第一能源 (FE) 2003 Q4 法說會逐字稿

Good morning, my name is Mandy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the fourth quarter 2003 earnings release conference call. All lines have been place 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 1 on your telephone keypad. If you would like to withdraw your question, press star then the Number 2.

Thank you, I will now turn the call over to Mr. Kurt Turosky, Director of Investor Relations.

Thank you, Mandy. During this conference call, we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities 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 based on current expectations that are subject to risks and uncertainties.

A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements.

Please read the Safe Harbor statement contained on page 8 of the consolidated report to the financial community, which was released earlier today, and is also available on our website at www.firstenergycorp.com, under the earnings release link.

You may also view the company's most recent Safe Harbor statement as contained in our 8K filings that were furnished to the SEC today.

Also participating in today's call are Rich Marsh, Senior Vice President and Chief Financial Officer; Harvey Wagner, Vice President and Controller; Tom Navin, Treasurer, and Terry Howson, Vice President, Investor Relations.

Also with us is Gary Leidich, President and Chief Nuclear Officer of FirstEnergy Nuclear Operating Company, who will provide an update regarding the restart of Davis-Besse. I'll now turn the call over to Rich Marsh.

Thanks, Kurt. Good afternoon, everybody, thanks for being with us today.

We released our consolidated report to the financial community earlier today. You might want to refer to that as we go through our results this afternoon.

Please note that I'll make reference to varies non-GAAP financial results, and the reconciliation to the corresponding results on a GAAP basis are available own page 1 of the consolidated report.

And that report, which also includes information required by Regulation G is available on the investor information section of our corporate website, and the address is www.firstenergycorp.com.

GAAP earnings in the fourth quarter of 2003 were 33 cents per share, compared to the restated GAAP loss of 20 cents per share during the same quarter 2002.

Fourth quarter results for 2002 were restated to reflect changes in the amortization of transition costs and above-market lease costs for the IR distribution companies, reclassification of certain international operations as discontinued operations, and other year-end adjustments.

During the fourth quarter of 2003, the Davis-Besse outage resulted in incremental O&M expense of $17 million and replacement power costs of $48 million, which reduced earnings by 12 cents per share.

Also during the quarter, we recorded discontinued operations, after-tax noncash charge of $36 million, to recognize the divestiture of our holdings in Bolivia, as well as the loss on the sale of a mechanical contracting company.

We also recognized a number of unusual items during the period, which in total increased earnings by 14 cents per share.

These included a net gain of $168 million from the sale of our settlement claim against NRG Energy, regarding the never completed sale of four coal-fired power plants, a 14 million disallowance resulting from the JCP&L rate case decision, an accounting reserve of $15 million associated with potential environmental remediation at historical manufactured gas sites, and $37 million of asset impairments associated with our international sites prior to the divestiture, as well as our investment in Pantellos, which is an electronic B-to-B marketplace serving the utility sector.

Excluding discontinued operations and unusual items, non-GAAP earnings in the fourth quarter were 30 cents per share. Excluding costs associated with the Davis-Besse outage, normalized non-GAAP earnings were 42 cents compared to restated fourth quarter 2002 normalized non-GAAP earnings of 65 cents per share.

The two largest factors that reduced normalized non-GAAP earnings relative to the fourth quarter of last year were the impact of the JCP&L rate reduction, beginning in August, and an increase in noncash pension and OPEB expenses.

Other factors that contributed to reduced earnings relative to fourth quarter of last year included higher energy delivery expenses due to an acceleration of spending to improve the reliability of our service; higher generation expenses resulting from planned maintenance at our fossil plants; dilution from the 32.2 million common equity offering completed in September; and lower electric generation sales and energy deliveries.

Partially offsetting those items were lower A&G expenses snow short-term compensation payments were made for 2003, reduced employee benefit costs reflecting greater cost sharing with employees and fewer employees; and the continued success of our program to aggressively reduce debt and lower financing costs.

Partially offsetting low volumes were lower A&G expenses, resulting from the fact that no short-term incentive compensation payments were made for 2003, reduced employee benefit costs reflecting greater cross-sharing with employees and fewer employees, and the continued success of our program to aggressively reduce debt and lower financing costs.

I'll now turn the call over to Tom Navin to discuss some of these matters in more detail. Tom?

Thanks, Rich and good afternoon, everyone. First, I'd like to remind you that the additional details of the major earnings variances for the quarter are included in our consolidated report to the financial community.

I'll start with an explanation of our sales and revenue statistics compared with the fourth quarter of 2002. Electric distribution deliveries decreased 2%, with residential deliveries declining 5%, reflecting milder weather.

During the quarter, heating degree days were 6% below normal levels, and 13% lower than the same period in 2002.

Electric generation sales decreased 7%, due to a 13% reduction in wholesale sales, and a 5% decline in retail generation sales. The retail sales decline was attributable to increased customer shopping.

Electric gross margin decreased $26 million after adjusting for changes in regulatory deferrals, JCP&L rate reductions and Davis-Besse's replacement power costs.

The reduction in electric gross margin resulted from lower wholesale generation sales and electric distribution deliveries.

Moving on to operating expenses, as Rich mentioned earlier, the most significant variance again this quarter was pension and other post-employment benefits, which increased by approximately $50 million from the fourth quarter of 2002.

Fossil operating expenses increased $24 million, primarily due to planned maintenance outages at the Mansfield 3 and Bay Shore 4 units, involving extensive turbine overhaul work, and a boiler outage for a [INAUDIBLE] burner replacement on Unit 5 of our East Lake plant.

Nuclear operating expenses, excluding incremental expenses associated with the Davis-Besse outage, increased $6 million, due to the refueling outage at Beaver Valley Unit 2, which was completed on October 12.

Energy delivery expenses increased $35 million, as a result of accelerated Jersey Central reliability improvement spending, additional tree trimming activities, and storm-related restoration expenses.

Employee benefit costs decreased by $26 million, reflecting greater cost sharing with employees, as well as a decrease in overall staffing.

As a result of 2003 earnings not achieving the threshold level required for payment of employees incentive compensation, administrative and general expenses were reduced by $51 million in the fourth quarter. Also, you may have noticed the sizable reduction in general taxes for the quarter on our income statement.

The after-tax impact of that reduction was offset in the income taxes line of the income statement, producing what appears to be an unusually high effective income tax rate.

These adjustments resulted from a reallocation of our tax reserves following favorable property tax settlement and further assessment of the realizability of future income tack benefits. Taken together, there was no material impact to earnings.

Moving on to financing activities, our continued debt reduction program resulted in a decrease in net interest charges of $12 million from the fourth quarter of 2002.

Financing activities during the quarter included $315 million of long-term debt redemptions, $335 million of debt refinancing and repricing, and $150 million of new debt issuance.

These activities and other financing transactions are expected to produce annualized interest savings of $49 million.

Major accomplishments in 2003 that enhanced our credit profile include a $1.9 billion reduction of debt and preferred stock, and debt refinancing and repricing totaling $1.2 billion.

In total, our financing activities are expected to produce annualized interest savings of approximately $155 million.

We also made significant progress towards decreasing our leverage from 65% at the end of 2002 to 59% at the end of 2003, and improving our interest coverage ratio from 2.7 times at the end of 2002 to 3.1 times at the end of 2003.

In spite of these credit improvements, in late December, Standard & Poor's downgraded our senior unsecured holding company debt to below investment grade.

However, with the return to service of Davis-Besse, a satisfactory outcome of our Ohio rate plan filing and continued debt reduction with our free cash flow, we hope to gain our investment grade rating from Standard & Poor's later this year. To date, collateral calls funded following the Standard & Poor's downgrade total approximately $145 million.

Although there may be additional collateral calls, we believe our remaining exposure to the S&P downgrade is less than $50 million. On February 6, Moody's reduced FirstEnergy's senior unsecured rating from BAA2 negative outlook to BAA3 stable outlook.

This means that we retain our investment grade rating for holding company senior unsecured debt at Moody's and Fitch, and all ratings outlooks are now stable.

I'll now turn the call over to Gary for an update on the restart efforts at Davis-Besse.

Thank you, Tom. And good afternoon.

I'd like to cover this afternoon the restart effort at Davis-Besse and talk briefly about the status of our two other nuclear generating facilities. Davis-Besse currently is in hot standby at normal operating pressure and temperatures, using our reactor coolant pumps.

We formally requested authorization to restart Davis-Besse at the NRC's [INAUDIBLE] 350 public meeting conducted on February 12.

The restart request is supported by thousands of actions taken during the past couple years in three broad areas: People, plant and processes.

From a plant perspective, we completed nearly 8,000 work orders, 120 design modifications, 15,000 condition reports and major projects involving, of course, the replacement of the reactor pressure vessel head, enhancing our containment sump, refurbishing containment air coolers, containment coatings, and improving our high pressure injection pumps.

From a people perspective, we've done a substantial amount of work on the human performance and safety culture area, with a restructuring of the organization with a new management team. We've aligned and trained our employees in areas such as meeting standards, adhering to procedures, identifying and reporting safety issues, and assessing improvements to our safety culture.

And I would add that we had strong support from our employees and our Union leadership at the public meeting on February 12.

From a process standpoint, nearly every significant operating program and procedure has been enhanced at Davis-Besse, these include our corrective action program, our employee insurance program, operating experience, and boric acid programs. The restart effort has been monitored by three independent teams, in addition to the NRC's oversight activity.

The Nuclear Quality Assurance Organization, a panel that we set up early in the restart process called the Restart Overview Panel, and the company's Nuclear Review Board. Our Quality Assurance Organization and our company's Nuclear Review Board will continue to monitor progress at Davis-Besse going forward.

In a separate NRC meeting on February 12, the NRC covered its recent inspections related to human performance and restart readiness from an operational perspective, and closed both those items on the restart checklist. The restart meeting itself was a checklist item which is also closed.

At this point, we have three administrative checklist items remaining: A confirmatory action letter item -- the public restart meeting, of course, was already conducted -- engineering information on our high pressure injection modification, and system readiness.

We have no items that we owe the Nuclear Regulatory Commission, and they're in the process of administratively closing these items out. It should be completed by the end of the week.

The engineering department at Davis-Besse is also evaluating a recent issue identified by the Union that concerns scientists about our service water system. And our preliminary review indicates that no further action on this issue will be necessary prior to restart. We have entered into our corrective action program for an operability evaluation.

The NRC has continued to indicate that it will take a week or two before rendering a decision, and upon gaining that NRC authorization for restart, Davis-Besse will implement its power extension program.

Operators will increase reactor power incrementally, and we have several plateaus along the way where we'll stop and evaluate our effectiveness and readiness to continue.

Wolfe restart effectiveness critiques at the two-week and four-week intervals are also scheduled, but the overall produce in getting to 100% should take between one and two weeks, with the plant returned to full service and power in the early March time frame. From a Perry perspective, the plant is running well, with 175 consecutive days online. Our capability factor since last summer is 97.5%, we've got no significant equipment issues.

Perry's industrial safety record continues to be among the industry leaders, and we recently strengthened our organization in the maintenance and outage area at Perry.

At Beaver Valley, both Units 1 and 2 are running well, with Unit 1on line for 98 days and Unit 2 on line at 127 days.

Year-to-date performance at Beaver Valley is over 99% in terms of the capability factor, and we've got a major effort underway to reduce our maintenance backlog at Beaver Valley -- we've seen good progress there.

And from a regulatory perspective, last week we successfully completed a triannual fire protection inspection by the NRC.

Planning for our fall outage for Unit 1 at Beaver Valley is running ahead of schedule; and again, that's targeted as a 30-day refueling outage. That completes my remarks, and I'll turn it back to Rich.

Thank you, Gary. When we recently took Tony Alexander to meet with some of our analysts and investors, he discussed our key objectives for 2004.

These are the return of Davis-Besse to safe and reliable service, approval of the Ohio rate stabilization plan, and intense focus on improving our core operations and service reliability. And a thorough commitment to achieving earnings, cash generation, and debt retirement targets.

Due to continued efforts of Gary and his team, we think we're close to achieving the first of those objectives. And we're also making good progress in gaining approval for the Ohio rate stabilization plan.

With the encouragement of the Public Utilities Commission, last October we filed an application to put in place a comprehensive plan that would provide for the stable and competitive pricing of our energy services and provide an assured supply of generation for Ohio customers.

If the plan is approved, customers will benefit from constant generation price through 2008, and the company will benefit by the predictability and stability the plan will add to earnings and cash flow over that period.

Hearings in the case began February 1,1 and the witnesses for the company and PUC staff have now completed their testimony.

Cross-examination of the intervenors has begun, and we would expect that process to conclude early next week.

We also expect that the company will present rebuttal testimony on Monday, and that Tony Alexander will return to the stand next week regarding that. Research [INAUDIBLE] will be filed by mid-March, and we hope for a final Commission order in the spring.

As I mentioned, improving the reliability of electric service is also a very high priority for 2004. We've implemented a number of aggressive actions to make sure that we meet or exceed the expectations of our customers.

And these include the replacement of our system control centers energy management improved training of our control room operators, aggressive tree-trimming and vegetative management practices, and acceleration of reliability improvement expenditures, particularly New Jersey.

And these include items such as additional distribution capacitors, substation monitoring, additional circuit protection and automation, and the use of mobile capacitors.

FirstEnergy was directed by the Public Utilities Commission of Ohio to file plan by March 1, detailing how it will correct the deficiencies cited in the joint task force interim report relating to the August 14, 2003 blackout.

That work is progressing, and we'll be filing our report shortly. Additionally, the FERC ordered FirstEnergy to fund an independent study of the reliability of a portion of Ohio's power grid. And we have contracted with General Electric to perform that study and expect their report to be filed with the FERC sometime in April.

Another key priority for us has been the sale of assets that aren't core to our utility operations. On February 2, we announced the completion of a series of sales that will allow to us retain our focus on our core business, and also provide incremental cash that can be applied to debt reduction.

I'm very glad to say that we've now successfully divested all international assets that we acquired in our merger with the former GPU.

This includes the sale of subsidiary companies with ownership interest in generation assets in Columbia and Bolivia, as well as the sale of our 20.1% interest in the parent company that owns Midlands Electricity in the United Kingdom.

We've also completed the sale of Ancoma, a small mechanical contracting company based in Rochester, New York.

And finally, we settled our claim against NRG Energy for the never-completed sale of four power plants, which resulted in free cash, cash proceeds of $168 million. The net impact to earnings from those transactions was recognized in the fourth quarter, increased net income by about $32 million or 10 cents per share.

Before we conclude, I wanted to take a minute and thank the many people in the investment community who expressed their condolences regarding Pete Berg's untimely passing. Your thoughts and remembrances meant a great deal to Pete's family during this very difficult period. We lost a great friend, and we'll all miss Pete.

On January 20, the Board named Tony Alexander as Chief Executive Officer, and also named George Smart a member of the Board of our predecessor company since 1998 as nonexecutive Chairman. We've also initiated an external search for a Chief Operating Officer.

The ideal candidate would have extensive experience in commodity operations, fossil generation and the wires business, and nuclear experience would be a plus. We expect that this process could take three to six months to complete.

Finally, I'd like to reiterate our financial guidance for 2004. Our earnings guidance remains at $2.70 to $2.85 per share, excluding incremental Davis-Besse costs and any unusual charges. Major drivers of earnings during the year will include DB's return to service, two fewer nuclear refueling outages compared with 2003, reduced financing costs, improvement in our commodity margin, and modest growth in our distribution delivery business.

These will in part be offset by increased Ohio transition cost amortizations, a full-year impact of the JCP&L rate decision, and dilution resulting from our common share offering for an entire year. We also continue to estimate our 2004 free cash flow after CapEx and common dividends to be $825 million.

With the application of cash proceeds from the sale of the NRG claim and our asset divestitures, we plan to retire in excess of $1 billion of debt and bring our debt ratio, defined by rating agencies, from the 59% level at the end of 2003 that Tom mentioned to about 55% by the end of this year.

While 2003 was not the year we expected to produce for either our investors or our customers, the fundamentals of FirstEnergy remain sound, and the management team and employees are fully committed to reaching or exceeding our operational and financial objectives this year.

Because of our performance, no short-term incentive compensation for 2003 was awarded to any of the 14,000 employees who participate in this plan.

While our team worked very hard last year, probably harder than they ever have before, this was a painful but powerful reminder that we need to do better.

Tony and I are confident that we have the right team in place to do so, and we appreciate your continued support.

Thanks for being with us this afternoon, and I'll now ask Mandy to open the call to questions from analysts and investors. Thank you.

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 is from Hugh Wynne with Sanford Bernstein.

Hi, Rich.

Hi, Hugh, how are you?

Good, thanks. A couple quick questions about taxes. I wonder if you might give us a little bit of guidance regarding the expected level of taxes other than income taxes, and the expected income tax rate in '04.

Sure, I'll ask Harvey -- Harvey Wagner, our Controller -- to answer that.

Hugh, the level of general taxes should be about the same as it's been, or it'll be slight growth due to increases from distribution deliveries or sales from our distribution business related to gross receipts, tax and the kilowatt hour excise tax in Ohio.

Our marginal income tax rate is about 41%, and that would be the expectation going forward. Obviously, there are always some permanent income tax timing differences for things that are deductible for tax purposes, or not deductible for tax purposes, that make that vary around that marginal rate. But using a 41% rate would be about right.

Great, thank you. And if I could just quickly ask, given your generation year-to-date, do you have a view as to what your load growth is likely to be in '04, assuming the rest of the year's weather is more or less normal?

More or less normal. I mean, for the full year, were are assuming moderate growth, something probably in the 1.5% range.

Great. Thank you very much.

Thank you.

Your next question comes from Paul Ridzon with McDonald Securities.

Good afternoon. I had a question for Gary. He touched on this briefly, but NRC hasn't come back with any further data requests or indicated they might need to do any further inspections? We're just kind of waiting on the recommendations here?

That's right. We're in constant communication with the NRC offices, and at this point we owe them nothing and they're in their administrative closeout process.

And Rich, the last time we talked you indicated your guidance of $2.70 to $2.85 excluded the potential benefit if your rate plan's accepted through lower amortization. That's still the case, right?

We said that, that was the earnings guidance for the year, Paul.

We don't have closure on what the Commission will come back with that, so we're not making any modifications to the earnings guidance at this point.

So there still is that upside?

There's a potential upside.

Thank you very much.

Your next question is from Dan Agers with CSFB.

Hey, good morning -- or good afternoon.

Hi, Dan, how are you?

Just one more question on the guidance. The $2.70, $2.85, that assumes Davis-Besse would have started January 1 or that assumes it starts mid-March?

Well, we've said that that guidance excludes Davis-Besse, Dan.

Okay, so it was there. Very good. Number two, can you give us a little clarity on the short-term bonus structure, when we should expect -- what kind of thresholds we should expect for 2004? And is that -- those bonuses accrued over the course of the year? And then the big fourth quarter hit was just a full-year added back?

Well, what had happened with our short-term incentive program -- throughout the organization, people have both financial goals and operational goals.

But the plan and structure varies, such that there is a financial gate, if you will, that if earnings are not above a certain amount, even though you may have earned various operational or financial goals, there is no payment.

And that is fact what happened. We did not earn in excess of the gate amount. So no short-term incentive compensation was paid for 2003 to any of the employees. And virtually all employees are in that plan. As I said, almost 14,000.

What -- can you share with us what the hurdle was for 2004, just so we can keep an eye on it?

The hurdle is that we have to generate earnings in excess of the common dividend.

And in 2004, we've adopted even an additional, more aggressive gate, which I think will ensure that, you know, obviously, the interests of shareholders remain first, as they should be.

So it's even -- it's considerably more aggressive -- much more aggressive than that.

Great. And just one more, so I don't keep you too long.

But are you guys seeing any improvement on the C&I customer bases? Are you seeing demand pick up with the economy? It looks like it held up a little better than your other constituents in a mild weather quarter.

Yeah, kind of mixed. I think fourth quarter was okay. I can't see we're seeing clear signs of the recovery making its way into our C&I customer base at this point. We only have one data point for '04.

Hopefully, we'll get a little pickup here in February. But at this point, many of our customers, particularly in northeast Ohio, are very much aligned with the steel, glass, auto manufacturing access. So how they do will largely depend on how that sector does going forward.

But at this point, I would say, you know, we've put in some very modest growth assumptions, and at this point, we certainly don't see any reason to change those.

Great, thank you, guys.

Thanks, Dan.

Your next question comes from Paul Patterson with Glen Rock Associates.

Good afternoon, guys.

Hey, how you doing, Paul?

All right. I wanted to ask you about the -- well, first of all, just in December of '03, you guys gave guidance of $2.61 to $2.81 before Davis-Besse unusual items, and you came in at $2.42.

And I was wondering, what were the elements that changed that? Was it pension, was it weather? You know, just if you give me an idea about what happen there.

And also, in terms of the pension, I was wondering if you could just give us maybe an outlook as to some sort of sensitivity you might see in '04, and what led to the reduced return assumption in the fourth quarter versus the beginning of the year?

Let me address those one at a time, Paul. When we confirmed the earnings guidance for '03, you know, we certainly thought we were going to be within that band, albeit probably towards the lower end.

But I think the things that changed that in the fourth quarter that we hadn't appreciated fully, number one, the weather was mild, warmer than normal, which reduced sales.

And also, expenditures for, particularly, vegetative management, and some of the work at our power plants were more than we had anticipated. So I think those were really the primary factors that drove us being a little bit below the low end of that.

In terms of your question on pension, I'll ask Harvey to contrast '04 versus '03. There was no change in the return assumption made in the fourth quarter, Paul; and in fact, for '04, the return on asset is the same as it was in '03.

And the discount rate was lower, as many planned sponsors dipped down to six and a quarter percent. I don't know if you want to add anything to that.

Just the favorable results in the marketplace, if you're looking at 2004 pension costs, we would expect those to be at least $20 million below the levels of 2003.

Okay. When you mention that there was no reduced return assumption -- maybe I'm confused here a little bit.

It says that pension other post-retirement benefits increased approximately 50 million, reflecting, among other things, the reduced return assumptions on trust assets.

Okay, I'm sorry, Paul. I misunderstood you.

That's really just a reflection -- I mean, '03 pension expense was much higher than '02 pension expense, but it's just a constant amount through the year. You know, it's not your pension expense [INAUDIBLE] of the year, and then that's what it is for the next 12 months. I'm sorry, I misunderstood you.

Okay, no, that's helpful. Okay, and then in terms of 2004, if I understood you correctly, you don't -- you expect it to be -- the expense to be somewhat less perhaps than '04; is that correct?

Yeah, right. And that's a function of two things. Number one, good asset returns during the year.

Second thing, being offset by the lower discount rate that you use.

Okay. Great.

And Paul, we did not change our increased return assumption on the plant assets. We're holding at 9% on that for '04.

Okay, great. Thanks a lot, guys.

Thank you, Paul.

Our next question is from Peggy Jones with Ed Monroe.

Hi, Peggy.

Hello. I had a couple of questions. The first one was, could you provide any information about the termination of the shareholder rights provisions, and why you chose to do that now?

Sure. Be glad to. Periodically, our Board of Directors looks at all our corporate governance practices. They've done that recently, and as a result of that, they decided to early terminate the poison pill, if you will, the shareholders' rights plan.

You might recall, Peggy, that there was a shareholder proposal in the proxy last year that garnered significant shareholder support. About 65%, I believe, of the votes cast were in favor of repealing the poison pill during last year's annual meeting.

But the Board of Directors felt, you know, given its overall mandate to continue to look for ways to improve corporate governance, that was the right thing to do.

But I would not read any more into it other than it was the Board's belief this was the right thing to do from a governance standpoint.

Thank you. I also had -- or I was confused about the cash flow numbers that were provided here for '03 and '04, and I wondered if you could go through the key elements that lead to the improvement in cash flow in '04.

And I thought I heard you mention during your prepared remarks something about a figure of 800 million of free cash flow, which didn't seem to match either of these others, but it may have represented these numbers adjusted for something.

Yeah, the 825 million that I mentioned, Peggy, is our free cash flow from operations guidance for 2004.

Okay.

That's consistent with what we talked about at the December analyst meeting, and since then.

I don't know -- Tom, maybe you want to point out some of the major drivers between last year and this year, some of the things that will --

Peggy, I think some of the items that we had laid out, you know, initially, back -- if you think back to the December 3rd analyst meeting, we had identified some of the key drivers between our 2003 cash flow and our 2004 projections.

And a lot of those major drivers are still the same. Obviously, the largest being the lack of Davis-Besse outage expenses in 2004. We also are expecting -- or we know we have two fewer refueling outages in 2004.

Those combined would probably total something close to 270 to 280 million dollars, and then if you look at the reduced financing costs, that would produce net cash flow of about $80 million, incremental over 2003.

So I think those are some of the major items we're expecting to impact us this this year.

And how do I get from the billion 49 to the 825?

What billion 49 is that, Peggy? Are you looking at the --

I'm looking at the 2004 estimate.

Hang on one second.

Okay.

That would be the total cash generation estimate for 2004, which would include additional items above and beyond the cash flow from operation estimate of $825 million.

Those additional items would include things like the after-tax cash proceeds from the sale of the NRG claim, would include other cash proceeds from asset sales. I think those are two of the major items. And also, the proceeds that we expect to receive with the Jersey Central Power and Light securitization transaction.

Okay. What confused me, I thought there were asset sales in here, and those were important, but it says cash from divestitures of non-core assets of just 50 million. So is some of the asset sale cash included in cash flows from operations?

What you may be thinking about, Peggy, is the income tax benefit on our abandonment of Emderso [PHONETIC]. That would be part of the cash from operations.

Okay. Got it. Thank you very much.

Thanks, Peggy.

Your next question comes from Jonathan Raleigh with Goldman Sachs.

Rich?

Hey John.

How you doing?

Good, how about yourself?

Did you say vegetative management?

I did.

It sounds like a new Atkin's diet. [INAUDIBLE].

I was pretty proud of myself, actually.

I've got two questions. Pennsylvania PUC liability investigation, which you put in page 8 of the release, little comment, I think in '03 you responded to some of the reliability issues in Jersey with higher expenses of about 60 million.

Are you budgeting anything in response to this, and have you gotten an indication of what they're going after?

We've not gotten an indication at this point yet, John. I mean, you know, the -- I think the reliability situation in Pennsylvania is a little bit different maybe than it was in New Jersey, and I think the perceptual issues might be a little bit different.

So you know, we are looking throughout the whole system of what we need to do to accelerate tree-trimming, for instance -- that work is not all in New Jersey, it's across the system.

So we don't have a specific number isolated, but certainly some of those higher expenses across the whole system will benefit Pennsylvania reliability.

What level of -- are we, are you earning at [INAUDIBLE]?

Post --

Looking back at '03.

I'm going to see if Terry remembers.

I'm not sure. We have certain research, [INAUDIBLE], so we can probably dig it up, can't recall off the top our heads.

Good, so last question: In terms of the new commissioner in Ohio, that are being mentioned, is there any chance that anything related to that process pushes out the timetable related to the rate stabilization plan proposal?

We certainly don't expect so, John. What will happen, that slate has been presented to Governor Taft. He will pick his appointee. We would very much expect that appointee to be the Current Chair, Ellen Shrieber, and that will be presented to, I believe, the senate for ratification.

That process typically in Ohio does not take a long period of time, and we would not expect to it interfere with the timing of the rate case.

Great, thank you.

Thank you.

Your next question dues from Jose Almonte with Clinton Group.

Actually, my question was asked and answered. Thank you.

Thanks, Jose.

Your next question comes from Leslie Rich with Banc of America Capital Management.

Hi, Rich. I wondered if you could tell me if you did adopt FIN46 during 2003.

That's our favorite topic, Leslie. Let Harvey give you a little summary of that.

Yes, Leslie, we did adopt it. The biggest impact for us was the recognition of a minority interest. We had to consolidate some of these trusts associated with our sale lease back arrangement.

As you may now, there are still unanswered questions from the FASB regarding FIN46, and still some carry-over for the first quarter of 2004. But we don't anticipate anything substantial coming from that.

Harvey and his staff really invested a lot of time in FIN46. As you know, it's a very complex order, and they worked very long and hard on it.

And could you just review your liquidity at year-end?

Sure. I'll handle that, Leslie.

We can do it at year-end, and as of now, how's that?

Okay, which ever.

Currently right now in terms of our total borrowing facilities that we have in place -- these are the revolving credit lines at both FirstEnergy and Ohio Edison -- we have a total of $1.8 billion of total capacity.

We currently have about $1.4 billion of that capacity available, undrawn. Bank debt outstanding is about $200 million, and we have letters of credit issued under that capacity of about $200 million as well.

And cash?

Very minimal cash invested at this point.

Typically, you know, rather than building cash, we have a schedule to take out that so that's reliable. From time to time we'll have a little bit that carries over overnight, but we try to use to it keep the borrowing amounts down.

Okay. And just finally on the Ohio shopping, do you have any thoughts in terms of, you know, directionally what you expect in '04? Do you expect continue -- continued shopping?

We would expect shopping generally to be at the levels that they are now.

As you know, in Ohio, that's being driven largely through governmental aggregation. I would not expect that program to -- or the percentage of customers [INAUDIBLE] to change significantly during the year, Leslie.

Okay. Thank you.

Your next question comes from Dan Jenkins with State of Wisconsin Investment.

Hello, Dan. Are you there, Dan?

Yeah, can you hear me?

Yes.

Okay. Your number, the 825 of free cash flow that you gave guidance for, does that also assume Davis-Besse online all year?

We said that that excludes the impact of Davis-Besse, similar to the earnings guidance.

Okay. Then I was wondering, on the second page of your release, you talk about the unusual items in the bullet point in the middle of the page and you talk about an environmental liability and an additional disallowance from the rate case decision.

I was wondering if you could give me some color on what those items were?

The environmental liability was a reserve we established for a claim that really came up from the former GPU companies related to possible remediation at manufactured gas plant sites that date back many, many, many decades. And Harvey --

Well, I just wanted to -- we really can't say much about it, because that's a claim against us that we need to negotiate with the parties.

There was a second part to Dan's question, the Jersey Central additional.

The additional disallowance was, Dan, we got some further guidance from the BPU staff on how they wanted to see the interest associated with the disallowance computed.

Which was a little different than what we had originally adopted whenever we recognized the disallowance earlier in the year. That's what that related to.

Okay. Then I was wondering, you know, the fact that you are selling the number of your non-core operations, you know, it looks like the MYR operations are contributing like negative operating income for the year, and I was wondering what your plans are for that operation?

Yeah, we've taken a number of steps to turn that situation around, Dan. Number one, we did replace the CEO at MYR.

And number two, we're looking at the different parts and pieces of their business with an eye towards focusing really on their core T&D construction business, which is the most stable, most profitable part of their business. So we are continuing to look at that.

But I think we've already taken some pretty aggressive steps that will result in them being a positive contributor to earnings in 2004.

Okay, that's all I had. Thank you.

Why don't we do, since it's almost 2:45, do a couple more questions.

Your next question comes from Danielle Sipes with Maxcore Financial.

Hi, Danielle.

Thank you, hi, quick questions. You don't anticipate a potential settlement in Ohio -- do you, feel that it's a little bit too late to do that? I know that some customers have already sort of agreed with the plan.

Yes, we have had some people support the plan. We may have additional people support the plan. But it will still go through the traditional litigated route.

There's no doubt about that. It won't be the type of almost universal settlement that we had, for instance, in the transition cost case.

All right. And in [INAUDIBLE], I'm assuming that even if you were filing for review of the case, it will likely not impact '04; it would have -- if it has a positive impact, it will be in '05?

Are you talking, Danielle, about the plus or minus 25 basis points --

Right, uhm-hmm.

You know, that adds on an annualized basis about a penny per share. So --

So it would not have much of an impact.

It wouldn't materially impact earnings, right.

Okay. And a follow up on the previous question, the -- what are your goals or strategy regarding MYR, as well as the [INAUDIBLE] FE facilities?

Yes, for all those companies we will review their role as we go forward. It is possible there will be other divestitures out of that portfolio.

We've said repeatedly that we built that group with the expectation that there would be competitive retail markets throughout that 13-state operating region that we were focused on. That's turned out not to be true. There's really very little shopping, very little competition, so we've been continually scaling back that business.

But we will continue to review that as we go through 2004. As we discussed, we did sell several of those companies in 2003. Continue to see what we need to support our retail strategy and what might, you know, be considered non core as 2004 unfolds.

You anticipate in '04 sort of an adjustment -- continuing adjustment in that area?

Continuing adjustment in terms of?

In terms of book value and assessment of the valuation?

No. I mean, we took a reduction to goodwill in 2003, and we wouldn't expect anything further in 2004.

Okay, great, thanks a lot.

Thank you.

Your next question comes from Raymond with Bear Stearns.

Hey, Rich, how are you?

Good, how you doing?

Good. Can you -- can Gary go back over the four checklist items that were remaining on the NRC? Have they been -- are they still outstanding or -- it sounded like three out of four remain outstanding. Did I hear correctly?

Yes, I'm glad we had a question for Gary, we didn't want him to let him off the hook here.

Thanks, Rich. Yeah, there are actually three, as of today. There were four as of last week in the public meeting.

The three that remain are confirmatory action letter items, which includes the public restart meeting, okay?

Yes.

So that was conducted. So that's a matter of signing it off. And with the confirmatory action letter, that's really the very last thing they will do.

The engineering information on the high pressure injection pump modification, we've had a lot of dialogue with the NRC. As of last Sunday, we gave them the final response to the last question they had, and they're reviewing those issues.

And as I mentioned earlier, we've had pretty much daily conversations with them. We don't owe them anything else, so that should be closing out.

And system readiness -- and the reason actually that they've kept it open is because of the HPI, so we're down to couple of these things at this point.

Okay, and just separately, the Ohio rate case going on, who are the key intervenors and what are their major issues?

Well, you typically have the various marketers, you typically have the Ohio consumer's council, which represents residential customers, and you would typically have various industrial customer groups. Those are the main intervenors.

Okay, great, thank you.

Thank you. Why don't we do one more and we'll let everybody go about their daily activities after that.

Your next question comes from Douglas Lee with UBS.

Hi, Doug.

Hey, good afternoon, guys. Two questions related to the purchase power expense. It seems like that increase year-over-year was a substantial part of the total expenses increase.

Can you please just walk us through those components? And also, what are your expectations for purchase power expense in '04?

Sure.

Thanks.

You want to do that, Harvey?

Obviously, the -- a major driver of the purchase power increase has to do with the PJM load that we have to serve. I think prices were a little high.

We were selling healthfully into the wholesale market, and very much at the end of the year -- and you may remember, at the beginning of the year, in the first quarter, when we had some atypical off-peak power prices that were actually higher than on-peak prices, and we had a shortage of load in PJM and needed to cover that, that was a substantial increase in the purchase power costs.

We also had an additional nuclear refueling outage in 2003 compared to 2002. So those factors combined to require more purchases for us.

Doug, if you look on page 6 of the consolidated reports in the financial community, you would see that overall generation of sales from the company were up over 8%. 2003 compared to 2002. So you know, that item with the refueling outages those were the primary drivers.

Okay.

We have made a number of modifications to our hedging program to ensure that, you know, we optimize that as best we can.

Obviously, we hedge for basically normal weather conditions but we made increased use of options this year to help us better manage type of volatility you get resulting from weather and customer load and so forth. So we think we've made some major improvements relative last year. But we appreciate the question.

Okay, great. Can you provide us with 2004 guidance as to what you might expect in purchase power costs?

That's a tough one, it's going to depend when Davis-Besse comes back on, number one, and it's going to depend on weather and customer load during the year. Kind of tough to predict.

Okay. Thank you.

Thank you, Doug. Well, thank you everybody for your time today, we very much appreciate your continued interest and support of FirstEnergy.

We look forward to seeing many of you here in the coming weeks as we continue some of our investor visits and some of the conferences that we'll be at.

So hopefully, we'll have chance to see many of you then and continue to update you on our progress this year. So again, thank you very much, please have a good day.

This concludes today's conference call, you may now disconnect.