Jeffries.

Just to clarify, was it the 25 cents that Peter was referring to, would they be largely comprised of the 13, the 9 and the 3 and would exclude the generation margin. I know you got to it almost the opposite way ,but I want to check and make sure that I'm following.

It's -- I mean the we way we had arrived at that was the 13 cents from the refueling outages, Paul, the 9 cents increased PJM wholesale prices and two of the 13 cents out of the generation margin is what we've used in that number.

Okay. Also when Peter talked about the growth rate and the impact in terms of all of this on your expected growth rate, you know, can you address that in any way, shape or form. In other words if we add back the non-recurring items back to where you would be in '03, what type of growth are you targeting at this point in '04 and does that include dilution or would that exclude the potential effects of dilution.

This is Pete, I guess the point I was trying to make is that right now we think it's premature to really focus on that. All I was trying to say was, we are confident that we'll get back on a trajectory of the 4 to 5% earnings growth that we were talking about.

Right, exactly. As we discussed in response to Steve's questions, I believe, or Paul's questions, we know that there are some items that will impact '04 earnings. We'll have to see what we can do between now and the end of this year to address those or offset some of those to see if there are some other additional things we can do and we'll work hard to do. The general growth trend is still intact. Exactly what the base is going to be apply that to, you know we've got to do a little bit more work and we'll refine our thoughts on that later on in the year when we would typically issue next year's guidance.

Last question for me. In earlier -- I guess going back to the analyst meeting that you guys had in New York, back in December of '02.

Right.

I think Peter had made some comments about sort of not having an open-ended commitment towards fixing Davis- Besse, that at some point you would decide to, potentially shut the plant rather than continuing along the repair track.

Can you give us a sense as to what type of events you would see as moving you to a shutdown mode versus a repair mode?

Well, 'm really not going to go quite in that direction, Paul. What I would rather go in is the fact that we think we've circled the wagon in terms of the cost estimate for 2003. We've finalized that at about $80 million. We have in place the power supply to get us well through the end of the year. We're still looking at a fall start date. We're making very good progress, and, you know, there's really very little capital costs that we're now incurring. So, the bulk of our costs, as I see them right now are over with, Paul. ,we're really looking to the restart. That's our goal at this point in time.

And, remember, also, Paul that almost half of the total expense we've incurred for Davis-Besse to this point has been for replacement power even if on day one we had made a decision not to restart the plant, we still would have incurred those costs for replacement power.

But, again to summarize that question, we're focused on the restart at this point in time.

Thank you.

Thanks, Paul.

Your next question comes from David Frank of Zimmer Lucas Partners.

Yeah, hi, Rich.

Hi, David.

Do you mind going over the accounting explanation one more time? Is there a schedule for the impact in '05 and 06 it. Sounds like 15 cents working against you, 15 cents in '05. Does it -- or 15 cents in '04, does it decline further in '05 and '06.

Yes, it does. There's a schedule attached to the investor letter that went out this afternoon, David, that shows the annual impacts and the components of the annual impacts, as well.

If you look at '01 through 2005 it reduces pretax net income by about $258 million over that period. If you look at the remainder of the period, which is 2006 through 2017, it increases pretax net income by about $936 million for a net increase of $676 million pretax net income, over the entire term that the changes encompass. But, it does show the schedule that we provided with the investor letter does show year by year impact, as well as the components of those impacts.

Okay. I apologize, I was scrambling to interest print some of this stuff out.

Yeah, it got out late, David.

Again, giving rise to these accounting changes was the transitions, you explained it before, related to transition costs in Ohio and it sounded like reversal of some goodwill related to the merger, related to the accounting for the leases.

Basically, the whole thought process, I guess was triggered by some higher level thoughts we were thinking about, the potentially of extending the rate plan, you know, if that was something that everybody would be interested in and as part of that it really led us to look at the accounting that's being used for the recovery under the existing rate plan, which was put in place and approved by the PUCO in 2000 and that was really the catalyst for that, David.

Okay. All right. Well, I've got to go through and read this. Thank you.

Thanks, David.

Your next question comes from Vick Haten of Deutsche Asset Management.

Yes, thank you, a couple of questions, Rich. Obviously, the news doesn't sound too good, but could you give us a little bit better understanding of 2004 in the sense that what's the drivers which will improve the 2004 earnings.

Second question is related to this Ohio extension. What might be the trigger which will get that process going again or are they going to be still waiting for the auditing to be completed or where do we stand there?

As far as 2004 earnings growth drivers Vic, the items that we've traditionally talked about with the investment community, remain intact. Those drivers include, you know, our continued cost reduction programs, which we've been implementing very successfully this year. Continued debt pay down and refinancing activities which will, again, substantially lower our interest costs going forward. Growth of our regulated wires business, and hopefully some additional growth in our competitive businesses as well. So, those remain unchanged and have not been impacted.

And the 25 cents that Rich talked about.

Right.

Obviously, will not be in next year, which will be offset by the Jersey central reduction.

Right. The basic basis underlying increased earnings growth in 2004 has not been changed. The second part of your question, Vic, regarding the possible extension of the existing rate plan in Ohio what would that take to happen?

Mm-hmm.

I guess it would have to be an agreement that makes sense for the company and the ratepayers, obviously. The Public Utility Commission of Ohio and the Ohio Consumer Council and the various other parties to the case would have to see agreement that you know, everybody views as mutually beneficial to the ratepayers in Ohio.

I think the existing dynamics are still there, currently the Chair, Allen Schreiber, earlier this year, outlined his thoughts, wishes and expectations. I don't believe those have changed. So, it's up to us to try to find a solution that fits that.

But, the process to hold that thing, is it that audit issue or is there something else that's holding that process.

There's nothing holding the process up at this point going forward, Vic. You know like many things, sometimes these things don't run in a linear path in terms of progress. Hopefully, we'll be able to get that notched up again going forward.

So, what's your best guess as to when the process may get, you know finalized?

You know there are lots of players in it, so it's hard to forecast that.

You know you don't forecast regulatory issues like, that Vic.

No, I understand. But ,there is some guess as to whether it's three month process or a one-year process, or what.

Well, we would hope it is not a three-year process, because we would be well through the period by then.

Also, the question regarding Davis-Besse. You said you are pretty close to resolving the pressure test. What are the items holing back NRC from giving you the restart.

Again, we have to complete our own work and as you -- I know you know in tandem with our own work, the NRC continues to do their own evaluations and check offs and so forth. So, I mean they are work diligently, believe me, and hopefully we're on the same page in terms of the completion of the process.

So --

So, yeah, I mean they he have a number of assessments that they continue to work on and they're making good progress, from what I understand.

Okay. Thank you.

Thanks, Vic.

Your next question comes from Faith Clause of Banc of America Securities.

Hi, my question is -- I mean, you talk about the accounting method and, you know that PWC came up with the decision that it should be modified. My question is why?

Let me rephrase that a little bit for the record. I mean financial statements are those of First Energy. We take responsibility for those. It was just in the context of a larger process about -- thinking about accounting for transition costs that some of these issues were reviewed. That's probably about the best way for me to describe it.

One of the clear factors here is that the Ohio transition plan for First Energy is enormously complex. It's very unique. It has some unusual features in terms of how transition costs are recovered. We're recovering things that are on the GAAP balance sheet, not on the GAAP balance sheet. There's two mechanisms, there's an RTC, which runs for one period of time, there's an GTC which runs for another period of time. We have shopping incentive deferral mechanism that creates new regulatory assets through an extension of the RTC. So, all of these parts and pieces make it very unique and very complex and just lots of complexity around it. That was probably as much a factor as anything.

You mentioned today that you wouldn't rule out an equity issuance. I'm wondering what you would do to save your investment grade rating.

Well, I think Pete made the point that we believe that that's a necessity in order to do that, that's something we would consider. Let me say, though, as I mentioned in my call, you know, we're on track to generate, you know, about $575 million of cash and with the potential securitization, New Jersey gets us within striking distance of about $900 million of deleveraging from a rating agency perspective this year.

So, we're still largely on course from a cash basis. Some of these impacts to earnings have been non-cash. So, from a credit profile improvement perspective, we've gone off the tracks. There's been a little slippage. We'll work hard to make that up, but we remain essentially on track and that's still a very, very, important objective to us.

But if S&P came to you and said you would lose your investment grade rating unless you issue equity -

Again, as we said, we're dedicated to the proposition of an investment grade rating and we'll face those types of issues as we go forward.

Thank you.

Your next question comes from Jonathan C. Raleigh of Goldman Sachs.

Hello John.

Hi, Rich, how are you doing.

Good, how are you?

You were pretty clear on the 25 cents that goes away and I think you said it's 13.9 and 2 cents is the generation margin that goes away in '04 or confined to '03 and the JCP & L rate decision carries over to '04 and has up tick in the revised accounting methodology laid out in this handout here.

The stuff in between, the other hit related to the generation margin, which, is I guess, 13 minus 2 or 11 cents and the higher nuclear cents and the JCP & L reliability improvements, that adds up to about 18 cents, is that potentially reversible or is that permanent next year.

No, I think there's maybe a little arbitrariness number to our 25 cents number than there should have been. I mean the way we prefer to look at is it you start at the 67 cents per share revision in earnings guidance for this year. The two items we know will carry over or the 20 cent full year impact of the New Jersey Rate Case relative to our original rate expectation, which was embodied in the settlement and the 15 cent per share non-cash item, because of the accounting revisions, so those two items total 35 cents. Out of the 67 cents those are the only two items that at this point in time, I'm going to say, will carry over into the next year. These other items I would expect not to recur in a meaningful way next year.

Okay. Thank you very much.

Thanks.

Your next question comes from Ashar Khan of Foresight Investment Solutions.

Hi, good afternoon.

Hi.

If I can just get a little bit sense on the timing when Price Waterhouse came in and made the determination that they had to reaudit and these charges had to be placed in, when that decision took place, was it early in the, you know, spring if you could give us some time frame.

You know, those decisions are arrived at by the audit committee, not by PWC.

Okay.

Audit committee reached their conclusion relatively - they've had a number of discussions about these items and have reached their conclusions fairly recently.

Fairly recently. But, you said this issue was identified by PWC, I guess what two or three months back, when you start visiting as part of the extension of the Ohio plan. I just want to get some timing perspective, because I guess -- the decision was made and did all of this work and then this announcement. I'm trying to find out when did it really start, because of course they audited your financial results and you came out with your K and, of course it was not an issue over there. So I'm just trying to get some time sense as to when did this start in essence.

Well, Chairman Schreiber had talked in New York about his views for a potential rate freeze here in Ohio. That was earlier in the year and that's when we really started thinking about the potentiality of how we might approach an extension of the rate freeze and I can't remember the exact time when Chairman Schreiber made his presentation. But, that really started our examination and our discussions regarding how we account for transition costs recovery of an existing plan and how that might sync up with recovery of transition plans under a potential extension.

Okay.

So it's really, this is Pete again. This is really an evolutionary process that we went over, over several months and our audit committee, you no he began to review it in the last little while and came to a conclusion recently about these items.

Okay. Then if I can for a second go back to your, I guess, reiteration of the 4 to 5% growth rate on an earnings basis going forward. I'm assuming that what we're hearing today is that based on a normalized basis, whatever cents you take off of, and not going forward next year, you're expecting still to achieve in '04 from a normalized '03, taking out these things which we're not yet, still 5% pickup, 4 to 5% pickup for next year as part of the plan, which might include the impact of in dilution?

What I was trying to say, this is Pete again, is it's premature to focus on '04 for us, however we are confident that when we get all done here, we are going to achieve exactly what you just said.

What is in your plan right now as the worst case scenario for the start date for Davis-Besse.

Let me put that around the other way and say we remain confident that we'll be able to restart that unit in the fall. It's sort of fruitless to predict a specific day or date or whatever, but we're close to the end of the process. The focus now is really getting that work done safely and efficiently and getting the unit back online. That's the best way to get to the finish line.

So if I can say, if this thing goes into '04, that will be a big surprise?

We've said that our expectation is that it will be this fall, and that's our expectation.

We're really getting -- we can see the light at the end of the tunnel. I think we know the NRC is working diligently to do their end of the bargain, if you will, and oversee what we're doing, so, I mean we really do see the light at the end of the tunnel here.

Thank you very much.

I know we kept you on here for quite a while and some of you have already gotten off , so why don't we take one or two more questions, okay?

We'll take two more questions. Your next question comes from Tarren Miller of UBS.

Good afternoon, gentlemen. Can we just go back to the audit issue one more time to make sure I've gotten it. Are you saying that you need to reaudit 2001 at Cleveland and Toledo and if that causes you to have to restate 2001 at [FE], there could be a delay in the 10-Q, but outside of that, you expect to produce your 10-Q on time?

I mean first, yes, we'll be restating 2001 for Cleveland Electric and Toledo Edison. They are two subsidiary. What Harvey referred to is there a small finite possibility that something could come up that would trigger a reaudit of First Energy at the holding company level for 2001. We don't anticipate that or believe that that will happen. We believe that the reedits of the two subsidiaries Cleveland and Toledo, could be conducted rapidly, probably in a week or two weeks, and we already started that. So, we would not anticipate that that would not allow us to meet the timely filing deadline for the 10-Q of the second quarter.

It's our plan to have the third quarter 10-Qs filed for all of the registrants by the due date, plus amending the 10-K for 2002, and the 10-Q for the first quarter of 2003 for all of the registrants .

I think you meant to say second quarter.

Okay , is that clear, Terran?

Yes, it is.

Thank you.

Your final question comes from Chris Melendes UBS.

Hi, Chris.

Where do you stay with the rating agencies have you kept them informed or is today's announcement going to be a surprise to them like it was to us.

We have a pretty much ongoing dialogue with the rating agencies.

So it's safe to say they will not be surprised by this stuff.

I can't put words in their mouth, but we certainly have that dialogue with them.

Also, what are you thinking in terms of what type of hours do you have in your quiver to prevent a non-investment grade. Everybody is talking about equity, but do you feel you have other options. I know you don't want to go there, because you feel you are on track but what if they do come to you, what are your other options.

The most important thing it is to generate that cash and use it to pay down debt. That that's the number one objective and we're substantially still on course of where we thought we would be on this year. There's slippage on the operational side that's largely offset by the other large cash inflows so looking at it on the net basis, we're not far off from where we thought we'd be. So, the most important thing is to generate that cash and in particular to really have a good remaining half of the year from a cash generation and earnings standpoint. That's the best way to stay on that trajectory.

Can I ask one quick technical question. The NRC came out and issued a yellow rating on the sump pumps. I guess that was a letter maybe last week last week and I was a little bit unclear on that. Could you clarify what they're talking about and how that plays into your actions on sump pumps Davis-Besse?

It's almost a confirmation of some issues that we discovered and have already either totally fixed or are in the process of finalizing our fix. So this is the enlargement of the sump area, if you will to really take more than any other unit in the country now at this point in time. So I think it's just a confirmation of what we had already known. So that's not -- that's really not anything new.

I read it that way and I didn't talk to anybody at the company about it. I appreciate it.

Once again, we want to thank all of you for your patience here today this. This was a lot of information. I want to you know that our investor relations staff is available, should you need to ask some additional questions and, again, to reconfirm that we still do, we think have a good cash flow story. We are on track in a number of areas and we're diligently going to work to maintain some of the kinds of things that we've talked about here today. So, thank you very much for your indulgence today.

Thank you.

This concludes today's First Energy Corporation conference call. You may now disconnect.