第一能源 (FE) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Natasha, and I will be your conference facilitator today. At this time, I would like to welcome everyone to FirstEnergy's fourth quarter earnings conference call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] Thank you.

It's now my pleasure to turn the floor over to your host, Kurt Turosky, Director of Investor Relations. Sir, you may begin your conference.

Thank you Natasha. During this conference call, we will make various forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements, with respect to revenues, earnings, performance, strategies, prospects, and other aspects of business of FirstEnergy Corporation, are based on current expectations that are subject to risks and uncertainties.

A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Plead read the Safe Harbor statement contained in the consolidated reports of the financial community, which was released earlier today, and is also available under our website under Earnings Release link. Reconciliations to GAAP for various non-GAAP financial measures that we will be referring to today, are also contained in that report, as well as on the Investor Relations section of our website.

Participating in today's call are Tony Alexander, President and Chief Executive Officer, Rich Marsh, Senior Vice President and Chief Financial Officer, Harvey Wagner, Vice President and Controller, Jim Pearson, Treasurer, and [Terry Alvin], Vice President of Investor Relations.

I will now turn the call over to Tony Alexander.

Thanks, Kurt, and good afternoon everyone. Thanks for joining us today. I'm pleased with our performance in 2005. We made significant progress in executing our plans, and everyone at FirstEnergy worked hard to achieve these results, and enhance shareholder value. I will start by reviewing our progress, and highlighting our 2006 objectives, and then Rich will discuss our fourth quarter financial results.

Our financial results during the year, either met or exceeded the expectations we established through our financial guidance. Our 2005 earnings guidance was initially established at $2.70 to $2.85 per share. We then raised this by $0.15 per share in July, to $2.85 to $3.00 per share. Our normalized non-GAAP earnings for 2005 were $3.00 per share, at the top of our revised guidance range.

On a GAAP basis, earnings we are $2.62 per share for the year. In a similar fashion, we initially established our 2005 non-GAAP cash generation guidance of $560 million, and then raised that to $620 million in July. Excluding the December voluntary pension plan contribution, our non-GAAP cash generation for 2005 was $688 million, exceeding our guidance by $68 million. We ended the year with our debt-to-capital ratio within our target range, and successfully concluded our debt retirement program. During this initiative's four-year term, we reduced outstanding debt and preferred securities by nearly $4 billion.

Due to our strong performance, and confidence in our outlook, our Board raised our common stock dividend twice last year, for a cumulative increase of 14.7%. Additionally, on November 15th, the Board declared a 4.7% increase in the dividend payable March 1st, 2006. Combined, these three actions represented an overall dividend increase of 20%. In addition to favorable financial results, we also produced solid operational performance.

Our fossil and nuclear generation groups established an annual output record of 80.2 million-megawatt hours during 2005, exceeding the previous record of 76.4 million-megawatt hours that we set in 2004. This was driven by higher fossil generation, which set record output of approximately 50 million-megawatt hours. Our base load fossil units operated at an 87% capacity factor, which places them in the top decile nationally.

Our nuclear units, beginning with the critical summer period starting in June, ran at 100% capacity factor for the remainder of the year. During the year, our coal-fired Sammis Unit 2 set the national record for the longest running single turbine steam generating unit in the nation's history, by completing 1,017 days of continuous operations. That broke the previous record by nearly 200 days.

In our transmission and distribution businesses, we have accelerated our capital investment to enhance our infrastructure, and improve levels of customer service and reliability. We are already seeing the benefits of this investment. For example, our transmission reliability was near top decile industry performance during 2005, and we expect the progress to continue over the next several years. We also resolved several important regulatory issues during the year. The JCP&L rate cases were successfully settled, and we implemented a recovery mechanism in Ohio for increased MISO transmission costs.

Another milestone was the approval of our Rate Certainty Plan by the Ohio Commission. This will provide customers with lower and more certain rate levels through 2008, and is expected to provide the companies greater earning stability and consistency. The Rate Certainty Plan gives us the ability to defer up to $450 million of delivery system improvement expenditures for future recovery, as well as the opportunity for current and deferred recovery of fuel cost increases. The approval of the Rate Certainty Plan was an important element in our preparations for the transition to competitive generation markets in Ohio in 2009.

We also took two other important actions during the year, to better position us for the future. The first was a transfer of our owned fossil and nuclear generation assets to our unregulated generation companies. This better aligns the ownership of these assets with their operational responsibilities, and prepares us for the time when we're no longer subject to a fixed polar obligation, to our regulated retail customers. Our generation fleet is efficient, cost effective, and prepared to succeed in a competitive generation market.

Second, we made a voluntary $500 million contribution to our pension plan in late December. This reduced a debt-like obligation, and will be accretive to earnings by about $0.06 per share during 2006, and in subsequent years. And also delays future funding requirements, and minimizes our exposure to any potential pension reform legislation. We are pleased that investors responded positively to our performance, as evidenced by our 2005 total shareholder return of 28.5%.

Going forward, we'll build on our accomplishments this year, by specifically focusing on further maximizing the performance of our generation fleet, reinvesting in our wires businesses to improve system reliability, and pursuing full and timely regulatory recovery of our eligible costs.

This year we have several important planned generation outages, that will be be a key focus for us. On Monday of this week, we started a complex outage at Beaver Valley Unit 1. In addition to refueling, we plan to replace the unit's three steam generators, as well as the reactor vessel head. The outage is expected to last two to three months, and will result in more efficient operations, and shorter refueling outages in the future, due to reduced inspection requirements.

refueling outages are also planned for Davis-Besse and Beaver Valley Unit 2. And the Davis-Besse outage is expected to include the replacement of two reactor coolant pumps. During the Mansfield Unit 2 outage this fall, we plan to have high pressure dense-packed turbines, that will enable addition 50 megawatts of output, similar to the upgrade that we successfully completed at Unit 1 in 2005. Even with these planned outages, we expect that we'll achieve generation output in excess of 81 million-megawatt hours in 2006, which of course will be another record.

Turning to our delivery business, we will continue to make substantial investments to improve our service infrastructure, and reach higher levels of reliability for our 4.5 million customers. As outlined in our Analyst Meeting in November, total capital spending in 2006 is projected to be about $1.1 billion, with approximately $630 million of that earmarked for our energy delivery business. Achieving full and timely regulatory recovery of our costs will remain a critical priority. We hope to achieve resolution on a number of such issues in 2006. Rich will touch on these in just a minute.

As I discussed at our November Analyst Meeting, FirstEnergy will consider a share repurchase program, after we gain additional clarity on three important milestones. Namely, the approval of the Rate Certainty Plan by the Ohio Commission, which occurred last month; completion of the Beaver Valley Unit 1 extended outage; and finalization of our environmental compliance plan for our fossil plants. We continue to expect resolution of these issues in the first half of this year, and at that time, we will be ready to address the share repurchase program.

I'm proud of what we achieved in 2005, and look forward to building on those results this year. I appreciate the support and the confidence received from the investment community, and assure you that our management team will continue to work hard to exceed your expectations for FirstEnergy.

I will now turn the call over to Rich for more details of our financial results, and other matters, before we take questions. Rich?

Thank you, Tony. for my portion of the presentation, it might be helpful to refer to the consolidated report to the financial community that we issued today. And that report is also posted on the Investor Relations section of our corporate website. Let's start with our fourth quarter results.

Earnings on a GAAP basis in the fourth quarter were $0.58 per share, compared to $0.61 per share during the same period in 2004. Normalized nonGAAP earnings were $0.77 per share, excluding the cumulative effective accounting change of $0.09 per share, and net unusual items of $0.10 per share. This compares favorably to normalized non-GAAP earnings of $0.72 per share in the final period of last year.

During the quarter, we recognized four unusual items. The first of these was a penalty associated with Department of Justice deferred prosecution agreement, regarding the Davis-Besse reactor head issue. This reduced earnings by $28 million, or $0.08 per share. The second was a $13 million, or $0.04 per share impairment, related to our non-core businesses. The third reflects a $13 million or $0.04 per share charge for potential assessments in a New Jersey state income tax audit, relating to prior years. And the final item was a benefit of $20 million, or $0.06 per share, resulting from an adjustment of the deferred tax write-off, associated with Ohio income tax legislation. This stemmed from Ohio tax benefits associated with the $500 million voluntary pension contribution that we made in December.

Also during the quarter we adopted FIN 47, accounting for conditional asset retirement obligations. This resulted in a cumulative effect of an accounting change that reduced net income by $30 million, or $0.09 per share. An important factor that contributed to the improvement in normalized non-GAAP earnings during the period was a $56 million, or $0.10 per share increase in our electric gross margin, after adjusting for changes in regulatory deferrals. This was driven by increased distribution deliveries, continued strong performance from our generation fleet, and the JCP&L rate increase.

These positives were partially offset by higher purchase power prices, and increased fossil fuel expenses. Electric distribution deliveries increased 4% in the final quarter, in part due to cold weather, with heating degree days being 7% higher than in the same period last year, at 2% above normal. Our total electric generation sales rose 7%. This was largely due to higher regulated retail sales from the cold weather, and the impact of customers returning from alternate suppliers that exited the northern Ohio market.

As Tony mentioned, our nuclear and fossil generation fleets produced a notable performance throughout 2005. In the fourth quarter, output increased 1.5 million-megawatt hours, or 8% compared to the same period last year. Most of this higher generation was used to serve increased regulated retail loads, which limited our opportunity to capitalizing on higher margin wholesale sales.

Other drivers of our improved financial performance included an $0.08 per share benefit for reduced nuclear operating expenses, primarily due to the absence of a refueling outage during the quarter, and a $0.05 per share benefit from lower pension and other employee benefit costs.

Factors that partially offset our earnings improvement included $0.07 per share reduction, from increased PJM and MISO transmission costs, primarily attributable to higher congestion, and service costs in PJM. A $0.06 per share reduction from decreases in depreciation and amortization expense, largely due to higher Ohio transition cost amortization, and a $0.04 per share reduction resulting from increased energy expenses, due to system reliability initiatives and higher uncollectible account costs. Uncollectible expenses increased significantly, due to a surge in customer bankruptcy filings in the fourth quarter, prior to the effective date of the new Federal bankruptcy law.

Net interest charges declined $4 million during the quarter, due to reduced debt, preferred stock levels. Financing activities included $140 million reduction in debt preferred securities, and $343 million of refinancings.

For the year, we reduced debt and preferred securities by $779 million, and completed $678 million of refinancings, and $80 million of repricings. These results exclude the temporary increase in short-term borrowings to fund the voluntary pension contribution in December. 2005 marked the end of our debt reduction program. Over the last four years we have reduced nearly $4 billion of debt and preferred securities, and lowered our debt-to-total capital ratio from 67% at the end of 2001, to about 56% at year-end 2005.

Going forward, the focus of our financing plan will shift from debt reduction, to capital structure management. This will include reducing debt at the holding company, as outstanding issues mature, including the $1 billion 5.5 note series due in November, issuance of new debt at the some of our utilities to achieve capital structures that are appropriate in a rate making context, and maintaining the consolidated debt-to-capital ratio at the current level. This will entail issuance of additional debt over time as equity grows, so that we can maintain our targeted debt ratio.

Finally, I would like to briefly update you on several regulatory initiatives, related to our continued efforts to gain full and timely recovery of eligible costs. We are preparing to submit regulatory filings in Pennsylvania, and seek recovery of increased costs at our Metropolitan Edison and Pennsylvania Electric utilities. We believe that our current transmission, distribution and generation rates taken together, resulted in adequate returns for both utilities.

You may recall that we previously sought to defer increased PJM ancillary service and congestion costs in Pennsylvania. We expect to provide notice of our intent to file these cases in the March to April timeframe, followed by the filing itself, not less than 30 days later. We will be able to discuss these cases in more detail, once we make the filings.

We also have a securitization request pending before the New Jersey Board of Public Utilities. The Board recently selected Bear, Stearns as their financial advisor, and we hope to receive approval for the transaction during the second quarter. Following a 45-day appeal period, the securitization could take place early in the third quarter, and the amount securitized could range from $177 million, to as much as $277 million.

Finally, we have also filed for $165 million increase in the non-utility generation clause for JCP&L, and if approved this request would recover above market costs associated with NUG contracts, and increase our cash flow, but have no impact on earnings.

Let me conclude by saying that while Tony and I are gratified by our performance and results in 2005, we remain very mindful of the need to again exceed the expectations of our investors and customers, in 2006 and beyond. We have sound plans in place to do this, and I think we have the right team to execute these plans.

With our continued focus on operational excellence, reinvestment in our business, and timely recovery of regulated costs, and an aggressive approach to increasing productivity and reducing expenses, I'm confident that we'll continue to improve the value proposition for both our investors and customers. We appreciate your support and interest in FirstEnergy, as well as your time today.

I would now like to ask Natasha to open the call to questions from analysts. Thank you.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question is coming from Greg Gordon of CitiGroup.

Thanks. Good afternoon, gentlemen.

Hi, Greg.

A couple of quick questions, what's the aggregate equity investment, and what was the average equity return on your Pennsylvania investments in 2005?

Yes, we're pulling the case together, Greg, at this point. We can't get into specifics. As we said, we'll be filing our notice of intent in the March to April timeframe, so that would infer a Filing in the April to May timeframe. So we can't get into specifics at this point in time.

Okay. Looking at page 10 of your release, the non-GAAP reconciliation of cash flows. That number, the $347 million at the bottom line is a little bit lighter than what you guys had projected in November. It looks like that there were some positives in operating cash flow related to non-operating items, and then there's this negative other net of $218 million, which is in addition to modestly higher CapEx. So can you just walk us through what those positives and negatives are, and why you came out modestly below the target.

The big driver this was the pension contribution we made in December, Greg, and on an after-tax basis that's $341 million.

Right.

Of what you are seeing there. So prior to that, it would have been, you know, $680 million approximately. So that was really the difference.

The last item in November was a $10 million positive from other net, and you came in at $218 million negative. That was like a $230 million swing, which ate into some of the positive items on the cash from operating activities line. So what was that item? Or what are those series of items?

Greg, this is Harvey Wagner. One of the items that was not included before, was the return of the cash collateral when our credit ratings were upgraded by S&P, and you will see that up in the net cash from operating activities. So to keep things on a comparable basis, that was removed as part of the other net down below, to get to the non-GAAP number.

Okay. Thanks. Another item your super critical plants performed very, very well and you highlighted that in your comments, Tony.

Yes.

I think your goal on overall fossil performance for the year though was 66% cap factors, and you came in about 200 basis points below that. So that would imply some of the other plants didn't operate up to your targets. Is that, in fact, correct? Or is there some nuance I'm missing?

Greg, I think all the plants operated pretty close to planned. My sense is that there is, if there was any slight deviation from that, it's probably related to utilization, in terms of whether or not the power could be placed in the market.

Okay. I mean, you weren't that far off. I just wanted to make sure that there weren't any operating issues.

No, there were not.

Final question, a little bit in the weeds. Back a couple of years ago when FirstEnergy solutions was still, you know, bidding into other markets outside of your jurisdiction, you won 11 traunchs of the BGS, roughly $55.50, those contracts roll-off in May of '06. One of the items that impacted your earnings in the fourth quarter was higher congestion.

I'm wondering if that's directly related to those load serving obligations, and when those roll-off, are you making money or losing money on those contracts right now, and when they roll-off, is the impact of that roll-off fully reflected in your current '06 guidance?

We are making money on those transactions now, and the impact of those rolling off is reflected in our earnings guidance.

Okay. Thank you guys.

Sure, thank you, Greg.

Your next question is coming from Charles Fishman of AG Edwards.

Hi, Charles.

Wholesale generating revenues for the fourth quarter and the full year, wholesale?

I'm sorry, I missed first part of your question, Charles.

The generating revenues, could you break it down between the wholesale and retail?

Sure. Hang on a second.

That would correspond to the sales, the actual kilowatt hour sales, megawatt hour sales.

Hang on a second here.

It's on page 9, isn't it?

Kilowatt hours.

But the actual revenues that correspond to those wholesale kilowatt hour sales is what I'm looking for.

This is Kurt Turosky. In the fourth quarter, the wholesale sales revenues are about $360 million.

360?

Yes.

And for the full year, do you happen to have that?

I can get back to you offline with that.

It's about $1.4 billion for the year.

Did you hear that Charles.

Yes, $1.4 billion.

That's correct.

Thank you.

Thank you.

Your next question is coming from Philson Yim of Morgan Stanley.

Could you talk about any data points you're receiving in Pennsylvania regarding Penn Power's RFP process proposal? I guess they didn't like the RFP results that a small utility there had.

You know, we're requesting that a fee process similar to what Duquesne had used. You know, obviously there's a lot of discussion now about what market rates are, and so forth.

We've not had any specific comments back on be our proposal, which is, you know, the mechanism behind it, as opposed to what the final result will be. So we're going ahead with that. You know, we expect to receive a decision from the ALG sort of in the first week of March, and probably with the Commission vote, probably around the beginning of April.

Great. Thanks. And as far as uses of cash, is that basically the same as what you had said at the analyst meeting late last year, you know possible stock buyback in the second half of this year.

Yes, there's really been no change in the views of the use of cash.

Great. Thanks very much.

Thank you.

Your next question is coming from Steve Fleishman of Merrill Lynch.

Hi, guys.

Hi, Steve.

In your commentary on the Pennsylvania rate filing, you said you are going to file for a change in transmission distribution and generation? Could you just clarify on the generation piece, since I thought that was frozen with the POLR contracts.

Again, Steve, our case is being prepared right now, and we'll have more to talk about when it's actually noticed towards the end of March or April.

Okay. But you are going to address generation? Is what you said?

As Rich indicated, that we believe when include transmission, distribution, and generation, the returns are inadequate.

Okay. And your rate freeze on T&D expired a while ago in Pennsylvania; is that correct.

That's correct.

Okay. And then you never received a deferral accounting order?

That's correct, Steve. That's still out there.

Okay. Okay. Thank you.

Thank you, Steve.

Your next question is coming from David [Springs] of Seaport Capital.

Hi, David.

Hi. I guess obviously the recent, or the results of the recent New Jersey BGS Auction were fairly profound. Is the main purpose of the upcoming Pennsylvania regulatory filing to mitigate future increases in unrecovered purchase power expense?

No, the main purpose is to deal with fundamentally what we believe to be inadequate returns, and how those are shaped will be a part of the case that we'll be talking about later on.

Okay.

In the filing.

Okay. Tony, I noticed that in your Q, the most recent Q, that FES changed its wholesale power agreements with Met-Ed and Penelec, to provide it with an option, I guess, over the next year to terminate the agreement at any time with 60 days notice. Are you in the process of ring fencing FirstEnergy from Met-Ed and Penelec, and if so, what steps still need to be be taken? You --

You know, I don't think we are in the process of doing that. We just made a business decision there.

Yes, it wasn't part of a specific rate expense strategy, David. I wouldn't put it that way. It's a decision that gives us flexibility, but it's not part of a specific ring fencing approach.

You had an agreement before that allowed you to break it once a year.

Right.

Why the necessity over the next 12 months, or, I guess, next year to have it to be able to be broken on 60 days notice?

Well, I think in large part, David, it's because there is, you know, at this point there's essentially no shopping in Ohio. So all of that load is coming back to the Ohio companies, and it's a question of how we're going to deal with that kind of issue going forward.

To the Ohio, I'm sorry, the shopping, the agreement was with the Pennsylvania utilities, though.

I understand that, but it's primarily supported by generation that was -- that's used to support the Ohio loads.

Oh.

Because they were shopping in Ohio. There was more free board to ship into the Pennsylvania markets.

I see.

That's being worked through right now.

I see. And your blended POLR price in Pennsylvania is, I want to say it's somewhere in the 40s?

Yes. That's right. 46, thereabouts.

Okay. All right. Well, thank you.

Thanks.

Your next question is coming from Hugh Wynne of Sanford Bernstein.

Hi, all.

Hi, Hugh.

I have a couple of quick questions on the chart on page 6, which compares the fourth quarters of '04 and '05. On the first line, the increase in regulated service revenues, and the decrease in power supply management revenues. I take it that's related to the shift in consumption of power from competing retailers in Ohio and Pennsylvania, to FirstEnergy's POLR supply, and therefore an increase in your regulated sales, versus your unregulated sales, or am I wrong about that?

Hugh, this is Harvey Wagner. On the regulated segment, that's all strictly increases in deliveries on our distribution side of our business. Under the power supply management, I don't know if you will recall we adopted a new reporting methodology for wholesale transactions in the PJM market in 2005.

Right.

And in doing so, there was a reduction of wholesale sales comparatively to the prior year in the quarter of about $240 million.

Okay, so this is really just a reflection of that new accounting?

That's correct. Yes.

Now, going down to line four, "Other," you have a significant drop in other revenues, or regulated services that would be an increase in other revenues at power management supply services. Could you elaborate on that?

It's primarily transmission related.

Why would it increase your revenues on one side, and reduce them on the other?

The transactions on the wholesale side by the power supply management services segments were increased.

And this was a, I'm sorry, can you give me any more color than that? I'm not understanding.

Just a volume of transactions going through the system toward the unregulated side of our business, that we're collecting more transmission revenue.

All right. And the reason that went down on the regulated side?

Again that would just be a function of the transactions. We can get you more detail on that, Hugh. I believe on the regulated side, about half of that difference is due to a reduction in transmission revenue.

Right. Maybe I will call Kurt afterwards.

That would be fine. We'll walk you through that.

Then going down to the expenses level, we have a major change in the amount of fuel consumed and the amount of purchase power bought at the power supply management services. I take it this is just a reflection of the reduction in outages at your nuclear fleet, is that right?

Well, again, the purchase power is also affected by that PJM netting transaction, so that's $240 million of it, and the difference in the fuel costs is the difference in the fuel mix and increased fuel prices.

Okay.

Of course, this quarter is the last time that we will see that.

Right.

-- PJM netting issue that will now drop away beginning with the first quarter of '06. It will make the comparisons easier.

Okay. A final quick question if I could, you have a $27 million increase in operating expenses at the regulated -- I'm sorry, decrease in operating expenses at the regulated services segment, those go down from 448 in '04, to 421 in '05. Yet on the first page of the release, you talk about a significant increase of $22 million in energy delivery expenses. What accounts then for the large decline in other operating expenses or regulated services?

Which specific line were you looking at?

Looking at line 9 on page 6.

Okay.

I don't know if we have the answer at our fingertips.

Part of it is the reduction in our employee benefit cost, pensions, and other post-retirement benefits.

Related to the funding of the pension plan, I assume?

Well that's part of it. But we also had changes in our healthcare plan, that are costs going forward as well.

These were obviously more than enough to offset the increase in your delivery expenses?

That's correct, that would be part of that, that's correct.

All right. Thank you very much.

Thank you.

Your next question is coming from Paul Ridzon of KeyBanc.

Hi, Paul.

Hi, how are you?

Good. How are you doing?

In Ohio, how much of your prior incumbent load is currently shopping?

Well, outside of our FES unregulated subsidiary, very little.

Everyone has already left?

Everybody has already -- well, basically all of the customers have come back to FirstEnergy.

Okay. Have left the competitor suppliers?

Yes.

And then with the return of the Ohio load, and what does that mean to Pennsylvania? What are you thinking about maybe getting longer, either acquisitions, or other ways?

Paul, I don't think it has any effect on our near term strategy, in terms of how we intended to deploy cash, and what we have said in the past. I mean we are incrementally upgrading our facilities at the Mansfield plant, as an example, and over the next, including what we did in '05 and over the next two years we will add about 150-megawatts to the system.

We are in the process of upgrading some of our nuclear facilities, so that they will be able to produce additional kilowatts for us. That's the near term plan at this point.

And the Pennsylvania rate case also mitigates some of the pressures?

In terms of supply, Paul, is what you are saying?

You want to address the generation side when you go into Pennsylvania, is that kind of what's driving that as well.

Again, Paul, we said we're not going to talk specifically about the components of that case, as it's being developed right now.

Okay. Thank you.

The next question is coming from Ashar Khan of SAC Capital.

Good afternoon.

Hi.

Rich, you said JCP&L, the timing of that case and the decision on that case, in terms of could you just repeat the cash flow amount.

About 165.

And when do you file, and when do you expect a decision?

We've already filed. I don't know if we know when we would expect a decision specifically, but yes, we filed in December. There's no statutory time limit on Jersey.

Okay.

I do know -- sorry, you are not talking about securitization, are you?

No, I'm talking about separately what you mentioned, but that's not in your cash flow guidance; is that correct?

That is correct.

Okay. And when do you expect the nuclear unit back online, is that May?

You are talking about Beaver Valley.

Yes.

That outage started just this week, actually, early Monday morning and it will be a two to three month outage.

Okay. Okay. Thank you.

Thank you.

Your next question is coming from Paul Patterson of Glenrock Associates.

Good afternoon, how are you.

Good how are you?

I just wanted to touch base here on the total hedge position you guys have, with respect to your POLR in Pennsylvania and Ohio, with the returning customers and everything else, what are we talking about in terms of exposure to your purchase power obligation with you know, you guys have done some upgrades, you have a few moving pieces here. What are we looking at, in terms of how hedged you are from, you know, 2006 through I guess, the end of the POLR?

Well, looking at '06 and '07 first, I mean, we're effectively net long in both PJM and MISO for that timeframe. Now when you talk about different periods of time, obviously, it will change after 2008, when the POLR is expected to go away in Ohio. Through that point in time, we are well covered for our needs in both states. Clearly, 2008, at the end of the year the Ohio POLR is expected to go away and then we are long, much longer in both markets as well.

Okay. So generally speaking, there shouldn't be a big increase in purchase power expenses for '06 through '08, right, systemwide? You guys are pretty well, covered, am I correct on that?

Yes.

Okay. So -- I know you guys done want to talk about the Pennsylvania case in detail, but we're not looking at you guys being exposed in some substantial way, in terms of getting recovery of purchase power expenses out there, is that correct?

You know we have talked in the past about our hedging strategies and so forth. As Tony said, we can't go into any specific details about what the PA case, what we will or won't do. We have been effective in trying to make sure that we have the supplies while the POLR obligation runs in Ohio, and I think we have been effective in doing that.

Okay. Excellent. And then what I also wanted to ask you guys, was in 2006, we're not expecting any impact from the Pennsylvania cases, in your guidance; is that correct?

That's correct.

Okay. And then finally, with respect to the bankruptcy law and the impact on there of the uncollectibles, which sounds like an unusual item to a certain degree, can you break out what happened there, and would it be safe to assume that that probably was unusual and won't show up in '06?

Yes, I think that was a one-time event, driven by the new bankruptcy laws where a lot of people wanted to file in advance of the stricter laws. So that should not be a recurring kind of event.

But how much was that, I guess? I mean, you mentioned the $22 million for delivery expenses, but how much of that, I guess, was from this bankruptcy thing?

About $8 million.

Okay. And then finally, with respect to PJM and MISO expenses, you know, when you guys were in November, you guys saw that hitting your 2006, you saw RTO transmission costs hurting you by about $0.05 a share.

Is there any change, or can you elaborate a bit, about what you are seeing, with respect to the PJM and these high congestion ancillary service costs, and how you see them trending going forward and what have you, and whether or not that $0.05 number still holds?

Well, we have the mechanism in Ohio to recover those costs. They are regulated services areas. So the issue here becomes PJM costs. In the fourth quarter, the net increase in PJM cost was about $37 million as a result of congestion and ancillary service costs.

So I think those are trending in expectation with our earlier thoughts, you know, we've obviously baked a number into our '06 projection, in terms of what those costs will be. We don't see anything that leads us to believe it will be grossly different than that, but I mean, obviously it is an item that we are very focused on. It's a big number for us.

Okay. Great. Thanks a lot.

Thank you.

Your next question is comes from Gregg Orrill of Lehman Brothers.

Thanks. My questions have been asked and answered.

Best kind. Thanks, Greg.

Thanks, Greg.

Your next question is coming from Paul Fremont of Jefferies.

Thanks. Just a clarification in terms of one of Paul Patterson's questions. For the '06 and '07 timeframe, your net long based on the generation that you own, plus the hedges that you have in place for Pennsylvania, is that sort of correct?

Yes.

And the hedges, I assume end in '07, so in '08, while you still are obligated to serve Ohio customers, I think through the end of 2008, right? Would you actually be net short in '08?

Your presumption that the hedges end at the end of '07 is not correct though, Paul. Some of those hedges continue on, many of them continue on over time.

Okay. So, I guess, just looking at '08 independently, would you characterize yourself as still net long in '08, despite the fact that you still have an ongoing obligation to serve the Ohio POLR customers?

Don't know specifically. Yes. I can't tell you specifically. I don't know the answer at this point. It would be close. It would probably be neutral, yes.

And I guess the other question that I have is, with respect to your request for deferred accounting treatment in Pennsylvania, I trust from your answer, Rich, that it was not that you didn't get a definitive yes or no out of the Commission, the Commission simply failed to act on that request.

It has not acted on our request.

There's been intervention in that case and nothing has been scheduled.

Okay. Thank you very much.

Thank you, Paul.

Your next question is coming from Margaret Jones of Citigroup.

My question has been asked.

Thank you.

Your next question is coming from Ben [Sung] of Luminous Management.

Hello, Ben. [ silence ]

Oh, I'm sorry. I'm sorry. I had it on mute. With respect to the potential Pennsylvania filing, would you characterize it as sort of a very standard, you know, rate case of returns, or is this a situation where you have been able to, where the calculations or the structure or the methodology is a little bit unusual, and therefore you have been able to discuss the potential structures with the Commission beforehand?

Ben, I'm not going to characterize the case at all.

Okay. Thank you.

Thanks, Ben.

Your next question is coming from Dan Jenkins of the State of Wisconsin.

Hi, good afternoon. I have a few things here. First on the nuclear fleet, I was wondering, you said the overall capacity factor in '05 was 87.2, do you have what the capacity factor was in June?

Yes, we can get you that. I will get you that offline.

Okay. And then among the outages, you know, I didn't catch what outages you are going to have, besides the Beaver Valley 1 Unit, that's going on right now. What other outages in '06?

Sure, the other outages in '06, and there are two others, Dan. We have Davis-Besse, which is going down in the March timeframe, and that will be a one to two month type of outage. It involves refueling and some reactor pump replacement. So it's more involved than just a typical straight refueling.

And then also we have Beaver Valley 2, which will be a conventional refueling outage in the October timeframe, and that should be about a one month outage.

By the way, we also have Mansfield Unit 2, to upgrade the environmental equipment and to install the dense packed turbines that we talked about. And that will take place this fall.

How long will that Mansfield outage be about?

My guess is again probably a two to three month outage.

Okay. So it's probably reasonable then, given the number and the length of some of these outages that your capacity factors will probably be lower in '06, than they were in '05; is that --

No, actually the outage days will be less in '06 than in '05, and I have the numbers that you had asked for, for the full year 2005 capacity factors. Beaver Valley 1 was actually 101.4%, Beaver Valley 2 was 91.8, Davis-Besse was 92.3, and Perry was 69.3. So obviously impacted by the forced outage in the beginning of the year, and then the extended refueling outage.

Okay. So you would expect those capacity factors then to be higher in '06 you said for about the --

Oh, yes.

For both the fossil and nuclear.

Yes.

So would expenses related to that probably be lower then as well?

You know, last year was an unusual year, in that we did have the extended outages and the forced outage at Perry, so these outages this year will be more conventional outages. So that's why we are saying the nuclear generation, the nuclear generation outage days will be less in '06 than in '05. Obviously, the steam replacement is a big unit for us, it has a significant cost component, sort of which has already been expanded in both the capital and the O&M side, but we have an ongoing benefit to us in the future, since future outages will be shorter, and we will have less inspection time.

Okay. Then, you know, you mentioned in your press release that you completed the transfer of the units to the non-regulated gencos.

Yes, that's correct.

And you talked a little bit about your capital structure management. Do you anticipate, you know, you talk about pushing some debt down to the operating institute, do you anticipate issuing debt at those particular gencos?

Well, our long-term overarching view is to be able to position our unregulated businesses as an investment grade entity. Obviously that implied certain levels of capitalization, but what we are really focusing on, is making sure that we get our regulated operating companies to debt levels that are appropriate in a rate making context. So we don't want those to be 'over equitized' as you are beginning a regulatory cycle. That's really where the focus is.

So when you refinance that FirstEnergy debt, it will most likely to be at the regulated operating?

That's right.

All right. I think I had one more question. Let me see here. I noticed in the fourth quarter, the interest expense was up versus a year ago, even though the debt was down, is that due to the higher interest rates?

Part of that is the interest on the tax, the accrued tax that we recognized related to New Jersey.

Okay. So without that, it would have been lower?

It would have been pretty flat, actually.

Okay. Do you expect given what rates have done and your balances, what do you expect interest to be about flat or higher or lower in '06, than in '05?

They will be lower in '06 than in '05.

Okay. That's all I have then. Thank you.

I appreciate it, Dan, thank you. Why don't we in the interest of time, take one more call and then if there's any follow-up questions, we can handle those offline.

Your last question is coming from [Gwen Winthrop] of PIMCO.

Good afternoon.

How are you?

I'm good. Thanks. Could you just remind me what you are targeting for credit ratings at the parent company and the new gencos?

At the parent company, we are targeting a strong mid-BBB rating. I think that's an appropriate spot for us. And our unregulated business, we're looking to have it be investment grade.

Investment grade at the gencos.

Well, at one of the entities, which would likely be FES, which is if you will, the holing company for the gencos.

Okay. Strong BBB at the parent?

Yes.

And then this is sort of related to the last caller's question, you were planning on transferring some of the pollution control debt from the opcos to the gencos, what happened to that plan?

That will happen. We are not obligated to transfer that debt under any certain time constraint, so we will do that opportunistically over time, when it makes economic sense to do that. But longer term that is the plan. Eventually that pollution control debt will migrate over to the generating companies from the operating companies.

Okay. Thank you very much.

Thank you very much. And we appreciate everybody's time and attention today. As I said, if there's any further follow-up questions that we didn't get to, please give Terry or Kurt a call. We appreciate everybody's time today and appreciate your continued interest in FirstEnergy. I hope everybody has a great day. Thank you very much.

Thanks, everybody.

Bye now.

This concludes today's FirstEnergy fourth quarter earnings conference call. You may now disconnect.