第一能源 (FE) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the FirstEnergy Third Quarter Earnings Conference Call and Web Conference. At this time, all participants have been placed on a listen-only mode. And the floor will be open for your questions following today's presentation. It is now my pleasure to turn the floor over to Mr. Kurt Turosky, Director of Investor Relations. Sir, you may begin.

During this conference call we will make various forward-looking statements within the meeting of the Safe Harbor provisions of the United States Private Securities Litigation's Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance strategies prospects and other aspects of the business of FirstEnergy Corp are based on current expectation that are subject to risks and uncertainties. A number of factors could cause actual result or outcomes to differ materially from those indicated by such forward-looking statements. Please read the Safe Harbor statement contained in the consolidated reports of the financial community which was released earlier today and also available on our Web site at www.firstenergycorp.com/ir, under the earnings release link.

Participating in today's call are Tony Alexander, President and Chief Executive Officer; Rich Marsh, the Senior Vice President and Chief Financial Officer; Harvey Wagner, Vice President and Controller; Tom Navin, Treasurer and Terry Howson, Vice President Investor Relations. I will now turn the call over to Rich Marsh.

Thanks, Kurt. Good afternoon, everyone. And thanks for being with us today. I'm going to provide an overview of our third quarter results as well as update you on some of our financial and other matters. And then I will turn the call over to Tony Alexander who will discuss some of our regulatory and operational matters, including the upcoming competitive bid process in Ohio.

We released our consolidated report to the financial community today, and it might be helpful to you to refer to that as we go through our results. Please note I will refer to earnings results on a non-GAAP basis and the reconciliation to the GAAP basis is available on the consolidated report. Additionally the investor information page of our Web site contains non-GAAP to GAAP reconciliations for both earnings and free cash flow measures.

Earnings on a GAAP basis in the third quarter of 2004 were 91 cents per share, compared to 51 cents per share during the same quarter of 2003. Excluding unusual charges of 6 cents per share, normalized non-GAAP earnings were 97 cents per share in the third quarter of this year, which compares favorably to the normalized non-GAAP earnings of 94 cents per share in the third quarter of last year.

During the period, we recognized two unusual charges totaling 6 cents per share. The first reflect as a 5 cent per share charge for losses and impairments related to the divestiture of noncore technology related investments. In the second charge of a penny per share, relates to the severance costs associated with the reorganization of FirstEnergy Nuclear Operating Company that we announced in August. This resulted in the elimination of 200 positions.

The primary factors that contributed to the improvement in normalized earnings in the third quarter of this year included the 9 cent per share decrease of financing costs, from our continued debt reduction and refinancing activities. An 8% per share reduction in energy delivery expense resulting from lower storm-related costs compared to the prior year, which included restoration expense for hurricane Isabelle. And also a higher level of construction activity this year, compared with more maintenance activities in 2003. A 6 cent per share reduction in generation operating expenses due the absence of a nuclear refueling outage in the third quarter compared with the Beaver Valley Unit One outage last year as well as lower fossil and maintenance expenses. And a 4 cent per share reduction in pension and other employee benefit costs.

Factors that partially offset these improvements including a 12 cent per share decrease in electric gross margin primarily resulted from weather-related reductions in residential generation sales and distribution deliveries. As well as lower unregulated generation sales due to our decision not to renew certain expiring contracts. Dilution of 9 cents per share from the issuance of 32 million shares of common stock in September of 2003, a 2 cent per share reduction in earnings as a result of last August's decision in the JCP&L Base Rate case. And the 2 cent per share market-to-market adjustment.

Additional information on these and other variances is provided in the consolidated report to the financial community.

Our continued -- progressive debt reduction at refinancing activities resulted in a decrease in interest charges of $49 million relative to the same period last year. Total debt decreased by $331 million in the third quarter of this year. And on a year-to-date basis, we now achieved our target of approximately $1 billion in total net debt reduction. We project net debt to total capital ratio of about 56% by year end.

Our financing activities during the quarter included $533 million in mandatory long-term debt -- redemptions, $17 million in optional debt redemptions, and about $236 million of refinancings and repricings.

Combined, these actions during the period will produce annualized financing cost savings of about $47 million.

Bank debt increased by $249 million during the quarter, and that's largely as a result of our decision to make a voluntary $500 million contribution toward the defined benefit pension plan. Our election to prefund the plan is expected to eliminate cash contributions before $600 million over the 2006-2007 period. And since the contribution is deductible for tax purposes we're able to effectively eliminate a $500 million liability through a net borrowing of $300 million.

Looking forward, we remain on track -- to achieve our financial guidance. The free cash flow projection for 2004, which is defined as cash from operations, less capital expenditures, and the common dividend, will meet or exceed our target of $825 million. We continue to use our strong free cash to strengthen the balance sheet and further bolster our credit profile.

With the return of Davis-Besse(ph) to service, strengthened balance sheet, consistent operational performance, settlement of our securities-related and derivative lawsuits, and implementation of the rate stabilization plan, we believe we should be in a strong position to regain our investment grade ratings for unsecured holding company debt from Standard and Poor's in the near future.

We are maintaining our 2004 earnings guidance of $2.70 to $2.85 per share. Excluding unusual charges.

With normalize year to date earnings of $2.18 per share, we expect the fourth quarter to be in the range of 52 cents to 67 cents per share.

Before I turn the call over to Tony, I would like to give one brief update on a rate, recent regulatory development in Pennsylvania. On September 30th, our Pennsylvania electric utility operating companies reached an agreement that settles all issues related to the outstanding Reliability Case pending before the Pennsylvania Public Utility Commission. The agreement outlines the steps to enhance service reliability and requires the companies to spend no less than $255 million on -- annually on transmission and distribution. This spending level is consistent with our current T&D spending projections.

On October 14th, the administrative law judge in the case recommended adoption of the settlement, and we anticipate the commission to rule on this by year end. Thanks for your attention. And I will now turn the call over to Tony Alexander.

Thanks, Rich. And good morning, everyone. Or good afternoon, everyone. I will provide an update on our Ohio Rate Stabilization Plan, and then briefly review our generation operations during the period.

On August 5, FirstEnergy implemented the Modified Rate Stabilization Plan approved by the Public Utilities Commission of Ohio. The plan provides for the continuation of current generation prices from 2006 through 2008. While the plan includes an opportunity to seek recovery of increased fuel costs we will continue to work to mitigate the need for any such increases. The plan also provides for a competitive bid to determine if the market could provide a lower generation price than that available under the Rate Stabilization Plan.

On October 6th, the commission approved the rules for the competitive bid process for FirstEnergy's Ohio Retail Load. If the bid is accepted by the commission, the competitive suppliers will be responsible for providing firm, full requirement generation service, for up to the peak load of approximately 9,000 megawatts for the period 2006 through 2008. This represents our total Ohio Peak Load requirement less special contract customers requirements.

The bid will be for a single product and a single price using a descending clock auction. The commission and nearer consult -- economic consulting, the auction manager, have agreed on a starting bid price of 5.5 cents per kilowatt hour. The commission has also determined that no one supplier can capture more than 65% of the total load.

The commission has identified several items that it will consider when comparing prices under the Rate Stabilization Plan to the auction result. Some of these would have an upward comparative influence on the -- rate plan rates, such as the potential for FirstEnergy to seek fuel cost increases under the plan, others such as the elimination of the 5% residential customer credit available to customers under the plan, would have the opposite effect. The commission will take these and other factors into account when comparing the auction results to prices under the Rate Stabilization Plan.

The auction was originally scheduled to begin on November 17th, but on Tuesday of this week, the commission elected to delay the start to December 8th. The commission still plans to accept or reject the results within two business days after completion of the auction.

The application to participate in the bid is structured in two parts. The part-one application will be due on November 4. This focuses on the credit worthiness of each bidder to determine the guarantees needed in the part-two application. Successful applicants in the part-one application become qualified bidders and can submit a part-two application by November 15th, if they wish to continue in the process.

FirstEnergy does not plan to file an application to participate in the auction. And electing to originally file a Rate Stabilization Plan almost a year ago we recognize that we might be giving up some potential generation margin upside compared to our plan. However, we decided that the revenue stability and predictability afforded by the plan was in the long-term interest of the company and its shareholders. If the competitive bid is successful, there are three ways that FirstEnergy will deploy its generation post 2005.

First, we will devote more of our generation to our Pennsylvania Polar obligation, there by improving the margin on that piece of the business. Second, through FirstEnergy Solutions, our unregulated affiliate, will aggressively pursue profitable retail customers within our operating footprint. And third, we will deploy any remaining generation into those wholesale markets that would be most beneficial for us, including potentially the supply of winning bidders in the auction here in Ohio.

I am confident that our generation fleet is cost effective in today's market. And will generate favorable margins for us whether through the Rate Stabilization Plan or through the other options I discussed.

Let me talk a little bit about operational performance. We began the refueling outage at Beaver Valley Nuclear unit number-one at midnight on Sunday. The refueling will replace 56 fuel assemblies, and is expected to take about 30 days. And it does include an inspection of the steam generators and the reactor pressure vessel.

This plain operated for a unit record of 339 consecutive days, and posted a 99.7% availability factor since the last refueling in April of 2003.

Our last quarter earnings conference call reported that we had established generation output records for both the second quarter and the year-to-date period. This quarter, we again set another record for generation of 19.8 million megawatt hours. During the first three quarter, we have now generated approximately 57 million megawatt hours and remain on track to achieve record output for the year.

In closing, let me say that I'm pleased with our operational and financial performance during the quarter. We continue to demonstrate significant improvements in both the generation and large parts of our businesses, and our strong operational performance again helped drive earnings results consistent with our guidance. We also further enhanced our financial strength and flexibility from our strong cash generation and substantial debt reduction, which will continue to reduce financing expense in the future.

These results are consistent with our vision of having FirstEnergy be a top performer in each of the states in which we operate. We will remain focused while producing consistent results that meet or exceed the expectations of our customers and investors. And I look forward to seeing everyone at the upcoming EEI conference next week, and hope that you can attend the luncheon that we will host on Monday at 12:45 p.m.

We appreciate your time. And thank you for joining us this afternoon. Now, before I turn this back over to -- before I open this for questions I would like to turn it back to Rich.

Thanks, Tony. Before we open the -- call to question, I just wanted to comment briefly on our disclosure yesterday regarding the formal Securities and Exchange Commission inquiry.

Yesterday, the SEC notified us that the informal inquiry that was initiated last September related to the earnings restatements and the extended outage at Davis-Besse(ph) has now become part of a formal investigation. This SEC investigation also encompasses issues raised during the SEC's examination under the Public Utility Holding Company Act.

During the past year, the SEC conducted a routine examination or what we might call an audit of FirstEnergy under the holding public -- public utility holding company act. You will recall that FirstEnergy became a registered holding company under the Holding Company Act as a result of our merger with the former GPU, in late 2001. During the examination, the SEC asked questions concerning accounting policies and various inter-company arrangements, and transactions and so forth, and of course, we fully cooperated with the SEC audit.

Yesterday, we also received a subpoena asking for various background documents and documents related to the restatements, and Davis-Besse(ph) issue, some of which we have already furnished to the SEC. FirstEnergy has cooperated fully with the informal inquiry and will certainly continue to cooperate fully with the formal investigation as well. The SEC doesn't have any specific timetable under which it must conduct the formal inquiry. So again, Tony and I appreciate your -- time today, and your interest, and I would now like to ask Elsea to open the call to questions from the analysts. Thank you.

Thank you, the floor is now open for questions. If you do have a question, please press star,1 on your telephone key pad at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question to please utilize your hand set to provide optimize sound quality. Once again that is star,1 for any questions at this time. Or first question is coming from Kit Konolige of Morgan Stanley. Please go ahead.

Good afternoon. I must be first because I'm probably the only guy who can, you know, has lasted the whole day of earnings calls.

That's right. It has been a busy day, I know.

Yeah.

Save the best for last.

That's it. Let me -- ask a -- couple of questions about Tony's discussion of the bidding outlook versus the RSP. Tony, you said that one of the possible uses -- FirstEnergy is not going to bid directly into the auction. First of all, can you, you know, -- was there a particular policy decision behind that? Or I mean what's the reason for that decision?

Well, Kit, we've -- as I indicated, we laid out our price as part of the rate stabilization plan. And my own sense is that we're going to allow the auction to proceed, and if the commission chooses to go the other way, which, you know, in my mind would give us different opportunities to deploy our generation.

I understand that. I mean it would seem to me, and you know, obviously we have been, -- you know, and everybody has been kind of trying to get -- a handle on this and take a look at how New Jersey works and other situations work, I think most folks would be in agreement that if a substantial portion of your capacity and energy is not devoted to the 9,000 megawatts, if the 9,000 megawatts will never be covered. Would you agree with that?

Kit, I don't know where suppliers will get their generation. And I quite frankly have not looked to see who would bid and where they would source their power from.

Okay. Now, let me ask this. I would assume that many potential bidders would approach FirstEnergy beforehand, and say, okay, you know, what can we buy from you at what price before we make our bid? How are they going to know what kind of bid to make if you're potentially going to sell them something unless they ask you, you know, and possibly contract with you beforehand? Are you in a mode of discussing with potential bidders any sort of optional sales, if they win the bid, that sort of thing?

I have laid out the strategy that we're -- that we intend to work through. My own sense, Kit, is that deploying it along those lines, first to reduce the Polar obligation and increase our margins there. Second after we know what the price is, to aggressively and actively pursue customers where we can increase our margins. And then third, deploy any remaining amounts, if there is any, to the highest available wholesale market we can find. And if that's in Ohio, that's fine.

So is that saying if somebody came to you, say a marketer without physical capacity in the region currently, of which there are several who have said they want to bid, you would be the -- at least one large likely source of them to purchase power for resale. You wouldn't talk to them beforehand about the auction, about what you would potentially charge them for selling to them for resale?

As you know, Kit, right now, most of our generation capacity is meeting our native obligation. As Tony said, I think we need to see where the bid price comes out, a and what that means. I mean there is a reserve price which is our existing GRSC(ph) price out there. And see where we go and whether the commission would accept a bid higher than that, or if somebody can come in and -- come in with a price lower than that. And I that would drive our decision in terms of what to do. But at this point in time, we don't have any formal arrangements in hand, as you know, most of our capacity goes to meet our existing native load.

Right.

All of it.

Right. But if there is a winning bid package, then that will no longer be the case, at least not directly and immediately.

Right, right. And as Tony said, the three options that we would pursue, if that in fact were to happen.

Okay. Fair enough. Okay. Thank you.

Thanks, Kit.

Thank you. Our next call is coming from Paul Ridzon of KeyBanc(ph) McDonald. Please go ahead.

It is actually Kit covered my question. Thank you.

Thanks, Paul.

Thank you. Our next question is coming from Paul Patterson(ph) of Glenn Rock(ph) Associates. Please go ahead.

Good afternoon, guys.

Hey, Paul.

I wanted to ask you about this Public Utility Holding Company Act. If you could just give us a little bit more of an idea of what the SEC is concerned about. I haven't heard of anything like this before, really, and it just sort of comes -- this sounds kind of odd. You can elaborate a little bit, like what they might be concerned about? Do you know what they're looking for specifically?

We really don't, Paul. And as I said, you know, we went through an examination or what we would call an audit when we became a registered holding company and my understanding it is typical practice for registered holding companying periodically to be audited or examined by the SEC 35-branch people. We went through that process. Would he have not received their report. We have not had an exit interview with them. And the information received from the SEC yesterday was not specific enough to really know what concerns they might have. So there is really nothing I can comment because I don't know myself.

Okay. Second question I want to ask you guys about, if you could quantify the impact of the nonrenewals of the contracts that fell off that weren't renewed, that portion of the $67 million decrease in electric gross margin?

12 million impact from that.

Okay. And we should be seeing that going forward pretty much?

Well, those contracts dropped away, there were other contracts being put into place, in other areas that will help offset that, Paul.

That will help offset that?

Yes.

I know you guys have a contract with Pepco(ph) that is going away in '06. Is there any large contract or something we should be thinking about that would have a similar impact?

No, Pepco(ph) is really the -- large contract and that does expire as you said Paul in, 2005.

And finally on the regulatory deferral, specifically the shopping credits, a couple of things. I guess sort of a compound question here, one is, I noticed the commercial switching seem to be, if I read it correctly on the right table there, it seemed to have moved up quite a bit. And the shopping credit seems to have, you know, there is a deferred balance seems to be growing quite a bit and I know the commission has sort of order this and you're due to get recovery of it. Could you just remind us what the rate of return is associated with this deferral, A? B, you know what would customer switching be without this incentive, do you guys think? Could you just give us a little more flavor for what is going on here?

Paul, this is Harvey Wagner. We're earning about a 7% return on the shopping incentives, and that's deferred as a new regulatory asset. It will be recovered at the same time as the incentive. After the transition cost recovery period.

Okay. That's a pre-tax 7%?

That's right.

That debt-like return.

That debt-like return, okay. And then the customer switching I guess, why is it -- it seemed like it boosted up quite a bit this period over last period and I'm just sort of trying to get an idea, you know what do you think is driving? That have the incentives themselves changed? Why are people switching more? What is going on there.

There is a specific reason. And I will let Kurt elaborate but it really has to do with the JCP&L and the rules of New Jersey that result in an apparent difference.

Paul, if you're looking at the statistics on page 9 of the consolidated report.

Yes.

It shows, if you look down on electric sales shop(ph), it shows that there is an increase of 278,000 megawatt hours quarter-over-quarter from third quarter '04 to third quarter '03. The lion share of that is in New Jersey. Actually New Jersey, they changed the auction rules back in 2003 to encourage more shopping directly outside the BGS process so actually New Jersey -- switching had about a 475,000 megawatt hour switch impact, where as Ohio was less than 100. It was an increase in Ohio, also, but it was less than 100,000 megawatt hours. Pennsylvania was actually the flip side of the equation, for MetEd(ph), you actually will have less shopping now in '04 than you did in '03. Some customers returning back to the Polar service so that was the offset. When you net the three states together that's how you -- ended up with the 278,000 increase.

That's very helpful. Can I just ask you what was the financial impact of the New Jersey switching? Was that also deferred. I mean -- are you guys losing margin as a result of that? What is the impact of these people leaving you?

Actually, that it is 0, because it is handled through the BGS auction process.

I see. I got you. Okay that explain. It okay. Thanks a lot, guys.

Thank you, Paul.

Thank you, our next question coming is from Margaret Jones(ph) of AB and Amorable(ph). Please go ahead.

Hi, Peggy.

I noticed a significant positive cash -- contribution from working capital, I believe. In the third quarter. And I wondered if you could talk about that. Or explain it.

Peggy, this is Harvey Wagner. Obviously one of the large items was the roughly $200 million income tax benefit from our pension contribution. So that was the lion share of that change.

Yes.

Thank you.

Thanks, Peggy.

Thank you. Our next question is coming from Ashar Khan(ph) of SAC Capital(ph). Please go ahead.

Good afternoon.

Hi Ashar.

Rich or Tony, if I heard you correctly, you believe that you might be able to earn a higher margin by going the route -- the other route, which is, you know, going through the New Jersey Polar and retail and wholesale, than versus the rate stabilization plan. Is that a correct -- what I heard?

Yes.

Okay. And is there -- as you've done -- I'm sure you've done your alternatives, is there somewhere you could share with us how much of load can go into all three of those three categories that Tony mentioned?

How much load? Well, if the Ohio bid is successful, that would free up, on a peak load base on something on the order of what, 9,000 megawatts something like that for our three Ohio companies.

Okay. But then you know Tony said some of it can go to New Jersey, some of it can go for retail and some into wholesale. Do you know how much can go into the New Jersey Polar (inaudible) ?

Actually he said the Pennsylvania Polar load.

Sorry Pennsylvania Polar --

That's where we have the polar obligation that runs through 2010.

How much load you can absorb over there?

The Pennsylvania load is -- does anybody know?

About 6,000.

6,000 megawatts. You know, the situation there is obviously, it is always less expensive for us to source that from our own plants than it is to buy it on the market. And right now, you know, we serve about three-quarters of our total needs systemwide from our own generation of about 25% from the market so that would allow us to source more from our own plants. So that's the rationale there.

Okay. Thank you very much.

Thank you.

Thank you. Our next question is coming from Steven Wang(ph) of Smith Barney. Please go ahead.

Actually it is Greg Gordon. Hello?

Hey, Greg.

I'm assuming that the -- I'm looking at the pre-tax gross margin and the electric sales this quarter and it was down from about 59.5% to 57.6%, just running some basic numbers, I'm assuming that is really just related to the soft weather?

That's largely the driver of it, Greg.

So you weren't -- there wasn't any operating issue that caused you to have to dispatch more expensive plants and it doesn't seem like you mentioned fuel as being a significant impact in the quarter, either.

It was not.

Okay. Great. And then when I look around the clock prices in the midwest region, they have run up a lot, obviously, on the back of higher Appalachian coal, and higher gas prices. It looks to me like the 2006 round the clock price right now for just a block, standard block of power, is approaching about $40 a megawatt hour. How does that compare to your RTC price, your RTC price averages about 46, is that right? Or is that -- is my recollection incorrect?

Right, it is something on that order but you're comparing a retail price, you know, that's fully shaved, full requirements, the whole nine yards, versus just a wholesale price.

No, I agree. I'm just saying that the margin between where, you know, you can just sell a firm(ph) block of power.

Right.

You know, taking a standard, you know, 40 to 50% premium on, that you know, we're talking about a price in excess of the $55 starting point that's been allocated by the consultants who are running this auction. So I mean when you look at the macro economic backdrop is it fair to say, Tony, that's one of the reasons why you feel confident that there is no significant loss of economic value when you gained this whole outcome?

I think if you -- if you think through the strategy I laid out, in terms of how we would deploy our resources to the highest markets, I think it is becomes pretty clear where the margin enhancement potential comes from.

You have hedged -- you have power purchase agreements currently in place to serve the Pennsylvania load. At what point did those hedges actually roll over? Would it be a smooth transition?

Yeah, currently they are positive mark-to-market.

But they -- but when do you have to actually renew those hedges? In other words, under Tony's strategy, you know, post 2005, you can sort of load with your own generation.

Right.

But are you hedged so that you will be -- it would be uneconomic to do till the hedges rolled off?

We don't hedge for the PA load specifically, Greg. We look at it on a systemwide basis. Those contracts that we have in place are for a variety of maturity, some as long as 2010, even. So, you know, it would not be problematic for us, on a system basis, if we were to try to source more of that from our Ohio generation.

Great. Okay, thank you, guys.

Thanks, Greg.

Thank you. Our next question is coming from Dan Eggers of CSFB. Please go ahead.

Hi, good afternoon.

Hi, Dan.

I hate to -- belabor this anymore, but can you --

Oh, go ahead.

You can explain to me the capacity as far as transmission out of Ohio to other markets for moving power from your generation out? I've been led to believe there is transmission constraints which limit the ability to move power around the region.

I guess that answer would probably vary every hour of the year, depending on loads and so forth. And I assume you're talking about power moving west to east, from Myso(ph) into PJN(ph)?

Correct.

There are periodically constraint, either physical constraints or constraints imposed by the PJN(ph) pool itself and that gets reflected in congestion, costs, charges and so forth. So you know, there are issues to deal with when you're talking about those power flow.

Yeah, one thing I should mention, thank you, is that beginning January 1 of 2005, we will be moving our Beaver Valley Nuclear Power Station into PJM(ph), concurrent with BQE(ph) moving over to PJM(ph) as well. So that is going to help us mitigate some of those transmission issues by having that plant now located within the PJM(ph) footprint so that is a very valuable benefit for us beginning January 1.

Got it. Thank you. Rich, you had talked last quarter about aiming to get back to investment grade radium(ph) by the end of the year and I think one of the contingencies was resolution of Ohio. And with the auction looking like it is going to come, you know, -- to a conclusion not to the middle or latter part of December. Is that still realistic? Or are we looking too to roll over into '05 before it gets taken care of?

I don't know if it is 4 Q '04 or 1 Q '05 but I think it is relatively timely. I think certainly we have met our promises to the rating agencies, the investors in terms of our progress this year and our hope is that they will notice and take timely reaction.

Great. And then just one last one. It looks like industrial demand growth for you guys was relatively subdued versus other utilities which had a pretty strong growth in the quarter; there anything specific to your region we should be aware of? Or are you guys pretty happy with where that is going?

I think it probably varies regionally based on the make-up of your industrial base. What we've seen over the last quarter, Dan; that some of our larger industrial customers, some of our steel company customers and so forth have been relatively robust. Some of our smaller industrial customers have been less so. So I think that's probably just a reflection of the make-up of our industrial mix as much as anything else.

Great. Thank you, guys.

Thank you.

Thank you. Our next question is coming from Taran Miller(ph) of UBS(ph). Please go ahead.

Good afternoon.

Hello,Taran(ph).

Hi, Rich. Tony, going back to the decision not to bid in the auction, is it simply a case of not wanting to bid against your own price that was set in the RSPIE(ph) bidding against yourself?

I don't think, so because we certainly wouldn't bid a lower price than the price we have on the table. As part of that plan. And I truly don't believe the commission will approve a price that will result in higher prices to our customers.

Okay. All right. And then Rich, within the context of the SEC investigation, and I know that it is -- it is pretty wide open at this point, do you have any idea in terms of scope and timing. And then how you think that might play with reference to the potential to get upgraded as an S&P? Has that now become a critical path item in your own mind?

In terms of timing, my understanding is that the SEC doesn't have any statutory schedule constraints so I think they can do this as they see fit. Certainly, you know, I don't know that there is much else that can be said regarding the restatements and certainly everybody is familiar with Davis-Besse(ph), those issues are well known, I mean those issues are in the past, and obviously, nothing has changed with those. I don't, in my mind, I don't see this this as a critical path event for our credit profile. I think what we've done in terms of improving balance sheet this year, our consistent operational financial -- performance, are far more important factors than the SEC investigation. So I would view that as really a lower order item for their thinking. That's my thought, anyway.

Okay. And then the last question is, is there an upcoming meeting between yourselves and the NRC with reference to Perry(ph) and if so, when?

Do you know when that it is (inaudible).

October 28.

October 28, I'm told.

Thank you.

Thank you. Our next question is coming from Steve Fleishman of Merrill Lynch. Please go ahead.

Hi, Taran(ph), kind of asked my question but just to clarify on the SEC review, was the documents they asked for before more related to kind of how you guys disclosed Davis-Besse(ph) changes and the accounting restatements? Is it mainly a disclosure issue they're looking at?

That would be their purview, Steve, yeah, it is obviously they're not getting into the operational issue, for instance, that the NRC might look at, so the SEC focus regarding Davis-Besse(ph) would be on our disclosures regarding the outage.

And then on the accounting restatement, are they looking at whether your auditor, you know, made the right choice in changing the accounting, your new auditor at that time? Or is it just how it was all disclosed?

I think at this point,, they're just gathering information related to the restatements themselves.

All right. Okay. Okay. Thank you.

Thanks, Steve.

Thank you. Our next question is coming from Dan Jenkins(ph) of State of Wisconsin. Please go ahead.

Hi.

Hi, Dan.

Just try to get a little more clarity on the Ohio auction process. And so I guess my question is what are the commission's options at this point? Can they still accept your plan and then just throw out all the bids or can they somehow mix the proposals together in some way? Or is it kind of an all or nothing? Or how does that work?

Yeah, they have two option, Dan. They can accept the competitive bid, or they can reject the competitive bid which means the rate stabilization plan stays in place. So they cannot mix and match. One of the futures, as Tony mentioned in his comments, was that this was a single product at a single price for the entire Ohio load. So it is one or the other and that's their -- that will be their option.

So have you spoken to them at all or gotten any feedback since you decided not to participate at all in the auction?

Well, the auction process itself has not even started yet. It is November 17. For the starting date.

Okay. How about, have you spoken at all to the rating agencies about, you know, your proposal going forward with that? And as far as the -- also the SIC -- or SEC inquiry and if not, what do you have plan to meet with them any time soon?

Meet with? I'm sorry, Dan.

The rating agencies.

Oh, we've actually recently met with Moody's(ph) and S&P, so I think they're well updated in terms of our progress this year. Let me just correct one thing I told you. The auction process, they changed the date of it and actually it is December 8th when it starts, so I apologize.

And then one other thing, you mentioned that you're still looking to sell noncore assets and so forth.

Yes.

And I was curious if you could give us some -- like a number of what you've sold so far, and how much you still have left on the books that -- to dispose?

Over the -- since we really closed the merger with GPU we've been working actively to divest noncore assets which included all of the international assets that came along with the GPU merger so at this point we're largely completed with that program. There's a few assets left, most of which are smaller. There's the facilities services group which -- where the HVAC company's we acquired and there is MYR which is really infrastructure, construction company that GPU had acquired and which came over us to in the merger. So there are some smaller scale items but those are the larger assets that are left.

Are you soliciting bids or have that, you know -- ?

We are tracking market conditions at this point in time to see when it might be advantageous to move forward with those sales.

Okay. So you don't have a timetable yet, but you're just kind of mapping that out, I guess?

Well, to the degree that conditions are favorable, we will keep trying to pursue the sale of those assets.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Daniele Seitz of Maxcor Financial. Please go ahead.

Hi. Just a quick last questions, and which do you anticipate to redeem in terms of debt next year? Do you have some (inaudible-heavy accent) that you had this year?

Sure, Daniele, it is Tom Navin. You know, next year, we have about $470 million worth of redemptions. 300 million of that is in the holding company. We've planned to take those holding company dementures(ph) out with cash flow, and, you know, the additional cash flow that we would have available after making those redemptions, we would also put toward debt reduction as well. To try to get to the 50, you know, below 50%, call it 53% target leverage that we're trying to achieve by the end of 2005.

Okay. And the reason why I was asking is also I was wondering if you were going to have free cash flow. Meaning anything that will be left giving you some opportunity to buy back shares, because -- if you thought you could do that. But it is not in the cards for '05, I guess?

We have the free cash flow, you know, that comes up from the regulated operating companies, and we will be producing free cash before capital expenditures and common dividends in excess of $2 billion per year going forward, so we certainly have free cash available for us to make those decisions.

Right.

Going forward.

Uh-huh. And is -- it an option, do you think you have for '05, or do you think more of '06, '07?

The free cash or --

Yes. I mean would you use it to purchase shares to make your target.

Oh, I'm sorry. We've talked Daniele, we think as we complete our debt reduction program, which is going to be completed by the end of next year, as we go through that process, heading into 2005, one of the things we definitely want to consider is sending some of that cash back to shareholders. The initial way we would likely do that would be in the form of dividend increase. Not ruling out the possibility down the road of other options but that's our primary objective at this point.

Okay. Just one quick question on the New Jersey rates. Is this still in progress? What is the status now?

You're talking about the two items before the New Jersey board?

Yes.

Of reconsideration? The -- that is still in place. Those process and talks continue. There is no statutory deadline on that. So it is out there, and hopefully we will be able to come to a conclusion relatively soon on that but there is no -- time frame that the board has to operate under.

Right. Daniele, on the phase two part, if we were not able to get a settlement, I think they would tentatively had scheduled hearings on the phase two at to start around February, so, you know, that proceeding would start hearings in probably, you know, commission decision in early summer.

Uh-huh. Okay. Great, thanks.

I know it has been a long day for everybody with the flood of earnings releases. Why don't we take one more call and than if there is any follow-ups certainly we would be glad to take your calls afterwards individually.

Thank you. Our next question is coming from Paul Deviss(ph) of Value Line(ph). Please go ahead.

Hi, this is Paul Deviss(ph).

Hi, Paul.

Following-up Daniele's question about the debt reduction, the 470, that is just what is mandatory next year and due have any specific goals for debt reduction over and above that?

That's right, Paul. Those are the mandatory retirements, and any additional cash flow that we would have available, we would look at applying that as well to the debt redemption, if it made sense to do that, as I said we are going to work toward completing the debt reduction program by the end of '05, and if we do have, you know, additional cash flow available to pay down debt, we will use it that way.

And regarding the settlement in Pennsylvania, if the commission accepts that as is, how would that affect your earnings, if at all?

What I had said about the level of spending required under the settlement is that it is consistent with our existing practices. So it wouldn't have an impact on earnings.

All right. Thank you.

Thank you. Well, thank you, everybody. I know this was a very busy day. We certainly appreciate your time and interest and look forward to seeing many of you at EEI and hopefully many of you will be able to attend our luncheon on Monday. So have a good trip to California and thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.